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Israel Groups Hold Virtual Fintech Conference

Conexx: America Israel Business Connector, the Consulate General of Israel to the Southeast with the Israel Economic Mission in NYC (Ministry of Economy) and the Israel Export Institute hosted a delegation of 17 Israeli fintech companies at the virtual Fintech South 2021 conference last month.

Fintech South hosted more than 2,000 fintech leaders from around the world for three days of content and experiences designed to help drive business success and help business thrive in the “next normal.”

Regulatory Lag, Regulatory Friction and Regulatory Transition as FinTech Disenablers: Calibrating an EU Response to the Regulatory Sandbox Phenomenon

Looking first to classic arguments that could potentially be marshalled against a centralised EU approach, a leading perspective from the economics literature is that there needs to be accommodation for when centralisation does not add up, seen most obviously in the emphasis in the post-Maastricht Treaty era on subsidiarity.Footnote 87 The subsidiarity principle recognises that sometimes Member State autonomy and regulatory competition between Member States may yield better outcomes over EU intervention aimed at a common approach.

Market failure may not occur if a small number of influential jurisdictions adopt a meaningful regulatory approach that leads others to come along.Footnote 88 However, context is everything and institutional competition among Member States does not inevitably lead to efficient outcomes, in which case supplementary EU intervention may be warranted to redress adverse outcomes associated with partitioning along national lines.

Secondly, in response to Member States responsiveness to facilitating FinTech innovators bringing their product to market, 2019 saw the launch by the Commission of the European Forum for Innovation Facilitators (‘EFIF’).Footnote 99 This network facilitates dialogue among supervisors and encourages discussion on common approaches within the EU and with third countries on the regulatory treatment of technological innovation.Footnote 100 It has representation from each innovation hub and regulatory sandbox in Member States and the ESAs are also represented.

Nonetheless, dialogue in these fora may usefully coalesce views on best practice approaches to the operation of regulatory sandboxes in the EU, and as to how regulation may evolve to fit FinTech.Footnote 101 This is the essence of the spirit of the new governance approach to regulation which has been well dissected in the literature on EU regulation.Footnote 102 Given the lack of real clout associated with dialogue, it is unsurprising that the ESAs envisaged that the establishment of an EU network of innovation facilitators could act as a useful knowledge-sharing forum, but only as part of a ‘multi-pronged approach’.Footnote 103 In the FinTech Action Plan, the Commission gave credence to this, and as a preliminary step the ESAs were tasked with charting authorisation and licensing approaches as applied to FinTech business models across the Member States and with exploring the vexed question of how national authorities approached questions of proportionality and the application of flexibility.Footnote 104 To conclude, while continuing stakeholder dialogue around the operation of regulatory sandboxes is valuable, more action is needed to develop a new governance approach founded upon stakeholder participation that ultimately leads to a bottom up framework.

Indeed, the issuing of non-binding guidelines has become a defining modus operandi in the field of financial supervision since the establishment of the ESAs.Footnote 108 The Securities and Markets Stakeholder Group suggested that some level of co-ordination spearheaded by the European Securities and Markets Authority (‘ESMA’) would help with both quality and transparency.Footnote 109 Following on the foundations laid by the work that has been jointly done by the ESAs on mapping national approaches and in identifying issues that need to be tackled,Footnote 110 the Commission’s report on best practices for regulatory sandboxes is awaited.

Furthermore, the Council has requested the Commission to study regulatory sandboxes and the use of experimentation clauses allowing regulators a measure of flexibility in relation to the application and of legal rules to the testing innovation within a regulatory sandbox.Footnote 111 Questions of competence loom large when possibilities of the ESAs adopting new guidelines or recommendations are mooted.Footnote 112 Do the ESAs possess the requisite competence to step in?

The Commission’s 2014 Report on the ESAs highlighted that guidelines and recommendations would have to meet the cumulative criteria of (i) establishing ‘consistent, efficient and effective supervisory practices’ and (ii) ensuring the ‘common, uniform and consistent application of Union law’.Footnote 113 The continuing value of this function was validated by the Commission in the Digital Finance Strategy.Footnote 114 As decentralised agencies rather than EU institutions, it could be considered challenging to identify a legal basis for the ESAs to be tasked with producing guidelines on regulatory sandboxes where there is no underlying EU legal framework in the field.

An expanded remit deriving from Article 9(2) which was inserted into the ESA founding Regulations with effect from 1 January 2020Footnote 115 gives the ESAs the obligation to ‘monitor new and existing financial activities’ and the power to adopt guidelines and recommendations ‘with a view to promoting the safety and soundness of markets, and convergence and effectiveness of regulatory and supervisory practices’.

Thus regulators’ websites may encourage contact from FinTech entrepreneurs and provide little or no detail concerning sandbox terms and conditions online before exploratory dialogue in relation to regulatory sandbox entry takes place with a potential applicant.Footnote 117 Consequently, for the pre-application stage, EU guidelines could usefully set transparency expectations surrounding the type of minimum information to be publicly provided on the websites of EU regulators offering regulatory sandboxes.

Rather than providing a set of admission guidelines, the CSA provides a strong level of transparency to regulatory actors through providing online public access to previous decisions including the terms and conditions imposed on sandbox users.Footnote 120 This reflects the fact that the CSA model is individualised, based on providing tailored exemptive relief from securities laws requirements.Footnote 121 Agreement on fundamental standards of best practice for regulatory sandboxes could help to avoid FinTech regulators being drawn into a race to the bottom in terms of admission criteria and post-admission conditions attached to sandbox participation.

The ESAs have highlighted a very real issue within the context of innovation hubs (and the point applies even more to regulatory sandbox participants)—that firms could mistakenly rely on general indicative guidance provided as having a final, legally binding quality.Footnote 122 Given the regulatory complexities at work, a sandbox regulator offering assistance in a test bed should take care not to appear to replace the need for specific legal advice concerning all aspects of product roll-out (including those aspects outside of financial services such as data privacy).

In addition, it would be prudent to require careful wording to be employed so as not to give the mistaken impression that a regulator operating a regulatory sandbox is in some way endorsing either the sandbox applicant or the proposition being tested.Footnote 123 The Commission in the Digital Finance StrategyFootnote 124 has adverted to a commitment to respect the principle ‘same activity, same risk, same rules’, so as to create a level playing field between existing financial institutions and new market entrants.

In line with that the ESAs firmly state the position that regulatory sandboxes cannot allow EU regulatory requirements to be relaxed, but that available proportionality levers may be applied.Footnote 125 This stumbles upon the problem of the uneven EU financial services playing field at national level, the effects of which FinTech players and their lawyers are not equipped to assess other than through a painstaking process of individual regulatory dialogue with national regulators and supervisors.

Policy nudges in the direction of the pursuit of a harmonised approach were cemented in the report of the European Commission’s Expert Group on Regulatory Obstacles to Financial Innovation which came out strongly in favour of harmonising standards across the EU for regulatory sandboxes, with a view to providing a level playing field.Footnote 126 The Group also stated that a common testing framework would help cross-border trade, ‘thereby enhancing confidence in, and portability of, test outcomes to other European jurisdictions, and network effects by better and more formalised coordination between regulatory sandboxes’.Footnote 127 Of course one must note that such benefits would be limited to addressing the sandbox as a stopgap solution, not the much bigger challenge of the regulatory framework within which FinTech operators must operate.

The availability of a co-ordinated one-stop shop approach to enabling cross-border testing could add to the attractiveness of the EU for FinTech companies.Footnote 129 At present availing of a regulatory sandbox in existence in a Member State will only aid market entry in the relevant national territory (and indeed only in relation to the particular sectoral regulator unless a multi-agency approach becomes utilised).

In 2019 the potential for establishing an EU cross-border regulatory sandbox regime was floodlit by the specialist Expert Group on Regulatory Obstacles to Financial Innovation in its recommendation that the Commission and the ESAs should give further consideration to this option.Footnote 133 Commission imprimatur beckoned in 2020 in the Digital Finance StrategyFootnote 134 which contains a commitment to working with the European Forum of Innovation FacilitatorsFootnote 135 to boost the work of national innovation hubs, but also crucially to providing a procedural framework that would allow cross-border testing and would allow firms to interact with supervisors from different Member States.

For instance, the Dutch DNB (Central Bank) has stated that it regards the regulatory sandbox as offering latitude in the interpretation of the rules to ‘take our cue from the purpose of a rule, while we will also review established policies with new (technological) developments in mind and adapt these where necessary […] to accommodate innovation that actually contributes to our supervision objectives as much as practicable’.Footnote 136 Meanwhile Hungary permits the creation of a tailor-made sandbox with relaxation of some domestic rules.

The FinTech Action Plan was cognisant of the fact that some competent authorities did not regard regulatory sandboxes with their competition-promotion aspect as within their mandate, while others zealously embraced the concept with a view to carving out FinTech turf.Footnote 137 Some competent authorities have also questioned the two-tier approach created by regulatory sandboxes whereby sandbox participants receive tailored advice and monitoring while non-sandbox participants are effectively an out-group and subject to less preferential treatment.Footnote 138 There may not be sufficient buy-in from Member States to feasibly achieve an EU cross-border sandbox regime allowing testing across multiple locations, particularly given that some regulators regard the sandbox as outside (or even opposed to) their mandate.

Notably, in providing for sectoral derogations to be available for DLT multilateral trading facilities and DLT securities settlement systems from some aspects of financial services legislation, this would allow participants in the Pilot to benefit from a preferential regulatory regime as compared with that available to non-participants, something which sandbox regimes have generally assiduously tried to avoid.Footnote 144 The planned DLT pilot regime is not being billed as a sandbox.


The following are some key Fintech areas monitored by FINRA’s Office of Financial Innovation ('OFI') that are impacting the securities industry: The term 'digital asset' generally refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering ('ICO') or pre-ICO) and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger —including securities and non-security products.

  FINRA continues to provide guidance on digital assets through various methods, including its joint statement on Broker-Dealer Custody of Digital Asset Securities and white paper on Distributed Ledger Technology, as well as seek information regarding broker-dealer activity in this space through Regulatory Notice 20-23.

Increasingly, these firms are turning to innovative regulatory technology ('RegTech'), whose application include compliance monitoring, fraud prevention, data management (access, storage, and reporting), and identification and interpretation of regulation.

AI, in its various forms, is rapidly being incorporated into the financial services industry, ranging from automated customer service applications and social media sentiment-based trading to sophisticated fraud and financial crime surveillance.

Digital investment advice generally refers to digital tools that help automate the process to develop an investor profile, to prepare proposals and sales materials, to develop an asset allocation, and to recommend specific securities to an investor.

Over the past few years, a new ecosystem of social media sentiment investing companies have emerged that aim to help investors predict market changes using social media sentiment analytics and facilitate communications through social networking platforms.

Different business models have emerged in this space, including social media data analytics companies, social media sentiment-based product issuers, crowdsourced research networks, and social networking platforms.

To support efforts to protect data and the systems on which it is stored, FINRA has issued a number of information notices to raise awareness on imposter websites, fraudulent phishing emails, and distributed denial of service attacks.

As investors increasingly conduct financial transactions using laptops, tablets, and mobile phones, the design and function of online websites and mobile applications ('platforms') have become intrinsic to broker-dealers’ interactions with customers.

Core services include data storage, processing capacity, networking, and software applications.  Cloud computing is transforming how broker-dealers operate by providing opportunities to enhance agility, efficiency, resiliency, and security within firms’ technology and business operations while potentially reducing costs.