The European Securities and Markets Authority (ESMA) has published a speech given by Patrick Armstrong, Senior Risk Analysis Officer in ESMA’s Innovation and Products Team. The speech is entitled Financial Technology: Applications within the Securities Sector.

Points of interest in the speech include:

  • the regulatory response to FinTech is critical for both regulators and market participants. The challenge is to identify when the regulator should step in. This is the regulatory “tipping point” – the point between “too small to care” and “too large to ignore”;
  • ESMA and Member States will have their first banning power when MiFID II becomes effective on 3 January 2018. Until then, if ESMA believes a harmful tipping point has been reached, it can take measures such as issuing warnings or statements;
  • the “wait and see” approach is the approach that ESMA, like most regulators, has taken towards distributed ledger technology (DLT). There is a collective need to better understand DLT and its possible applications in the financial market. This should not be interpreted as a passive approach, but rather one in which ESMA is actively trying to learn more about the innovation while it remains sufficiently immature so that no risks are taken by this action. At the same time, by waiting to see how the innovation develops, ESMA does not risk stifling potentially socially or economically useful products or processes;
  • robo advice is of interest to ESMA. The European Supervisory Authorities’ (ESAs) December 2015 joint discussion paper on this topic highlighted certain risks to the automation of financial advice, compared to traditional “human” professional advice. The ESAs, having analysed the responses received, are in the process of deciding whether further cross-sectoral action is warranted or needed at this stage; and
  • ESMA’s initial thinking on DLT is that it could bring a number of benefits to securities markets, including to post-trade processes. However, a number of challenges will need to be addressed before the benefits may materialise. Importantly, DLT is still at an early stage and ESMA remains unclear as to its capacity to overcome the challenges arising. ESMA realises that while DLT may reduce or mitigate certain risks, it may also create or exacerbate others. It will continue to closely monitor market developments around DLT to assess whether a regulatory response may be needed.

View ESMA speech on application of fintech in securities sector, 23 January 2017