Digitalisation and Fintech

  • Big Data

Big Data is defined by the Joint Committee of the European Supervisory Authorities (i.e. the three ESAs: EIOPA, ESMA and EBA) as “situations where high volumes of different types of data produced with high velocity from a high number of various types of sources are processed, often in real time, by IT tools (powerful processors, software and algorithms)”.

Insurance intermediaries are confronted daily with the processing of data (see also our article on the General Data Protection Regulation in this respect) and are directly concerned with Big Data.

Joint consultation of the ESAs

The Joint Committee of the ESAs published a Discussion Paper on the use of Big Data by financial institutions on 19 December 2016.

The aim of this Discussion Paper was to receive feedback from stakeholders in order “to understand better what the Big Data phenomenon means for consumers, the financial industry and regulators”. In its answer to the consultation, BIPAR emphasised the need for a level playing field among the different distribution channels, for a consistent interaction between existing EU Regulations and EU Directives (such as the GDPR but also MiFID II, PRIIPs and the IDD) for instance.

The European Parliament's Report on Big Data

The European Parliament published on 20 February 2017 a report “on fundamental rights implications of Big Data: privacy, data protection, non-discrimination, security and law-enforcement”. This report states that Big Data tools may generate a concentration of powers which would “have a detrimental effect on consumers’ rights and fair market competition”. This report also states that “the Digital Single Market must be built on reliable, trustworthy and high-speed networks and services that safeguard the fundamental rights of the data subject to data protection and privacy” and calls for “closer collaboration among regulators of conduct in the digital environment, so as to strengthen the synergies between regulatory frameworks for consumers and competition and data protection authorities”.

  • FinTech: EC consultation and EP report

European Commission's consultation: “FinTech: a more competitive and innovative European financial sector”

In March 2017, the European Commission launched a consultation on “FinTech: a more competitive and innovative European financial sector” to gather input to further develop its policy approach towards technological innovation in financial services and more in general to look at how to make the EU Single Market for financial services more competitive, inclusive and efficient.

The Commission focuses on:

  • the impact of FinTech on the financial services sector (both from the perspective of consumers and service providers).
  • whether the current regulatory and supervisory framework fosters technological innovation in line with the Commission’s 3 core principles regarding FinTech: technological neutrality, proportionality and market integrity.

The consultation is structured along 4 broad policy objectives which, according to the Commission, reflect the main opportunities and challenges related to FinTech:

  • Fostering access to financial services for consumers and businesses
  • Bringing down operational costs and increasing efficiency for the industry
  • Making the Single Market more competitive by lowering barriers to entry
  • Balancing greater data sharing and transparency with data security and protection needs

With regard to its policy objective of fostering access to financial services, the Commission states, for example, that the combined use of artificial intelligence with Big Data analytics (e.g. robot advice) has the potential to significantly lower the price of financial advice, which could facilitate the access to advice in the area of investment services, loans and insurance. The Commission underlines, however, that regulators and supervisors need to ensure that automated advice does not undermine consumer and investor protection. In its response, BIPAR will explain that automated advice is not always an appropriate answer to consumers’ needs when it comes to insurance and investment products and services. The human factor will remain an important element in the distribution process and the importance of personalised and adapted advice provided by intermediaries, using new technologies or not, should not be underestimated.

With regard to its policy objective of making the Single Market more competitive, the Commission is wondering amongst other things, whether the EU should introduce new licencing categories for FinTech activities, with harmonised and proportionate regulatory and supervisory requirements; including passporting of such activities across the EU Single Market. In its response, BIPAR will focus on the importance of the technology-neutral principle, i.e. “to ensure that the same activity is subject to the same regulation irrespective of the way the service is delivered, so that innovation is enabled and level-playing field preserved”.

BIPAR has answered this consultation on 15 June 2017.

European Commission's conference on FinTech

Together with the launch of the public consultation, the European Commission organised a conference which BIPAR attended on “FinTech EU, is EU regulation fit for new financial technologies?” on 23 March.

With the event, the Commission aimed to feed into the debate on whether the EU is ready for the digital transformation and identify which specific measures and overall approach will contribute to creating “a vibrant EU technology enabled finance sector”.

The conference was split into 3 roundtables:

  • How technology is transforming finance: looking at which technologies are driving the financial technology revolution, what the opportunities and risks are and how regulators should react to, and anticipate, those changes in order to make the EU as FinTech-friendly as possible and contribute to a retail financial services market.
  • Regulatory and supervisory innovation: looking at whether the current policy and regulatory framework is the right one.
  • Cybersecurity: looking at the challenges/practical and concrete steps the EU can take to contribute to preserving cybersecurity in the financial sector.

European Parliament's own-initiative report: "FinTech: the influence of technology on the future of the financial sector"

In parallel with the European Commission’s consultation on FinTech, the European Parliament’s Economic and Monetary Affairs Committee (ECON) drafted an own-initiative report on "Fintech: the influence of technology on the future of the financial sector" (drafted by Dutch Liberal MEP, Cora van Nieuwenhuizen) BIPAR welcomed ECON’s initiative on FinTech and was in touch with the Rapporteur and shadow rapporteurs during the drafting process.

In its comments on the draft EP report, BIPAR focused on:

  • The need for a level playing field: many intermediaries are developing, implementing or using modern technology to improve client experience (formerly called "service"), to rationalise processes and to decrease costs. While doing this, they also have to be compliant with a whole new wave of regulation and to compete with "FinTechs" or hybrid distribution and advice systems.
  • Overregulation should not be looked at exclusively with regard to FinTech, but overall.
  • Intermediaries can contribute in finding solutions with regard to new FinTech-related risks and cyber risk mitigation.

In the final parliamentary report, FinTech is described as “finance enabled by or provided via new technologies, affecting the whole financial sector in all its components, from banking to insurance, pension funds, investment advice, payment services and market infrastructures”. Insurtech is described as: “insurance enabled by or provided via new technologies, for example through automated advice, risk assessment and Big Data, but also by insuring against new risks such as cyberattacks”.

EP Report key points

  • Any actor can be a FinTech
  • There has to be a level playing field
  • FinTech can lead to considerable benefits such as cheaper financial services for consumers and business and to price decreases
  • The ESAs are asked to monitor the risks of automated advice to ensure that it can really generate better, transparent, accessible and cost-efficient advice and the report calls on the Commission to investigate how FinTech can help provide better quality financial advice and whether the “fragmented EU regulatory framework dealing with advice is sufficient to accommodate this
  • Legislation, regulation and supervision have to adapt to innovation. Existing rules should be revised when necessary
  • The Commission is asked to draw up a comprehensive FinTech Action Plan, with cybersecurity as its number 1 priority
  • Use should be made of controlled sandboxes both for existing players and new entrants
  • The Commission and the ESAs should monitor and avoid overlaps of regulation
  • Regulators and supervisors should monitor the impact of digitalisation on the competitive situation across all relevant segments of the financial sector, and to design and deploy tools to prevent or remedy anti-competitive behaviour or distortions of competition
  • The report emphasizes the link (and need for action) between FinTech and Big Data/data protection

The European Parliament adopted the ECON report without amendments in its Plenary session on 17 May 2017.

  • Automation in financial advice

On 4 December 2015, the ESAs launched a Discussion Paper on automation in financial advice aimed at assessing what, if any, action is required to harness the potential benefits of this innovation and mitigate its risks.

In its response submitted in March 2016, BIPAR explained that the challenge for regulators and supervisors today is to focus on where boundaries are challenged by new ways of providing insurance and financial advice. Output generated by an automated tool provided on the basis of questionnaires without the possibility for consumers to ask questions, without the possibility for the robot to assess the need to probe where further clarification or information may be required from the consumer, should not be presented as "advice" to consumers. Automated financial advisor tools/robo-advisor technology cannot be portrayed as some sort of silver bullet that will draw the masses to financial advice and the cost saving benefits will allow everyone to have a pension or investment portfolio. This is not a binary issue, it is not a human or computer. Most financial advisers or insurance intermediaries use IT to support their activities and it makes them more efficient. "Robot" advisers, like traditional insurance and financial intermediaries, will offer their products abroad if the products are capable of being provided cross-border. The fact that this often does not happen today is due to a number of factors such as the taxation regimes, the different legal systems and cultural factors. Standardised digital products will not solve the problems of currently existing barriers to cross-border activities and consumer protection. The human factor will remain an important element in the distribution process, even when distribution is carried out through digital means, and the importance of personalised and adapted advice provided by intermediaries should not be underestimated.

In its final report published in December 2016, the ESAs explained that, given that the majority of respondents confirmed the potential for growth of automation in financial advice, they will continue to monitor the evolution of the market, including by identifying issues related to financial institutions’ compliance with applicable EU laws and regulations and by considering the consequences of the phenomenon and its cross-border characteristics on national supervisory frameworks and initiatives. They will do so separately in their three respective sectors, on account of the different developments across the sectors.

The ESAs will monitor automation in financial advice across the spectrum of this innovation, including the different types of automated tools (i.e. tools that combine automated advice with an element of human advice). The ESAs will also consider the possible (legal) barriers to the development of automated advice and ask financial institutions to carefully assess in the meantime the applicability of the current EU laws and regulations to the innovation they are developing.

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