UK: ESMA Publishes Report On Licensing Of FinTech Business Models

On 12 July, the European and Securities Markets Authority (ESMA) published its Report on the licensing of FinTech business models (the Report) as part of the European Commission's wider FinTech Action Plan. While ESMA concluded in its report that it was not necessary to put forward any recommendations to the European Commission to adapt the current financial services legislative framework to address innovative business models in the FinTech industry, the Report did set out some of the key challenges National Competent Authorities (NCAs) are facing in regulating FinTech firms.

ESMA prepared the Report using the results from two surveys sent to NCAs. The first (carried out in January 2018) focused on collecting information from NCAs about the number and nature of regulated and unregulated FinTech firms, how the business models of these FinTech firms fit within the existing rules and whether NCAs considered any regulatory action at national level necessary to accommodate such business models. The second (carried out in January 2019) was conducted to update ESMA's knowledge about the FinTech market and clarify how the principles of proportionality and flexibility within financial services legislation were applied in relation to FinTech firms.

Which firms were in scope of the Report?

In the surveys to NCAs, the following Financial Stability Board (FSB) definition of "FinTech" was used:

"technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services".

In line with ESMA's mandate, the FinTech firms within scope of the surveys were limited to those firms that provided:

  • clearing and settlement functions;
  • capital raising;
  • investment management and investor services; or
  • market support.

Firms that provided functions relating to deposits, lending, insurance or payments were excluded from scope (as these firms were within the remit of the European Insurance and Occupational Pensions Authority (EIOPA) and European Banking Authority (EBA)).

Using this definition of a FinTech firm, NCAs reported that the large majority provide investment management and investor services (around 70%), with less than 1% providing clearing and settlement services. In terms of types of innovative models, online platforms made up just under half (43.9%) of FinTech firms, followed by cloud computing (22.9%) and application programme interfaces (17.3%).

What are the key themes from the Report?

No changes to legislation recommended

The key conclusion of the Report was that aside from crypto-assets, ICOs and DLT, there were currently no regulatory gaps in the relevant EU legislation. This conclusion was line with the conclusions from EIOPA and EBA on the same point.

Most NCAs reported to ESMA that the current framework provided sufficient flexibility when authorising or licensing FinTech firms, and there has not been a need to develop a specific licensing regime for innovative business models. NCAs authorise financial activities and not the underlying technology.

There is divergence among NCAs on what constitutes a "FinTech" firm

Although a standardised definition (from the FSB) was used to formulate the surveys, the Report noted that there was divergence among NCAs around which firms to include. Some NCAs would include within the scope of FinTech firms any existing firms carrying on FinTech activities, while other NCAs would exclude such incumbent entities from the scope. Further, as unregulated FinTech firms are outside the perimeter, it was difficult for NCAs to report on the total number of FinTech firms in each jurisdiction. The figure for the total number of unregulated FinTech firms was reported as 328 (excluding the UK), although this was likely understated. (The UK estimated its combined total of regulated and unregulated FinTech firms to be over 1600.)

Regulation of platforms may be overly onerous

A key theme arising throughout the Report was the recognition that some of the licensing requirements for small-scale trading platforms were disproportionately onerous for new entrants, with limited flexibility to apply the requirements in a proportionate way. The capital requirements and specific compliance rules on multi-lateral trading facility (MTFs) in particular were highlighted as potential barriers to innovative entrants. ESMA noted that the licensing requirements for such small-scale platforms may need to be analysed from a proportionality standpoint.

Regulatory sandboxes and innovation facilitators continue to play an important function

The Report noted the role that regulatory sandboxes and innovation facilitators had an improving level of engagement of FinTech firms with their NCAs. Sandboxes provide an opportunity for FinTech firms to better understand regulatory expectations, and enable NCAs to increase their understanding of the risks and challenges posed by FinTech firms. The FCA's regulatory sandbox was called out in particular as a device which can influence the regulation and business model of FinTech firms.

Crypto-assets continue to cause concerns

Although crypto-assets, ICOs and DLT were expressly carved out of the surveys completed by NCAs, the Report noted that "the relevance and importance of crypto-assets, ICO and DLT issues was deemed of such urgency" that NCAs nevertheless submitted comments on the licensing of such activities. As we have previously highlighted, the regulatory regime surrounding crypto-assets remains uncertain, and ESMA confirmed in this report that they are continuing to seek supervisory convergence on this topic.

FinTech in the wider context of cyber-security and risk management

The Report also noted that NCAs had referred to cyber-security risks when considering FinTech business models, and had requested prescriptive provisions dealing with these risks at an EU level. ESMA noted that there were two recently published Joint Advices considering these risks: one on the need for legislative improvements relating to ICT risk management requirements in the EU financial sector (the ICT Risk Management Advice), and one on the costs and benefits of developing a coherent cyber resilience testing framework for significant market participants and infrastructures within the whole EU financial sector (the Cyber Resilience Testing Framework Advice).

The ICT Risk Management Advice set out sector specific legislative changes to support risk management, as the ESAs considered that there was currently a lack of specific references to ICT and cyber-security risk. It was also noted that efforts should be made towards harmonisation of terminology, templates and reporting timeframes across different financial services sectors, as there were currently inconsistencies.

The Cyber Resilience Testing Framework Advice concluded that the benefits of establishing a cyber-resilience testing framework outweighed the costs, and considered that the European Commission should set out an explicit legal basis for the development and implementation of a coherent framework across the sectors under the remit of all three ESAs, with the ESAs also being granted an explicit mandate to develop sector specific guidance. Longer term, the ESAs also considered that it might be appropriate to establish co-ordinated cyber-resilience testing exercises for the most "systemic, critical and relevant" entities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions