By Alessandro Ferrari and Ludovica Mosci
Last year witnessed the increase of fintech services on the Italian market, thanks to the encouragement provided by PSD2, with the “open banking” obligations on banks and the related API technologies.
Fintech startups are no longer seen as a threat to traditional banking, rather as an opportunity to expand services. Last year, several partnerships between banks and fintech were completed, and this finally helped Italian banks start their innovation journey towards a “digital bank”, with the development of new products and services that align with today’s customer needs.
Regulatory sandboxes for Italy: waiting for secondary legislation to finally boost the Italian fintech market
Twelve months ago we predicted(and hoped for) the adoption of a regulatory sandbox for Italy in the year to come. Our expectation was satisfied by the Italian legislator on the 29th of June 2019 with the passing of Decree No. 34/2019. This authorises the main Italian authorities operating in financial and insurance sectors (the Minister of economy and finance, the Bank of Italy, Consob and Ivass) to establish a regulatory sandbox within 180 days from the passing of said Decree.
Sandboxes are structured test environments where fintech innovations can be tested in collaboration with supervisory authorities, who maintain a margin of discretion and flexibility in applying the rules. Fintech services falling under the scope of the sandboxes are addressed only to a small circle of end-customers who are made aware that such products are being tested.
In the sandbox, new products and new rules (or adaptations of old rules) are developed between fintech companies on the one hand, whether they are startups or consolidated companies, and supervisory authorities on the other. Sandboxes allow fintech to apply existing rules to their new business models, as well as enjoy some regulatory exemptions for a transitional period and reshape their products according to what emerged during the test, before the actual launch on the market. On the other hand, authorities become aware of these new business models more easily and in real time, thus proposing new rules in line with the operators’ needs or, alternatively, prohibit those services which present excessively high risks for the financial market. In addition, participation to fintech sandboxes by supervisory authorities of other sectors (e.g., privacy, insurance, etc.) and countries can boost the interoperability across sectors as well as increase cross-borders services (for a more in-depth analysis, see our article on Regulatory Sandboxes on DLA Piper UFO (Unconventional Financial Overview).
Starting with the UK, several countries in Europe introduced regulatory sandboxes for the fintech sector. Additionally, European authorities such as the EU Commission and the EBA have highly encouraged the introduction of sandboxes as they are considered suitable to ensure the development of proportionate and flexible legislations.
The Growth Decree set out the general principles that should guide the establishment of the new Italian sandbox by the Ministry of Economy and Finance within the envisaged 6 month period. In line with the European approach, the Italian sandbox must comply with the proportionality principle and must be characterized by: a maximum duration of 18 months; reduced capital requirements; simplified and proportionate obligations with respect to the activities to be carried out by the operators admitted to the sandbox; reduced time for authorization procedures and finally the definition of operating perimeters. Participation to sandboxes should never entail authorization to perform regulated activities.
Now that the 180 days provided by the Growth Decree have expired, we expect the Ministry of Economy and Finance to adopt the specific regulations necessary to establish the sandbox very soon. Such regulations will provide for:
- the requirements for admission to the test phase;
- capital requirements;
- simplified and proportionate obligations to the activities that are intended to be carried out;
- the operating perimeters;
- disclosure obligations;
- the times for issuing authorizations;
- the professional requirements of company representatives;
- the corporate governance and risk management profiles;
- eligible company forms;
- financial guarantees;
- the procedure following the end of the test phase.
Upon the official operation of the sandbox, each relevant supervisory authority (Consob, Bank of Italy and Ivass) will have to annually report what emerges from it and propose regulatory changes or necessary regulations for the development of the fintech sector, the protection of savings and financial stability. Also, to promote the development of new legislation and favor interoperability with other sectors, the Growth Decree established a “Fintech Committee”, made up of the above mentioned supervisory authorities plus the Agid (the Agency for the digital transformation of the Italian public administration), the Italian Data Protection Authority, the Italian Antitrust Authority and the Italian Tax Authority.
As a result of introducing the sandbox, the Italian market may welcome new fintech innovations as well as new laws and regulations in the sector in 2020.
New legislation for ICOs likely to come
Among other legislative initiatives, we expect the Italian Government to issue ad hoc regulations for Initial Coin Offerings (ICOs) soon, which is a fundraising mechanism where new projects sell their underlying crypto tokens. As we predicted one year ago, this sector can no longer remain unregulated as it continues to pose uncertainties for investors.
As of today, there is no united European approach on how to deal with ICOs and whether they have to be regulated. Further, ICOs were not specifically included under the Commission Proposal for a European regulation on European Crowdfunding Service Providers for businesses (ESCP).
In March 2019, Consob launched a public consultation on this topic pending the establishment of a shared European view on the legal qualification of crypto-assets and in particular, their potential qualification as securities/financial instruments,. In particular, Consob asked stakeholders their views on the introduction of a special regime for the issuance and trading of crypto-assets, aimed to protect investors.
Among other matters, Consob requested stakeholders to assess:
- The definition of crypto-assets as “digital recordings representing rights related to investments in entrepreneurial project, created, kept and transferred by means of Distributed Ledger Technology, allowing the identification of the holder of the rights and intended to be traded or are traded in one or more trading systems”. In this regard, Consob proposes the creation of a category of crypto-assets, different from the financial instruments falling under the MIFID regulations.
- The use of crowdfunding platforms – authorized pursuant to Consob Regulation No. 18592 of 26 June 2013 – as a means to promote and issue crypto-assets, provided there is separation from the crowdfunded activity itself. In any case, Consob is willing to allow offers and issuance of ICOs outside crowdfunding platforms, provided that the operators meet certain subjective requirements and comply with the applicable regulations in case of crypto-assets that fall within the regulation of financial instruments.
- The establishment of crypto-assets exchange platforms, for the trading of the assets, through a public register held by Consob. Consob would like to introduce requirements in terms of compliance, business continuity, due diligence, transaction monitoring, information on crypto-assets, cyber security. Also, in order to attract a wider range of crypto-assets to the regulated area, Consob would like to allow exchange platforms registered with Consob to trade also crypto-assets that have not been initially offered through regulated ICOs platforms, provided that sufficient information is available to the public.
- The minimum requirements for ICOs promoters and platforms’ obligations. In this regard, great attention is given to transparency in terms of a publication of an initial offer document with a minimum set of information (white papers) relating to the transaction, the crypto-assets and exchange facilities where crypto-assets will be traded, as well as publication of annual updates of the white paper.
On 2 January 2020, Consob published its final report on the above consultation. We are now waiting anticipatingly for the drafting of an Italian regulation on ICOs based on this exercise.
Ad hoc legislation for marketplace lending
Marketplace lending, also known as Peer-to peer or social lending, is a very interesting phenomenon of the last decade.
Lending marketplaces are online platforms that allow “investor” users to lend money to other “borrower” users who request it. Borrowers can be private consumers, as well as small and medium enterprises looking for credit for any type of activity (there are marketplaces offering loans for buying eCommerce products, to help paying tuition fees, etc.). , On the other hand, investors are willing to diversify their risks and see these marketplaces as a new type of profitable investment.
In this process, the platform remains as “neutral” as possible. Unlike banks, lending marketplaces do not accept deposits and do not lend money themselves. They act as intermediaries between those who offer and those who request money. Consequently, lending marketplaces do not take any risk in their financial statements. They earn from the commissions received by who offers and who receives the loan.
The above is a very interesting and disruptive fintech application compared to the business models of traditional banks, posing issues from the point of view of the regulatory strategy.
In fact, this business model, which falls within the macro area of crowdfunding, consists of both lending money (falling within the regulated activity of collection of savings and/or disbursement of credit) and investing money (falling within another regulated activity). Thus, lending marketplaces carry potential risks connected to the protection of savings and, more in general, to the functioning and competitiveness of the financial system.
A configuration of the platforms in terms of total disintermediation/neutrality (without taking risks or guarantees on the return of money) would lead the platforms to their removal from the regulatory set. However, such a configuration may not always reflect reality.
In fact, in addition to linking borrowers and investors, platforms may also offer a variety of other services to users such as: the selection of borrower users to be admitted; credit scoring with the use of big data analytics; matching of applications according to risk categories; management of liquidity flows and funds transfer; management of the contractual relationships between investors and borrowers; credit recovery actions, etc..
It is evident that the above should fall within the path of regulation. However, these marketplaces cannot simply fall within a single regulated activity. Given the peculiarities of this business model, the best solution would be a dedicated regulation like Consob Regulation No. 18592/2013 for equity crowdfunding..
Some European countries have already introduced ad hoc regulations for marketplace lending. The European Commission issued a Proposal for a European regulation on European Crowdfunding Service Providers for businesses (ESCP), which covers both investment based crowdfunding and lending based crowdfunding. Such proposal sees the introduction of a special regime, falling outside of the MIFID directives and other EU regulations, in order to avoid that a single crowdfunding activity is subject to different authorizations.
At present, in Italy there is no organic discipline for marketplace lending, but the issue is at the attention of the supervisory authorities (see Quaderno Fintech – 5 July 2019 by Consob).
As it happened for the equity based crowdfunding, in 2020 we expect the Italian legislator to start developing new laws to regulate the marketplace lending phenomenon.