A cross-industry working group in Luxembourg is seeking new ways to enable financial technology to thrive in Europe’s tough regulatory environment. Updating the country’s financial services outsourcing rules could help unlock the potential of open banking.
How to make the second payment services directive (PSD2) work for Fintechs and clients? No one can be sure yet, but Luxembourg’s financial sector has begun a year-long reflection on how the country’s regulatory and legal framework could be adapted to help. PSD2 offers substantial exciting potential for providing third party “open banking” services. The trick is to find the sweet-spot between tough rules and sufficient flexibility to allow innovation to develop. Luxembourg has thrived in this zone for decades, and the country wants to devise a formula that works for Fintechs and financial services outsourcing firms.
Grand FinTech hub vision
The country’s senior decision makers have a grand vision of the Grand Duchy as a neutral global Fintech hub through which financial services could be processed and delivered cross border. “Clients will use digital platforms to inform, compare and execute their financial transactions and this applies to both retail and commercial clients,” is one example cited in Luxembourg for Finance’s publication Amazonisation is the future of European Financial Services. So earlier this year, Pierre Gramegna, the finance minister, invited the Finance & Technology Luxembourg (FTL) trade association to lead work towards reform.
To ensure an industry-wide response, FTL is working with the public-private think tank the Haut Comité de la place financière. Banks, fund service providers, insurance firms, the Big 4 consultancies, Fintechs, law firms, and more have become involved, with around forty people attending the first kick off meeting. The plan is to deliver a report of potential reforms to the Haut Comité by the end of 2020. “Interests are not always aligned between the different players—as their core businesses can be so different—but we want everyone to be involved,” noted FTL’s chairman Jean-François Terminaux in an interview with Investment Officer.
Potential reform ideas
Most ripe for reform is regulation around outsourcing through Support PSFs (Support Financial Sector Professionals), rules which date from 2003. Yet at that time a major concern was the safeguarding of banking secrecy, and lawmakers were still getting used to the information age. Currently, Support PSFs only perform a limited range of roles including client communication, IT systems operation and administrative tasks, all regulated by the CSSF. Outsourcing functionality to Fintechs is at the heart of the open banking world driven by PSD2.
More recent regulation also needs re-examining through this lens. “The 2018 financial law allows banks to outsource within their groups including internationally, but Support PSFs are still following the CSSF circulars that do not authorise such outsourcing,” Mr Terminaux said. Also Support PSFs could find a new role to provide cloud computing solutions in accordance with CSSF circulars and the European Banking Authority guidelines.
Making regulation work
“In the past you would hear Fintech entrepreneurs say they wanted to create new business models outside of the regulated space, but that has changed,” noted Mr Terminaux, but “now in Luxembourg you are seeing some Fintechs applying for regulated Support PSF status because they see the benefits,” he added.
Some will continue to find the rules overly restrictive, but others see regulations giving clients comfort, and thus easing the adoption of new digital solutions. Moreover PSD2 offers substantial exciting potential if the rules can be designed to match the technology. Creating a first draft of the legal framework to make this happen is a major challenge.