Transactions May 2017

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Fintech in Spain and their legal regulation

By Cristina Pardo

The economic crisis has allowed the development of a new digital ecosystem where new startups are daily born, proposing innovating solutions that are materialised in more economic and user-friendly digital services and products. This ecosystem consists of more than 12,000 Fintech worldwide.

The word Fintech is a compound word from English which results from combining the first two syllables of the words “Finance” and “Technology”. This term designates all such financial services startups that use new technologies to provide digital products and services to final clients, either consumers or companies.

Such Fintech are mainly leaded by entrepreneurs that use technology in a much more efficient manner than financial institutions. In this regard, the Fintech interact either on a collaboration or competition basis with the financial sector.

In Spain, Fintech have grown at a dizzying rate and have caught the financial industry and its regulatory environment by surprise.

Such Fintech are mainly leaded by entrepreneurs that use technology in a much more efficient manner than financial institutions

1. Types of Fintech in Spain

Fintech intermediate in all areas of the world of finance, acting as financial advisers or payment mediators. The technological finance companies currently operating in Spain include the following business areas:

1.1. Crowdfunding

a) Reward based crowdfunding: companies engaged in (i) lending money for a project in exchange for a return; or (ii) borrowing money for a project and offering a return in exchange.

b) Equity-based crowdfunding: companies that invest in other company’s interests that needs to be financed.

c) Crowdlending: companies that put in contact small investors with the financing applicants through its web and which attend and help them to take their investment decisions. For the investors is a way to capitalise their money with the risk to lose it.

d) Donation based crowdfunding: individuals that jointly donate money for social projects.

1.2. “Lending”: companies that offer financing through loans or credits, both to individuals or companies through an individual lender network who want to invest their private capital at reasonable rates.

1.3. Financial advice and equity management: startups that render their advice service on wealth management, managing the finances of its users, organizing their accounts and advising where to invest their money.

1.4. Payment intermediation systems: startups that manage payments on the Internet quickly and safely.

1.5. Big Data: companies whose purpose is to forecast the consumers’ behaviour.

2. Regulation of Fintech in Spain

Currently, Fintech in Spain are under-regulated. There is not a specific regulation for this sector and this lack causes insecurity among users and also damages competition among startups. For this reason, it is essential to approve an appropriate legislation.

2.1. Spanish Association of Fintech and Insurtech

The Spanish Association of Fintech and Insurtech (“AEFI”) has encourage the development of a “White Book of Fintech Regulation in Spain”, with the aim of making visible to supervisors and regulators the needs of these startups to compete in the financial arrangements.

With this “White Book” the AEFI wants to promote:

a) The grant of a provisional and temporary license to certain Fintech to test their services in the market under the relevant Supervisor’s control and with limited activity. This measure is known as sandbox and is already established in the United Kingdom, Singapore and Switzerland.

b) The implementation of a system of exemptions in the application of certain obligations of conduct (e.g., pre- or post-contractual information).

c) The implementation of virtual test spaces where startups may experiment with their solutions virtually without accessing the market.

(…) CNMV and the Government are working on legal rules and initiatives to adapt the regulations in force to the services offered by Fintech (…)
d) The implementation in each Financial Supervisor of the three markets, i.e., Banking, Investment Services and Insurance, of a specific Authorisation Management and a technical advisory team relating to the interpretation of the applicable rules to the products and services in question.

e) The establishment of advice Units within each Supervisor as a mechanism to assist the Fintech in the authorisation proceeding required to access, if applicable, the regulated activity or once with a license, to favour simplified measures of regulatory performance under certain conditions, provided the interest of consumers is protected.

2.2. Spanish Securities & Exchange Commission

The Spanish Securities & Exchange Commission (“CNMV”) offered on its web a digital portal addressed to financial innovation with the purposes of promoting the initiatives within the Fintech scope in Spain.

The goals of this portal, among others, are: (i) to help the promoters and financial entities on regulatory aspects of the stock exchange which may affect their projects; and (ii) create an informal space of communication with the promoters and financial entities on initiatives in this scope.

In turn, the CNMV and the Government are working on legal rules and initiatives to adapt the regulations in force to the services offered by Fintech as participating finance platforms by means of loans and securities to this new reality and enhance their development, thus allowing Spain to attract foreign investment.