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Payments & FinTech Lawyer

ECB identifies FinTech bank business model IT risks in draft guide to assessments

The European Central Bank (‘ECB’) published its draft guide to assessments of FinTech credit institution licence applications for public consultation on 21 September 2017, which aims to help FinTechs that are considering applying for a banking licence understand what is required of them, whilst also making the application process more transparent. The ECB’s draft guide identifies risks specific to the FinTech bank business model and states that the two most common and significant IT risks are the increased vulnerability to cyber attacks and the increased reliance on outsourcing.

The ECB’s draft guide claims to be ‘technology-neutral’ and does not seek to ‘either support or discourage the entrance of FinTech banks as market participants.’ The draft guide includes a list of safeguards against cyber attacks to be implemented by FinTech banks, which may be used in the assessment of an applicant’s IT related risks, as well as assessment criteria relating to a FinTech bank’s outsourcing arrangements and data governance and security frameworks. The draft guide provides FinTechs with examples relating to the main assessment criteria in the licensing process, which aim to shed light on the ECB’s expectations with regard to the standards that need to be achieved and maintained in order to be granted a banking licence.

“Cyber security and the maintenance of safety when relying on outsourcing have been pointed out as the main concerns to be addressed during the licensing procedure,” said Tanja Kordys and Dafni Ragousa of CMS Hasche Sigle. “It is not a question of accuracy of risk identification, since the guide is a legally non-binding document but it helps to build a common understanding of the application procedure and that assessment will be made on a case-by-case basis. The potential for increased vulnerability of technology based business models to IT related risks appears rather realistic and the proposed non-exclusive safeguards seem reasonable without hindering FinTechs substantially from obtaining a banking licence.”

The draft guide also includes a section on the suitability of the members of the management body and the suitability of shareholders, as well as a section on capital, liquidity and solvency assessment, which identifies amongst other things that during the startup phase FinTech banks may face a greater risk of financial losses, which may warrant additional capital above the minimum requirements.

“I get the sense when reading the draft assessment guide that there is quite a strong element of reassuring the traditional banks that the ECB are trying to create a level playing field,” adds John A. Lunn, Partner at Morton Fraser LLP. “FinTech tends to be characterised by fast entry into the market, and the guide calls out the additional risks inherent in that. Many will be VC backed, with those VCs keen to see a quick return on their investment before they back out of the market. FinTech banks therefore have to build a solid capital base quickly, or risk closing if they cannot establish themselves within that short period. Senior management need to have a strong grounding in banking to support the new age of digital technology, and the guide makes it clear that you can’t have one without the other.”

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