Regulatory Divergence and Why the EU Needs Harmony

February 3, 2020 4 minute read

On the week of Brexit Day and the official withdrawal of the UK from the European Union, Paris held a global-focused event to examine how the financial industry will change. The Paris Fintech Forum founder and CEO, Laurent Nizri organized an in-depth look at what matters right now and more importantly, what will matter in the long term.

Outcomes of Regulatory Divergence

As almost everyone is aware, 5AMLD was transposed across EU nations, including the UK on 10 January 2020. While the legislation was, in part, a reaction to the Bataclan tragedy it also serves as one of the biggest efforts for regulatory harmonization across Europe in the financial sector since MiFID II harmonized securities regulation in 2018.

However, just because that’s the aim doesn’t mean that it’s an easy thing to get right. The Payment Services Directive (PSD2) was implemented differently across all EU regions and has had limited impact.

Regulatory harmonization is a key focus for regulators and the question of how to make regulations fit for customers in each region is core to that. In Europe especially there is a focus on human welfare with each regulation so they all need to be capable of properly serving customers. Aligning these differing goals of harmony and local customization can be a difficult task and is sure to continue to be one if regulators don’t work to create a minimum basic level of financial capability and infrastructure across EU member nations.

5AMLD is arguably doing the work to create common ground across member states by implementing minimum standards across compliance issues. But the difficulty comes from the multiple interpretations that can be given to those standards. It’s worth noting that many countries are yet to be fully compliant with 4AMLD so the actual implementation and fulfillment of the anti-money laundering directives could vary from what’s expected.

It’s because these regulations are a minimum rather than clear standards with guidance on how to implement them – it leaves room for businesses to do better than required but that transforms regulations from a shield to something complex which can trigger issues. All this complexity can cause some startup businesses to skirt regulatory demands.

Out of the Sandbox

One speaker at the event believed that compliance is nothing more than a hobby for fintechs, but while fintechs may take advantage of sandbox environments those who have failed to meet their requirements out of the sandbox come under heavy fire from regulators and industry news. They’re forced to make sure their compliance systems are up to standard otherwise they risk further reputational damage.

But it does raise the issue of whether the sandbox is the best idea for new technologies. Explaining how a technology works is of far less importance than making sure it has compliant outcomes.

If regulators in the EU are capable of achieving regulatory harmonization then it will cement the EU as the market to enter, businesses will only need to build once prior to rolling out across the entire bloc.

What Could go Wrong?

Without regulatory harmonization, there’s a distinct possibility that the EU could fall foul of the US and APAC markets. If EU regulations fail to be a baseline for innovation then they’re just priming the market for others. And right now the EU is failing to account for innovation, successful companies are fleeing the trading bloc to develop in more stable markets.

The US is acquiring startups at an impressive rate with several recent multi-million deals having occurred in 2020 alone and the APAC super-apps have already become leaders in their market. However, customer appetites in the EU are not the same as other markets, there are no super-apps as either the regulatory ecosystem doesn’t permit them or (more likely) customers do not want all their data located in one space.

How the EU will work to achieve regulatory harmonization is yet to be seen. 5AMLD represents a significant opportunity to create a standard across the trading bloc that could make it capable of competing with and possibly superseding the US and APAC markets.

Find out more about what the future holds for compliance in our 2020 report here.