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“FinTech differs from new tech-nologies in other sectors in that it involves the introduction of new business models within one of the most heavily regulated industries,” says Alvin Khodabaks, a partner at Clifford Chance, whose areas of focus include the technology and telecom sectors. “Technological solutions and services now being developed do not always fit comfortably within the existing regulatory framework. And that creates uncertainty. Then there is the fact that many of the rules designed to eliminate or reduce risks undermine the very nature of start-ups. Essentially, they have to become risk averse, which gives them less room to manoeuvre.”His colleague, Marian Scheele, a senior counsel who specialises in supervision of financial services providers, such as asset manage-ment firms, banks and payment service providers, goes on to say: “We are seeing FinTech startups emerging not only in the financial world, but also in other sectors, such as IT. Initially, their view is

‘how complicated can it be to build systems that facilitate the provision of financial services, such as provid-ing credit and payment services?’ These companies in particular are often shocked by the extent of the regulations imposed by law and the financial supervisory authorities.”The regulatory mechanisms may be strict, but, as both Clifford Chance lawyers are quick to point out, they certainly do not make it impossible to run a business, especially with the progressive harmonisation of the rules within Europe.

PSD2At the end of 2015 the European Parliament adopted the Revised Directive on Payment Services (PSD2) to regulate services provided by pay-ment institutions. Over the next few years EU member states will have to transpose this new directive into national law. “PSD2 differs consid-erably from its predecessor in that more service providers and services now fall within the scope of the directive. Many parties, including

companies that facilitate payments without being the bank where the account is held, will be shocked to discover that their activities are now regulated,” says Scheele. Yet, accord-ing to her, there is also a potential upside in that, in the future, parties will be allowed to access bank cus-tomer data. One of the objectives of the revised directive is to level out the differences in the rules in dif-ferent member states, which should make it easier for FinTech compa-nies to operate throughout Europe.As things stand, FinTech com-panies often find it difficult to offer services throughout Europe, either because national regulators interpret European regulations dif-ferently, or because additional rules may be imposed at a national level. “Some countries interpret the reg-ulations as leniently as possible, other countries are more exacting,” says Scheele.

Robo-adviceWhile PSD2 will make it easier for payment service providers to oper-

Which FinTechs will survive the regulations?FinTech is hot, but FinTech companies tend to find that they quickly run up against the limits of what the regulator allows. How do young companies navigate their way through the regulations imposed by the supervisory authorities? And who are the shoo-in winners in the race to acquire FinTech companies? A conversation with Alvin Khodabaks and Marian Scheele of law firm Clifford Chance, who counts financial institutions, startups and larger FinTech companies among its clients.

JORIS HEIJN

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Marian Scheele, Alvin Khodabaks

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ate throughout Europe, when it comes to FinTech solutions, in many instances it is not yet clear whether European regulations apply or, if they do, how they are interpreted by individual member states. “Take the provision of robo-advice, for exam-ple,” says Scheele. “It is governed by the European MiFID directive, which raises the issue of whether it is possible to dispense with human

involvement entirely when providing computer-generated advice. In the UK it has been decided that human involvement is always required, and similar rules are expected to be adopted in the Netherlands, in the sense that there must always be a person who is responsible for the service being provided. The Neth-erlands Authority for the Financial Markets (AFM) has also specified situations in which robo-advice solutions are subject to MiFID rules. The existence of different national rules may mean that suppliers have to build systems that allow for the application of different solutions, depending on the country or coun-tries in which a service is offered.”Scheele and Khodabaks are both of the view that the attitude of the reg-ulatory authorities is an important factor when FinTech companies are choosing the countries in which they intend to operate, but it is cer-tainly not the only consideration. European rules will make it more difficult for national regulators to launch a race to the bottom by inter-preting the regulations leniently as a means of attracting FinTechs. “Europe is now intervening far more rapidly than it did in the past,” acknowledges Scheele.Having said this, regulators can also make a positive difference by adjusting their procedures to more effectively facilitate new market entrants. “In the UK this is seen as an important priority,” says Khodabaks. The Financial Conduct Authority has proactively identified the barri-ers that hinder market entrants and steps that can be taken to help. AFM and DNB have also taken action and are prepared to extend assistance to new market entrants.

RegTechAccording to the Clifford Chance lawyer, in the Netherlands the reg-ulators are still developing their understanding of FinTech com-

panies. But they are making rapid progress. “We will probably find that the regime becomes more facilita-tive as their knowledge increases.” The emergence of so-called ‘RegTech’ (regulatory technology) will make it easier for precisely the right information to be submitted to the regulatory authorities without having to set up a whole bureau-cracy. “Much of the technology now being developed includes Privacy by Design. Maybe we will also see the increasing introduction of Compli-ance by Design.”According to Khodabaks and Scheele, the Netherlands offers conducive conditions for FinTech companies. “Factors such as the infrastructure, the adoption of tech-nology and the clarity of the market make the Netherlands an attractive prospect,” says Khodabaks. “And let’s not forget that the Netherlands also offers a good business climate. Given the size of the Dutch market, the Netherlands is performing rela-tively well. It now has a unicorn: a startup with a market valuation in excess of $1 billion. And hopefully there will be others.”Many FinTech companies do not immediately need to apply for a full banking licence, but can opt for a somewhat lighter regime. Bunq was the first company to be awarded a new banking licence in many years. Many other FinTech compa-nies focus on the provision of credit extension and asset management services, which means that they fall under other supervisory regimes.So there are countless FinTech com-panies and, between them, they are offering a wide range of services. Yet, how long this will continue to be the case remains to be seen. “At the moment we are witnessing a prolif-eration of FinTechs, the emergence of an incredibly broad spectrum of services, and considerable potential for investment,” says Khodabaks. “The market will eventually normal-

Marian Scheele is a Senior Counsel in Clifford Chance's Amsterdam office and specializes in the regulatory and legal aspects of financial institutions such as asset managers, payment service providers and banks. She has been in the lead of large licensing and restructuring projects involving EU legislation for asset managers, pay-ment service providers and banks, including AIFMD/MiFID/PSD/CRD. Marian frequently speaks at seminars on regulatory and other topics, such as fintech. She is a member of the public affairs committee of INREV.

Alvin Khodabaks is a Partner in Clif-ford Chance's Amsterdam office. Alvinhas always been fascinated by the intersection between technology, business and society which is where his focus lies. He is a Partner in the Technology Transactions Practice and heads up the Intellectual Property (IP) and Technology, Media and Telecom-munications (TMT) practice group. He also co-heads Clifford Chance’s global Cyber Security Working Group and is a key member of the firm's global fin-tech and TMT sector focus groups. He has a wealth of experience in IP, data protection and technology-related commercial contracting and litigation.

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ise and we will see consolidation. But it will be a while before we reach that point.”

Apple and GoogleWho will come out on top when the market starts to consolidate? According to the two Clifford Chance lawyers, that still remains to be seen. “The large banks will endeav-our to protect their market and their customer and account-holder bases will be an advantage in this respect,” says Scheele. “If they are able to offer effective FinTech solutions, they will be well placed to come out on top.” She also feels that banks have another advantage in that they are familiar with the existing reg-ulations. “Technology companies such as Apple, Amazon and Google are also in a strong position,” adds Khodabaks. “Everyone carries a smartphone, tech companies are perceived to be more innovative and consumer centric. They have the technology, consumer base and market position to move more into the financial services sector.” There are also likely to be fewer cul-tural issues if a FinTech company is acquired by a technology giant rather than a bank. Yet Khodabaks also sees a third category of companies that may well venture into the realms of FinTech, and that is telecom compa-nies. “The telecoms industry started out with phone services. Over the years it has expanded to include data, internet, messaging, television, content and wireless services, and now offers ‘quad play’ deals. The tel-ecom sector has already experienced significant consolidation and we will probably see the same thing in the FinTech industry. Who knows? Maybe the next step for telecom companies is to integrate FinTech solutions, so they become ‘quin players’ and move closer to the financial services sector. In fact, financial institutions may find that telecom companies end up being their main rivals.” •

Bas Boris Visser is Clifford Chance’s Global Head of Innovation and Business Change and a Partner in its Amsterdam Finance & Capital Markets practice. He was managing partner of the Amsterdam office from 2009 until 2015. Bas Boris focuses on the financial institutions sector.

Bas Boris Visser: Technological developments mean many of our clients have been going through huge transformation processes over the past decade. Take financial institutions for instance, they are slowly but surely becoming technology companies and they are increasingly offering technology based client solutions. So, as a firm we asked ourselves a number of questions; What does it actually mean that a financial institution is becoming a technology company? What kind of new issues are they con-fronted with, and do we have what it takes to help them with these new issues?

Lawyers and technology is not necessarily a match made in heaven but we can-not just accept it in the context of a society which is increasingly dominated by technology. Lawyers just have to become more tech savvy than most of us are today. At Clifford Chance we are working on this for instance by having become a partner of Singularity University Europe. Singularity University is a Silicon Valley based university totally focused on the impact of technology on society. Another example is the partnership we started with Startupbootcamp particularly on their FinTech and cybersecurity program. A while ago we also started our global Fin-Tech platform. A lot of our younger lawyers and professionals play a key role in it. A final example is linked to the partnership we entered into with Kira Systems. Kira is what we call second wave artificial intelligence software in the legal sector with the increasingly advanced E-discovery products being the first wave.