The Portugal Fintech Report 2020
WHERE REGULATION MEETS INNOVATION
Portugal as a Fintech Hub: from the view of Policymakers
ANDRÉ DE ARAGÃO AZEVEDO
Secretary of State for Digital Transition
Portugal has the Portugal Finlab as a unique touch point between fintechs and all the financial regulators. What is your opinion about the program?
This is a very positive program, I believe this is a triple win situation, for the fintechs, the stablished companies and financial regulators.
I BELIEVE THIS IS A TRIPLE WIN SITUATION, FOR THE FINTECHS, THE STABLISHED COMPANIES AND FINANCIAL REGULATORS
The fintech startups benefit with the program in a way that they open up to the market and the experience of stablished financial companies, also receiving support by the regulators to develop their solution aligned with the regulatory framework. For the companies, they can fast track innovation with the typical flexibility intrinsic of the entrepreneurship world. The regulators also have here an opportunity to update policies aligned with the new ways of doing business and emergent technologies.
The government is pushing the “Free Technology Zones” (Zonas Livres Tecnológicas). The financial sector is a natural candidate for that. Can you describe the initiative? And specifically for the financial sector?
The Promotion of Technological Free Zones through the creation of special regulatory regimes is one of the emblematic measures of the Action Plan for the Digital Transition. The expected benefits of this measure will actively contribute to the development of the industry and Portuguese research centres by accelerating the processes of development, testing and creation of knowledge and Portuguese Intellectual Property. It will help promote Portugal’s positioning in research and development (R&D), national resources and the participation in international projects, as well as the attraction of innovative projects and investment related to emerging technologies.
Also, the government approved a Resolution of the Council of Ministers that established the general principles for the creation and regulation of Free Technological Zones. The objective is to create a legislative framework that promotes and facilitates research, demonstrations and testing activities, in a real environment of technologies, innovative products, services, processes and models, in Portugal. After the creation of a legislative framework, for instance the financial sector – with its specificities - must be object of specific treatment and a possible new framework.
Recently the law n. 57/2020, of 28th August requests for a report regarding the creation of a regulatory sandbox for fintech. Will we have a fintech sandbox in Portugal? What is the timeline that we can expect?
The National Council of Financial Supervisors is set to present a report on the possible creation of regulatory sandboxes and free technological zones developments in the area of fintech, with reference in particular to developments in the European Union, including initiatives taken in this field by the European Commission or by the European Supervisory Authorities, until 29th of December, 2020. Independently of an umbrella legislative framework for experimentation, that the government is working on and will necessarily involve several relevant stakeholders in its different stages, and subsequent sectorial legislative frameworks, support frameworks for experimentation may coexist, as regulatory sandboxes, Innovation Hubs (eg.: Portugal Finlab), or accelerator programs. A fintech sandbox could, in a near future, coexist in Portugal with a legislative framework for experimentation and other support frameworks for experimentation, like accelerator programs.
Regarding fintech policy, do you follow any other country benchmark? Any specific policy or initiative that you see as a vision for Portugal to follow?
All these initiatives were preceded by a benchmark evaluation of other examples, not only European but worldwide, and in the design of our national initiatives we took that into consideration. The idea on the Technological Free Zones is to have a global framework, which will be the first example in the world, a common framework that will be followed by a specific Technological Free regulatory framework for each sector or industry.
We encourage fintech ecosystem to invest and contribute to the design and the program of this cluster around Technological Free Zones in Portugal.
Regarding the European Union landscape, funds, rules do you see any opportunities and threats that portuguese fintechs should pay more attention?
We are closing the financial package for the next decade and from that point of view there will be countless opportunities, also because digital is an immense opportunity by itself.
The Portuguese FinTech are a relevant partner in the transformation of the financial sector in Portugal, an increasingly recognized role, but it is also important that they know how to associate and take advantage of the regulator lines defined by the European Union for this area.
The government’s commitment is that we will work, in partnership with the private sector, namely with Fintech Ecosystem, to co-design these measures.
Portugal FinLab is a communication channel between innovators in the financial sector in Portugal – start-ups or incumbents – and the sector’s regulatory authorities. This project is part of the three regulators’ efforts to increase transparency and address concerns over the Portuguese regulatory framework, and reflects their requirement to keep up with the sector and be aware of emerging needs driven by financial innovation.
Projects selected on the pitch day were analysed by the regulators and a report listing possible regulatory obstacles and critical issues for the project was issued, so that innovators understand their boundaries and possibilities within the Portuguese legislation and regulations.
Based on the projects analyzed in the 1st batch (analysis of 2nd batch projects still ongoing), it was concluded that the main regulatory issues raised, in more or less detail, were very similar to those of the previous edition, with the exception of one. In short, the following was found:
Increase of the number of questions about securities transactions and investment advisory, especially related with the requirements applicable to the activity of so-called robot advisors in terms of authorization, supervision and portability of requirements in the EU;
Increased number of questions about Insurtech business models;
Decrease in the number of questions about virtual currencies, but not on the application of blockchain technology;
The high number of issues related to payment services remained at the level of the previous edition, mainly implying requests for authorization to provide account information services (AIS) and payment initiation services (PIS). It should be noted that, in this field, one of the projects presented aims to combine financial and non-financial services;
Relevant number of business models that combine various services, e.g. collaborative financing and tokens or payment and insurance intermediation services;
Some issues outside the scope of competence of the Authorities involved, such as: digital identity apps (CNPD); premium issue debt issuance project (IGCP); credit compensation project (AMA and CNCS).
In conversation with the Organizers
DIRECTOR OF THE BOARD OF DIRECTORS AT BANCO DE PORTUGAL
JOÃO DE SOUSA GIÃO
MEMBER OF BOARD OF DIRECTORS OF COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS
MANUEL CALDEIRA CABRAL
MEMBER OF THE BOARD OF DIRECTORS OF AUTORIDADE DE SUPERVISÃO DE SEGUROS E FUNDOS DE PENSÕES
The second edition of the Portugal FinLab has reached its end. How do you evaluate this edition and the program?
Hélder Rosalino - I am very happy with the results, not only because of what we have accomplished as a supervisory Authority – in terms of knowledge on new technologies being used in financial services or new business models –, but also due to the positive feedback from all participants. The first edition was a risky bet, but it paid off, and that is why we decided to go on into a second edition. There was also the risk of the market “losing steam”, but that did not happen and we were able to communicate with a very significant number of interesting FinTech projects (32 versus 39 in the 1st edition). Overall, we have received about 70 applications in the two editions, which is higher than the number of reports produced (20), and a good indicator of the success and interest of this initiative for the FinTech market.
João de Sousa Gião - The second edition of Portugal FinLab continued the good results of the first edition, allowing the Regulators to improve their understanding and awareness of market trends. This became clear due to a more agile and dynamic communication between innovators and the Portuguese regulatory authorities in this last edition and the main reason for this improvement was the knowledge acquired by the authorities in the first edition. Thus, it is fair to say that the coverage and capacity of the CMVM to give a fast and straight to the point response to FinTech companies has never been better and has developed the blueprints to a fast-track structure to deal with FinTech companies. Overall, this kind of improvement and the impressive number of FinTech companies that we interacted with exceeded our expectations.
Manuel Caldeira Cabral - The second edition of Portugal Fintech can be considered a success. Despite a decrease in the number of applications compared to the first edition, there was still a very interesting adhesion on the part of startups, which presented very attractive and innovative projects. Also, we had, for the first time, a participation of an incumbent, which reinforces the credibility that this hub of innovation has achieved in the market. I cannot fail to mention the fact that this edition has been running since March, under the strong restrictions imposed by the Covid-19 pandemic, and this has not prevented its development with the success we can see.
Any specific new trend and difference between the two editions?
Hélder Rosalino - I would highlight two trends that were especially relevant for Banco de Portugal. Firstly, the fact that we had an incumbent Bank participating in the program for the first time, which shows that incumbents are indeed also innovators and that supervisory Authorities do care with the “level playing field” between incumbents and new entrants. Secondly, the fact that we have witnessed increasingly complex projects being developed, which often mix several financial activities,. These projects are those which benefit the most from the Portugal FinLab format, by having the three Authorities involved and collaborating for the same purpose. As to differences, in this last edition the Authorities have made additional efforts to clarify, whenever relevant, the regulatory doubts of the non-selected candidates through bilateral communications. Their projects were all appointed to a designated Contact Authority, who will be the contact point in case they need further information.
João de Sousa Gião - I would say that this edition revealed an increase of projects related to RegTech and Robo-advise. A frequent and challenging topic was the liability arising from the automation inherent to new technologies. On the other hand, it was exciting to get to know all the important benefits of these new project to the efficiency and stability of the financial sector. For these reasons, CMVM decided to prepare a public consultation about RegTech and Robo-advise, to be launched in the first half of 2021, for the purpose of sharing experiences and views with the market and establishing a comprehensive set of guidelines for market players. Other trends associated with blockchain and payment services continued in this second edition, and the levels of maturity of this kind of project was visible. CMVM examined blockchain projects in this second edition of the Portugal FinLab that cover a broad range of financial services in innovative models with new and complex features.
Manuel Caldeira Cabral - Both editions counted on the collaboration of the three financial regulators, the Insurance and Pension Funds Supervisory Authority (ASF), Banco de Portugal (BdP) and the Securities Market Commission (CMVM). In the first edition, the association Portugal Fintech also joined the organization. The themes remained relatively stable, however, it is worth noting an increase in the participation of projects that included the insurance area. Two of them, Coverflex and Swood, were even selected, respectively in the first and second phases.
There is a global race to be the best fintech hub. Regulation plays a critical role. Regarding this field, any highlights you would underline about the advantages of Portugal to start a fintech or insurtech?
Hélder Rosalino - I believe that more than a race to be the best FinTech hub, we are in a race to offer the Portuguese market the support that best serves its interests. The fact that we have the three Authorities collaborating on the Portugal FinLab, with two pitch days per year and a program that is designed to, from day one, facilitate the communication between the project owners and the supervisory Authorities, has been a very good fit to our growing FinTech and InsurTech local market. Furthermore, Portugal FinLab proved to be a good vehicle to attract foreign projects/companies to Portugal. These FinTech can benefit from our fluency in English, technical skills, regulators’ proximity, synergies with Fintech already established, amongst others.
João de Sousa Gião - Portugal has an important advantage over other jurisdictions in having an innovation hub with the three financial competent authorities, as fintech and insurtech projects tend to have regulatory queries that cover all financial sectors. In this way, the authorities can easily coordinate and provide the right answers expeditiously, generating security and fluidity to the market. Another important advantage is that all three authorities clearly understand and support innovation while at the same time, ensure that all the players are carrying out their financial activities within the same rules and with a full understanding of their regulatory perimeter. I would also like to highlight the relevant role that the FinTech community has played in welcoming new projects, both national and international.
Manuel Caldeira Cabral - Portugal has been proving to be quite attractive for the development of an ecosystem favorable to the installation of startups, both due to the economic policy conditions of support to technological companies, as well as the availability of highly qualified Portuguese staff and the ability to attract foreign talent to the parents. The holding of the Web Summit in Lisbon has contributed greatly to publicize the country’s advantages, whether natural, such as climate, safety, geographic diversity, or those related to infrastructures such as quality internet, co-work spaces and business acceleration. I think it is unequivocal that the national effort to increase innovation facilitators is visible, with Portugal FinLab being a good example.
What can we expect in terms of coordination between regulatory authorities from different countries in terms of openness and channels of communication with innovators. Can we expect an european answer? What type of advantages do you see in it?
Hélder Rosalino - The European Commission has several ongoing initiatives in this regard. I would perhaps highlight the New Digital Finance Strategy that went into public consultation and is expected to give rise soon to a new Action Plan, which will give a strong role to Innovation Facilitators. Also, it is important to note that the European Supervisory Authorities, under the request from the Commission and following the publication of the Report on FinTech hubs last year, launched the European Forum for Innovation Facilitators (EFIF), which has been a great tool for sharing experiences and discussing next steps.
João de Sousa Gião - When dealing with financial innovation we are mainly dealing with inherently cross-border products and services. For that reason, harmonization of the applicable rules and, most importantly, supervisory convergence is paramount.
Manuel Caldeira Cabral - The collaboration and coordination of the various supervisory authorities in different countries has been very intense and fruitful. At EIOPA level, the European supervisory authority in the area of insurance and pension funds stands out, the existence of a permanent task force dedicated to Insurtech that has a wide participation of States, working in strict collaboration-members with the Union European Union. There is also a strong collaboration between the three European financial supervisory authorities, EBA, EIOPA and ESMA, who, in a joint committee, coordinate various initiatives in the field of innovation.
Recently the law n. 57/2020, of 28th August requests for a report regarding the creation of a regulatory sandbox for fintech. Can you share some insights about this subject?
Hélder Rosalino - In fact, the 3 Authorities (CNSF) were asked for a report on regulatory sandboxes until the end of the year. We do not have much information yet about the aim of this report. Nevertheless, this report will have to be articulated between the 3 Authorities (CNSF) and I am sure that we have gathered some very interesting knowledge and experiences to share, whatever the purpose is.
João de Sousa Gião - This is a very interesting initiative. The CMVM has been monitoring for some years all types of financial facilitators across the globe, with the aim of seeking suitable solutions to improve Portugal FinLab, and we already analyzed the advantages and disadvantages of the different existing models. The CMVM, together with the other national authorities, will now make the best efforts to provide the Portuguese Government and Parliament with the information required in a manner that it facilitates a thorough assessment of the best FinTech policies at national level, placing Portugal in a prominent position to attract important economic opportunities.
Manuel Caldeira Cabral - The legislation requires that “a report be prepared on the possible creation of regulatory sandboxes and technological free zones in the area of fintech, with reference, in particular, to developments within the European Union, including the initiatives adopted in this field by the European Commission. or by the European Supervisory Authorities”. This topic is being analyzed and, for now, consists on mapping the existing realities within the scope of the European Union so that it is possible to know what is implemented or under development at the community level with a view to assessing future forms of evolution in this area.
For the innovators that want to be “regulated by design” do you have any recommendation? After all these years of experience seeing new projects, any particular good practices that you can highlight?
Hélder Rosalino - That is a very abstract concept, considering the different financial activities that are regulated, their requirements and the constant evolution. I do think that having in mind the regulatory compliance since the conception of a project and designing a roadmap that is adjusted to the legal requirements that may be required, for example in terms of authorisations, is a good way to ensure simultaneously a reduction of the time-to-market and regulatory certainty, which may help leapfrog FinTech companies.
João de Sousa Gião - From our experience, the recommendation we can give is to clearly state the main objectives of your projects and to be transparent. Firstly, if you still have doubts as to the main objectives of your projects, the authorities will not be able to help. The legal regimes of the financial sector can be complex, so if your objectives are not clear, the answers of the authorities cannot be deep and focused. Also, if your inputs are misleading, you will not receive the appropriate information for the project that you actually are going to implement. We understand if you still have indecisions about the main features of your project so if can present your doubts clearly, we will certainly help you in your choices.
Manuel Caldeira Cabral - The main recommendation is that they participate in FinLab, where they can clearly find out how the project fits into the law and regulatory standards, working with the simultaneous support of the three supervisors. The experience of FinLab, which has been around for two years, has effectively enabled us to get to know several projects closely, many of them intensely innovative. On the other hand, in relation to the selected projects, the regulators present a final report with the conclusion of the analysis carried out according to the regulatory questions that were asked, which originates its systematization. So there is enough experience to be able to consider different ways of transmitting these conclusions.
Regarding the regulation recently implemented or about to come would highlight any with a more disruptive potential? Anyone particularly important for the fintech community? Why?
Hélder Rosalino - Now that PSD2 is becoming more “business as usual”, it is expected that the new 5AMLD, which gives Banco de Portugal new powers in terms of crypto-assets supervision, will impact some FinTech projects. In particular, with Law No.58/2020, of 31 August, the custodian wallet service providers, the providers engaged in exchange services between virtual assets and fiat money and the providers of exchange services between one or more forms of virtual assets and transfer of virtual assets, are now considered obliged entities. Aside from that, I find also very relevant the work that EU institutions, namely the European Commission, have been developing on crypto-assets, retail payments, operational resilience and digital finance, and that resulted in the launch of consultations.
João de Sousa Gião -As said above, CMVM is working in a public consultation document about RegTech and Robo-advise that will be launched in the first half of 2021. In 2020, CMVM issued 4 draft regulations for public consultation aiming at reducing reporting obligation deemed redundant. This effort will reduce up to 30% of periodic reporting obligations of entities subject to CMVM’s supervision. This initiative supports the fintech community since it provides a proportional application of the regulatory requirements to supervised entities and eliminates regulatory costs. Additionally, CMVM expects to provide its support in the pursuit to the strategic vision of the European Commission for digital finance that surely will result in important legislative initiatives in this area.
Manuel Caldeira Cabral - Innovation often raises new questions that may not be immediately addressed in existing regulations. First of all, what is important to do is to know these new realities and understand how they work in order to be able to determine whether, although they are the result of an evolution or even a disruption, they are still within the scope of the existing regulations. Experience has shown that in many cases the rules that exist can accommodate innovation. When this does not happen, changes to existing regulations will have to be considered. At the moment, at European level, the issue of increasing innovation facilitators, may lead to developments that may represent gains for fintech, namely in terms of contact, experience and knowledge of the regulatory environment in which they must develop.