In Austria and CEE, too, these developments have led to FinTechs establishing themselves as drivers of financial innovation which is changing the financial market.
The Austrian Financial Market Authority ("FMA") has been dealing with the topic of FinTech in Austria for some time, in particular with the question of what a FinTech is and what challenges it faces.
FinTechs are financial innovations based on information technology that
- often, but not necessarily, is developed by unlicensed companies;
- typically includes interfaces to licensed companies; and
- can bring about lasting changes in the way the financial sector functions.
From a new payment app to automated consulting systems, the term is broad and encompasses a variety of different models that affect numerous supervisory areas. Many existing financial products or services simply find new channels via FinTech, are managed via online platforms, apps or new technologies such as distributed ledgers. A subsection of this group are the so-called InsurTechs, which, for example, digitalise and simplify the conclusion or administration of insurance policies.
"FinTechs" are therefore often companies/start-ups in the technology sector that are active in the field of using such financial market (digitalisation-)technologies. However, it is a grown term and no national supervisory law regulates FinTechs per se. Both, unlicensed and licensed companies can be referred to as FinTechs, if they bring together new technologies and financial services.
Domestic and foreign FinTechs are active in Austria. Some do not require a licence to operate; some are established financial institutions that are currently developing FinTech businesses for their existing business models; some FinTechs are just starting out and have only recently been supervised. And some FinTechs are not aware that they are supervised or require a licence to operate…
In a nutshell, FinTechs can include completely different market participants, from (specialised business units of) traditional banks to high-tech start-ups.
The range of business areas of FinTechs extends from the simplification of certain banking processes to Robo advising, a financial technology that creates a suitable portfolio on the basis of algorithms depending on the client's risk affinity.
It becomes interesting from a legal perspective if you ask when, and for which services a licence from a supervisory authority is needed. The widespread belief that as long as a FinTech is still small it certainly does not need a licence and can "fly under the radar", is not correct. As the financial sector is strictly regulated and the FMA monitors the market closely, it is particularly important to pay attention to not carrying out licensable activities without having obtained a proper licence before. Violations of regulatory regulations or the provision of licensable services without proper licence can lead to significant administrative fines both for the legal entity as well as natural persons (such as the managing directors of the FinTech company). Under certain circumstances such fines can amount up to EUR 5 million or 10 % of the aggregate annual net turnover of the whole group the company belongs to.
Depending on the business model of a FinTech, different financial services licences may be required. Necessary approvals may range from a licence for banking services, investment services, payment services, insurance services to services in the context of (alternative) investment funds or issuance of e-money. Specific care should be taken in particular if a certain business model envisages the collecting and/or investment of client monies.
A further common misunderstanding often exists around the factor of territorial scope of licensing requirements. Not being established in a Member State – on its own – does not necessarily exclude a FinTech from licensing requirements in a certain Member State. The provision of licensable service on a mere-cross border basis into a Member State (e.g. targeting clients in a certain country via the internet) would often be sufficient for triggering a licence requirement.
Here is a list of financial regulations that may need to be considered by FinTechs:
- Austrian Banking Act (Bankwesengesetz) regulating banking activities. Be aware: banking activities are defined broadly, and for instance also include factoring business, the intermediation of loans or deposits or exchange services in relation to foreign currencies;
- Austrian Securities Supervision Act 2018 (Wertpapieraufsichtsgesetz 2018) regulating investment services, including the advice in relation to financial instruments (also if carried out on an automated-basis, e.g. roboadvice);
- Payment Services Act 2018 (Zahlungsdienstegesetz 2018), including new services such as payment initiation services and account information services ("open banking");
- Alternative Investment Funds Manager Act (Alternative Investmentfonds Manager-Gesetz), e.g. in case the business model contemplates collecting client monies and investing such monies according to a defined investment strategy (or for other non-operational business purposes);
- Insurance Supervision Act 2016 (Versicherungsaufsichtsgesetz 2016) in case the business model relates to insurance services.
We can support FinTechs from foundation, through the assessment as to whether financial services licences are required, or how to change the business model to avoid a licence requirement, to obtaining a licence from the FMA, if needed. To obtain legal certainty from the outset, it could be helpful to consult the FMA with a request to assess whether a given FinTech business model would require a licence or not.
We regularly advise on these requirements and are also in regular contact with the FMA on FinTech and other regulatory questions. Please contact Thomas Kulnigg or Matthias Pressler for further questions.