This document compares the FinTech regulatory regimes in the UK and Hungary. It provides examples of FinTech projects like crowdfunding, payment services, and data analytics. The UK regulator (FCA) takes an approach that favors innovation while ensuring consumer protection. The FCA provides guidance and consults with firms but regulatory burden is high. Hungary has no FinTech regulation yet but specific rules may be introduced. Key issues being addressed include PSD2 implementation and developing instant payments. New technologies like bitcoin raise questions about appropriate regulation.

1. FinTech regulatory landscape
in Hungary –
a comparative analysis of the UK
and Hungarian regulatory
regimes
Trystan Tether
Partner, London
Gábor Helembai
Senior Associate, Budapest

2. UK Perspective - Overview
● Previous meaning of "FinTech":
• the provision of IT services to established providers in the financial
services sector
• often in relation to back-office systems
● Current broader meaning:
• the application of technology to enable new ways of providing financial
services
• often by new providers previously outside the financial services industry –
disruptors
● Presentation approach:
• regulatory regime regarding FinTech and FCA in the UK
• Comparison of UK approach with the Hungarian approach
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3. Examples of the interface between FinTech and
regulation
● Regulation of "FinTech"? – no single scheme of regulation, but varied
regulation of projects according to what the technology actually does
● Typical examples of FinTech projects in the UK:
• Crowd-funded lending – individuals lending money to other individuals
or to businesses; potential disintermediation of banks
• Crowd-funded investments – both small scale equity investments and
acquiring shares in specific assets such as real estate – example of
Property Partner
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4. Examples of the interface between FinTech and
regulation - continued
● Cloud-based solutions to financial service provider IT requirements
● Comparison websites for financial services products (mortgages, loans,
insurance policies) becoming a primary interface between the product
providers and their customers
● International money transmitters - providing money transfer services
previously only available from banks
● Prepaid debit cards - providing basic banking services to the previously
unbanked
● Data analytics providers - working with data gained from financial
transactions for profiling and fraud prevention purposes
● New payment initiation services - designed to cut the major card
schemes out from payment chains
● Bitcoin and other cyber currencies
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5. Examples of the interface between FinTech
and regulation - continued
● Blockchain and distributed
ledger technology – more for the
future, but possibilities believed
significant
• Settlement of securities transfer and
transmission of other valuable assets
transactions
• Central bank cash?
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6. Key Regulatory Questions and some factors
● Unauthorised party? Does a FinTech project involve a regulated activity
being carried out by an unauthorised party?
● New regime needed? Does FinTech involve activity which the Regulator
considers should be made the subject of a new regulatory regime – for
example crowd-funded lending or crowd-funded investment?
● Risk for an authorised party? Does a FinTech project involve an
authorised party carrying out its regulated activity in a way which creates
risk? – e.g. IT services through the Cloud or the use of third party for
customer due diligence AML identification
• Is there an "outsourcing"?
• Is there any unacceptable potential compromise to systems and controls
of a regulated party?
• Is there any material risk of data breach?
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7. Key Regulatory Questions and some factors -
continued
● Approach to game-changing technology? How should the Regulator
approach a highly disruptive but potentially game-changing development like
the blockchain and distributed ledgers?
• AML implications
• Risk to consumers
● Data collection and mining issues? What are the data protection
implications of the collection of large quantities of financial data which is
often involved in FinTech projects?
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8. Approach of the UK Regulator (the FCA)
● In favour of competition, innovation and efficiency
• Approach to crowd-funding: creation of two new regimes (for lending and
for equity/asset investment)
• Engages in consultation exercises to investigate industry perspectives
• Has produced fairly extensive guidance on where perimeter lies between
regulated and unregulated activity
• Has produced guidance to regulated entities in relation to utilisation of
the Cloud
• Reasonably easy to consult in relation to borderline cases – although will
not issue non-binding action letters
• Not perceived as being unduly influenced by existing providers
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9. Approach of the UK Regulator (the FCA) -
continued
● Cautious
• Intelligent (although over-worked), and normally tries to look at
substance over form – seeks to be technology-neutral
• Consumer protection focus - concerned as to possibility of perception of
serious failure if too permissive
• Cautious in relation assessing new technologies – e.g. Bitcoin
• Comprehensive compliance handbooks – useful but also heavy regulatory
burden
• Medium length of time-to-authorisation where required
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10. Approach of the UK Regulator (the FCA) -
continued
● Conclusions on the above balance
• FCA is probably getting the balance about right
• Many financial service providers concerned
about some aspects of external sourcing – e.g.
use of the Cloud
• Some commentators say that crowd-funding
may lead to substantial future losses
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11. Interface with the Hungarian regulation
• Not regulated as such or no general regulation exists
• May be subject to specific regulations in the near future
• Fast changing environment: companies composing the market may react
faster – by-laws, code of conducts, recommendations and guidelines
• Guideline No. 15/2015 of the MNB on the security of internet payments
Regulatory landscape in Hungary
Subject matter | Client Details
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12. Hot topics in Hungary
• Transposition of the Payment Accounts Directive
• Preparations for the SEPA End-Date Regulation
• Recent changes of the renewed Payment Services Directive
• Implementation of an instant payment system
• Introduction of the intraday clearing and settlement of bank card payments
• Bitcoin, crowd-funding, cloud based computing
Latest developments in regulations affecting financial infrastructures in
Hungary
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13. Implementation of the Payment Accounts Directive
• 3 main scopes of Directive 2014/92/EU (PAD):
• Comparability of fees related to payment accounts
• Payment account switching
• Access to payment accounts with basic features
• Hungarian regulation enters into force in October 2016
• Comparability of fees: MNB's comparison website has been launched
• Payment account switching: highly debated its effectiveness – to be fine tuned
• Basic account: seems to be useless
Homework almost done
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14. Preparation for SEPA end-date
• SEPA is based on common technical standards and payment schemes
• Aim is to execute euro payment transactions easier
• Full migration to common European payment schemes: credit transfers and
direct debits in Euro must be executed in accordance with the common
standards and technical requirements
• Deadline is 31 October 2016 to complete the migration to the common
payment schemes
• MNB is continuously monitoring the progress of SEPA preparation – working
closely together with Hungarian Banking Association
• Status of the migration: more than 85 per cent of the euro-denominated
credit transfers were performed in accordance with SEPA requirements (June
2016)
EU requirements for credit transfers and direct debits in euro
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15. Key changes in the renewed Payment Services
Directive
• PSD2 lays down contemporary requirements and trends to encourage the use
of innovative, electronic payment solutions
• Must be implemented no later than 13 January 2018
• Importance: establishing market entry of enterprises providing innovative
electronic services, while regulating the protection of customers' personalised
security credentials
• Provides the means for the provision of innovative electronic services in a
regulated and supervised framework
• Tight security, risk management and authentication requirements on
payment service providers
One of the most awaited regulatory changes in the sector
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16. Key changes in the renewed Payment Services
Directive
• PSD2 contains important consumer right related provisions, e.g. right to
terminate the framework contract free of charge, reduced liability for losses
relating to any unauthorised payment transactions, etc.
• Enables banks to "outsource" certain parts of their services
• Access to accounts: one of the most controversial territories of PSD2 - conflict
between the new requirements and the current bank secrecy, data protection,
anti-money laundering rules
• RTS draft was published on 12 August 2016; however, a lot of questions have
not yet been answered:
• Eligibility of 3rd party
• Minimum set of data to be accessed
• Responsibility issues
Continued
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17. Ongoing developments of the financial
infrastructure
• Developing the concept for an instant payment system in Hungary
• To improve the competitiveness of the Hungarian economy
• Extending the scope to additional payment situations
• The use of secondary account identifiers
• Intraday clearing and settlement of bank card payments
• Only apply to domestic payment card transactions
• EU regulation on interchange fees – opportunity to take over the clearing
• Final aim: further expansion of the card acquirer infrastructure –
alternative instead of cash payments
Dimensional shift in the area of domestic payment transactions
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18. Bitcoin, crowd-funding and cloud based solutions
• Bitcoin: MNB'S official standpoint: highly risky and not recommended at all
• General concerns: no issuer, no regulatory authority, no control and no
appropriate liability regime established
• Crowdfunding
• No sui generis regulation set forth as it was developed in the UK
• No high demand for this type of fund raising
• Could be handled by the legal instruments designed for other purposes
• Cloud based services
• Treated as outsourcing
New solutions, new questions, new answers?
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Trystan Tether
Partner, London
trystan.tether@twobirds.com
Gábor Helembai
Senior Associate, Budapest
gabor.helembai@twobirds.com