The Connector Podcast - DFS Digital Finance Summit - Navigating Europe's Regulatory Landscape: A ...

Welcome to The Connector Podcast, an ongoing conversation connecting fintechs, banks, and regulators worldwide. Join CEO and founder Koen Vanderhoydonk as you learn more about the latest available trends and solutions in the markets.

Welcome to another podcast from The Connector in collaboration with Belgium Fintech. And I have the pleasure and joy to have somebody in my podcast that is not the first time, and that's Philippe. And you're representing Simon Brown, and you're a lawyer firm in Europe. And today you're going to give us a bit of updates on some of the points that are happening today in the European landscape. Is that correct?

Absolutely. And glad to be back.

Yeah, me too. Me too. Can you maybe explain a little bit what Simon Brown actually does and who you are?

Sure. So we're a business law firm based here in Brussels, serving the Belgian and the European market. We're a full-service law firm, so we cover all aspects of business law. But specifically relevant for the fintech industry is that within the firm, we have what we call our digital finance team. So we service all actors in the broad digital finance sector. So young fintechs, more mature incumbents going digital, pure tech and data players, everyone who is concerned by fintech at large, I would say. So we provide regulatory advice for them. We negotiate licenses with the regulator. We keep them updated on regulatory changes, what happens quite often, obviously. And then more classic lawyer work, you know, contractual reviews, drafting, litigation. Sometimes that happens as well.

I can imagine. What I always appreciate about having the conversation with you and your firm is that you don't shy away from the more relevant, sometimes, how to say, sensitive topics. And I think that's the first one we're going to cover. It's about the potential impact of deregulation.

Yeah, absolutely. Recently, there has been a lot of talk about deregulation. It was it started before, but we really feel that it was kickstarted again by the inauguration of President Trump in the U.S.

Not only that, but the fact that he actually did what he said he would do.

Absolutely, absolutely. And so here in Europe and and also the European Commission, I think. Subject to some social and political pressure, they felt that the reaction was was necessary. And so one of the one of the things that we've observed was the the publication early February of the EU's Commission work program. So every year they get a work program out, and when this work program in 2025 was announced, Ursula von der Leyen, the president from the EU Commission, said. You know, citizens, businesses, you have called for a simpler EU and we've heard you. So we're going to simplify. That was basically the tagline when the work program got out. And so this created quite a lot of expectations. And we saw, especially online, on social media, a lot of people jumped to conclusions around this work program. Jumped to conclusions. in a way that probably they based themselves as well on, I would say, non-final or leaked versions. And there was quite a lot of fuzz about important regulation being withdrawn. And one of these important regulations was FIDA. Maybe as a reminder, FIDA is the Financial Information Data Access Regulation. It's a draft, but—

Open finance.

Open finance, exactly. So building on open banking from PSD2, but making it broader and establishing a framework to share all kinds of financial data. It covers insurance, credit, mortgage, pension data. And so there was a proposal from the French to withdraw altogether this FIDA project because the scope was too wide, because it would involve high costs for the industry, etc. So I wouldn't say it's real deregulation. It's probably also the result of some lobbying. But in the end, in the final version, when the work program came out, FIDA was still there. And if you look at the whole work program, it isn't really the regulatory, I would say, deregulation earthquake that was announced. If you look a bit at the numbers, in reality, 123 pending proposals are maintained, only 37 are withdrawn. And from those 37, most of them were anyhow obsolete or the negotiations were stuck and 51 new proposals were added. Then again, this is not about financial regulation only. It's about all topics that, that concern the, the, the, the Commission. So bottom line, especially for the fintech industry, is that all important initiatives that were on the table, and I think about PSD3, PSR, FIDA, they're all still on track. If we look at the timetables for those important initiatives, PSD3, PSR, I think we're not ready yet for the trilogue. So whenever a new piece of regulation is introduced, there is always interaction between the Commission proposing something the Parliament, and then also the member states in the Council. And so at this point, for PSD3/PSR, we only have the Commission and the Parliament that took a common position. The member states are still negotiating. So long story short, I think we're going to a final text not before the end of this year, maybe the beginning of next year. And then you still need to count 18 months for implementation or entry into force. And FIDHA, I think we're a bit more advanced. I think all the parties have A common position, but the trilogues are either just started or still need to start. So we're also looking at the end of 25, early 26, with 24 months of entry into force. But this being said, so the work program felt a bit like a big fuss, but we do observe certain trends of deregulation. And a recent example is that the Commission is trying as much as possible to push back on what I would call certain regulatory overdrive.

So is that then the omnibus? Is that the example, or—

that's not—

different topic.

Different topic. Yeah. But what I wanted to say is that the commission is not really deregulating, but it's trying to suppress unnecessary overgrowth of regulation. So how it normally works is you have level 1 regulation, like PSD2, for example, the large policies, the text. And then you have level 2, level 3, which are more the technical texts and sort of implementation level. Exactly. And there we observed for both DORA and MiCA that the ESA, so the Joint European Regulators, and the EBA, so the European Banking Authority, who are in charge to take these level 2 regulations, they've received quite some pushback from the Commission. So they made They made some proposals on RTS, and the commission got back to them saying, when we give you a mandate, we expect you to remain within that mandate, and you need to be proportionate and keep in mind what you're trying to regulate. So they were limiting a bit of the initiatives taken by those level 2 proposals. And so I wouldn't call it real deregulation, but it's a new trend. It's trying to limit unnecessary growth of regulation.

Can you give an example what that means in reality, this shift?

Well, the reality, it remains to be seen. But the texts as they were proposed from the regulatory technical standards weren't accepted as such. For example, for DORA, there were RTS on the monitoring of chain of subcontractors that you have in IT providers. And the EASA said, Sorry, the European Commission said, you're going too far with this. What you're trying to regulate here exceeds what we've asked you to do. So now they have to go back to the drawing table. And so we can expect less stringent technical requirements in this respect.

But doesn't it go both ways? Because RTS is also very often used as, these are my boundaries. So This is my level playing field. And it's sort of something wanted by the financial industry because it allows you to have more black and white approaches.

It's true. It's always a bit of, I would say, teamwork between regulators, or at least that's supposed to be, and the sector. But then again, the scope itself is something that is determined by the Commission. Right. And if you stay within the limited scope that is given to you, Then this can also have its impact in practice. But so we'll have to see how it turns out. But it's an interesting observation when it comes to deregulation or limiting overgrowth of regulation.

Well, in this conversation, where does gold plating come into play?

Well, gold plating is, as a reminder, it's a technique whenever European legislation needs to be, I would say, implemented on a national level. So directives, for example, they need to be implemented on a national level. And we've seen in the past that certain member states take this opportunity to literally gold plate, to add layers of regulation. We're moving away from this, and that's something that is not a 2025 trend. The overall trend is to move away from directives and go to regulations. Why? Because regulations, they have Direct entry into force in the member states. They don't need to be implemented locally, so you avoid heavily the risk on on gold plating. So definitely, gold plating is is being combated by by the commission. But that is a trend that we've seen that was already ongoing.

Yeah, exactly.

Yeah, absolutely.

Like Aidas was I think one of the first examples.

Yeah.

If you if you look at now AML will also become regulation. We have PSR for the first time. So the R stands for regulation. So part of PSD2, which is now a directive, will become a regulation. MiCA, a regulation. The AI Act as well. FIDA, again, an example. So it's really a trend going towards regulation and limiting the—

So we're actually moving really to a singular market.

That's the idea. Yeah.

What about Mi Fit? Because there's a lot of discussions about Mi Fit as well lately.

Yeah, Mi Fit. Well, Mi Fit is quite old. If you—

A lot of gold plating as well. I mean, like detailed, like the devil is in the detail gold plating.

Exactly. Exactly. I think Mi Fit, if my memory serves well, it's almost 10 years old. Mi Fit 2. So it was a different era at that moment. We were definitely in the directives, the idea and the Within the directives, you also have a difference between maximum harmonization, minimum harmonization directives. PSD2 is an example of a maximum harmonization. MiFID also tried that to be, but indeed we observe quite some differences in the member states. And so maybe going forwards, we'll see a MiFID III or maybe a regulation on investment services that could help that.

Yeah. Well, like I said before, I really enjoy these sort of conversations with you, and there's so many other topics to be discussed. So perhaps a little bit on AI and financial regulation, because that's also very hot at the moment.

Yeah.

A lot of things are happening in the world of AI. We have DeepSeek, we've got US being strong on AI. It comes a little bit together in the sort of geopolitical sort of discussion. So what's your take on that?

Yeah, I think again, we talk a lot about AI, but especially if you look at it from a financial industry's perspective, AI— and it depends on the definition you use of AI— has been around for decades, actually. I mean, early, early use cases of AI have been used since the '90s. In, for example, credit card fraud detection. Even before that, check processing—things that are still done in certain countries, including by the way, in the U.S. Exactly. But now, when more and more use cases become become clear, and and and the whole you know the whole society is more more vocal about it, and and if you look at it from from the front office, we see things like chatbots, robo advice, or even investment advice given by AI agents to the middle office, everything which concerns AI support for KYC, AML purposes, fraud detection, risk management, and up to the back office, basically general aid for compliance or HR. And when we look at AI in financial services, it's all about focusing on productivity, It's focusing on efficiency. But what we observe is that there is still a lot of what we would call everyday AI, things that are not radically changing the financial industry, but that are more making it easier, making it easier to use. It's about repeatable process implementation. It's about trust building. It's about making better use of existing client data. But the real game-changing AI features in the financial industry, I don't think we've seen them yet. They may be coming, but we're still talking same services, same products.

I think it has a name, which is agentic AI. Yeah, that's what I agree with you. But I agree with you that it's not heavily implemented or maybe not implemented in a lot of financial institutions.

No, but nevertheless, we get more and more questions from clients saying, okay, we want to use AI. How will this interact with the fact that we're running a regulated business? How will the regulator look at it? And actually, things are quite clear if you look at them. There is no specific AI regulation for the financial industry, right? The only thing we have is general AI regulation for all types of AI tools. And now I'm talking about the AI Act.

The AI Act.

Obviously, which will apply from, I think, if memory serves well, August next year. So 2026. And it will enter into force in different phases. And it's going to be a risk-based regulation. So it means that going from a minimal risk, a limited, a high, to an unacceptable risk, which will be prohibited.

Which is a nice initiative to keep fostering innovation, right?

Should be, yes. At least that, that's the idea. And so every AI tool that is used within the financial services industry should fit in one of those risk categories. And in function of in what category you will fall, different rules will apply. And the rules will also be different in function of whether you're a user of AI, a deployer, a developer. But That is general, and there is no specific rules, for example, for AI in payment services. That is not existing. And I don't think this will ever exist because financial services regulation by nature tends to be neutral from a technological perspective. And AI is just that. It's a technology. It's, it's an enabler. However, what we do see is that different European supervisors are looking at how AI could interact with the existing, with the existing regulation we have. And we've seen papers from, from ESMA, which is the European Markets Authority, back in '23 already about AI in EU securities markets, for example. So their view on how AI will interact with that. The EBA, European Banking Authority, issuing technical advice related to the mortgage credit, Directive. Obviously credit scoring, AI, etc., plays a logical, logical link. So they don't come up with new regulation, but they say, how should we look at the existing regulation in light of AI?

It almost feels like a level 2 handle.

It is. Yeah, it absolutely is. And other examples include EIOPA, which is more the insurance regulator, looking at AI in health insurance, for example. And and I think and maybe to end this topic is AI will become regulated in Europe for sure, but I think other other regions will will follow as well. And that might actually be a good thing for fintech and financial services. Why? Because there is no other industry around that is so heavily regulated as financial services. And so. That also has the upside that financial services fintechs, they know how to deal with regulation. And whenever these additional AI regulations will come into play, they might also be better placed compared to other industries to deal with that type of regulation. So I think lots is to come there, but definitely regulators are looking at it not to regulate it, but to see how it will interact with existing financial regulation.

Well, Philip, as always, it's a pleasure and joy to listen to your observations, what's happening in the industry. So I think it's very obvious why people should contact you, but nevertheless, I still would like to ask that question before we close this conversation of today. So why should people come to you?

Oh, well, whenever they are looking to roll out new products, new services, innovative things in the financial industry, if they need help interacting with the regulator. I mean, those are all things that we're very happy to be challenged on and would be our pleasure to help.

Well, brilliant. Thank you very much for your contribution today. Thank you also to the audience. And as usual, stay tuned. More fintech updates to come. Thank you, Koen.

Thank you. Thanks for listening to another episode of The Connector Podcast. To connect and keep up to date with all the latest, head over to www.jointheconnector.com or hit subscribe via your podcast streaming platform.