Defusing the legal minefield in financial technology

Melanie Martin, an associate in the EU competition and regulatory practice with Maclay Murray & Spens LLP, examines fintech's impact on competition legislation.

Authorities are grappling with the field of fintech. Picture: Contributed

Technology is rapidly changing the face of financial services. While the fintech boom will generally make markets work better for consumers, authorities are watching closely and gearing up to spot where there might be the risk of damage to competition.

In the past, the sophistication of a cartel was gauged by the quality of the restaurants members frequented for their meetings. Authorities are now grappling with algorithms, big data, e-commerce, multi-sided electronic market places and platforms. Blockchain technology, recently used to guarantee a trade finance transaction for the first time, is likely to revolutionise many aspects of how companies do business and pose new questions for competition authorities.

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In the race to exploit new technology and opportunities, few are stopping to consider the competition law risks. Some argue that the application of competition law could stifle innovation. However, it is not innovation itself that is the problem, but using emerging technology in a way that affects rivalry without passing on benefits to consumers.

Competition law prohibits cartels and abuse of dominance, as well as allowing regulators to intervene where markets do not appear to be functioning as effectively as they might in order to promote innovation and competition. The challenge for competition regulators faced with a rapidly evolving digital marketplace is being able to keep up with developments and spot when competition law is being broken.

This new era for enforcement has already thrown up a few high-impact cases, such as the chatroom messages exchanged between the forex traders who dubbed themselves “the cartel” and manipulated forex spot trading until the financial authorities caught up with them. Ultimately the banks were fined significant sums in a number of countries and traders have been indicted on criminal charges in the US.

Algorithms – which underpin most fintech solutions – might raise concerns depending on how they are used. Last year a trader using Amazon Marketplace to sell posters was fined by the UK’s Competition & Markets Authority (CMA) for an illegal cartel with a competing online seller, which was implemented by using automated repricing software. The parties agreed to configure their software to ensure that they did not undercut one another. So in this case, it was the prior agreement that was really the issue, rather than the technology itself. Whether self-learning pricing algorithms can trigger automated price coordination in the absence of an agreement between competitors is a hotly disputed issue.

Regulators are also keeping a close eye on how electronic markets are working. Last month, the Financial Conduct Authority (FCA) confirmed that it will launch a market study into investment platforms following its finding that there were a number of areas of weakness in the asset management market. The study is expected to look at how “direct to consumer” and intermediated investment platforms compete to win new customers and retain existing ones. It will also consider whether retail investors are obtaining value for money and, if there are competition problems, what is causing them.

Although the FCA will be looking at how the market as a whole operates, rather than at specific companies, platform operators are well advised to review their operating models for any underlying competition concerns. The FCA will also be aware that one of many interesting issues to emerge from the European Commission’s recent e-commerce sector inquiry is how platforms where the platform operator is also selling products or services in competition with platform users, such as Amazon Marketplace, might give rise to competition risks.

The same principles could apply to investment platforms that are vertically integrated with an adviser or fund business. Platform operators need to be alert to these risks. Information barriers between different levels of the business might provide a simple compliance solution. Away from platforms, the full range of competition risks related to fintech is difficult to predict with certainty, as technology continues to develop apace. Collaboration with competitors in developing new solutions will need to navigate the competition rules.

Interesting questions for the future include whether fintech can be designed to operate ethically or whether human intervention will always mean it is susceptible to anti-competitive effects. But for now, financial services companies must get used to an increased focus on the competitiveness of their industry.

If an innovative fintech solution promises a market advantage, companies must also ensure that those promised benefits are not achieved by reducing competition.