«They say things are happening at the border, but nobody knows which border» (Mark Strand)
by Valerio Lemma
Abstract: This analysis focuses on the application of fintech to collective portfolio management, as a result of a regulatory intervention that arise from the directions of EU policymakers and authorities.
Our research aims at understanding if the effects of the use of technology improves the current techniques of the asset management, and then if the latter require further regulation. The outcome suggests that the regulatory framework based on the UCITS Directive and the AIFMD is out-of-date and it does not consider the role of technology in this sector. In this respect, the analysis of the most common fintech innovations has led to the need for regulatory innovations that may lead to the supervision of the services related to the ‘digital portfolio management’, which includes the algorithmic trading, digital ID verification, predictive/descriptive/prescriptive analytics, and algorithmic trading tools.
Summary: 1. Introduction. – 2. Fintech firms as outsourcers of asset managers. – 3. The use of platforms by asset managers. – 4. The development self- execution investment policies.
New market failures arise from the combination of globalization, financialization and digitalization. These failures has been a challenge to both understand the importance and the influence of the crisis in the evolution of legal forms, but also to deal with the problem of coordination of the public intervention, provided that the financial markets is not ruled by an unified set of rules. And this has led to the identification of new needs for regulating finance.
In this respect, this analysis focuses on the regulatory interventions that arise from the directions of policymakers and from understanding the effects of the oversight of the use of technology for improving the asset management. In particular, it refers to the “new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services” (as FSB stated in 2019 in the document named “Monitoring of FinTech”). This now leads to recall that past researches have highlighted that policymakers had generally avoided a disciplinary intervention overt the status of the technical structure of the asset managers.
Fintech cannot be considered in a reductive way as a sort of ‘tool-box’ which managers can make use to pimp their business. In the first place, fintech is a node in which the innovations, the culture and the trends belonging to the most brave firms own experience. From this perspective, the analysis of fintech cannot go deep into the contents of such experience: it is only possible to appreciate partially it through the information collected in the market. Thus, the need for understanding the aforesaid contents calls for the public intervention in regulating and supervising the application of innovation to the collective portfolio management.
Hence, it is worth investigating the role of the regulation in the opening of the asset management industry to the technological environment, and then in the use of algorithms, software and any other high-tech tools devices or autonomous tools based on machine learning and artificial intelligence. Most of the conclusion will refer to the need for regulating the use of technology in order to protect savings, market integrity and price stability. Indeed, as the use of algorithms makes the foundation of artificial reasoning visible, the supervisors may control what programmers and coders have written in the logical sequence underlying the high-tech investment process; hence, it is possible to control how software will provide an output in respect of certain inputs. Therefore, we expect new ways of regulation and control over asset managers that apply the fintech solutions to their activities.
2. Fintech firms as outsourcers of asset managers.
It is possible to consider the juridical difference between in-house providing and outsourcing, provided that the second model requires other entities and therefore would place certain decisional power out of the organizational structure of the asset manager.
In this context, the contracts between the mangers and the fintech outsourcers may refer to the execution of the investment policies, and then with the asset management itself because of the relevance of the algorithms, big data and any other specific chosen by the outsourcers themselves. Hence, it is possible to question the current schemes provided by the law to regulate such contracts, which have not been designed to regulate the current digitalization and, in particular, the possibilities due to sharing, common usage, duplicability, intermediation, etc. 
As a result, these schemes may not suit to an extensive use of outsourcing policies in asset management, whose content shall comply with the investment policies agreed with the investors (and written in the fund rules). Indeed, the application of fintech solutions does not refer to the same policies that drives the choice for outsourcing certain functions, but to the evolutionary innovation of the business configuration. In this respect, the current rules on outsourcing appear inadequate to regulate the use of fintech solutions, provided that the activities of the fintech firms running platforms may influence the sound and safe management of the savings collected by asset managers.
Fintech is not an exception to the above, because the relevant rules belongs to national or regional legal system, even if the globalization made national borders transparent to business relations. According to the above, the Europeanization of financial law may help in gaining a convergence towards a common framework for implementing financial innovations in the capital market. As the ESFS supervise the end-users of such innovations, the public control may drive the circulation of ideas and models which contribute to maturing a shared concept of concrete solutions in this topic deemed acceptable and shareable also by market participants. According to the use of involve the participants themselves in the regulatory processes, the relevant authorities may discuss the support of fintech with stakeholders, representatives of businesses, investors and savers.
Hence, it has been envisaged that these fintech firms should obtain an authorization (as it is provided for the exercise of similar activities managing the multilateral systems that bring interests together as alternative venues for financial instruments). On the contrary, there are no evidences that may justify putting such firms out of the supervision of any public authority.
Keeping this topic in the current perspective, there is no suitable justification to allow fintech firms to seize new opportunities without following a safe process (similar to that provided to take possession of the authorization to carry out one of the reserved activities that these firms intended to replace, supplement or improve). In this respect, we should recall the European Central Bank’s “Guide to assessments of fintech credit institution licence applications”, which shows a comprehensive approach to the business of banking (including the business model in which the production and delivery of banking products and services are based on technology- enabled innovation).
From a law and economics perspective, it is possible that the monitoring of the industry cloud led to the extension of control to the fintech providers and in particular to decentralized financial technologies, artificial intelligence, big data analytics, open banking and programming interfacing (APIs). It is worth recalling that, with respect to banking, EBA stated that the “materiality of cloud outsourcing determines whether an institution is required to adequately inform its competent authority about it”. This may suggest including in the scope of the public supervision the fintech tools used in risk-taking, decision-making and record-keeping. Accordingly, it may lead also the compliance of the mechanisms used for organizing and running the platforms used by asset managers. According to the above, this undertaking may refer to both economic efficiency and social utility.
The same attention should be paid to the growing importance of the firms’ running the fintech platforms, as their use in the provision of varied services to support asset managers in implementing the investment policies of their investment funds, by a system that allows the sale and purchase of the relevant assets. With regard to what has been experienced so far, it is useful to consider the evidence of platforms that with respect to the supervised activities are (i) alternative (so called non-bank financial intermediation), (ii) instrumental (aimed at improving the use of traditional services, e.g. websites comparing the offer), or (iii) similar (and then they need a special authorization, e.g. FinTech Banks). Indeed, the use of such platforms refers to the contents of the agreements concluded between the platform’s managing firm and the asset manager, with respect to the rules on the access and the functioning of such platforms, as well as the ancillary services provided by the aforesaid firm. Hence, there is the expectation of specific rules to govern this way of innovating the operating model of traditional operators.
3. The use of platforms by asset managers
The asset management may access to platform in order to gain advantages from a virtual shared-resource system where individual users, acting independently, may offer or demand money or risks. Indeed, all the above refers to platforms that allow the execution of exchanges (or the provision of services) that in the past were exclusively related to the performance of reserved activities (by credit institutions, brokerage firms, asset managers, insurance companies, etc.), and today these platforms are based on the possession of a compatible electronic instrument (a device), the use of a computer program (an application), and the access to an interconnection network (even immaterial). 
Hence, the asset manager who aims at using the platforms shall verify, on the one hand, the contents of the ‘supporting infrastructures’ of the platforms and, on the other hand, the relevant failures, also in case of cross-border transactions. It shall take into account both the above and the management of these platforms. In this respect, any asset manager should be in the position to verify the resilience of the infrastructure (digital or traditional) behind the website, through which it can exercise its negotiations (on behalf of the fund), and – as this infrastructure is not supervised – it should asses the compliance of the relevant mechanisms to the disciplinary framework. This requires the transferring of in-formation from the fintech firm to the asset manager.
It is worth noting that the systematic use of ICT tools for the execution of the investment policies management of the contents of the relative relationship (from new infrastructures, to new devices, to new block programming). In addition, it has been observed the use of mechanisms able to auto-operate the activity of asset management, the accessing to significant aggregations of information (so-called big data) and the application of new software architectures (including blockchain technology). This highlights the importance of the platforms in this sector of the financial markets, their effects on competition and the new conditions for performing asset management on the basis of cloud computing, big data analysis, artificial intelligence, blockchain and distributed ledger technologies.
It is useful to consider also certain objections to the application of fintech to asset management. The first concerns directly the general intention to promote this process. This objection also emerged during the analysis of the shadow banking system. It stems from the risk that savings may be jeopardized for the benefit of a competitive model, which would end up in marginalizing the purposes of social utility that the public intervention should pursue. It is easy, however, to reply to such objection, not only by leveraging the benefits of fintech and other economic aspects of the latter, but also by referring to the evidence that an uniform technology would guarantee an equal status to all the market participants. Obviously a quantitative analysis may confirm if the benefits outweigh the costs.
A second objection may attack the technological evolution having regard the possibility that it excludes certain citizens from accessing to this new form of finance. In this respect, any rule aiming at protecting individual rights (of savers or consumers to access to the market) may be seen as aimed at protecting also certain positions or at slowing down the progress. In this respect, it is clear that the balance between technology and rights may never lead to the detriment of the latter, which constitute the inflexible core of the market relationships. This may be sufficient to avoid the risk that the regulation of innovation can sacrifice the standards of protection set by the policy makers.
However, the risk of an abuse of the power held by the ICT service providers, the platform’s managing companies and the fintech firms must also be taken into account. All of the above challenges the reliance of asset managers that are using these innovations. It is worth recalling the approach proposed by the European Commission (through the ‘Financial Technology Action Plan’ COM_2018, 109), which aims at encouraging new types of financial activities under a legal order able to avoid asymmetries within the capital market (between asset managers that use a traditional approach and the others that use platforms and other fintech tools). Obviously, the EU policy maker is called to ensure the neutrality of the technology with respect to the protection of the private interests and the social utility.
From a regulatory standpoint, any asset manager has to consider that the technological platforms perform a dual function: referring to the provision of services (alternative or instrumental to the exercise of reserved activities) and to the circulation of capital (and so, to the meeting of supply and demand). The result is a dualism between the functions of providing service and those of managing the market, so that the relationships do not exhaust their value in a bilateral linkage (related to servicing), but extend their relevance to any user of the platforms. Hence, the need for controlling these platforms and avoiding asymmetries in their use by the asset managers.
4. The development self- execution investment policies
In asset management, the fund’s rules set forth an investment policy and the legislator reserves to the managers the business of executing such policy. As any investment policy is made by a set of purchases and sales, the human directors of the asset manager usually develop the relevant instructions, but these instructions can also be settled by an algorithm, and then it can be executed by software and any machine learning tool would suggest any specific change to them.
It is worth considering that the use of such ICT tools may be direct or indirect, by the use of fintech firms as software suppliers or outsourcers, even if the power to take any investment decision remains with the board of directors of the asset manager. In this respect, the automation of the investments requires that every aspect of the investment policy can be so precisely described that a machine can execute it (on the basis of the relevant inputs). Thus, this refers to the capability of the programmers to develop an algorithm able to support the performance of the relevant tasks required for the ordering of sales and purchases that leads to the result expected by the investors (in compliance with the fund’s rules). Hence, an asset manager may gain advantage also by a machine-learning system that can solve cognitive problems commonly associated with investment activities (such as gaining information, problem solving, and pattern recognition). It can also use software that supports the human resources that manage the assets of the fund.
All the above lies under an out-of-date regulatory framework, based on the UCITS Directive and the AIFMD. The analysis of the most common fintech innovations leads to the need for regulatory innovations that may lead to the supervision of the services related to the ‘digital portfolio management’, which includes the algorithmic trading, digital ID verification, predictive/descriptive/ prescriptive analytics, and algorithmic trading tools.
Firstly, the need for regulation refers to the risk that the internal features of the relevant software may reduce competition among asset managers. Indeed, there is the possibility that that the decision-making processes may rely on the same set of data or algorithms, and this may align the output of the ICT tools. Hence, the policymaker should intervene to prevent any market failure related to such possibility. Secondly, asset managers must consider the operational risks associated with both cyber security and cloud outsourcing, and then have to provide technical standards able to verify that the ICT tools have a coherent and resilient infrastructure and software. Indeed, both these considerations lead to a concentration of market failures and risks that raise the awareness in respect of modernity and technology. 
In considering the main contents of the supervisory approach to fintech as a whole, the most relevant authorities revealed a propensity for adopting an open and general approach aimed at a cross-sectorial coordination of the supply and demand of capital, by leveraging the possibility of a horizontal harmonization of the rules concerning cross-border and domestic asset management. Within the EU, this refers to the choice between ‘minum directives’ or ‘maximum regulations’, as the firsts would establish a mere common standard consisting of mandatory principles to guide the individual legislative action of each Member State. The choice of such directives has the advantage to maintain the national level of protection (in the States where it is high), however this choice has the disadvantage to permit a run for the shopping of a forum that, at the same time, has low legal duties and allows any kind of cross-border activity.
In this respect, the implementation of a European regulatory framework refers to the principle of effectiveness, combined with the principle of subsidiarity and the principle of the preliminary recourse to the remedies provided by the national courts. In a globalized and digitalized context, the financial relations refers to rights that are within the competence of such courts, as the effective judicial protection of such rights require an effective legal remedy against any kind of infringements. According to the above, the implementation of fintech tools in the asset management industry may require EU rules designed to specifically address the remedies regarding the protection of investors and the financial stability, both in case of bilateral disputes or market crisis. On its own turn, these rules require substantive provisions regarding the relations with individuals.
In this case, an evident example is the action plan on fintech, adopted to foster a more competitive and innovative European financial sector. The implementation of such action plan may led to a proliferation of remedies in national legal system. This would also imply that there will be Member States where the compliance would be protected by a remedy of absolute nullity and an automatic enforcement (i.e. ex officio), and other Member States where nullity would be relative and/or partial. At the same time, in certain Member State, the judge may be able to change, rectify or adapt the contractual terms that he/she considers unfair (in respect of the criteria of good faith, balancing of advantages, and composition of interests). Thus, the implementation of EU standards by means of public or private enforcement, which aims at protecting the general and collective interests and at safeguarding the rights of individuals.
This leads to the conclusion that the application of fintech to asset management comply with the principles set forth by the EU regulation. This kind of innovation are in line with the goal of collective portfolio management, whose efficiencies are gained by unifying the savings of several investors on the basis of a common interest for a specific investment policy. As EU managers are able to manage and market AIFs to professional investors across the Union with a single authorisation (according to directive 2011/61/EU), certain issues have been raised in the ‘Report from the Commission to the European Parliament and the Council assessing the application and the scope of Directive 2011/61/EU”, and these issues could possibly require further action to respond to technological developments ensuring that the AIFMD legal framework is fit for the purpose of a safe implementation of fintech.
 See Capriglione, La nuova finanza: operatività, supervisione, tutela giurisdizionale. Il caso “Italia”. Considerazioni introduttive (La finanza post-crisi: forme operative e meccanismo di controllo), in Contratto e impresa, 2017, fasc. 1, p. 7 ff.; Lener – Rulli, La vigilanza sui mercati finanziari, in Banca borsa e titoli di credito, 2019, fasc. 4, pt. 1, p. 447 ff.
 See FSB, Monitoring of FinTech, 2019
 See Report of the European Parliament with recommendations to the Commission on hedge funds and private equity (A6-0338/2008) [‘Rasmussen’ Report] and on the transparency of institutional investors (A6-0296-2008)
 It follows another analysis published by Lemma, Fintech regulation: the need for a research, in Open Review of Management, Banking and Finance, 2018, which raised certain questions on the definition of ‘fintech’ and its fundamental elements, in order to highlight that the evolution of the European regulation (of the internal market for capitals, banking and financial services) suggests that the path will continue through the use of new technologies in banking and finance.
Indeed, this preliminary research suggested that the efficiencies of fintech should be the rationale for the development of the intermediation processes.
 See, on this need, European Commission, Adoption of the banking package: revised rules on capital requirements (CRR II/CRD V) and resolution (BRRD/SRM), Brussels, 16 April 2019
 See Masera, La (non) proporzionalità della sorveglianza bancaria nell’UE: problemi e prospettive, in Rivista Trimestrale di Diritto dell’Economia, 2020, fasc. 1, pt. 1, p. 40 ff.
 See Alpa – Gaggero, Appunti sui contratti bancari tipici, in Contratto e impresa, 2019, fasc. 2, p. 45 ff.
 See Recommendation of the European Systemic Risk Board of 7 December 2017 on liquidity and leverage risks in investment funds ESRB/2017/6, 2018/C 151/01
 See Letter of 3 February 2020 to DG FISMA from the ESRB on its considerations regarding the AIFMD.
 See Schena, C. – Tanda, A. – Arlotta, C. – Potenza, G. “The development of FinTech. Opportunities and risks for the financial industry in the digital age”, Quaderno FinTech n. 1 – March 2018
 See also ESMA Annual Statistical Report EU Alternative Investment Funds 2019, 21.01.2019, ESMA 50-165-748, (ESMA Statistical Report 2019) and ESMA Annual Statistical Report EU Alternative Investment Funds 2020, 10.01.2020, ESMA50-165-1032, (ESMA Statistical Report 2020).
 See Burchi, A. – Mezzacapo, S. – Musile Tanzi, P. – Troiano, V. “Financial Data Aggregation e Account Information Services. Questioni regolamentari e profili di business”, Quaderno FinTech n. 4, 2019; March; Sciarrone Alibrandi, A. – Borello, G. – Ferretti, R. – – Lenoci, F. – – Macchiavello, E. – Mattassoglio, F. – Panisi, F. “Marketplace lending, Verso nuove forme di intermediazione finanziaria?”, Quaderno FinTech n. 5, 2019
 See EBA, Final report – Recomendations on outsourcing to cloud service providers, 2017
 It is worth pointing out that the primary area where regulatory gaps and issues have been identified by national authorities is the one where fintech firms do not fit neatly within the existing rules; and this is more evident if these firms exploit also crypto- assets, ICOs and DLT. In this respect, see ESMA, Licensing of fintech business models, 12 July 2019 on the mapping of current authorising and licensing approaches for innovative FinTech business models in Europe where it is reported that the responses of national authorities served to confirm ESMA’s Crypto Asset Advice, that certain tokens are financial instruments and subject to the full attendant regulation, while those tokens that are not deemed financial instruments should be subject to some minimal level of regulation. In this respect, it is noteworthy that ESMA continues to foster supervisory convergence on the topic of crypto assets across Member States.
 See Canepa, Il dilemma della regolazione delle piattaforme., in AA.VV., I servizi pubblici. Vecchi problemi e nuove regole, Torino, 2018, p. 143 f.
 See again ESMA, Licensing of fintech business models, 12 July 2019 on the maping of current authorising and licensing approaches for innovative FinTech business models in Europe.
 See Lemma, Fintech Regulation, London, 2020; see also Id., Le piattaforme nel mercato dei capitali, in AA.VV., L’attività delle banche, Padova, 2020; Lemma, Fintech Regulation, London, 2020
 Commission staff working document Impact Assessment on cross-border distribution of collective investment funds, SWD(2018) 54 final, 12.3.2018
 See ECB Advisory Group on Market Infrastructures for Securities and Collateral “The potential impact of DLTs on securities post-trading harmonization and on the wider EU financial market integration”, 2017
 In this context, we will not consider the structure of the costs related to the use of such tools; in general, see 4 ESMA Guidelines on sound remuneration policies under the AIFMD, 03 July 2013, ESMA/2013/232.
 See Jagtiani, J. – Lemieux, C. 2018 “Do Fintech Lenders Penetrate Areas that are Underserved by Traditional Banks?” FRB of Philadelphia Working Paper No. 18-13 on the role of innovation in shaping financial and banking landscapes
 See Committee on Economic and Monetary Affairs, ‘Report on FinTech: the influence of technology on the future of the financial sector’, 2016/2243(INI), 28 April 2017.
 It is worth considering that ‘Innovation hub’ usually means an institutional arrangement where regulated or unregulated entities (i.e. unauthorised firms) engage with the competent authority to discuss FinTech-related issues (share information and views, etc.) and seek clarification on the conformity of business models with the regulatory framework or on regulatory/licensing requirements (i.e. individual guidance to a firm on the interpretation of applicable rules). At the same time, we shall recall the regulatory ‘sandboxes’, as the choice of the policymakers to provide financial institutions and non-financial firms with a controlled space in which they See EBA/DP/2017/02 can test innovative FinTech solutions with the support of an authority for a limited period of time, allowing them to validate and test their business model in a safe environment; see Discussion Paper on the EBA’s approach to financial technology (FinTech), 4 august 2017
 See McCormick – Minto, Governance of Banks in an Era of Regulatory Change and Declining Public Confidence, in Law and Economics Yearly Review, 2014, Vol. 3, I, p. 6 ss.;
 Let us merely recall Lemma, Collective portfolio management, in VV.AA., Italian law on banking and financial markets, Palgrave MacMillian, London, 2015, p. 62 ff.
 See Cœuré, B. “Fintech for the people. Keynote speech by the chair of the CPMI and Member of the Executive Board of the ECB, at the 14th BCBS-FSI high-level meeting for Africa on strengthening financial sector supervision and current regulatory priorities”, Cape Town, 2019
 It has been highlighted that in 2016, the financial sector was targeted by cyber-attacks 65 % more often than any other sector. This resulted in more than 200 million records being breached, a 937 % increase over 2015 when just under 20 million were breached; see: IBM, ‘Security trends in the financial services sector’, April 2017.
 See EC, Resilience, Deterrence and Defence: Building strong cybersecurity for the EU, Joint communication to the european parliament and the council, 13 September 2017
 See Alpa, Competition of legal systems and harmonization of European private law, Minuch, 2013, p. 51 ff.
 Let us recall EC, FinTech action plan: For a more competitive and innovative European financial sector, 8 March 2018 with respect to Fintech impacts on the way financial services are produced and delivered, as this document clarifies that FinTech sits at the crossroads of financial services and the digital single market
 See EC, ‘Report from the Commission to the European Parliament and the Council assessing the application and the scope of Directive 2011/61/EU”, 10 June 2020
Valerio Lemma is Full Professor of Law and Economics at the Law Faculty of Università degli Studi Guglielmo Marconi in Rome, and Coordinator of the Master programme in «Financial market regulation» at Luiss University.