The application of innovative technologies is facilitating changes to the structure of the EU’s financial sector. In response to the ever-changing financial services landscape, European Commission has called for advice three European Supervisory Authorities (EBA, EIOPA and ESMA) on actions to ensure that EU regulatory and supervisory framework remains fit for purpose in digital finance.
European Supervisory Authorities (ESAs) note that with digitalisation, financial entities are increasingly relying on third-party providers, such as technology companies (including BigTechs), while growing intertwined relationships between financial institutions and unregulated service providers poses not only opportunities, but a series of regulatory and supervisory challenges. Especially, considering that these relationships may not be specific to one financial sector, but rather existent in different financial and non-financial sectors, and/or focusing on cross-border transactions, outside of EU.
ESAs intended to address risks arising from (i) the fragmentation of the digital financial services value chain, (ii) the growth of digital platforms, and (iii) emerging operations by mixed-activity groups, combining financial and non-financial services.
The recommendation by ESAs on further actions to ensure that EU regulatory and supervisory framework fits twists and turns of digitalisation, provides us with a sneak-peak of potential upcoming changes for digital financial service providers.
What to expect next?
ESAs have recommended the following actions on digital finance legislative framework:
Develop thorough approach to the regulation and supervision of the financial services value chain. Expect more thorough regulation and supervision on third-party provider arrangements, especially on certain providers that may not be captured by DORA and represent a risk to financial stability. Setting-up of a regulatory and supervisory framework for third-party reporting providers is also to be considered.
Strengthen consumer protection in a digital context, notably regarding pre-contractual disclosures. Expect more thorough disclosure requirements in EU law, set to address risks of miss-selling and to overcome potential weaknesses in complaints-handling processes.
Promote convergence in the classification of cross-border services. According to ESAs, digital financial services are inherently borderless, which raises questions about when the obligation to notify of ‘cross-border provision of services’ applies. This creates not only supervisory challenges, but also difficulties for consumers in establishing which authority is the relevant authority e.g. in the event of a complaint. Expect further guidance on the definition of cross-border services in a digital context.
Address new forms of ML/TF risks. Expect clarified data protection obligations in the customer due diligence (CDD) and wider AML/CFT context. Also, ESAs are suggesting to assess as a matter of priority whether to subject all crowdfunding platforms to EU AML/CFT legislation.
Ensure effective regulation and supervision of mixed-activity groups. Mainly expect updated and potentially expanded prudential consolidation rules, to manage prudential risks posed by mixed-activity entities, performing financial and non-financial services.
Strengthen supervisory resources and cooperation between financial and other relevant authorities, including on a cross-border and multi-disciplinary basis. Expect more supervisory convergence.
Actively monitor the use of social media in financial services. ESAs acknowledge the growing use of social media in relation to financial services, and notices new trends, such as ‘social trading’, or investment advice shared over social media. ESAs will continue to monitor these developments and assess where regulatory action may be warranted. Expect more monitoring in use of social media in relation to financial services, particularly the ones associated with digital trading and investment advice.
Anticipate legislative changes in:
consumer protection, notably regarding pre-contractual disclosures;
AML/CFT;
the perimeter of prudential consolidation.
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