ESMA published its response to the EC consultation on the new digital finance strategy for EU. Steven Maijoor, the ESMA Chair, has issued a letter to EC that summarizes key points of response of ESMA. ESMA welcomes the EC consultation noting that it builds on the 2018 Fintech Action Plan that set a number of deliverables for the ESAs, all of which were completed. ESMA believes that certain initiatives, such as developing Digital Financial Identities, would support the goal of removing fragmentation in the digital financial services market. The response also outlines several conditions needed for a well-regulated data-driven financial sector, including data standardization and data security.
The following are the key highlights of the response from ESMA:
- Identifying risks and benefits of digitalization of the financial sector. The response outlines the benefits and challenges of digitalization in the financial sector, based on ESMA analyses. The benefits include increased speed, efficiency, and convenience; greater economies of scale; and development of automated tools to help firms and authorities detect cases of poor conduct. The response also highlights the risk areas of digitalization, which include data security, operational incidents, data privacy, price segmentation, sales practices, and the financial exclusion of some individuals.
- Ensuring a technology-neutral EU financial services regulatory framework that supports innovation. An EU-wide harmonized regulatory or supervisory framework is necessary to allow innovative firms in EU to reach the scale that they need and provide for the necessary safeguards to investor protection, financial stability, and orderly markets.
- Removing fragmentation in the single market for digital financial services. An important way to address fragmentation in the single market for digital financial services is through cooperation at EU level, for example, through the European Forum for Innovation Facilitators (EFIF) established by the Joint Committee of ESAs. ESMA believes that initiatives such as electronic identification initiatives can support the goal of removing fragmentation in the single market for digital financial services. ESMA believes it would be important to develop Digital Financial Identities that are usable and recognized throughout the EU. This depends on the introduction of a unique standardized and harmonized means of identification. Such means already exist in the financial sector in the form of the Legal Entity Identifier (LEI), which should be promoted to the maximum extent possible.
- Promoting a well-regulated data-driven financial sector. Key requirements for efficient and easy use of data are data standardization and harmonization, security of IT systems, and legal certainty regarding pertinent responsibilities, liabilities, and usage permissions. Data quality issues should be addressed through robust verification mechanisms and text data need to be in machine-readable format. An important way in which data is driving the development of the financial sector is through tools based on artificial intelligence. Firms use such tools for their business and for regulatory reporting. Supervisory authorities are developing their own suptech tools, including examples that make use of artificial intelligence. ESMA has begun exploring new applications based on artificial intelligence. An area of particular interest is the potential for tools based on artificial intelligence (such as machine learning) to support statistics-related activities, such as flagging outliers and inconsistent entries in the databases that ESMA hosts. Nevertheless, guidance for the EU financial sector could still be welcome, as a complement to horizontal-level EU rules on artificial intelligence. It would also be necessary to incorporate privacy considerations into any horizontal-level rules, which would require a review of existing regulations in this area.
Keywords: Europe, EU, Banking, Securities, Fintech, Regtech, Suptech, ESEF, Digital Finance Strategy, Reporting, Machine-Readable Regulations, ESMA, EC
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