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    ESAs Recommend Actions on Digital Finance Legislative Framework

    February 07, 2022

    The European Supervisory Authorities (ESAs) published a joint report in response to the February 2021 Call for Advice on Digital Finance, from the European Commission. The proposals in this joint report are intended to address risks arising from the transformation of value chains, platformization, and the emergence of new "mixed-activity groups"—that is, groups combining financial and non-financial activities. ESAs recommend rapid action to ensure that the financial services regulatory and supervisory framework in European Union remains fit-for-purpose in the digital age. In addition to the joint report, ESMA also published two reports setting out the outcomes of a​ survey to national competent authorities and the outcomes of a public call for evidence covering fragmented value chains, digital platforms, and mixed-activity groups, which have served to inform the ESAs work and recommendations.

    The join report from ESAs covers cross-sectoral and sector-specific market developments in the three key areas identified in the Call for Advice and the risks and opportunities posed by digitalization in finance. It goes on to present ten cross-sectoral and two insurance-specific recommendations for actions to ensure that the regulatory and supervisory framework remains fit for the digital age. ESAs note that the use of innovative technologies in the financial sector is facilitating changes to value chains, that dependencies on digital platforms are increasing rapidly, and that new mixed-activity groups are emerging. These trends not only open up a range of opportunities for both consumers and financial institutions in the European Union, but also pose new risks. The proposals presented by ESAs include:

    • a holistic approach to the regulation and supervision of the financial services value chain
    • strengthened consumer protection in a digital context, including through enhanced disclosures, complaints handling mechanisms, measures aimed at preventing the mis-selling of tied/bundled products, and improved digital and financial literacy
    • further convergence in the classification of cross-border services and in addressing money laundering and financing of terrorism risks in a digital context
    • effective regulation and supervision of "mixed-activity groups," including a review of prudential consolidation requirements
    • strengthened supervisory resources and cooperation between financial and other relevant authorities, including on a cross-border and multi-disciplinary basis
    • active monitoring of the use of social media in financial services

    The September 2020 Digital Finance Strategy sets out the intention of European Commission to review existing financial services legislative frameworks to protect consumers, safeguard financial stability, protect the integrity of the financial sector, and ensure a level playing field. As part of this review, in February 2021, the European Commission issued a request to the three ESAs for technical advice on digital finance and related issues. In particular, the European Commission called on ESAs to provide advice on the regulation and supervision of more fragmented or non-integrated value chains (section 3.1), platforms and bundling of various financial services (section 3.2), and groups combining different activities (section 3.3). In accordance with the Call for Advice,  ESAs have analyzed market developments as well as the risks and opportunities posed by digitalization in finance and have set out their findings and advice in the report to the European Commission. In their report, ESAs note that they remain at the disposal of the European Commission, including for assistance on how to introduce the proposals into law and the production of any necessary guidance. 


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    Keywords: Europe, EU, Banking, Insurance, Securities, Regtech, Fintech, Digital Finance, DORA, Operational Resilience, Digital Platforms, Lending, Bigtech, Headline, ESAs

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