ESAs Recommend Actions on Digital Finance Legislative Framework

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. 

Related Links

• Press Release
• Joint ESA Report
• ESMA on Call for Evidence
• Survey on Digital Finance Issues
• EC Request on Technical Advice (PDF)
• EC Digital Finance Strategy

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