On 29 June 2020, the European Securities and Markets Authority (ESMA) published its response to the European Commission’s consultation on a new digital finance strategy for the European Union.
ESMA welcomed the European Commission’s consultation, noting that it built on the 2018 FinTech Action Plan, and provided responses to a number of questions which had been posed.
Risks and benefits of digitisation in the financial sector
ESMA drew attention to the increased speed, efficiency, convenience and economies of scale that firms could leverage from digitisation as well as the potential use of automated tools to detect cases of fraud or poor conduct.
Risks arising from digitisation include the increased likelihood and potential severity of data security or data privacy breaches as well as the possibility that firms could use new technology or data granularity to impose unfavourable pricing metrics on customers.
The promotion of a well-regulated data-driven financial sector
ESMA stressed that data harmonisation, IT security and legal certainty around responsibilities in the age of automation will be areas of focus to users seeking to utilise data more broadly.
In addition, ESMA noted that one area of particular interest is the potential for AI-based tools, such as machine learning, to support the ESMA’s statistics-related service.
How the EU policymakers can help remove fragmentation in the single market for digital financial services
ESMA reiterated the importance of addressing fragmentation in the single market for digital financial services through cooperation at the EU level.
In particular, ESMA drew attention to the ongoing work of the European Forum for Innovation Facilitators and specific initiatives around the use of electronic signatures and legal entity identifiers.
The importance of ensuring a technologically-neutral EU financial services regulatory framework
ESMA emphasised that an EU-wide harmonised supervisory framework is necessary in order to allow innovative firms to scale up their businesses and to provide the necessary safeguards to investor protection, financial stability and orderly markets.
Whilst ESMA was optimistic regarding the EU’s broad approach to digital finance by, for example, confirming that it agreed with the Commission’s choice of priority areas, it did highlight that the current regulatory framework was not designed with innovative technologies in mind.
ESMA identified the following challenges for both firms and supervisors going forward:
- A lack of clarity as to whether and exactly how the existing rules may apply to innovative business models and processes. Specifically, ESMA noted that different interpretations on the part of firms and across national supervisors may create inconsistencies and the potential for fragmentation between the EU member states.
- The fact that adaptations may be needed to allow for an effective application of existing rules, for example, when new technologies make certain operating processes redundant or uneconomical.
- The global nature of these new technologies mean that a coordinated response is required at both the EU and international levels. In particular, ESMA believes that the recent developments around so-called stablecoins require close scrutiny (including at international level) considering their potential to reach a large scale quickly and the risks that they may pose to financial stability.
ESMA also expressed concern in its responses that there may be a deficit of digital financial literacy on the part of certain consumers or investors, which could have a detrimental impact on investor protection and/or financial inclusion. ESMA gave an example of customers who are not comfortable using online services being excluded, where these “crowd out” other traditional modes of provision.
ESMA’s response to the consultation was accompanied by a letter from Steven Maijoor, the ESMA Chair summarising its main comments. Mr Maijoor noted, among other observations, that digital transformation of the financial sector continues to have profound consequences for ESMA’s objectives of protecting investors and ensuring stable and orderly financial markets and that the Commission’s strategic work in the area is therefore “highly relevant” to ESMA’s own work.