Digital transformation in the financial services sector  

The European Commission adopted a Digital Finance Package end of September 2020.  This complex set of initiatives endeavors to create a competitive EU financial services sector  giving consumers access to innovative financial products, while ensuring consumer  protection and financial stability. The package includes a Digital Finance and Retail  Payments Strategy, as well as legislative proposals on crypto-assets and digital resilience. If  adopted, these proposals will affect both established firms in the financial services sector  and new FinTech market entrants.  

  1. Digital Finance Strategy  

The Digital Finance Strategy generally sets out how Europe can support the digital  transformation in finance in the coming years, while regulating the related risks. It aims to  make financial services more digital-friendly and to stimulate responsible innovation and  competition amongst EU financial services providers. Further, it covers four broad priority  areas, as well as related measures to achieve those priorities.  

The first priority is removing fragmentation in the Digital Single Market so that  consumers have access to financial products across borders and that FinTech start-ups can  scale-up and grow.  

The adaptation of the EU regulatory framework facilitating digital innovation in the  interest of consumers and market efficiency forms a second priority. In this context, the  European Commission proposes its legislative initiatives on crypto-assets, which are further  discussed below.  

The European Commission aims, as a third priority, to create a European financial data  space to promote data-driven innovation, building on the broader European Data  Strategy. At the same time, the European Commission is particularly vigilant about  maintaining the EU’s very high standards on privacy and data protection.  

The fourth priority consists of addressing the challenges and risks with digital  transformation. In this respect, the European Commission prepared a legislative proposal  on digital operational resilience, which is further described below. In order to ensure  consumer protection and a level playing field between existing financial institutions and new  market entrants, particular attention has been paid to the principle “same activity, same risk,  same rules”.  

  1. Legislative proposals on crypto-assets  

The Digital Finance Strategy is accompanied by a proposed legal framework on crypto assets (i.e. digital representations of values or rights that can be stored and traded  electronically). This framework is divided into a proposal for a Regulation on markets in  crypto-assets (“MiCA”) and a proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (“DLT pilot regime”). The objective is  to boost innovation while preserving financial stability and protecting investors from risks.  

In this respect, the European Commission differentiates between those crypto-assets  already governed by EU legislation and other crypto-assets.  

Where crypto-assets are covered by EU financial services legislation, there is a lack of  legal certainty on how to apply existing EU financial regulation (e.g. the Prospectus  Regulation, MiFID II and the Central Security Depositary Regulation). This situation leads to  limited security token issuances in the primary market, and limits the potential use of DLT in  financial markets, as demonstrated by a lack of DLT-based market infrastructures (such as  trading venues or central security depositaries) enabling the trading of security tokens and  the settlement of transactions.  

The crypto-assets that already fall under existing EU financial services legislation will remain  subject to that legislation. However, under the DLT pilot regime, the European Commission  is also proposing a pilot regime for market infrastructures willing to develop trading and  settlement of transactions in financial instruments in crypto-asset form. This pilot regime  represents a controlled environment that allows temporary derogations from existing rules so  that regulators can gain experience in the use of DLT in market infrastructures, while  ensuring that they can deal with risks relating to investor protection, market integrity and  financial stability. The intention is to enable companies to test and learn more about how  existing rules are applied in practice.  

Where crypto-assets are not covered by EU financial services regulations, the absence  of applicable rules to services related to such assets (such as exchanges, trading platforms,  crypto custody and wallet providers) leaves consumers and investors exposed to substantial  

risks. There are also substantial market integrity risks (e.g. market manipulation) in the  secondary market of crypto-assets. Some Member States have put in place bespoke rules at  the national level for all – or a subset of – crypto-assets falling outside current EU regulation.  This leads to regulatory fragmentation, which distorts competition in the Single Market,  makes it more difficult for crypto-asset service providers to scale up their activities cross border and leads to regulatory arbitrage.  

The MiCA proposal will apply to the previously unregulated crypto-assets (including  ‘stablecoins’) and will set strict requirements for issuers of crypto-assets and crypto-asset  services providers willing to apply for an authorization to provide their services in the EU.  Safeguards include capital requirements, custody of assets, a mandatory complaint holder  procedure available to investors and investor rights against the issuer. These new rules will  allow operators authorized in one Member State to passport their services across the EU  and prohibit market abuse in the secondary markets for crypto-assets.  

  1. Legislative proposals on digital operational resilience  

The second group of legislative proposals will create a regulatory framework on digital  operational resilience. The ever-increasing dependency of the financial services sector on  software and digital processes means that Information Communication Technologies  (ICT) risks are inherent in finance. The European Commission intends to prevent and mitigate those risks via a proposal for a Regulation on digital operational resilience for the  financial sector (“DORA”) and a proposal for a Directive amending several other directives.  

DORA will require all firms to ensure they can withstand all types of ICT-related  disruptions and threats. Financial entities such as banks, stock exchanges, clearing  houses and FinTech companies will have to respect strict standards for: (i) ICT risk  management, (ii) ICT-related incident reporting, (iii) digital operational resilience testing and  (iv) the sound monitoring of ICT third-party risk. DORA will also allow financial services firms  to set-up arrangements around the exchange of cyber threat information and intelligence  amongst themselves.  

In addition, the European Commission introduces an oversight framework at EU level on  critical ICT third-party service providers, including cloud computing service providers. In this  respect, the European Supervisory Authorities (ESAs) will operate as Lead Overseers for  each critical ICT third-party service provider and receive powers to ensure that technology  services providers fulfilling a critical role to the functioning of the financial sector are  adequately monitored on a pan-European scale. The national supervisors will act as  enforcers.  

  1. Retail Payments Strategy  

A renewed strategy for modern and safe retail payments embodies the last pillar of the  Digital Finance Package. With this strategy, the European Commission seeks to further  develop the European payments market so that Europe can benefit fully from innovation and  opportunities that come along with digitalization. The strategy focuses on four key  priorities.  

Firstly, the European Commission proposes to promote digital and instant payment  solutions with a pan-European reach. Citizens and businesses in Europe should benefit  from a broad and diverse range of high-quality payment solutions, supported by a  competitive and innovative payments market and based on safe, efficient and accessible  infrastructures. 

The second priority is the development of a competitive and innovative payments  market. The intention is to support the further development of open banking, to further align  the EU legal framework for retail payments and to ensure a high level of security and  consumer protection.  

The European Commission further focuses on the creation of efficient retail payment  systems and other support infrastructures by reinforcing inter-operability, ensuring direct  access by non-bank players and eliminating access restrictions to essential technical  infrastructures to facilitate mobile contactless payments.  

Enabling more efficient international payments (including remittances), which supports  the international role of the euro, is the fourth priority.  


Authors: Pierre E. Berger, Isabelle Van Biesen and Lene Coenen  




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