On 24 March 2017, we blogged that the European Commission (Commission) published a consultation paper, Fintech: a more competitive and innovative European financial sector (consultation paper). The consultation paper was seeking input from stakeholders to further develop the Commission’s policy approach towards technological innovation in financial services. It was also seeking input in terms of stakeholders’ perspectives on new technologies’ impact on the European financial services sector, both from the perspective of providers of financial services and consumers.
The European Securities and Markets Authority (ESMA) has now published its response to the consultation paper and shares its thoughts on the following topics:
- artificial intelligence and big data analytics for automated advice and business. While ESMA welcomes potential benefits and shares the belief that fintech can be a driver for better financial services, it also agrees that the use of big data may trigger a number of concerns from a market integrity or an investor protection standpoint which will need to be carefully monitored. With reference to automated advice, ESMA draws attention to the Joint Committee report on this matter which had extensively considered the potential benefits and risks in relation to advice using automated tools. Following this joint work, ESMA is currently considering how to provide some further guidance on this topic in the context of a review of its Suitability Guidelines. In particular ESMA is looking at how clients are informed of the provision of advice through automated tools and the organisational arrangements adopted by firms to take into account the specific features of automated advice such as the reliance on algorithms and the limited human interaction with clients;
- ESMA reiterates that particular consideration should be given to the possible development of a specific crowdfunding EU-level regime, which would ensure investors across the EU are equally protected and would enable crowdfunding platforms to operate cross-border based on a common regulatory framework;
- ESMA recognises that there may be significant benefits if market participants and regulators use technology in order to facilitate compliance with legislation developed after the global financial crisis. ESMA acknowledges that regulators need to be adequately equipped to collect and analyse all the data they receive in order to achieve new policy objectives;
- outsourcing and cloud computing. ESMA acknowledges that outsourcing can pose a number of challenges for financial firms and supervisors, particularly when the outsourcing of certain functions risks introducing unacceptable operational risks to the functioning of firms and to the national competent authority’s ability to effectively supervise financial services, especially when the service provider is located outside the EU. ESMA is also of the view that cloud computing should be implemented in a manner that complies with applicable European legislation, including data security and data protection rules;
- distributed ledger technology (DLT). While DLT could bring a number benefits to securities markets, notably more efficient post-trade processes, enhanced reporting and data management capabilities and reduced costs, ESMA believes that a number of challenges need to be addressed before they materialise. DLT-related challenges include interoperability and the use of common standards, access to central bank money, governance and privacy issues and scalability. At this stage, ESMA believes that it’s premature to fully assess the changes that DLT could bring and the regulatory response that may be needed, given that the technology is still evolving and there are not many practical applications;
- role of regulation and supervisors. ESMA supports the approach which ensures a level playing field among stakeholders operating in the digital and traditional markets as well as ensuring a similar level of protection for consumers. ESMA does not see a strong case for the creation of specific licensing categories for fintech start-ups; and
- role of industry – standards and interoperability. ESMA strongly supports the objective of data standardisation and harmonisations, in particular for the purpose of regulatory reporting by market participants. However, ESMA feels that the idea that standardisation can be competition-friendly is highly questionable, due to the significant complexity and associated costs it creates both for market participants and for the regulatory community. Therefore, based on previous work ESMA firmly believes that the successful introduction of any harmonised reporting regime primarily depends on choosing a single, appropriate standard. Suitable governance should also be in place to ensure the concerned entities can use the standard on a fair, reasonable and non-discriminatory basis.
View ESMA response to European Commission consultation on fintech, 7 June 2017