On 2 February 2021, the European Commission (the Commission) sent a request to the European Supervisory Authorities (ESAs) for technical advice  on digital finance and related issues. Specifically, the Commission requested advice on how to address “same activity, same risk, same rules” issues, more fragmented value chains, the scope of the supervisory perimeters, the prudential risks related to non-bank lending and the protection of clients’ funds. This initiative originates from the Commission’s Digital Finance Strategy that was published in September 2020, one of the stated objectives of which was “the Commission’s ambition to adapt the EU’s prudential and conduct regulation and supervision frameworks to be future proof for the new financial ecosystem.” Noting, among other, the importance of digital finance for economic transformation, the increasing role of technology companies in the financial services sector and the role of technology in the breakup up of previously integrated value chains in financial services (for example in payment services), the Commission intends the technical advice to provide input into its ongoing work, which may result – in due course – in proposing new legislation, amending existing EU laws or taking other action. To this end, the request for technical advice covers the following five topics:

1. Regulation and supervision of more fragmented or non-integrated value chains

The ESAs are requested to monitor and if applicable report, “on new material developments in the evolution and fragmentation of value chains of single financial services driven by technological innovation and the entry of new market participants”. In relation to their respective areas of competence, they should also assess if and when more fragmented or non-integrated value chains lead to unidentified or unaddressed risks and what challenges they bring for supervisors, and to advise how to manage the overall risks of the value chain with a focus on a holistic approach to regulation and supervision. In particular, the advice should address regulatory and supervisory challenges (prudential, AML/CFT and conduct) stemming from: (i) cooperation among regulated providers active in multiple subsectors of financial services (e.g. retail financial services, payments, investment services, insurance) and established in one or various Member States in the EU; (ii) cooperation between technology companies – in particular BigTech firms – and financial service providers established in one or various Member States in the EU; and (iii) cooperation among multiple subsectors of financial services and nonregulated companies operating in the EU but established outside the EU.

Deadline: joint interim report by 31 October 2021; joint final report by 31 January 2022.

2. Platforms and bundling of various financial services

The ESAs are requested to assess the extent to which platforms that operate across multiple Member States to market or provide various financial products and services are effectively regulated and supervised. To this end, they should advise whether there is a need to extend or modify current EU financial services regulation and whether there is a need to enhance supervisory practices, including through convergence measures. In doing so, the ESAs should take into account the supervisory perimeters of the legislation already in force or already adopted, as well as assess if current supervisory capacities and skill are adequate for monitoring such online services and enforcing rules and provide such advice as appropriate.

Deadline: joint interim report by 31 October 2021; joint final report by 31 January 2022.

3. Risks of groups combining different activities

Considering the level playing field, the European Banking Authority (EBA) is requested to assess: (i) whether current approaches to group regulation and consolidated supervision that aim to address the risks of regulated financial groups at consolidated level could be detrimental to a level playing field between entities providing the same financial services as part of a group versus as a single entity; and (ii) whether there are areas where targeted adjustments to the EU regime could be considered without endangering prudential soundness and safety. In addition, the ESAs should assess the situation in other sectors such as investment firms and insurance groups, and more generally mixed activity groups going through digital transformation and provide advice on the potential need for adjusting the associated legislation.

Regarding mixed activity groups, the ESAs are requested to analyse new emerging risks, in particular large technology companies with a significant activity outside the financial sector marketing or providing financial services, and to assess whether current licencing practices and regulatory requirements are adequate for large mixed activity operators that gain significant market share or have particular business models in payments, lending, holding customer funds, and/or insurance and investment or whether these providers should be required to fulfil more stringent and proportionate requirements. To this end, they should also assess whether existing EU legislation address these risks, or whether adjustments would be needed.

The ESAs are also requested to analyse the potential need for a new cooperation and coordination arrangements between financial supervisors and – if needed – other authorities in order to ensure effective supervision of emerging new types of mixed activity groups. The advice should specify how to adjust the supervisory arrangements relative to mixed activity groups, in particular large technology companies that build up substantial market share in financial services, and it  should focus on (i) whether large technology companies (with substantial market share) in financial services as mixed activity groups should be supervised specifically; (ii) how interdependencies with, and potential risks stemming from, the financial and non-financial part of the business can be identified and addressed; and, (iii) how supervisory cooperation within the EU and with third countries can be improved for these companies and groups.

Deadline: joint interim report by 31 October 2021; joint final report by 31 January 2022.

4. Non-bank lending

The EBA is requested to examine to what extent lending provided by financial intermediaries outside of the European financial services regulatory perimeter, including as applicable by technology companies and digital platforms, exists in the EU and may evolve recognising the deployment of innovative technologies as a means to reach new customers. In particular, the EBA should: (i) report on the business models and legal structures employed; (ii) identify any regulatory and supervisory issues that may impede effective risk management at both a micro and macro level, and also scaling up of services cross-border; and (iii) assess to what extent these activities are not covered – or sufficiently covered – by other EU legislation. The EBA should advise on any potential need to adjust the EU regulatory perimeter and it should develop and propose policy options to address any identified issues, taking into account the necessity of establishing specific authorisation, passporting, prudential requirements, conduct, consumer protection and supervision arrangements at both the domestic and cross-border level.

Deadline: an interim report by 31 December 2021, the final report by 31 March 2022.

5. Protection of client funds and the articulation to the deposit guarantee scheme directive (DGSD)

The EBA is requested to advise on the implications of the DGS protection of the client funds held by financial firms, such as payment and emoney institutions, investment firms or other financial technology companies. In addition, the advice should discuss the advantages and disadvantages of such protection through Article 7(3) DGSD, as well as the conditions allowing to preserve the level playing field between non-banks and banks. The EBA should also: (i) map how often credit institutions are used to fulfil the safeguarding requirements; (ii) at which point in time and how often the client funds are deposited; (iii) what the deposited volumes are; and (iv) whether these placements cause potential concentration risk. Finally, it should also analyse: (i) potential misconduct which could lead to detriment to existing customers and consumers; and (ii) potential discrepancy between the extent of deposit protection granted to customers of different financial institutions. If appropriate, the EBA should propose amendments to the DGSD framework addressing any identified shortcomings.

Deadline: an interim report by 31 July 2021, the final report 31 October 2021.