The European Securities and Markets Authority (ESMA) has published a speech given by its executive director, Verena Ross. The speech is entitled Financial innovation: towards a balanced regulatory response and covers how ESMA responds to financial innovation.
Ms Ross explains that when ESMA examines financial innovation it does so with a dual perspective. On the one hand, it tries to understand what advantages the innovation may introduce and whether there are barriers to the emergence of those benefits that it can work to address. On the other hand, ESMA also wants to ensure that it has identified potential risks, analysed them, developed mitigants such that it is comfortable that the potential advantages of the innovation outweigh the disadvantages.
Ms Ross also mentions that ESMA has established a Financial Innovation Standing Committee, made up of representatives from the competent authorities of the 28 Member States. It is charged with ensuring that the European national supervisory authorities achieve a harmonised approach to the supervision and regulation of innovative products.
Before determining whether an innovation justifies additional analysis from ESMA Ms Ross states that it asks a number of fundamental questions as to the nature of the innovation to better guide its action such as understanding the primary issue of the problem and its urgency, and the outcome the innovation is hoping to achieve and its market impact. ESMA’s response may come in the form of an opinion, advice, statement, warning or in future product intervention.
Ms Ross notes that in the future, MiFIR will give ESMA and Member State competent authorities the power to prohibit or restrict the marketing, distribution or sale of financial instruments if there is a significant risk to investor protection, market integrity or financial stability.
In the final part of her speech Ms Ross discusses some examples of ESMA’s approach towards financial innovation covering ‘robo advice’, exchange-traded funds, crowdfunding and distributed ledger technology (DLT).
In relation to ‘robo advice’ Ms Ross reminds her audience that the Joint Committee of the European Supervisory Authorities launched a discussion paper on the topic of automation in financial advice in December 2015, which explains the concept of automated advice and highlights the potential benefits and risks to consumers and to financial institutions.
On DLT (also known as ‘block chain’) Ms Ross refers to ESMA’s call for evidence which was published in April 2015 which covered investments using virtual currency as an underlying and on the anticipated use of the core distributed ledger technology. Ms Ross states that ESMA’s initial research has found that the potential benefits sit more squarely in the post-trade environment. It has found that clearing and settlement, collateral management, record of ownership and securities servicing are the areas where the technology is most likely to bring useful changes. However, at the same time, ESMA sees a number of possible limitations to the technology. In particular, it questions the ability of DLT to handle large volumes, to manage privacy issues and to ensure a high level of security.
View Financial innovation: towards a balanced regulatory response, 7 March 2016