The digital transformation of the financial sector – ESMA issues its feedback to the EC’s consultation document

On the 29th June 2020, the European Securities and Markets Authority (“ESMA”) published its reply to the Commission’s consultation on a Digital Finance Strategy for Europe. The transformation of the financial sector taking a digitised form affects ESMA’s goals and objectives of protecting investors while ensuring the stability of the financial market.

ESMA’s constant monitoring of the changing financial market enabled it to gather precious information on several emerging topics such as Distributed Ledger Technology and Crypto-Assets. Through this information ESMA was able to provide a thorough response to the consultation delineating the risks and benefits brought by the digitisation of the financial industry. Some of the benefits identified by ESMA include increased efficiency and convenience. Nevertheless, digitisation has also brought certain risks to privacy as well as an increased number of poor sales practices. Additionally, while digitisation may result in the financial inclusion of some individuals it may inadvertently also exclude other.

Technological Neutrality

ESMA’s response contains several points aimed at the main factors raised by the consultation. Particularly, ESMA mainly suggests that a technology-neutral EU financial services regulatory framework that supports innovation is to be maintained. Although, ESMA identifies the current regulatory framework as technologically neutral, it also notes that innovative technologies are not taken in particular consideration resulting in particular challenges such as the need of burdensome clarifications on the applicability of the rules or the adaptation of certain existing rules for their effective application. ESMA suggests the implementation of an EU-wide harmonised regulatory framework to bolster innovative firms to attain their true potential while also providing the required investor protections and market stability.

Eliminating fragmentation 

Another vital suggestion made by ESMA is to remove the fragmentation in the single market for digital financial services. ESMA notes that in order for fragmentation to be removed there must be cooperation at EU level. It proposes that the work conducted by the European Forum for Innovation Facilitators to facilitate the sharing of technological expertise and business practices by innovative firms should be streamlined with the workstreams of other authorities. Additionally, ESMA notes that electronic identification makes up a key role in removing fragmentation in the market. Therefore, ESMA suggests the development of Digital Financial Identities that may be usable and acknowledged throughout Europe. ESMA recognises, that a harmonised regime already exists in the form of the Legal Entity Identifier and that is should be further promoted.

Promote a well-regulated data-driven financial sector

The promotion of a well-regulated data-driven financial sector is also suggested by ESMA as being a fundamental need of the market. In order to achieve this, ESMA suggests that primarily, data should be in standardised and harmonised form. In the case of publicly available data, it should be easily usable and accessible in a timely manner. Many firms are also adopting AI-based tools for their business and for regulatory reporting. In a similar fashion, supervisory authorities are also commencing the development of equivalent AI-based tools to improve their data systems.

Finally, ESMA concludes its reply by stating its support for the Commission’s continued work in relation to digital financial services while also tendering its support to the Commission in its finalisation of its proposals for a new Digital Finance Strategy.

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