When the new Commission mandate started in December 2019 and Ursula von der Leyen and her team of Commissioners took office, we knew that the policy agenda would be shaped by two key overarching themes: digitisation and sustainability.
However, with the launch of public consultations on its digital finance and retail payments strategies last week, the Commission has shown it believes that digitisation of the financial sector is as important as ever, if not more so.
Background to the digital finance strategy
Freshfields Digital regulars may recall that the previous Commission mandate (2014–2019) also included a Fintech Action Plan (PDF), published in March 2018, which contained a number of (mostly non-legislative) initiatives to help drive 'a more competitive and innovative European financial sector' (see our blogpost on the Fintech Action Plan).
You would be forgiven for thinking that this new Commission had simply repackaged its previous strategy and given it a new name. And, in a sense, you wouldn’t be far wrong! However, what this Commission plans to do is build on the work that has been done so far and develop a more ambitious Fintech Action Plan 2.0.
One of the reasons why the previous Commission only came forward with one legislative proposal under its fintech action plan was that there was only approximately one year left of the EU policy-making cycle (the European Parliament elections were in May 2019). Seeing how the legislative process for the proposal for a crowdfunding regulation developed, some would say they were justified in deciding not to legislate prematurely in a rapidly developing environment.
Given the hype and legal uncertainty at the time, a number of Members of the European Parliament (MEPs) sought to include initial coin offerings (ICOs) within the proposal, to enable certain ICOs to benefit from an EU right of passport. The Commission was very clear that, until further evidence had been gathered on their legal standing (which ultimately came in the form of advice from the European Securities and Markets Authority (PDF) in January 2019), this may send the wrong signals about ICOs more broadly to a developing market.
In the intervening period since finalisation of the legislative proposal, we have seen the discussion around ICOs eclipsed by that on stablecoins and the global regulatory response to the announcement of The Libra Association. The number of cyber-attacks in the financial sector, as well as the reliance on cloud service providers, has put digital operational resilience to the top of the agenda for financial regulators globally and, in reaction to the policies of the current US administration and concerns about Chinese technology (eg Huawei), there is an increased emphasis on the need to ensure European technological sovereignty.
In hindsight, the Commission’s decision to take a more considered approach to legislating and take time to study this rapidly developing environment may have been prudent. In the past two years, they set up the EU Blockchain Observatory and Forum, which has produced reports on important themes, they tasked an expert group with identifying the regulatory obstacles to financial innovation and worked with the European Supervisory Authorities to gather advice on a range of issues, from the licensing of fintech firms (PDF) to the benefits and risks of big data (PDF).
This has allowed the Commission to commence its new mandate with clear direction and ambition, launching consultations on cryptoassets, cross-sectoral Financial Services Act on operational and cyber resilience, digital finance and retail payments, with the aim of publishing the first legislative proposals in Q3 2020.
The digital finance strategy – in focus
With the recent launch of its public consultation, open until 26 June 2020, the new Commission has just taken its first steps towards fleshing out its thinking on digital finance and has given stakeholders the opportunity to have their say on what it considers the priority areas of focus.
Ensuring that the financial services regulatory framework is technology neutral and innovation friendly
Technology neutrality and remaining innovation friendly are clear areas of concern for European policy makers as they look more and more at a wider range of firms including incumbent financial institutions, start-ups and technology companies. Indeed, we have seen a growing concern in Brussels around the entry of "big tech" into finance.
As ESMA Chair Steven Maijoor recently pointed out, 'Their data-based business model raises issues around privacy and could facilitate price discrimination. And if competition suffers in the long run, consumers may lose out and markets may face concentration risk'.
The Commission is therefore carefully considering its policy response and is asking stakeholders explicitly for their views on 'which financial services [they] expect technology companies to gain significant market share in the EU in the five upcoming years', the changes such developments will make to prudential and conduct, as well as consumer, risks and the application of the principle that the 'same activity creating the same risks should be regulated in the same way'.
Identifying ways to remove fragmentation of the single market for digital financial services
It was helpful to see that the Commission is asking the industry questions about fragmentation and divergence of approach between EU regulators. While this has long been a topic for discussion, it is particularly relevant in an increasingly digitised world where provision of services tends more towards remote access.
We expect that the recently revised anti-money laundering regime will be a key area flagged in the responses, given the significant divergence of approach across the EU (including the registration requirements, where there is no passporting available and firms providing services on a cross-border basis could be required to register in multiple EU member states).
Promoting a well-regulated data-driven financial sector, building on the current horizontal frameworks governing data
The need for a data-driven financial sector is also front and centre of the Commission’s work on digital finance.
Following the launch of the European Data Strategy (PDF) earlier this year (one of the key pillars of the broader digital strategy) and the focus on data in the MiFID consultation, the Commission is considering a number of steps in this area. This includes the use and role of publicly available data, consent based access to personal data and more importantly in this context, data sharing in the financial sector – something which is now being referred to as an 'open finance' model, an evolution from 'open banking'.
The revised Payments Services Directive (PSD2) has led the way towards the sharing and use of customer-permissioned payment data by banks and third party providers to create new services and the Commission now is considering how this principle could be extended to cover other types of financial services data.
The retail payments strategy – in focus
The Commission also published a public consultation on its retail payments strategy with a view to reinforcing the international role of the euro.
The COVID-19 outbreak has brought digital and contactless payments to the fore and thus how the crisis is accelerating the digitalisation of the European economy. Technology has already shaped the retail payments market, but the pace of change has increased over the last few years. Digitalisation brings both new opportunities but also new risks and challenges, even outside the world of cryptoassets (which are the subject of a separate consultation launched in December 2019).
The Commission’s consultation on retail payments is focused on the following four areas.
Fragmentation and 'same as domestic' customer experience
The Commission is keen to understand the fragmentation of the payments landscape at the EU level and has asked questions around levels of adherence to the Single European Payments Area (SEPA), the jurisdictions where instant credit transfers are a premium service (or just the new normal) and (non-)interoperability across borders for instant credit transfers.
An innovative, competitive and contestable European retail payments market
This section of the consultation seeks preliminary feedback on the entry into force of PSD2. Although open banking is covered in the digital finance consultation, other parts of PSD2 are considered here. In particular, this gives market participants the opportunity to comment on the much-discussed strong customer authentication (SCA) requirements.
Questions also consider whether the limits on contactless payments should be increased, whether the authorisation and prudential regime (including capital requirements) that currently applies to e-money institutions is adequate and whether programmable money to facilitate the execution of smart contracts is a promising development.
Access to payment systems and interoperability
The Commission notes that some issues for payments infrastructures include ensuring the interoperability of payment systems and ensuring that there is a level playing field between banks and non-bank payment service providers in accessing payment systems.
While some payment systems allow direct access by banks, payment institutions and e-money institutions, others only allow payment and e-money institutions indirect access. The Commission has asked a number of questions around direct participation and whether this is needed from a competitive perspective.
Improved cross-border payments into and out of the EU
Although there has been significant progress towards SEPA, cross-border payments between the EU and other jurisdictions are generally slower and more costly. The Commission notes the UN’s sustainable development goals include the reduction of remittance costs to less than 3 per cent by 2030.
Digital identity is a topic that was covered in both of the consultations – in the context of customer on-boarding in the digital finance consultation and for payment authentication purposes (as part of the SCA requirements). In each case, the Commission asked questions around facilitating use of digital identities across the EU is an area to consider and what could be done at EU level to develop the use of digital identity solutions – this is likely to be an area for future EU-wide developments given the relevant to multiple pieces of EU legislation.
Impact of COVID-19 on EU decision-making
From recent discussions we have had with EU officials, it is clear that COVID-19 has only served to increase the impetus to push initiatives on digital finance forward. The digitisation of the financial sector is expected to accelerate as a consequence of the pandemic and has served to highlight the importance of innovation in digital financial products and services.
The Commission’s consultation was due to be published a few weeks earlier but was tweaked to reflect the impact of COVID-19. It will come as no surprise that, in addition to their business-as-usual workstreams, the Commission’s responsible department for financial services (DG FISMA), together with the Financial Services Commissioner (Executive Vice-President Dombrovskis) and his team, are the same individuals having to deal with much of the EU’s economic response to COVID-19.
It will be key to see to what extent industry will be able to provide the same detailed responses to these consultations given that the focus is currently on other business critical issues. If input is lacking in terms of substance and quantity, this could affect the overall policy decisions that the Commission is able to take.
That being said, we have already seen positive signs that the Commission views digital finance and retail payments as ever more important in light of COVID-19 and will thus prioritise these strategies and stakeholders have been given longer than the usual 12 weeks to respond to its consultations.
Once the Commission comes forth with its first legislative proposals (currently expected in Q3 2020), it will be interesting to see how the other EU institutions are able to process and react to these proposals.
Timeline and next steps
The Commission is due to publish its amended Action Plan for 2020 (adjusted to account for the impact of COVID-19) at the end of April and this will set out the concrete timings for the digital finance and retail payments strategies. All being well, the legislative proposals on cryptoassets and the cross-sectoral Financial Services Act on operational and cyber resilience will be published in Q3 2020, together with the finalised digital finance and retail payments strategies.
Alongside the consultations, between now and June, DG FISMA is organising a series of online roundtables connected to digital finance, including on open finance and cryptoassets. We participated in the roundtable on 'A Digital Single Market for financial services', which addressed digital identities, cross-border solutions for digital on-boarding, co-operation between European and national supervisory authorities, sandboxes and innovation facilitators, passporting, digital financial education and literacy and further obstacles to innovation.
Conclusions and contacts
It is clear from these consultation papers that fintech remains high on the Commission’s agenda, despite (or perhaps in part because of) the COVID-19 crisis.
The consultations are also extremely broad in scope and should all of the areas which the consultations cover result in legislative change, its Fintech Action Plan 2.0 will be significantly different to its predecessor.
It is clear from these consultation papers that fintech remains high on the Commission’s agenda, despite (or perhaps in part because of) the COVID-19 crisis. The consultations are also extremely broad in scope and should all of the areas which the consultations cover result in legislative change, its Fintech Action Plan 2.0 will be significantly different to its predecessor.