On 24 September, the European Commission ('the Commission') published the follow-up to its 2018 Fintech Action Plan, which encompasses strategies for Digital Finance (including legislative proposals on crypto-assets and digital operational resilience) and Retail Payments.
Since COVID-19 reached Europe in the early months of 2020, European consumers have been flocking to the e-commerce space and using contactless payments like never before.
But such swift strides into the digital world need a co-ordinated policy response that will enable Europe to grasp all the potential of the digital age, including in financial services, and keep pace with its global peers. At the same time, the response must preserve competition, increase consumer protection, improve and further centralise supervision, and enable greater interoperability of services.
It won’t just be traditional financial services players that are affected. The response will also capture entities whose business models are primarily rooted in data utilisation rather than financial transactions.
The two strategies unveiled by the Commission, which we previewed in April, are part of broader efforts to make this Europe's 'digital decade' and ensure Europe becomes a 'global role model for the digital economy'. As Commission President Ursula von der Leyen said during her State of the Union address on 16 September, 'We want to lead the way, the European way, to the Digital Age: based on our values, our strength, our global ambitions'.
The digital finance strategy – in focus
In line with von der Leyen’s speech, Commission Executive Vice-President Valdis Dombrovskis, currently responsible for financial services, said today that '[t]he future of finance is digital […] An innovative digital single market for finance will benefit Europeans and will be key to Europe's economic recovery by offering better financial products for consumers and opening up new funding channels for companies'.
Building on the 2018 FinTech Action Plan, the work of the European Supervisory Authorities (ESAs) and the recent public consultation, the Commission plans to overhaul the regulatory landscape by addressing the four focus areas set out below.
1. Ensuring that the EU regulatory framework facilitates financial innovation
The Commission, as well as the ESAs, have analysed the EU regulatory framework to identify the regulatory obstacles to financial innovation. The result is a legislative package to reform the areas of operational resilience and crypto-assets, along with guidance on the use of artificial intelligence (AI).
As financial institutions shift away from their legacy IT systems and migrate towards the use of cloud systems, the Commission is proposing a framework for digital operational resilience, ensuring that ICT standards are harmonised across the sector, testing frameworks are established and critical third-party ICT providers are subject to clear oversight.
Using the wealth of work that has been done on crypto-assets at international level (including with the Commission’s involvement), the Commission is proposing an ‘enabling’ legislative framework that will:
- clarify how existing EU rules apply to crypto-assets;
- introduce a pilot regime for those that are covered by these rules (as well as interpretative guidance); and
- establish a new legal framework for those that are not covered.
In order to further facilitate financial innovation, the Commission will:
- promote the update of AI tools;
- promote investments in software; and
- regularly provide interpretative guidance on how existing legislation on financial services is to be applied to new technologies.
We will publish more on these developments in due course.
2. Tackling fragmentation
Innovators and businesses will welcome the Commission’s intention to roll out its passporting and one-stop-licensing principle in all areas that ‘hold strong potential for digital finance’. In doing so, the Commission is directly addressing criticism that different licensing procedures make it difficult for innovative fintech start-ups to truly scale up across the EU and compete with existing sectors.
In addition to common rules and passporting for crowdfunding services (introduced via the pending Crowdfunding Regulation) and crypto-asset issuers and service providers (via the legislative proposals on crypto-assets – see more above), the Commission is considering extending the principle to other areas, such as the prudential regulation of non-bank lending.
Industry will also welcome the Commission’s intention to introduce, by 2024, a legal framework for enabling a quick and easy remote customer on-boarding. The Commission plans to achieve this through, among other things, more harmonised anti-money laundering rules (legislative proposals are expected in Q1 2021) and a review of the eIDAS Regulation (allowing for electronic signatures), which could be extended to cover the private sector and promote trusted 'digital identities' for European citizens (the Commission’s consultation on this is open until 2 October).
3. Creating a European open finance data space
Building on the ‘open banking’ concept introduced by the Payment Services Directive (PSD2), the Commission intends to promote data-driven innovation, including enhanced access to data and data sharing within the financial sector, which is referred to as ‘open finance’.
Aiming to have an open finance framework in place by 2024, the Commission will propose legislation by mid-2022. This will build on and align with other upcoming Commission initiatives focusing on data access, such as the European Data Strategy, the Data Act (due 2021) and the Digital Services Act (due Q4 2020). This will also be co-ordinated with the review of PSD2.
4. Maintaining the principle of ‘same activity, same risk, same rules’
The Commission intends to adapt the existing prudential and conduct supervision framework to the new financial ecosystem by 2024. The ‘same activity, same risk, same rules’ principle should address new challenges and risks associated with digitalisation.
For instance, the Commission will assess how to ensure comprehensive supervision of the increasingly fragmented value chains and entry of new providers of financial services. One possibility (as proposed for crypto-assets) would be to establish a supervisory college for the ecosystem of a given financial services value chain.
In this regard, the Commission will also review whether provisions on group supervision in EU financial services legislation, such as the Financial Conglomerates Directive, can adapt to a constantly changing financial market structure regardless of the group’s corporate structure and main activities.
In addition, the Commission will consider if legislation is needed to address potential risks stemming from possible large-scale lending operations by firms outside the banking perimeter, which may entail both micro- and macro-prudential risks.
The retail payments strategy – in focus
If the Commission already considered the retail payments sector to be at the forefront of financial innovation, COVID-19 and the big increase in digital transactions have only served to consolidate its position.
In line with the pace and scale of these technological advancements, following its recent public consultation, the Commission has proposed a dedicated retail payments strategy based on four pillars, as set out below.
1. An innovative and competitive payments markets
As mentioned above, PSD2 has enabled open-banking business models based on the sharing of account data, such as payment initiation and account information services.
To untap 'the large potential of open banking', the Commission will launch a comprehensive review of the application of PSD2 at the end of 2021. This review will also:
- analyse the impact of strong customer authentication (SCA) requirements on payment fraud in the EU;
- examine the existing legal limits on contactless payments;
- consider greater alignment with the Electronic Money Directive; and
- evaluate risks stemming from unregulated (especially technical) services and how these could be mitigated.
2. Digital and instant payment solutions with pan-EU reach
The Commission argues that citizens and companies in the EU should be able to access high-quality, secure and cost-efficient payment solutions.
As set out in its 2018 Communication on the International Role of the Euro, the Commission believes that such solutions should mainly rely on instant payments systems. In order to achieve full uptake in the EU by the end of 2021, the Commission proposes significant advances on rules, end-user solutions and infrastructures.
This will also involve increasing consumer trust, which is linked to SCA requirements under PSD2 and 'digital identities' (see more above). By the end of 2023, the Commission will explore suitable measures, such as the development of a 'label' for pan-European payment solutions.
The Commission highlights that it supports the issuance of a much-discussed euro retail central bank digital currency (CBDC), and plans to work with the European Central Bank (ECB) to ensure ‘a high level of complementarity’ with the payment solutions developed by the private sector (such as the recently announced European Payments Initiative (EPI), which is supported by both the Commission and the ECB).
3. Efficient international payments
Beyond promoting pan-EU payment solutions, the Commission argues that cross-border payments involving non-EU countries should become faster, and more affordable, accessible, transparent and convenient.
The strategy therefore proposes both jurisdiction-specific and global measures, especially to facilitate linkages between European (eg the TARGET Instant Payment System) and third-country payment systems.
Specifically concerning remittances, the Commission encourages member state initiatives to support the remittance sector, subject to service providers committing to progressively reduce the cost of remittance services over time.
The Commission will also support Single Euro Payments Area (SEPA)-like initiatives and the possibility for third countries (eg in the Western Balkans and in the Eastern Neighbourhood) to join SEPA.
4. Efficient and interoperable payment systems, and other support infrastructures
To ensure access to payment systems, the Commission plans to review the Settlement Finality Directive in Q4 2020 to see whether it should cover electronic money (e-money) and payment institutions.
The review will also examine whether the Commission should establish a right of access under non-discriminatory conditions to technical infrastructures (eg elements of software or hardware) necessary for the provision of payment services.
Timeline and next steps
The legislative proposals on crypto-assets and digital operational resilience, which were published with these strategies, have been submitted to the European Parliament and Council for examination.
It is unclear how long the respective legislative processes will take but it’s likely the legislation won’t come into force until at least 2023.
Both strategies also contain a large number of other legislative and non-legislative initiatives, many of which have been alluded to above, which will be developed over the coming years and months.
The Commission’s follow-up to its 2018 Fintech Action Plan is incredibly ambitious, aiming to facilitate financial innovation in Europe and set global standards. Time will tell whether it achieves its ambitious targets. What is certain is that we will be busy working closely on these proposals over the coming months and years.