[Newsletter n. 18]

The EU Commission adopts a new set of measures to foster FinTech

On 24 September 2020, the European Commission has adopted a new Digital Finance Package that encompasses a broader strategy for digital finance and legislative proposals on crypto-assets and digital resilience. The goal is to make the EU financial sector more competitive so to give consumers access to innovative financial products, while ensuring consumer protection and financial stability.

The Commission aims to promote responsible innovation in the EU’s financial sector by making standards safer for consumers and more digital-friendly, while mitigating potential risks in relation to investor protection, money laundering and cybercrime.

The European Commission Digital Finance Package includes: Digital Finance Strategy and Retail Payments Strategy, and legislative proposals on crypto-assets and digital resilience.

1.Digital Finance Strategy

The Digital Finance Strategy (COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on a Digital Finance Strategy for the EU) sets out broad indications on how Europe can support the digital transformation of finance in the coming years, while regulating the attached risks.

The Commission has identified the following priorities:

  • to reduce fragmentation in the digital single market
  • to ensure that EU financial services rules are fit for the digital age, for applications such as artificial intelligence and blockchain;
  • to promote business-to-business data sharing in the EU financial sector and beyond (“open finance”), while maintaining the EU’s very high standards on privacy and data protection;
  • to ensure a level playing field among providers of financial services. The Commission will apply the principle “same activity, same risks, same rules”: from traditional market actors (banks, insurance and investment companies) to Fintechs and Bigtechs that provide payments, savings, insurance, everyone is subject to supervision.

2. Legislative proposals on crypto-assets

The Commission differentiates between (a) those crypto-assets already governed by EU legislation and (b) other crypto-assets.

a) The previously regulated crypto-assets remain subject to existing legislation but the Commission proposes a pilot regime for market infrastructures that wish to try to trade and settle transactions in financial instruments in crypto-asset form, the “DLT market infrastructures” (Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on a pilot regime for market infrastructures based on distributed ledger technology).

The objective is to develop a secondary markets for ‘tokenised’ financial instruments and promote the uptake of DLT in the trading and post-trading area. This pilot regime represents a so-called ‘sandbox’ approach, or controlled environment, which allows temporary derogations from specific requirements embedded in EU legislation (MiFID II, CSDR) so that regulators can gain experience on the use of distributed ledger technology in market infrastructures, while ensuring that they can deal with risks to investor protection, market integrity and financial stability.

b) For all crypto-assets not covered elsewhere in financial services legislation and e-money tokens, including ‘stablecoins’, the Commission proposes a bespoke regime for markets in Crypto-Assets, “MiCA” (Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937).

The objective of MiCA is to provide clarity and legal certainty for cryptocurrencies that fall outside the scope of existing financial services legislation and establish uniform rules for cryptocurrency providers and issuers in the EU. The proposed regulation will replace existing national regulations applicable to crypto-activities and will establish specific rules for the “stablecoins”. The new rules will allow operators authorised in one Member State to provide their services across the EU (“passporting”). Issuers of significant asset-backed crypto-assets (so-called global ‘stablecoins’) would be subject to more stringent requirements in terms of capital, investor rights and supervision.

3.Legislative proposals on digital operational resilience

In light of the ever-increasing dependency of the financial sector on software and digital processes, information communication technologies (ICT) risks are now more than ever inherent in finance. As such, efforts at EU level shall be made to ensure that all participants in the financial system have the necessary safeguards in place to mitigate cyber-attacks and other risks. To this end, the Commission proposes a Digital Operational Resilience Act, “DORA”  Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on digital operational resilience for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No 600/2014 and (EU) No 909/2014).

The proposed legislation will require all firms to ensure that they can withstand all types of Information and Communication Technology (ICT) related disruptions and threats. The proposal aims at the harmonisation and streamlining of existing (limited) rules on ICT risk management and ICT-related incident reporting and introduces new bespoke rules on digital testing, information sharing and management of ICT third-party risk, including an oversight framework to monitor digital risk of critical ICT third party service providers, such as cloud computing service providers.

To ensure consistency with the ICT risk management requirements applicable to the financial sector, DORA will apply to 20 types of regulated financial entities in the EU. This facilitates a homogeneous and consistent application of all risk management components in ICT-related areas, safeguarding a level playing field between financial entities in relation to their regulatory obligations, recognizing the natural presence of significant differences in terms of size, company profiles or exposure to digital risk among the various financial entities.

In addition, pursuant to a more comprehensive approach, the Commission has proposed a fine tuning of existing regulation, by amending financial services directives to introduce cross-references to the DORA and update empowerments for technical standards (Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and EU/2016/2341.

4.Retail Payments Strategy

The Commission presented the “Retail Payment Strategy” (COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on a Retail Payments Strategy for the EU) with a view to making e-commerce transactions safer and more convenient and achieving a fully integrated retail payments system in the EU, including instant cross-border payment solutions.

The Commission has identified the following objectives:

  • to promote innovative and competitive retail payment markets (by promoting open banking solutions, ensuring that the legal framework covers all important players in the payments ecosystem including technology companies, further aligning the EU legal framework for retail payments (PSD2 and EMD2), ensuring a high level of consumer protection);
  • to promote efficient and interoperable retail payment systems and other supporting infrastructures (by ensuring direct access by non-bank players to all payment systems, revising existing legislation, eliminating restrictions of access to essential technical infrastructures to facilitate mobile contactless payments)
  • to promote efficient international payments (by supporting cheaper international payments, adopting global messaging standards, promoting links between payments systems in different jurisdictions, reducing time to process transactions and increasing transparency through regulatory action, encouraging regional payments initiatives through EU development policy).

Conclusion

The Digital Finance Package follows broad consultations and the initiatives under the Digital Finance Outreach and, as stated in the press release accompanying the publication of the Digital Finance Package, it “will be crucial in supporting the EU’s economic recovery as it will unlock new ways of channeling funding to Europe’s businesses, while also playing a key role in delivering the European Green Deal and the New Industrial Strategy for Europe”.

The scope of this initiative strongly underlines the width, ambition and market-favour of the endeavors that the EU is making to keep the internal financial market up to date with the fast changing times.

Legália will monitor the further developments concerning FinTech and will keep you posted. Meanwhile, please do not hesitate to contact us for any further clarification on this and related topic.

Contacts:

Vito Vittore
Partner

Elena Pagnoni
Partner

Rocco Disabato
Associate

Roberta Talone
Associate