On 24 September 2020, the European Commission unveiled its Digital Finance Package. The package covers 5 key areas:
- Digital finance strategy (DFS)
- Retail payments strategy (RPS)
- Draft Regulation Of Crypto-assets (MiCA)
- Pilot regime for market infrastructures based on distributed ledger technology (DLT)
- Digital operational resilience / cloud computing (DORA)
Our International Finance and Financial Regulation Group have reviewed the package and have summarised their key findings below.
1. Digital Finance Strategy (DFS)
The European Commission has set out a strategic objective addressing the need to drive and harness digital transformation within the EU financial sector by promoting new opportunities and tackling the risks and benefits to consumers and businesses, while ensuring an integrated and level playing field for existing and new market players.
The implementation of this strategy is based on four instrumental targets ("priorities"):
- removing fragmentation in the Digital Single Market for financial services;
- adapting the EU regulatory framework to facilitate digital innovation;
- establishing a European financial data-space to promote data-driven innovation in finance;
- addressing key-challenges and risks associated with digital transformation of the financial sector.
To achieve the first target, the Commission will carry out the following actions:
- implementing a harmonised pan-EU regulatory framework on the use of an interoperable digital identity, enabling consumers and firms to have quick and easy access to cross-border digital financial services which will enable safe remote "on-boarding" by financial institutions;
- redefining and harmonising customer-due-diligence (CDD) requirements to avoid having different processes in each EU Member State.
In this respect, changes and innovations to the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) rules as well as the Electronic identification and trust services for electronic transaction Regulation (e-IDAS Regulation) will be introduced by 2024.
The new legal framework should also determine the basis which the 'on-boarding' information may be reused (e.g., 'on-boarding' with another provider, and access to other non-banking services).
- examining the need to introduce additional harmonised licensing and passporting regimes in the areas with high potential for digital finance. This would be reached through close work with the European supervisory authorities (ESAs) and the European Forum of Innovation Facilitators (EFIF);
- establishing a new EU digital finance platform to encourage cooperation between private (e.g. fintech startups etc.) and public stakeholders (supervisory authorities; national innovator facilitators etc.).
For this second target, the Commission announced specific initiatives:
- by 2024 the EU should implement a new comprehensive legal framework for distributed ledger technology (DLT) and crypto-assets in the financial sector, with differentiation based on a taxonomy of types of crypto-assets. In addition to this, the Commission will consider updating the prudential rules for crypto-assets held by financial firms.
Alongside these measures, the Commission supports the work of central banks, and in particular, the ECB, in considering issuing a retail central bank digital currency (CBDC) available to the general public, while safeguarding the legal tender of euro cash.
- a proposal to launch a European cloud services market by the end of 2022, integrating the various (alternative) cloud service offerings on the market, to promote the use of cloud computing solutions;
- promoting investments in software by adapting prudential rules (in the form of regulatory technical standards (RTS)) on intangible assets, in order to facilitate a transition to a more digitalised banking sector;
- promoting adoption of artificial intelligence tools by providing legal clarity – through joint work between the Commission, ESAs and ECB – on the use of artificial intelligence (AI) applications in financial services, possibly by developing regulatory and supervisory guidance.
This guidance should follow the upcoming proposal for a new regulatory framework for AI planned in 2021.
Finally, the Commission aims to ensure that the EU regulatory requirements for financial services do not create obstacles to the use of new technologies, through regular legislative reviews and interpretative guidance.
In relation to the third target, setting up a common financial data space helps integrate European capital markets, channel investments into sustainable activities, support innovation and bring efficiencies for consumers and businesses. To achieve this target, the Commission proposed a number of specific measures:
- ensuring by 2024 that publicly released information under EU financial services legislation to be disclosed in standardised and machine-readable formats;
The Commission will implement EU infrastructure and interoperability to facilitate access to all publicly available disclosure relevant to capital markets (as part of the Capital Markets Union Action Plan).
- development of a strategy on supervisory data in 2021 - together with the ESAs - to help ensure that supervisory reporting requirements are unambiguous, aligned, harmonised and suitable for automated reporting;
- a legislative proposal for a new open finance framework for business-to-business customer data sharing in the EU financial sector by mid-2022, building on and in full alignment with broader data access initiatives (including the upcoming Data Act, and the Digital Services Act) and in coordination with the review of the Payment Services Directive (PSD2) in 2021.
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Originally Published by Bird & Bird LLP, February 2021
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