02 July 2020

ESMA response to EC consultation on a new Digital Finance Strategy for Europe

The digital transformation of the financial sector continues to have profound consequences for ESMA’s objectives of protecting investors and ensuring stable and orderly financial markets, as we have highlighted in our response to the consultation. The Commission’s strategic work in this area is therefore highly relevant to ESMA’s own work.

ESMA continually monitors the rapidly-evolving environment for financial markets. We have carried out detailed analyses of a number of topics within our remit in recent years, such as Distributed Ledger Technology and Crypto-Assets. We have also witnessed significant trends in market structure, with the growth of many FinTech start-ups in recent years now accompanied by larger, established technology companies seeking to make inroads into the financial sector.

Based on our work, we have provided much detail in our response to the consultation. At a general level, our response identifies risks and benefits to digitalisation of the financial sector. Benefits include increased speed, efficiency, convenience and greater economies of scale. Automated tools can help firms and authorities detect cases of poor conduct, thereby enhancing the integrity of markets.

However, we see a number of risks around digitalisation too. Digitalisation brings an increasing need for effective management of risks around data security, an operational risk that affects all entities within the sector. Other significant risks are especially relevant to consumers, including risks to privacy, a growing capacity for poor sales practices, price segmentation and even outright discrimination based on consumer data.

Some ESMA believes it would be important to develop Digital Financial Identities that are usable and recognised throughout the EU. A prerequisite for this task is the introduction of a unique standardised and harmonised means of identification. Such means already exist in the financial sector in the form of the Legal Entity Identifier, a global standard. It should be promoted to the maximum extent possible.

3) Promote a well-regulated data-driven financial sector
A challenge for firms, authorities and consumers alike is to build the necessary knowledge and expertise to fully reap the benefits of digital technologies.

Key requirements for efficient and easy use of data are data standardisation and harmonisation, security of IT-systems and legal certainty regarding pertinent responsibilities, liabilities and usage permissions. For publicly available data to be easily usable, they need to be subject to unrestricted access in a timely manner. Data quality issues should be addressed through robust verification mechanisms. Text data need to be in machine-readable format.

An important way in which data is driving the development of the financial sector is through AI-based tools. Firms use such tools for their business and for regulatory reporting. Supervisory authorities are developing their own SupTech tools, including examples that make use of AI. ESMA has begun exploring new AI-based applications. An area of particular interest is the potential for AI-based tools (such as machine learning) to support ESMA’s statistics-related activities, such as flagging outliers and inconsistent entries in the databases that ESMA hosts.

The recent expansion in AI-based models is not limited to the financial services sector. Nevertheless, guidance for the EU financial sector could still be welcome, as a complement to horizonal-level EU rules on AI. It would also be necessary to incorporate privacy considerations into any horizontal-level rules, which would require a review of existing regulations in this area.

I will conclude by reiterating ESMA’s support for the Commission’s work in relation to digital financial services.

We stand ready to provide any additional support as the Commission finalises its proposals for a new Digital Finance Strategy.
Yours sincerely,
[signed]
Steven Maijoor
Chair
ESMA

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