November 23, 2020  

The European Commission’s Digital Finance Strategy for the European Union

By Jonathan Cardenas

On 24 September 2020, the European Commission (the “Commission”) adopted a Digital Finance Package[1] aimed at enhancing the European Union’s (’EU’) competitiveness in the financial sector and ensuring that EU financial services regulation is “fit for the digital age.”[2]  The Digital Finance Package builds upon the Commission’s FinTech Action Plan of 2018,[3] and consists of two initiatives: the EU Digital Finance Strategy[4] and the EU Retail Payments Strategy,[5] both of which establish a series of regulatory objectives and priorities that the Commission intends to achieve by 2024.  In addition, the Digital Finance Package includes legislative proposals on markets in crypto-assets,[6] market infrastructures based on distributed ledger technology,[7] and digital operational resilience for the financial sector,[8] as well as related amendments to pre-existing EU regulation.[9]  This article briefly summarizes the regulatory objectives and priorities that the Commission has outlined in its EU Digital Finance Strategy.

  1. The Commission’s Strategic Objective for Digital Finance

Recognizing that technological disruption is transforming the European financial services sector and the European economy as a whole, the Commission has defined its strategic objective as that of embracing digital finance “for the good of”[10] European consumers and businesses.  In this light, the Commission states that its aim is to promote digital finance on the basis of European values and emphasizes that the EU must “drive digital finance with strong European market players in the lead.”[11]  The Commission’s strategic objective of embracing digital finance is justified on four grounds.  First, it would catalyze financial innovation and provide opportunities to develop improved financial products for consumers and small businesses.  Second, it would advance Europe’s economic recovery strategy, and in particular, would help to create new channels of financing that would support Commission President Ursula von der Leyen’s New Industrial Strategy for Europe.[12]  Third, it would strengthen European Economic and Monetary Union through enhanced market integration in the EU’s Banking Union and Capital Markets Union.  Fourth, it would strengthen the EU’s “open strategic autonomy” in the financial services industry and would also strengthen the EU’s ability to regulate and supervise the global financial system.[13]

  1. The Commission’s Regulatory Priorities for Digital Finance

In order to achieve its strategic objective of embracing digital finance for the good of consumers and businesses, the Commission has identified four priorities that will inform EU policymaking activities through the end of Commission President Ursula von der Leyen’s term in 2024.

  1. Removing Fragmentation in the Digital Single Market for Financial Services

The Commission’s first priority is to address fragmentation in the Digital Single Market in order to enable consumers and retail investors to have access to cross-border financial services and in order to facilitate the ability of financial services firms to scale up their businesses across the entire Single Market.  In this regard, the Commission calls for the implementation of a legal framework that enables the use of interoperable digital identity solutions across the EU that would allow for quick and easy remote onboarding of new financial services customers.  The Commission explains that this framework should be based on harmonized anti-money laundering and counter-terrorism financing rules, as well as on an updated version of the EU Regulation on Electronic Identification and Trust Services for Electronic Transactions in the Internal Market.[14]  In order to facilitate the scaling up of financial services across the Single Market, the Commission plans to introduce regulatory reforms that permit passporting and one-stop shop licensing across the EU in areas that are considered essential to digital finance, such as crowdfunding, crypto-assets and non-bank lending.  In addition, in order to encourage cross-border cooperation between public and private sector stakeholders, the Commission will establish an EU digital finance platform that will allow for online interactions related to digital finance initiatives, as well as online access to national innovation facilitators and national e-licensing procedures.

  • Adapting the EU Financial Services Regulatory Framework

The Commission states that the purpose of the Digital Finance Strategy is to ensure that EU financial services regulation is “fit for the digital age.”[15]  In this regard, in order to make the EU financial services regulatory framework compatible with best practices in software development and deployment, and in order for EU regulation to serve as a facilitator of the use of financial services technology across Europe, the Commission has identified five strategies to accomplish its objectives. 

First, the Commission recommends that the EU adopt a comprehensive regulatory framework by 2024 that enables the uptake of, and that addresses the risks associated with, distributed ledger technology and crypto-assets in the financial services industry.  In this light, the Commission has published legislative proposals that would clarify the applicability of existing EU rules to crypto-assets and distributed ledger technology and that would establish a new EU regulatory framework for those crypto-assets that are not covered by pre-existing EU rules. 

Second, the Commission recommends that the EU promote the use of cloud computing infrastructure in financial services.  To do so in a secure way, the Commission has published a legislative proposal that would create an oversight framework for critical third-party financial services industry cloud service providers.[16]  The Commission has also requested that the European Union Agency for Cybersecurity develop a cybersecurity certification program for cloud service providers that would comply with the requirements of the EU Cybersecurity Act.[17] 

Third, the Commission recommends that the EU promote a significant level of investment in software by financial services industry players.  In order to do so, the Commission recommends that EU rules on prudential requirements for financial institutions be adapted so as to facilitate a transition toward a more digital European banking sector.  In this regard, the Commission plans to adopt regulatory technical standards that are presently being developed by the European Banking Authority. 

Fourth, the Commission recommends that the EU promote the deployment of artificial intelligence (‘AI’) tools in the financial services industry.  To do so, the Commission intends to collaborate with the three supervisory authorities of the European System of Financial Supervision (namely, the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority) to clarify supervisory expectations as to how EU financial services regulation should apply to financial services-related AI applications.  In addition, as set out in the Commission’s February 2020 White Paper on Artificial Intelligence,[18] the Commission plans to promote the use of AI by proposing significant investment in AI at the EU level.  The Commission also plans to propose a new regulatory framework for AI in 2021 that reflects European values. 

Fifth, the Commission aims to ensure that the EU financial services regulatory framework is future proof by engaging in legislative reviews and issuing interpretative guidance on an on-going basis.  It plans to do so by regularly carrying out an EU Digital Finance Outreach that will identify potential regulatory obstacles to financial services innovation and that will provide interpretative guidance on these issues.  

  • Promoting Data-Driven Innovation in Finance

In conjunction with the Commission’s European Strategy for Data, the Commission plans to promote data-driven financial innovation by establishing a “common financial data space”[19] that will help to integrate European capital markets and facilitate investment in sustainable development.  In addition, in furtherance of the objectives of the EU Capital Markets Union, the Commission plans to facilitate real-time online access to capital markets-related public disclosures by 2024.  The Commission also plans to promote the use of regulatory and supervisory technology tools for supervisory reporting by regulated entities, as well as for information sharing between and among the Member States and EU regulatory authorities.  The Commission also plans to promote open finance by presenting an open finance regulatory framework by mid-2022.

  • Addressing Digital Transformation Challenges and Risks

In order to address the challenges and risks posed by the digital transformation of financial services, the Commission plans to modernize EU prudential and conduct regulation in line with the “same activity, same risk, same rules” principle.[20]  It also plans to integrate consumer protection and competition policy goals into its digital finance-related initiatives.  As set out in the EU Retail Payments Strategy, the Commission plans to review and revise the Payment Services Directive[21] and E-Money Directive.[22]  The Commission will also explore ways of ensuring that the EU prudential supervisory regime is sufficiently flexible to capture risks arising from the provision of financial services by non-bank internet platforms and technology companies.  Finally, the Commission plans to strengthen the resilience of digital financial operations, and in order to do so, has introduced a legislative proposal for a new EU regulatory framework for digital operational resilience in financial services.[23]

[1] European Commission, Digital Finance Package (September 24, 2020). Available at: https://ec.europa.eu/info/publications/200924-digital-finance-proposals_en.

[2] European Commission, Digital Finance Package: Commission sets out new, ambitious approach to encourage responsible innovation to benefit consumers and businesses (September 24, 2020). Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1684.

[3] European Commission, FinTech Action Plan: For a more competitive and innovative European financial sector (March 8, 2018). Available at: https://ec.europa.eu/info/publications/180308-action-plan-fintech_en.  See also, Cardenas, J., The European Commission’s FinTech Action Plan and Proposed Regulation on Crowdfunding, TTLF Newsletter on Transatlantic Antitrust and IPR Developments, Stanford–Vienna Transatlantic Technology Law Forum (June 8, 2018). Available at: https://ttlfnews.wordpress.com/2018/06/08/the-european-commissions-fintech-action-plan-and-proposed-regulation-on-crowdfunding/.

[4] European Commission, 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 (September 24, 2020). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020DC0591&from=EN.

[5] European Commission, 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 (September 24, 2020). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020DC0591&from=EN.

[6] European Commission, Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (September 24, 2020). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0593&from=EN.

[7] European Commission, Proposal for a Regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (September 24, 2020). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0594&from=EN.

[8] European Commission, 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. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0595&from=DE.

[9] European Commission, 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. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0596&from=EN.

[10] European Commission, 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 (September 24, 2020).

[11] Id.

[12] European Commission, Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions: A New Industrial Strategy for Europe (March 10, 2020). Available at: https://ec.europa.eu/info/sites/info/files/communication-eu-industrial-strategy-march-2020_en.pdf.

[13] European Commission, 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 (September 24, 2020).

[14] Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014R0910&from=EN.

[15] European Commission, 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 (September 24, 2020).

[16] European Commission, 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. 

[17] Regulation (EU) 2019/881 of the European Parliament and of the Council of 17 April 2019 on ENISA (the European Union Agency for Cybersecurity) and on information and communications technology cybersecurity certification and repealing Regulation (EU) No 526/2013 (Cybersecurity Act) (Text with EEA relevance). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32019R0881&from=EN.

[18] European Commission, White Paper: On Artificial Intelligence – A European approach to excellence and trust (February 19, 2020).  Available at:

https://ec.europa.eu/info/sites/info/files/commission-white-paper-artificial-intelligence-feb2020_en.pdf.

[19] European Commission, 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 (September 24, 2020).

[20] Id.

[21] Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (Text with EEA relevance). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32015L2366&from=EN.

[22] Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (Text with EEA relevance). Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32009L0110&from=EN.

[23] European Commission, 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.