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New trends in the financial sector - What regulatory framework for digital retail financial services (data protection, new entrants)?

What regulatory framework for digital retail financial services and how could it stimulate innovation?

By Zilgalvis Pēteris - Head of Unit, Health and Well Being Member, FinTech Task Force, DG for Communications Networks, Content and Technology, European Commission

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The innovation finance ecosystem can benefit greatly from the use of digital technologies and platforms enabling it to function more dynamically and to cross borders more easily to deliver funding to creative start ups and SMEs, as well as to larger companies seeking to invest in innovation. These new approaches can be grouped under the name “FinTech”, signifying “technology-enabled financial innovation”. Their deployment is frequently linked to “RegTech” and “LegalTech” which are applying digital technologies to regulatory compliance, particularly relevant in the financial sector, and to the practice of law. RegTech has the potential not only to reduce compliance costs but also to help organise the relevant data for supervisory authorities. The principles of Better Regulation, and the Digital Single Market and Digitising European Industry initiatives can help to ensure that this potential to stimulate the European economy is realised, while ensuring that financial stability is not endangered, and fraud and regulatory arbitrage are prevented.

Better regulation
The aim of the Commission’s Better Regulation principles is to design EU policies and laws to achieve their objectives at minimum cost, ensuring that policy is prepared, implemented and reviewed in an open, transparent manner, informed by the best available evidence and comprehensive involvement of stakeholders. Key goals are to ensure that EU legislation is “Internet ready”, in that it does not discriminate between its implementation in the digital or physical worlds, and is designed to make the most of the productivity, efficiency and disruptive innovation potential that “Digital” can provide.

Digital Single Market
Completing the Digital Single Market (DSM) is one of the European Commission’s top 10 political priorities. The DSM Strategy aims to build trust and confidence to deliver economic and social benefits. Relevant initiatives for financial services are eID and cybersecurity.

eID
The Regulation (EU) N°910/2014 on electronic identification and trust services for electronic transactions in the internal market (the eIDAS Regulation) adopted by the co-legislators on 23 July 2014 is a milestone providing a predictable regulatory environment to enable secure and seamless electronic interaction between businesses, citizens and public authorities.

The Network Information Security (NIS) Directive
It will provide legal measures to boost the overall level of cybersecurity in the EU by increasing Member States’ cybersecurity capabilities, enhancing cooperation between them and ensuring a high level of risk management practices in key sectors (banking, energy, health and transport).

Three priorities in financial sector cybersecurity are (threat) intelligence sharing (pre-incident), rather than only post-incident reporting, the need for solid penetration and resilience testing and the need for regulators not to duplicate testing requirements, and strong technology that overcomes weaknesses of people, processes and poor technology.

Digitising European Industry
Digitising European Industry is a strategy for the digital transformation of industry, complementary to the Digital Single Market and national and regional initiatives. Under the auspices of its Smart Regulation for Smart Industry pillar, the Commission will be launching a public consultation on the safety of apps and other non-embedded software (that can be downloaded from an app store or from somewhere else on the Internet, for instance). This software category includes downloadable 3D printer software models and blockchain/distributed ledger technologies. The purpose of the consultation will be to gather views on possible EU tools to support safety and avoid adverse impacts from non-embedded software (including economic harm/damages).

Data protection
On 15 December 2015, an agreement was reached on the proposal for a General Data Protection Regulation following final negotiations in the trilogue meetings. The proposal aims at a data protection framework for the European Union which responds to new data protection needs, such as those created by social media.

The General Data Protection Regulation will enable people to better control their personal data. At the same time modernised and unified rules will allow businesses to make the most of the opportunities of the Digital Single Market by cutting red tape and benefiting from reinforced consumer trust.