Technological Innovation In Financial Services

In this article, we look at regulators’ approach to fostering innovation in Europe.

17 February 2022 8 min read
by Alex Viall

This article was featured in Issue 3 of Orbit TRC Magazine, Global Relay’s exclusive publication focusing on Technology, Risk, and Compliance.

Innovation within financial services is in overdrive, from new reporting tools and digital currencies to blockchain and personalized customer experiences. In this article, we look at regulators’ approach to fostering innovation in Europe.

EU regulators are throwing their weight behind innovative regtech and suptech tools to make it easier for regulated firms to carry out supervisory reporting.

Over the next three years, the European Commission (EC) and the European supervisory authorities will be making it a priority to support the uptake of innovative new tools by financial services firms.

They are also working together on a strategy for supervisory data, with the aim of creating the conditions to enable firms to use the latest technology for supervisory reporting by 2024.

Making Data Sharing Easier

EC director general for financial stability John Berrigan said the move to support innovative technology was part of efforts to make it easier for financial services firms and regulators to share data by creating a “common European financial data space.”

“One factor in… innovation is data, and data sharing is key to developing more innovative tools and products, giving customers more choice,” he said.

The common European financial data space is “critical” to driving data sharing, and the EC has three priorities for this “ambitious” project:

• Supporting innovative technology to make reporting easier for financial services firms

• Requiring all company and financial information to be made publicly available in a format that is standardized and machine-readable

• Promoting data sharing within the financial services sector and beyond.

According to Berrigan, Europe “should have” an open finance framework in place by 2024, in line with the EC’s
broader data strategy, that would facilitate the level of data sharing that regulators are aiming to achieve. It would ensure fair competition while, at the same time, giving consumers full control over their data.

“Open finance is a great chance to empower consumers, enabling them to access a range of financial providers and make the most of more effective and personalized products and services,” he said. However, this would require a concerted effort to tackle the large amount of fragmentation and numerous barriers to innovation currently affecting the European financial services sector; the EC would be working to expand passporting to prevent borders from impeding the flow of information.

Driving Digital Transformation by Embracing Innovation

Berrigan, who leads the EC’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, was speaking at the Association for Financial Markets in Europe’s recent conference on European capital markets technology and innovation, where he delivered the opening keynote speech.

Focusing on how Europe is driving the digital transformation of financial services by embracing innovation, he outlined the priorities for the European Commission and its partners over the next year, to give consumers more choice while protecting them.

The digitization of financial services has been accelerated by the Covid-19 pandemic, he said, and the sector has been disrupted as a result. Disruption can open up new opportunities as well as create uncertainty, and it has seeded opportunities for new products, new services, new applications, new customers, and new business models.

“We’ve been seeing more innovation in finance lately than in a very long time,” he said. “Organizations both established and new, as well as citizens, are getting stuck in.

“It’s difficult to think of a product that can’t be accessed or a transaction that can’t be executed online, simply with a couple of clicks. So consumers for their part increasingly expect a personalized offering. They want to be able to handle their finances online efficiently, or take out a loan, look for an insurance product, or invest in shares or other asset classes.

“This innovation holds great potential, especially as we slowly but steadily overcome the pandemic. Digital finance has a key role to play in shaping a more competitive, sustainable, resilient economy and a more inclusive, modern, prosperous society.”

But, although there were plenty of innovative new products and services and many promising, innovative firms in Europe, the region wasn’t leading the global innovation race. This was a concern, said Berrigan, because “it’s a question of ensuring that our economies, our businesses, our citizens can make the most of new opportunities that are being created by digital finance.”

Strategy for Innovation

A year before the conference, the EC had launched its digital finance strategy, with the aim of embracing innovation while, at the same time, preserving market stability and integrity and protecting investors and customers.

The strategy had four main priorities:

• Overcoming fragmentation in a digital single market

• Adapting the EU regulatory framework to foster digital innovation

• Promoting data-driven finance

• Tackling the challenges arising from digital transformation, such as cyber risks.

Berrigan was pleased to report that the EC had already made “good progress” with the strategy and in its efforts to foster innovation. The work involved “ambitious” legislation, such as a proposal to create a regulatory framework for previously unregulated markets in crypto assets. The framework would seek to provide legal clarity, helping to boost innovation while protecting investors and markets by establishing “solid” rules for issuers and providers to prevent misuse or theft.

The EC’s proposals were in line with approaches taken by organizations such as the G7 and the Financial Stability Board, he said, and the EC expected to work with international partners such as the US government to “find synergies” within crypto assets because of the global, potentially systemic nature of developments such as stablecoin.

“It’s very good to see that the member states and the European Parliament have been making progress in the
negotiations on an EU framework for markets in crypto assets. Crypto assets are evolving quickly, enabling innovative homegrown firms to enter this market while attracting retail investors. It’s our duty as policymakers to put sound rules in place as quickly as possible.”

Creating a Safe Space for Exploration

The EC was also working on a project to set up market infrastructure based on distributed ledger technology, to create a “safe space” for market players to experiment with using new technology that had the potential to make financial services more efficient. The project would allow legislators to see how the technology works in practice before they overhauled legislation, and how to balance innovation with safety.

“We’re pleased that member states have found a common approach here and we hope to conclude negotiations with them and the European Parliament very soon,” said Berrigan. “This will mean that, as early as next year, market participants will be able to test the use of distributed ledger technology on a large scale in asset classes such as shares or bonds.

“This is an opportunity not only to give our capital markets a much-needed push but also in particular for smaller firms to attract new business.”

Preparing for a Digital Euro

Berrigan added that another “hotly debated area where innovation is gathering pace” is central banking digital currencies (CBDCs). The EC had been working with the European Central Bank (ECB) to explore the potential of a digital euro, and the ECB had launched a two-year investigation phase to prepare for its possible introduction.

He acknowledged that there would be criticism that the EC was moving too slowly and that other jurisdictions or even private organizations could forge ahead and gain an advantage, but such a view was short-sighted.

He said, “Many other central banks are also taking their time to assess all the challenges and technical questions linked to this issue. More importantly, this decision is simply too big to rush. Getting it wrong would have serious consequences and that’s why, together with the ECB, we’re carefully looking at all the legal, technical, and policy implications.

“A digital euro could bring great benefits. It could support the creation of new payment solutions for consumers by, for instance, providing an alternative to cash and boosting inclusion by bringing those into the financial system who currently don’t have a bank account. More broadly, it could be a vital factor in helping us to achieve some of the political goals that the EU has set itself, such as stimulating innovation, supporting the digitization of our economy, and strengthening the international role of the euro.

“But there are important questions that we need to answer here. What about the role of banks as financial intermediaries? How will we prevent grave consequences for commercial banks’ sources of funding and their ability to lend? How would we avert bank runs? How would we ensure that a digital euro complements cash and provides secure alternatives without disrupting them? How would we design it to make sure it’s robust and safe? And what can we do to ensure every European citizen has access to the internet and the skills to use digital central bank money safely and responsibly?

“This is a key precondition if a digital euro is to enhance inclusion rather than deepen exclusion.”

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Published 17 February 2022

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Alex Viall Director, Regulatory Intelligence

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