EU lawmakers and UK regulators have announced a raft of proposals recently, aimed at ensuring the right market and regulatory conditions are in place to promote innovation within the financial services sector – as well as at the same time ensuring that critical operational resilience is maintained. Whilst some of these proposals, once implemented, will not be directly applicable in the UK post-Brexit, the themes emerging will no doubt impact in some way on firms operating across these territories in the short and medium term.
The European Commission launches its EU Digital Finance Strategy
In a communication published on 24 September 2020, the European Commission launched its EU Digital Finance Strategy (“Strategy”) to embrace and promote digital transformation in the financial sector.
Following the 2018 FinTech Action Plan, the Strategy recognises how digital innovation trends, such as the increasing use of data and digitisation of payments, have revolutionised financial services. Whilst the Strategy sets out a strategic objective to embrace digital finance for the benefit of European consumers and businesses, it also aims to address the new challenges this brings and mitigate the risks associated with this digital transformation.
The Strategy outlines four priorities to guide EU actions in promoting digital transformation up to 2024:
- tackle fragmentation in the Digital Single Market for financial services, thereby enabling European consumers to access cross-border services and help European financial firms scale up their digital operations;
- ensure that the EU regulatory framework facilitates digital innovation in the interest of consumers and market efficiency;
- create a European financial data space to promote data-driven innovation, building on the European data strategy, including enhanced access to data and data sharing within the financial sector; and
- address new challenges and risks associated with the digital transformation.
The Strategy forms part of a digital finance package, which in addition to the communication includes the following:
- proposed Regulation on digital operational resilience;
- proposal for a Directive to clarify and amend existing EU financial services Directives;
- proposed Regulation on markets in cryptoassets; and
- proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT).
Proposed Regulation on digital operational resilience
Following a consultation in December 2019, the proposed Regulation implements a dedicated framework on EU cross-sectoral digital resilience in the area of financial services.
The proposed Regulation places a number of requirements on applicable entities, relating to governance, ICT risk management, ICT-related incident reporting, digital operational resilience testing, ICT third-party risk and information sharing. The proposal also outlines requirements concerning contractual arrangements concluded between financial entities and ICT third-party service providers, and an oversight framework for critical ICT third-party service providers when providing services to financial entities.
The proposed Regulation applies to a vast range of financial service entities, including payment institutions, investment firms and credit rating agencies. It will be considered by the European Parliament and the Council of the EU, and will become directly applicable in EU member states 12 months after it has been adopted and entered into force (apart from Articles 23 and 24, which will become applicable after 36 months).
Proposed Directive clarifying and amending existing EU financial services Directives
The proposed Directive complements the proposed Regulation on digital operational resilience, by amending various operational risk and risk management requirements in a number of existing Directives and cross-referencing with provisions in the proposed Regulation. These amendments include changes to the definition of “financial instrument” in the MiFID II Directive to include cryptoassets and changes to the requirements in the CRD IV Directive on contingency and business continuity plans, to include plans relating to ICT business continuity.
The proposed Directive also seeks to establish a temporary exemption for multilateral trading facilities (MTFs).
The European Parliament and the Council of the EU will consider the proposed Directive, which will then be adopted and enter into force 20 days after it is published in the Official Journal of the European Union. Member States will then have one year to ensure it is adopted and complied with.
FCA announces first firms will move to RegData in October 2020
The Financial Conduct Authority (‘FCA’) recently announced in a press release that the first firms will be moving to a new regulatory data collection platform. From 17 and 18 October 2020, the first firms will make the switch from Gabriel to RegData in order to complete their regulatory reporting. Other firms will continue to be moved to RegData in the following months, based on their reporting requirements.
The FCA has also published a series of step-by-step guides and explainer videos to assist users with the RegData platform.
RegData forms part of the FCA’s data strategy, which outlines its plans to use data and advanced analytics to transform financial regulation.
Law Commission announces two new projects on smart contracts and digital assets
The Law Commission recently began work on analysing English law in relation to two emerging technologies: smart contracts and digital assets.
In a press statement on 21 September 2020, the Law Commission outlined the work regarding smart contracts will involve analysing the law and highlighting any uncertainties and potential reforms. The work on digital assets will help to ensure the law is capable of accommodating cryptoassets, electronic documents and other digital assets.
The Law Commission is aiming to publish a call for evidence on the smart contracts project in late 2020, and a consultation paper on their digital assets work in the first half of 2021.