Europe has been urged to take rapid action over how it regulates financial services as the sector becomes increasingly reliant on digital platforms and big third-party tech companies play a larger role, European Union regulators said on Monday.
Digitalisation has “unlocked new synergies” but may also introduce “systemic risk” that must be addressed by a “holistic approach”, said the joint report from the EU’s banking, insurance and markets regulators.
“Digital finance has unlocked new synergies between financial and non-financial activities that potentially introduce systemic risk into the market for financial services,” they wrote.
The study recommended strengthening national supervisory agencies that “may lack the necessary expertise and resources” to monitor digital markets.
The European Banking Authority, European Securities and Markets Authority, and insurance regulator EIOPA said tech companies and other third parties are playing an increased role in finance.
This requires a “holistic” supervisory approach that should include regular assessments of whether third parties pose a risk to financial stability, they said.
The comments were made in a 109-page response to the European Commission’s call in February last year for advice on how the bloc should deal with digital finance and related issues.
The three regulators – known as the European Supervisory Authorities – said the Commission should consider “possible ways to strengthen skills and resources available” to national regulators which may be hobbled by the “rapid pace of change and complexity observed in digital financial markets”.
They said the Commission should investigate whether AI and machine learning could lead to “potential bias leading to discrimination and exclusion”.
Consumer protection should be strengthened in a digital context through enhanced disclosures, complaints handling mechanisms, measures aimed at preventing the mis-selling of tied or bundled products and improved digital and financial literacy, they said.
The report identified cross-border finance and money laundering risks as amongst those being rapidly altered by digitalisation, and requiring a new regulatory approach.
The study also recommended the active monitoring of the use of social media in financial services, amidst concerns over the way social media is increasingly used propagate scams and fraud or bypass regulatory scrutiny.
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