07 February 2022

ESMA: Report on Call for evidence on Digital Finance

Fragmentation was not
considered a necessarily undesirable trend because outsourcing to third-party service
providers enables financial firms to focus on their core products. Nor is fragmentation a
recent phenomenon in financial value chains.

7. If left unmanaged though, fragmentation poses certain risks for the financial sector,
including concentration risk, the risk of an uneven playing field between regulated firms
and technology companies, reputational risk for customer-facing firms and risks to investor
protection, e.g., in case liabilities are not clearly established along the value chain or when
consumers have no clarity as to with whom they are actually contracting. Several
respondents also highlighted the rising costs of market data and the growing importance
of unregulated data providers.

8. Half of the respondents confirmed the existence of platforms bundling different financial
services from different financial firms in the EU. Stakeholders primarily shared insights on
fund distribution platforms, which have seemingly changed their business model in the
recent years, with the provision of additional services and new remuneration models that
raise fee transparency issues. Risks reported by stakeholders in relation to the use of
platforms include market concentration and risks to fair competition, investor protection 4
with a particular focus on the risks of poor customer outcomes, conflicts of interest, lack of
transparency around pricing models and potential exclusion of categories of customers.
Respondents also highlighted increased risks in relation to information and communication
technology (ICT), data protection and privacy and money laundering/terrorist financing.
Meanwhile, they also noted opportunities, such as a wider offer of financial products and
diversification opportunities for investors and access to a larger consumer base, lower
operating costs, scale efficiency and automatization of processes for firms.

9. Overall, respondents recognised the cross-border nature of platforms and fully support
enhanced cross-sectoral and cross-border cooperative arrangements and monitoring
practices. High level recommendations from respondents in relation to the current
regulatory framework include ensuring a level playing field, proportionality, and harmonised
rules across the EU. They also mentioned the need to promote interoperability between
platforms, European regulatory sandboxes, and financial education.

10. A common observation from respondents is that BigTechs currently participate in financial
services either through partnerships or directly with a focus on the areas that are subject
to a less stringent regulatory framework, not capital intensive or/and show higher ROEs.
Several respondents expect that BigTechs will further develop their direct participation in
financial services. Almost all respondents they see risks in relation to MAGs coming and
named among them financial stability, consumer protection, data related, competition and
ICT risks and risk of unlevel playing field between 'solo' financial firms and MAGs. The
majority believe that the current EU regulatory framework does not capture the emerging
risks generated by the entry of MAGs into financial services and needs adaptations, while
few respondents do not see any need to change the current regulatory framework. All
supported enhanced cooperation between securities regulators, consumer protection
authorities, AML/CFT agencies, data protection authorities, central banks, competition
authorities, tax authorities in the EU and with third countries...

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