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Fintech and, technological innovation in general, have been the drivers of a number of developments in the financial sector in recent years. Indeed, new forms of services and businesses such as automated advice or crowdfunding have emerged. ESMA sees these developments as a positive evolution as long as they are aimed at improving consumer financial experience and facilitate financial inclusion. ESMA would also want to stress that it adheres to the core principles (technological neutrality, proportionality and market integrity) highlighted by the Commission and agrees that any EU policies aiming to ensure the financial sector takes advantage of cutting-edge technologies, while remaining sound and safe for investors, need to integrate these principles.
ESMA acknowledges that evaluating the existing and future benefits of the use of such recent and fast-growing technologies is a difficult task. However, the ESAs have undertaken such a preliminary assessment and identified some potential benefits. For instance, Big Data technologies could improve the quality and accessibility of services for users of financial services, including from a cross-border perspective. Such technologies could also contribute to the provision of certain services at a reduced cost, such as in the case of automated advice.
The increased granularity of the segmentation of markets could lead to restrictions with respect to the access of services for certain consumers of financial services classified as “undesirable”. The collection and analysis of behavioural data could also lead to firms charging different prices for similar services to customers in the same target group (e.g. their inertia to changing providers or their ability to pay a higher fee). An enhanced segmentation of products and services would enable services more tailored to the needs of customers but would conversely also limit the ability of customers to compare products/services. The ESAs have also noted that a very precisely segmented marketing material has the potential of being perceived by customers as a personalised recommendation (e.g. financial advice) while it is not, raising concerns from a regulatory standpoint.
It is important to stress that the use of technology for compliance purposes is not new. Market participants have already been using and developing bespoke applications to help them comply with their legal obligations. For example, fund managers use software to comply with legal concentration rules or leverage limits and banks use complex IT tools to calculate their capital requirements. Also, regulators rely on technology to detect fraudulent activities such as insider trading via trading reporting systems.
ESMA believes that DLT could bring a number of benefits to securities markets, notably more efficient post-trade processes, enhanced reporting and data management capabilities and reduced costs. However, a number of challenges will need to be addressed before these benefits could materialise. These challenges include interoperability and the use of common standards, access to central bank money, governance and privacy issues and scalability. Importantly, despite a number of interesting proofs of concept, DLT is still at an early stage and it remains unclear if the technology will overcome all of these challenges.