Shearman & Sterling LLP | FinReg | European Banking Authority Urges EU Legislative Update for Cross-Border Banking and Payment Services in the Digital Era
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  • European Banking Authority Urges EU Legislative Update for Cross-Border Banking and Payment Services in the Digital Era

    The European Banking Authority has published a report identifying potential barriers to customer choice and the cross-border provision of banking and payment services in the EU, together with proposals for how to overcome these issues. Building on the EBA's FinTech Roadmap and the European Commissioner's Consumer Financial Services Action Plan, the report sets out the areas where the institutions, including FinTech firms, may face challenges when seeking to provide intra-EU cross-border services, focusing on authorizations and licensing, consumer protection and conduct of business requirements and anti-money laundering and countering the financing of terrorism. The EBA makes recommendations for where changes to EU primary legislation or further guidelines could address the issues to enhance the EU's single market.
    The EBA is also calling on the European Commission to provide clarity by updating the 1997 Interpretative Communication on when cross-border business is relevant for the purpose of the freedom to provide services. In the report, the EBA highlights that an important issue that needs to be addressed is the identification of when a digital activity amounts to the cross-border provision of financial services. Two aspects that require consideration are the location of the place of provision of the characteristic performance of the services and a clear indication that the services are directed to the host Member State. The lack of harmonized EU laws means that a case-by-case consideration is required of when a service provided through the internet constitutes a cross-border service and then whether it should be seen as the exercise of a right of establishment (a branch passport) or a right to provide services (a services passport).
    The key issues highlighted as potential barriers to the cross-border provision of services are:
    • Authorizations and licensing
    Firms providing financial services in the EU must typically be authorized under relevant EU legislation, which also usually ascribes responsibilities to home and host competent authorities. The EBA proposes changes to this legislation to strengthen the passport notification requirements upon institutions to assist both home and host competent authorities in conducting supervision of cross-border services. The EBA also suggests that it should be mandated to issue guidelines on communication by competent authorities to the industry on the requirements applicable to businesses with establishments versus those providing cross-border services without establishments. This would assist institutions to determine the requirements applicable to them in home and host Member States.
    • Consumer protection and conduct of business requirements
    The EBA reports that consumer disclosure requirements differ across the EU sectors, in particular in relation to advertising and providing adequate explanations to consumers. Furthermore, Member States have often developed their own national-specific disclosure requirements. In addition, some of the requirements are not fit for the digital provision of financial services, such as the requirement for hard copies of pre-contractual and contractual information and the definitions of "durable medium" and "consumer". There is also a lack of clear allocation of supervisory responsibilities between home and host competent authorities. The EBA proposes greater harmonization within relevant legislation, in particular in the areas of consumer disclosure requirements and the allocation of home-host responsibilities for supervision of complaints handling.
    • AML and CFT
    The EBA highlights that cross-border provision of services faces challenges because cross-border businesses may: (i) be exposed to different Member State AML/CFT requirements depending on the implementation of the Fourth Anti-Money Laundering Directive; and (ii) face different money laundering or terrorism financing risks depending on the Member State in which they are operating. To help address this issue, the EBA is in the process of updating its Risk Factors Guidelines, which support competent authorities' understanding of ML/TF risks linked to different business activities, to address risks relating to remote onboarding of clients and innovative technologies. In addition, the European Supervisory Authorities will be publishing draft Guidelines on supervisory cooperation. However, the EBA notes that to really improve convergence across the EU, amendments to the primary EU legislation would be required to minimize the possibility of regulatory divergence.
    View the EBA's report and Q&A on cross-border banking and payment services.
    View details of the EBA's FinTech roadmap.

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