Dear friends, dear interested,
There is news on consumer and investor protection in digital financial services! The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has just demonstrated how strict consumer protection can go hand in hand with innovation friendliness in the FinTech sector. The Committee’s position on blockchain-based trading systems combines strengthened investor protection and supervision with more space for innovative providers. We Greens had been advocating this approach. Furthermore, the European Securities and Markets Authority (ESMA) has presented an assessment of the business model of so-called neobrokers, following a Green request. The new trading apps offer investors many advantages, but consumer protection has not always been a priority for them so far. ESMA is now calling on national supervisory authorities to take a much closer look. The established standards of consumer and investor protection must also apply in the digital world. This is how we strengthen consumer rights and ensure fair competition between old and new players.
We share the hopes of many that the distributed ledger technology (DLT) behind Bitcoin and other cryptocurrencies will make the trading and settlement of securities more efficient. In the so-called DLT Pilot Regime, companies will be able to try this out for a period of six years. Rightly so! However, the EU Commission’s draft legislation lacked balance: although there were restrictive upper limits for the size of trading systems, the requirements – especially with regard to consumer protection – remained partially vague and inadequate to the risks. Moreover, 27 national supervisors were supposed to oversee the application of the pilot regime. This would inevitably lead to a fragmentation of supervisory standards and an overburdening of some less tech-savvy supervisors. We also know from experience that member states like to abuse lax supervisory practices as an instrument to attract FinTech firms.
We Greens have proposed to make ESMA the single European supervisor for the DLT Pilot Regime. This ensures uniform application of the rules and makes the pilot regime a real beacon of the European Capital Markets Union. We have also made proposals to ensure consistent investor protection and full assumption of liability by the providers. At the same time, we advocated opening up the pilot regime with higher ceilings and additional asset classes, such as government bonds. The ECON Committee followed us on all these points, so that both innovation-friendliness and investor protection of the DLT pilot regime are strengthened. A list of all Green amendments can be found here and here. The draft adopted in Committee can be downloaded here.
The next step will now be to reach a final compromise with the Council of Ministers and the EU Commission in the trilogue negotiations. Especially with regard to the central role of ESMA, we will certainly be facing headwinds from the Member States. I will do my best to ensure that the good results of the parliamentary negotiations are not lost in the process.
Speaking of ESMA: The authority has just proven its expertise in digital finance with its assessment of the so-called neobrokers. These firms offer retail investors seemingly free or at least very low-cost trading in securities, often via attractively designed apps. The core of their business models is the kickback payments they receive from trading platforms and exchanges. This remuneration model, called “payment for order flow”, has come under increasing criticism, especially since the events surrounding the Gamestop share at the beginning of the year. Because: A broker should actually act exclusively in the best interest of his clients and seek the best price available on the market for their buy or sell orders. However, kickbacks create tangible conflicts of interest because the broker has an interest in using the trading venue which offers the highest provisions – which does not necessarily deliver the best price for the customer.
In a hearing on the Gamestop case in February, I asked ESMA to investigate payment for order flow in more detail and to clarify to what extent the model is compatible with the European financial market regulation MiFID II. ESMA has now presented its report and has come to the conclusion that most current providers very likely violate the consumer protection rules. It has called on the national supervisory authorities to quickly scrutinise their local neobrokers and put a stop to any practices that violate the rules. In the Gamestop hearing, the EU Commission announced that it would propose a possible amendment to MiFID II on the basis of the ESMA assessment. I will continue to advocate that we need to end, once and for all, all rebate and provision models which are detrimental to consumers in the financial sector.
By the way: Yesterday, the ECB decided to push ahead with the project of a digital euro. We Greens expressly welcome this, but we would like to see a more direct access of European citizens to the new digital currency without artificial upper limits. In addition, the negotiations on the EU’s major crypto-legislation will take place after the Parliament’s summer break. So there is still a lot to do in the digitalisation of finance! I will stay tuned.
With green European greetings
Sven Giegold
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Draft of the ECON Committee on the DLT Pilot Regime of 13 July 2021:
https://sven-giegold.de/wp-content/uploads/2021/07/20210713_DLT-Pilot-Regime_ECON-after-1st-reading.pdf
ESMA’s assessment of payment for order flow of 13 July 2021:
https://www.esma.europa.eu/press-news/esma-news/esma-warns-firms-and-investors-about-risks-arising-payment-order-flow
My take on the Gamestop hearing in the ECON Committee on 24 February 2021:
https://sven-giegold.de/en/closer-look-at-neo-brokers/
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