One of the tasks of the Joint Committee of the European Supervisory Authorities, EBA, ESMA and EIOPA, collectively known as the ESAs, is precisely that of monitoring the market for any new risks for consumers and financial service providers. The Committee can then adopt the necessary measures in order to counteract such risks, enhance consumer protection and ensure the safety and soundness of financial markets.
It is in fulfilment of such an objective that the said Joint Committee has recently published recommendations relating to the appropriate regulation of financial service providers, such as banks and insurance companies, which offer retail financial services across borders.
Passporting, that is, the provision of services by a financial institution in a member state (referred to as the host member state) other than in the one in which it is licensed to operate (referred to as the home member state), is an ever-growing phenomenon. This is possible thanks to the one of the cornerstones of the four fundamental freedoms underlying the EU’s single market, namely the freedom to provide services and freedom of establishment.
Such cross-border provision of financial services of course benefits consumers, who are free to choose from a wide variety of financial products offered by different financial service providers. Such a practice is not, however, without its own challenges, particularly arising from the necessity of ensuring that such passporting entities are being well supervised and complying with the relevant legal obligations towards consumers.
The reaction of the EU’s legislators to the financial crisis has been to ensure there is a robust and integrated regulatory framework in place, capable of ensuring the utmost supervision of financial institutions without impeding their right to exercise their freedoms.
Passport procedures are sometimes not followed consistently by the authorities
Despite the various legislative measures which are already in place and which seek to ensure utmost cooperation among the various competent authorities in the member states in carrying out their regulatory task, a number of defaults and new challenges for national authorities have been highlighted by the ESAs in their recently published report.
The identified challenges relate to institutional and organisational ones, supervision and enforcement ones and regulatory gaps and arbitrage.
The main institutional and organisational challenges identified in the report relate to the distribution of responsibilities between home and host competent authorities.
The ESAs observed that this factor is not always clear. Similar challenges relate to the notifications and exchange of information process amongst such authorities. In the latter case, the Committee noted that passport procedures are sometimes either not followed consistently by the authorities or the legislation itself does not provide for exchanges of all information that the authorities might need.
In so far as supervision and enforcement issues are concerned, the Committee observed that there is a risk that home competent authorities prioritise financial institutions that represent a higher risk in their own territories. This could lead to serious issues, particularly where the activity of a financial institution is carried out exclusively or almost exclusively on a freedom of services basis outside the home jurisdiction, the Committee has noted. Misleading cross-border marketing of complex financial products to retail clients is yet another concern.
The ESAs also highlighted insufficient harmonisation or divergences in the implementation of EU law at national level as another cause for concern.
Recommendations made by the ESAs include considerations of reinforcing the harmonisation of provisions governing the marketing and sale of services and products, especially in the banking sector.
A clear indication as to the allocation of responsibilities between the home and host competent authority in so far as the application of consumer protection and conduct of business provisions are concerned, was also considered to be necessary.
The report also calls for more clarity as to when activities carried out through digital means fall under passporting rules, and for considering the identified high-level principles on cooperation as the basis for any new legislation or possible amendment to current legislation. The ESAs also recommended the consideration of a requirement that a passport regime includes the proportionate provision of information on whether the products and/or services covered by the notification are, in practice, provided.
Innovative online services and the digitalisation of traditional financial services have driven progress towards a more integrated market for financial services, making it easier for financial institutions to provide services across borders and giving consumers a greater choice and better access to financial services across Europe.
Such opportunities must, however, always be availed of within the parameters of a regulatory legislative framework, designed to ensure not only a robust European financial services market but also the utmost protection for consumers.
Mariosa Vella Cardona M’Jur, LL.D., is a freelance legal consultant specialising in European law as well as competition law, consumer law, data protection law and intellectual property law. She is also a visiting examiner at the University of Malta.