The regulators suggest improvements to the supervision of firms passporting retail products and services in the EU.
By Rob Moulton, Thomas Vogel, and Charlotte Collins
The French and Dutch financial services regulators (the AFM and the AMF) have published a joint position paper on strengthening conduct supervision of cross-border retail financial services.
The regulators are concerned that the current split of responsibilities between home and host state regulators in relation to cross-border retail business needs to be adjusted to ensure better consumer protection. While the paper does not represent agreed EU policy at this stage, it gives a clear picture of the regulators’ views in these prominent jurisdictions, and could well lead to changes to the supervisory approach in the future.
What is the current position?
Currently, the home state regulator (where the firm is authorised) holds the sole responsibility for supervising a firm operating on a purely cross-border basis into another EU Member State (i.e., where that firm has not established a branch in the target Member State). Passporting notifications contain little detail and do not allow for comprehensive information sharing to enable host state regulators to fully understand the activities being passported into their jurisdiction. Only when a firm has established a branch in the host Member State is the host state regulator responsible for conduct supervision.
What are the regulators’ concerns?
The AFM and AMF are particularly concerned that this position, combined with increasing digitalisation that makes it easier for firms to provide services and products across borders, may lead to regulatory arbitrage. They observe that some firms seek to set up business in a Member State other than that of their target audience, where they may believe it will be easier to obtain authorisation. Such firms often offer high-risk products to retail investors.
The regulators comment that home state regulators often lack the relevant expertise to supervise cross-border activities effectively, as they may not have sufficient knowledge of the language or marketing and sales behaviour in the host jurisdiction, which can create practical barriers. Home state regulators may also lack the resources to address cross-border issues as they will naturally wish to prioritise activities affecting domestic consumers. Such limitations on expertise and resources can prevent effective conduct supervision of cross-border activities, as the host state regulator is reliant on the home state regulator to oversee the activities being conducted in the host state’s jurisdiction. The AFM and AMF argue that the host state regulator is best placed to detect and act on infringements occurring in their own jurisdiction.
The AFM and AMF also highlight that passporting notifications do not require firms to indicate the scale of the services they intend to offer cross-border, and there is no obligation for passporting firms to update regulators about their activities. Therefore, regulators cannot easily identify instances when firms significantly scale up their cross-border activities.
What are the suggested solutions?
The regulators suggest strengthening the supervision of cross-border activities by host state regulators, to give them primary supervisory responsibility in relation to conduct matters. In particular, they propose the following:
- The division of responsibilities between home and host state regulators should be reconsidered. The AFM and AMF believe that making the distinction based on whether or not a firm has a branch in the host state is outdated given increased digitalisation in financial services. They also suggest that ESMA should be involved if difficulties arise in cooperation between home and host state regulators, and that, for firms that operate in many different Member States, joint action through supervisory working groups at the level of the European Supervisory Authorities (ESAs) could be appropriate.
- Home state regulators should conduct minimum due diligence before a passport is granted. They also suggest that home state regulators should be required to withhold or withdraw authorisation if a firm has sought authorisation in a particular Member State clearly to avoid stricter standards of the Member States where it will carry out most of its activities.
- A centralised and up-to-date database on cross-border activity, potentially managed by the ESAs, should be established.
- A limited timeframe within which home state regulators must act once solicited by the host state regulator should be established. The regulators also propose allowing host state regulators to impose temporary measures against firms that can be lifted once the home state regulator takes appropriate action. They also suggest enabling host state regulators to join forces by opting in to a cease-and-desist measure by another host state regulator.
As noted above, the position paper articulates the concerns of two leading Member States, and has the potential to influence EU policy in this area. Although the regulators’ proposals relate specifically to retail financial services, the paper stresses that “some suggested solutions would be relevant to consider with respect to other product/services groups for which there is a cross-border market within Europe”. Firms engaged in cross-border activities within the EU would thus be well-advised to keep an eye on developments in this area.
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