European Supervisory Authorities publish a report on cross-border supervision on retail financial products and services

The work undertaken by the European Supervisory Authorities is based on the acknowledgment that the deepening of the European single market, driven by the growing digitalisation in the distribution of financial products and services, places new demands on national supervisory authorities.

According to the report, the main issues that national supervisory authorities face in the cross-border supervision on retail financial products and services relate to:

• Passport notifications. Passport notifications sent by the home authority to the host competent authority do not always comply with formal requirements nor contain all the required and necessary information.

• Distribution of responsibilities between authorities. The European legislation does not lay down clear and uniform rules on the distribution of responsibilities between home and host authorities, more specifically as regards the supervision of institutions exercising the freedom to provide services;

• Definition of cross-border provision of services. It is often unclear how to determine if a given activity is cross-border or if the cross-border activity is developed under the right of establishment and freedom to provide services;

• Gaps and regulatory arbitrage. Insufficient harmonisation and clarity of EU laws in a number of areas leads to discrepancies in the implementation of legislation at national level, which may hinder a level playing field for institutions and create the risk of regulatory arbitrage;

• Use of third parties. The use of third parties (agents, intermediaries) to distribute products or provide services in the host Member State, more specifically by institutions authorised to operate in that territory under the freedom to provide services, poses some difficulties to supervisors, particularly when those entities operate in areas where the EU legislation is not harmonised.

In light of the issues identified, the European Supervisory Authorities have agreed on a series of principles for cooperation to facilitate information exchange between home and host supervisory authorities, and admit that they may be tailored to each financial sector.

In addition, the European Supervisory Authorities have decided to issue recommendations for:

• National supervisory authorities to:

  • Ensure an effective collaboration and regular exchange of information to establish appropriate preventive measures and to identify at an early stage any potential issues;

  • Follow the principles on cooperation between home and host authorities in the absence of any detailed requirements on cooperation in the applicable legislation;

  • Liaise with the European Supervisory Authorities to ensure that registers of contact points are kept up to date and to improve the framework for cooperation in consumer protection between national authorities.

• EU co-legislators to:

  • Reinforce the harmonisation of legislation governing the marketing and sale of financial services and products;

  • Provide more clarity on what are cross-border activities and the criteria to determine whether they fall under the right of establishment and freedom to provide services, particularly when they are carried out through digital means;

  • Take legislative action to overcome supervisory difficulties when there is simultaneous exercise of the right of establishment and the freedom to provide services;

  • Look for solutions to prevent risks associated with jurisdiction shopping;

  • Improve the passport regime, which should require the proportionate provision of information on whether the products and services covered by the notification are, in practice, provided.

This report results from the work developed by a sub-group of the European Supervisory Authorities, in which Banco de Portugal participated. The sub-group was established in 2016 to assess the key challenges of cross-border supervision on retail financial products and services.