Speech by Commissioner McGuinness on ‘Beyond the Horizon: the Future of Financial Services’ at Central Bank of Ireland Financial Services Conference
Thank you very much for the warm welcome, and thank you Yvonne for chairing this morning.
It’s good to be in Dublin and it’s good to be with the Minister, the Governor, the Deputy Governors, and indeed the team behind this event in the Central Bank.
It was perhaps an idea that was sparked maybe in a room, in a discussion, but it took legs.
And in my view, yesterday from what I’ve listened to and read, it has been a great success. I hope today will build on that.
So as I said, it’s a pleasure to be here because I’ve been asked to take a look ‘Beyond the horizon – to the future of financial services’.
I think we all know that the financial system and indeed financial services are going through a time of great change – but the backdrop and the background to this change is a very challenging economic and geopolitical stage.
If you look to the future – it is laced with uncertainty.
As we embrace technology, I think we might take time to reflect on the fundamental idea of ‘service‘ in financial services, given that the overall theme of this important two-day event is about supporting the economy; delivering for consumers.
I was very interested that there is no ‘and’, it’s both, and they both have importance and relevance. So I think it is a very key topic.
So maybe a word in my deliberations will be about the backdrop that I speak about, the current economic outlook, what we’re doing then in the Commission around building the future, built on the past but also looking towards what’s coming next.
And then really gazing into what might happen if and when technology offers more and more solutions.
But going back to October 2020, when I took office we were gripped with a horrible pandemic.
It was extraordinary what happened at that time. We did things that were really unprecedented that people said could never happen, would take decades, and happened overnight.
Because necessity is the mother of invention.
And I think in the financial system in particular, those changes were dramatic, they worked because they were necessary because people were able to continue engaging with the financial system despite the fact that we could not meet and that we could not physically go to places.
So I think we have seen because of COVID-19 a system that was geared for change but has accelerated at an extraordinary pace.
And indeed if you look to January of this year we were quite optimistic, we were not quite out of COVID-19 but we were managing the situation very well.
But it’s fair to say that in February when Russia invaded Ukraine, I think our optimism was severely dented because of the impacts both economically and in terms of geopolitical developments with that illegal invasion.
Because it did exacerbate the existing inflationary pressures and is also weighing on economic growth.
So we see a macro environment that is increasingly more challenging – tightening financial conditions, volatility, and we even hear talk about recession. So there is that anxiety in the system.
And yet, the financial sector has proven to be resilient. First through COVID-19 and now during the current uncertain times.
And of course that’s in small part due to what happened after the crash a decade ago, where we put in place regulatory reforms in order to avoid instability in the future.
Out of that very damaging financial crisis, we have built a robust and well-performing financial sector. But there is unfinished business.
For example, we don’t yet have a fully functioning Banking Union. I’m often asked by citizens why we can’t have capital that flows freely across borders.
We did implement the first two pillars of Banking Union: Single Supervisory Mechanism and the Resolution Framework.
And we will continue to work on Banking Union.
Not going as far as we believe we need to, but we’re answering the invitation of the Eurogroup to reform the crisis management and deposit insurance framework.
And here the goal is to ensure a more consistent approach to resolution so that any bank can exit the market smoothly if it needs to.
And that will bring greater financial stability, protect taxpayers, and improve the confidence of depositors.
And we need to do that in order to protect the European banking sector from a future crisis, and to safeguard financial stability.
Because while post-crisis reforms are about the stability of banks, these reforms are also about protecting everyone’s deposits and limiting the risk that citizens end up footing the bill for bank failures.
That brings me to the other big structural project for the European financial system – the Capital Markets Union.
We want to integrate capital markets, they’re important for the financial sector, they‘re vital for a resilient European economy.
Allowing businesses – particularly SMEs – have access to more sources of finance, beyond bank loans.
Also supporting start-ups and innovative businesses, as they seek to grow and expand.
And offering people more opportunities to save and invest for the long-term.
Because one of the things we saw during COVID-19 was that those who were working were saving and saving – but not investing. And that’s something we need to look at.
To build a European capital markets union, we will make several proposals building on steps already taken.
So in order to build on this Retail Investments Strategy we have done a lot of research, we’ve talked to all the supervisory authorities, and consulted widely.
And there are as you know some tricky questions so it’s not a surprise that some areas in the public consultation attract strong and diverging opinions.
We recognize that there are many important issues and we’re careful in considering the potential options.
But my view is that we should be as ambitious as possible if we are serious about unlocking the potential of the CMU for the retail investor.
The CMU is also about unlocking finance and getting investments flowing across the Single Market.
And we all know, and Minister you alluded very strongly to it, that the transition to a sustainable future is amongst our most urgent and demanding investment needs.
You know the European Green Deal is very ambitious to reach net zero by 2050 and the ongoing energy crisis and its impact on the cost of living again highlight the need for more urgent action on the need for alternative energy sources.
Sustainable finance is now a big buzzword in the financial system and it will allow the system to play its part in this transition.
And already sustainable finance is moving into the mainstream, so people are asking questions about products, not only in the financial world, but also products generally, and asking themselves how they can be, in a way, supporters and enablers of our transition towards sustainability.
We also need greater energy security. Our reliance on fossil fuels has really been exposed with this illegal invasion.
It’s important to also stress that we have made rapid and dramatic changes in our energy mix.
We’ve reduced from 40% to 9% our reliance on Russian gas. We’re sourcing our gas elsewhere, and yes that does come at a cost, but we’re also reducing our energy use.
The transition to a carbon neutral economy requires huge investments, public and private. Public will not be enough, so private investments are crucial.
And our agenda on sustainable finance is about helping to direct private investment towards the transition to a more sustainable economy.
You all know that the main centre of our work is the EU Taxonomy, a guide to economic activities, their environmental impact and whether they can be considered sustainable.
And this guide is really important because we were being asked by the system how do we know, and therefore not only is Europe talking about a taxonomy and leading on it, but it is a discussion that is happening globally.
Clearly investments in renewable energy are front and centre of the taxonomy as is work around construction retrofit, energy efficiency, and research into clean technologies.
We have a very useful online tool, the EU Taxonomy Compass, to help investors and companies navigate Taxonomy activities and criteria.
But it is a challenging piece of work.
Developing a taxonomy is challenging. And we thank our outgoing Platform on Sustainable Finance for incredible work in helping us produce a taxonomy.
Developing sustainability reporting standards for corporates and the financial system is also challenging.
And ensuring consumer protection against greenwashing is really important.
We are working to make sure that sustainability claims are credible and robust.
The Corporate Sustainability Reporting Directive will set out guidance for companies to report on sustainability issues.
Their business strategy on sustainability, and indeed transition plans and progress towards meeting the targets they have set.
The first tranche of companies required to report according to European Sustainability Reporting Standards will be in the financial year 2024.
But of course, climate change is a global problem, and therefore it needs a global response.
I’m conscious that Europe is ahead, leading the way and we want to show leadership.
But we’re also conscious of the need for global co-ordination and cooperation.
So European sustainability standards will and are being built on what’s already there and we will continue to contribute to global standardisation initiatives.
We want to seek as much alignment as possible with the work of the International Sustainability Standards Board.
Even though the EU is likely to go further and faster to meet our more higher ambitions on climate.
Our Sustainable Finance Disclosure Regulation, which is now in application since March is about the transparency of sustainable financial products, including ESG impact and risks, and how investments are financing Taxonomy-aligned activities, and how investments might be exposed to unsustainable sectors – including fossil fuels.
Transition finance for SMEs, consumers and corporates and financing of credible transition efforts are key to our work.
One of the things I’m conscious of is that there are green investments today, but they’re a very small part of the market.
And the biggest change will come in investing in the transition with those entities that are moving in that direction.
So we have to make sure to allow money to flow in that way.
So we are assessing, for example, on how best to encourage green retail lending, in particular to SMEs, starts-ups and households.
With the support of the European Banking Authority, we are examining what needs to be done to promote the growth of green loans and green mortgages – which are already on the market.
Retail investors can make a difference by specifying their preference for sustainable investment products, which need to be taken on board by financial advisors and the investment chain.
And we’re also aware that expertise may not exist everywhere in this market, so we are supporting this part of the work by boosting financial advisors’ sustainability expertise.
Last but not least, the Commission continues to help Member States in their efforts to support SMEs to voluntarily report on sustainability risks and impacts.
One of the issues that is often raised with me by companies, particularly SMEs, that their concern that they may not be able to meet all of these standards or indeed have the expertise or have the finance to do it.
But we don’t want SMEs to be left out of the equation, because they are important parts of the supply chains.
So we’re working on developing standards that SMEs will be able to use on a voluntary basis, so simplified sustainability reporting standards.
The European Financial Reporting Advisory Group is already working on these.
This will make an enormous contribution to allaying concerns for SMEs but equally making sure that they’re included in our work and our transition because they’re key to it.
This is in line with the Corporate Sustainability Reporting Directive.
In one sense sustainable finance will allow finance to serve consumers who want to make sustainable choices.
And finance can serve society by helping fund the transition to a sustainable economy.
And money is key to all of this.
And I think what struck me when I took over the role in financial services there was a sense that the financial system was on its own out there somewhere.
But actually today the financial system is crucial to every single sector. And it’s crucial to our whole approach, not just on climate change but around environmental issues as well.
So money matters, and we need to make sure it is spent and invested in the right direction.
But of course not only is sustainability issues driving change, digitalization is bringing about huge structural change to the system.
So we’re relying more on digital processes, we have innovative applications, we have new products, new asset classes, and these are all gaining ground, transforming the way people engage with the financial system both as individuals and as businesses.
And in September 2020, the Commission adopted a digital finance package to respond to the opportunities and risks to the system from digitalisation.
Recently we agreed on the Markets in Crypto-Assets regulation to bring order to crypto markets, with stronger consumer and investor protection.
The package also includes the Distributed Ledger Technology pilot, which will apply from March next year.
This will allow market participants to experiment with issuing, trading and settling shares or bonds using blockchain technology.
We also recently reached agreement on the Digital Operational Resilience Act, which will help the financial system withstand digital risks like cyber-attacks.
Fraud and cyber-attacks are a threat to the financial system and our cyber security needs to match the severity of that threat.
But of course in some areas we have to nudge the financial system sometimes quite heavily, towards offering greater customer service.
So if you take last week, we made a legislative proposal on instant payments – to make them universal, affordable and secure.
Instant means instant – a payment that is sent and received in less than ten seconds – 24 hours a day, 7 days a week, 365 days a year.
This proposal will help Europe be a leading payments market and boost our competitiveness.
But it will also make a tangible difference to everyday life for businesses, especially SMEs, who will get more control over their cashflow.
For consumers who will have more payment options, so that they can split a bill, buy products, etcetera.
It‘s a great demonstration of the benefits that rolling out technology can bring.
The Commission is working at technical level with the European Central Bank to explore the possible of a digital euro.
That could provide businesses and citizens with more innovative, competitive means of making daily payments.
A digital euro would provide a public money alternative to private means of payment, while citizens would still maintain their right to access physical cash.
And I think that is an issue that certainly comes up in conversations around my role as Commissioner and when I have a public stage, I always say that I defend the right of citizens to have access to cash.
It’s important to citizens not just older citizens which we tend to think of, but I think across the board there is a sense that some citizens like having access to cash.
And I’ll mention as the Minister did in his very rounding speech, the issue of anti-money laundering, because we want cash to be clean otherwise it pollutes the system.
So the digital euro is a work in progress.
We are moving from open banking to open finance.
So this is about data, how do we access data, how do we share it, what do we share, who gets to use it.
I’d like to think, and it’s hugely important that we ensure that consumers are protected, that they have control over what is shared, how it’s shared, and how it’s used.
And I think our work in open finance would encourage that debate, and create more awareness of that we as individuals have that possibility to control.
I‘ve mentioned trust earlier.
I believe that the entire financial system lives or dies on the basis of trust – it’s key to financial stability, and it’s key to consumer belief in and trust for the financial system.
So when it comes to all these developments including, as Minister you alluded to, the revision of the Payment Services Directive, we would take account of stakeholders and look at what’s best for the financial system.
I won’t go into the details, I think the Minister was very accurate on the of anti-money laundering package.
The truth is that we’re not doing enough to tackle terrorist financing and money laundering.
The criminals are better than we are, we need to get ahead.
I think the move to a European authority with greater coordination of Member States is key to that success, so the co-legislators are working on that and I think there will be a good outcome because we need to strengthen our work on anti-money laundering.
So that’s the agenda and where we’re looking towards, and those are the priorities as we move into 2023.
But I want to tell you about a little gathering I had last week.
We ran a competition, and I asked young people in the European Year of Youth to come forward in a minute, (because most of us don’t listen for thirty seconds anymore), but in one minute what they thought about the future of finance.
And it was fascinating when I gathered them in a room together, the level of engagement and their thoughts were really inspiring.
And I think we need to listen more to that age group than to the age group in this room, most of you are younger than me so apologies if I’ve aged you, because I think they are the future, we’re the present and indeed maybe the P.A.S.T. as well, but I think we need to listen to our young people.
What was fascinating was there wasn’t a uniform view that technology is wow and we’re all gung ho going in that direction. There were some cautious voices. On the other hand, there were some very challenging voices.
Which basically were saying let technology rip on. And let technology upend the financial system as we know it, including the role of central banks but I pushed back you’ll be happy to know.
But it was good to have them in a room and to listen very carefully.
So I think their views are about where we’re all at.
We’re not sure, we know the possibilities, but we’re not sure of eventual impacts or outcomes.
So things might accelerate or they might slow down. All it takes is a blip in the system for us to lose confidence or trust and things become a little more cautious.
But what we want to see, for now and indeed for the future, is a financial sector that is resilient, strong and competitive in its own right.
But we also want finance to serve the economy by providing it with a stable backbone and an investment to make it stronger and more sustainable, a system that serves the planet by sending and ensuring that investment is in the right direction, and one that serves people by being resilient and providing a reliable source of useful products for all of us.
A system that provides choice, including the right to access and use cash in transactions.
So we are building with the regulators, with the Member States, with the European Parliament a solid regulatory framework that will continue to ensure that the financial sector is resilient and competitive. But all the while looking at what might come next.
And what if and when decentralized finance takes hold.
So here we’re talking about providing financial services without a central intermediary like a bank or exchange. Now this really does challenge both international standards and European rules because we tend to base those on entities.
In fact decentralized finance challenges some of the fundamental aspects of the financial system, as it currently exists.
Now needless to say the Commission is monitoring the developments and risks in this very fast-moving area very closely.
But every expert I’ve talked to on this area of finance, really nobody has any certainty as to what sort of system we will have if it takes hold.
And therefore I think we need to have conversations and debates which we probably have now, around what we think we might like to see.
And then how we as regulators, as policymakers respond.
My last remark is around timeliness.
I’m acutely aware that technology is as I said around COVID-19 did things that were dramatic, we thought we’d never do them in a short period of time.
I often ask myself the question on the policy side, how do we keep up, how do we make sure that our rules and regulations are fit for purpose in this fast-moving area.
I think we all don’t have the answers, but I think we are aware that given the rate and pace of change in recent years that it is going to be something that that will challenge us.
But I believe we’re up to the challenge because we have the architecture in place to make those choices with our co-legislators.
Source – EU Commission