Committee on Economic and Monetary Affairs Ordinary meeting
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ECON European Parliament
Follow its sittingsSpeaker 2
Neo banks, they can also more easily concentrate on the whole client experience than what we see in legacy banks. Often these more traditional banks, they have been founded through a range of complicated mergers where they operate on old IT systems and also complex product lines. And then finally, neobanks enhance competition. They enter the market with agile digital-first business models and cost-efficient structures also. So in many aspects, neo banks have challenged the incumbents, also the more traditional banks.
This means that traditional banks need to rethink the core banking system, they need to rethink their product offerings, improve customer experience, and also accelerate digital transformation. This can encourage banks to modernize their business and their systems, but of course, at the same time, stronger competition can also compress the margins, and it requires banks to maintain sound risk management. All of this can help support the dynamic of the European banking sector and, in turn, the competitiveness of the banking sector, of course, provided that innovation develops within the framework that preserves resilience and financial stability. Let me then turn to the supervisory challenges as we see them. As promising as new banks are, they have quite rapid growth and startup and venture culture.
This poses some risk and some supervisory challenges that, in our view, require our attention. First of all, business model sustainability, they tend to prioritize growth over profitability. Some have persistent low profitability, also a lack of a diversified business model. This can also be a vulnerability. Second, on governance and conduct risk, here.
Here, there's a need that there should be no running behind the business also. And these new banks, they need to implement a more robust risk management practice, which is commensurate with the growth and vulnerabilities, including in the AML sphere also. In that regard, we focus on board composition, oversight, sufficient banking experience, knowledge, and also senior risk management and control here. Also, some new banks have heightened operational risk due to their digital nature. They are sensitive to severe operational disruptions also.
And then finally, funding risk with some neo banks, they depend quite heavily on online, price sensitive, cross border retail funding. For all of these risks, the SSM is well suited for supervising this in an effective way, using the full suite of our powers. And as the Supervisory Board Chair mentioned yesterday, ECB Banking supervision is continuously adapting its supervisory approach as banking business models evolve, including a response to digitization and new market entrants. Then on the way forward, looking ahead, neobanks, they illustrate the dynamic and the diversity of the European financial sector and show that innovation and meaningful cross border activity is achievable. This is really an essential element of a true single market for banking.
Greater integration, greater financial innovation that must be matched by resilience and also supported by an appropriate institutional and supervisory framework, and the growth of cross-border digital banking models that also highlights the limitation of naturally organized deposit guarantee schemes and reinforces the need to complete the banking union. From a forward-looking perspective, further progress towards a European deposit insurance scheme will be critical to ensure both financial integration and resilience. In the meantime, we do our part pursuing effective supervision, and we look forward to the Commission's upcoming report on banking competitiveness and resilience in this regard. Let me stop here. Thanks.
Aurore Lalucq
Thank you. Now we'll give the floor to Anne Schwerholz. I think you're online. Welcome.
Speaker 4
Good morning. Good morning, Madam Chair, honorable members of the committee. Thank you for the opportunity to discuss the evolution of the European banking landscape. And on a personal note, thank you for building that digital bridge. And I'm sorry that I can't be with you in person this morning.
We often hear that the tired narrative that Europe has lost the tech race to Silicon Valley or the East. This is actually, if you look at the example of n twenty-six, it's not true. N twenty-six is a living proof that this narrative is wrong. We are a digital native, fully licensed bank made in Europe for Europeans, and regulated by the highest European standards, making a contribution to the European strategic autonomy. Today, N26 serves over 5,000,000 customers across 24 markets in the European Union, and we are no longer just a startup experiment.
On the contrary, we manage billions of customer deposits. Our customers' decision is not solely driven by price. They're also choosing us because we represent what Europe should be about in the twenty-first century, namely speed, transparency, and borderless access. Our mission is to provide true financial mobility. In a union where you can study in Berlin, work in Paris, and retire in Madrid, your bank should not be an anchor that holds you back.
By offering intuitive tools that simplify complex financial data, we strengthen financial literacy and empower citizens across generations to navigate their finances with confidence and self-determination. This has led to a historic shift in capital market participation, for the first time in Germany. We see more stock owners under the age of 40 than over the age of 40. And this isn't a coincidence. By stripping away the gatekeeping of traditional banking, we are empowering a younger generation to build wealth as well as financial resilience.
This is social mobility in action, driven and powered by tech. Let me be also clear. We also thrive because of the banking union. It is a cornerstone of European financial stability and provides strong supervisory credibility for all licensed institutions. Neo banks, like any traditional bank holding a European license, operate under the same robust and harmonized prudential framework.
This ensures a level playing field and consistent oversight across the union, underscoring that neo banks are subject to the same stringent safety and soundness requirements as established players are. They serve a powerful real-world example of the potential benefits of a truly integrated European single market for financial services. The operating model is inherently designed to be cross-border, leveraging digital technology to offer services seamlessly across different member states, overcoming traditional national banking barriers. This promotes competition, innovation, and consumer choice throughout the European Union. And finally, by prioritizing user-friendliness and reducing operating costs, our presence exerts a healthy competitive pressure on incumbent banks to modernize their own offerings.
This dynamic ultimately benefits the European consumer through lower fees and superior user experiences. While Europe may not lead in every technological sector, we are a global leader in fintech. To capitalize on the strengths of our strategic autonomy, we must ensure that the internal market is not just a regulatory theory, but an enforced reality. However, the experience of neo banks also reveals remaining and sometimes significant fragmentation within the supposed single market. Let me give you a few examples.
First, we still witness in a way even illegal barriers such as persistent I ban discrimination, where consumers are penalized for using a cross border account. This is a fundamental failure of the single market that requires strict enforcement by the national and European authorities. Secondly, we must move forward to true supervisory convergence. For a licensed institution like N26, the bottleneck is the fragmentation of oversight. We advocate for a tested one principle. If a digital innovation is rigorously vetted and approved by one national supervisor, it should also be recognized as compliant across the entire banking union.
We need to ensure that a single set of rules results in a single predictable supervisory outcome. And finally, in current policy debates, some advocate for broad deregulation. However, for digital-first players like N26, the priority is rather harmonization via the single rule book. It is fragmentation, not regulation per se, that stifles the growth of European champions. Thank you very much, and I'm looking forward to the discussion and your questions.
Speaker 5
Thank you, Chair, and good morning, everybody, and thank you also for the invitation. From the consumer side, we agree with the previous speakers that neo banks have added a degree of competition that was thoroughly necessary to the banking market and are putting pressure on classic banks to adapt to more digital and accessible systems. However, I would also flag, in addition to what has been previously said, that inclusion is a two-way street here. And as our banking markets also move to a more digital platform, while that makes access easier for some demographics, it may also make it harder for some as it moves away from real space services in some ways. The business of new banks is an appreciable benefit to the banking union and to consumers.
However, they also provide some challenges to the consumers who choose these services. The primary one I would like to flag is poor responsiveness to requests for help. Consumers who try to reach the help hotline at a new bank very often face significant delays, even in emergency cases such as the need to block an account or to unblock an account or to flag an, sorry, I'm stalling, an unauthorized transaction. There you go. Many consumers report and many of our members observe that it is frequent for chatbots or call center interaction systems to raise the barrier for consumers to actually speak to help, or for, yes, consumers to actually manage to achieve their objectives in this interaction.
Finally, there is a higher preponderance of interference in the use of the service for consumers through account blocking, including for AML reasons, which can be quite disruptive to consumers. On the banking union in general, the fragmentation of the EU internal market is famously caused by many things, including civil law and taxation and so forth. And the online banks, while they are inherently more aligned with a single market than classic banks are because they do not feature a regional distribution system as their competitors do, are also subject to these. Many, so we have observed, for example, that help hotlines also are only available in English in some cases in countries that do not speak English. The apparent unwillingness of member states to harmonize legal and regulatory frameworks, however, does remain the principal barrier to the banking union, which affects everyone.
This includes the duality of the EU and national legislation, national options and discretions in EU regulation, and so forth. For a better banking union, it would likely come to a degree of consolidation, which would, in principle, be welcome. However, it must not lead to oligopolistic market structures within individual member states. That is also part of why we need the banking union, so that scale can be achieved without market power in national silos. This may also lead to further aggravating to big to fail issues at the EU level, however.
On further legislation, I would like to flag that the complexity of the EU regulatory environment is not necessarily significantly more burdensome than in other jurisdictions. In the US, for instance, a variety of federal agencies, the Fed, OCC, and FDIC operate in parallel alongside 50 state level regulators. There is room for improvement in the EU, especially in terms of assigning more supervisory competence to the EU level, and centralizing banks reporting on a single platform, where standardized data are collected and made available to national and EU supervisors. The simplification efforts should therefore concentrate on harmonizing EU and national legislation, streamlining supervisory institutions and processes, and centralizing and digitalizing supervisory reporting and data collection and coordination. And I will leave it there for now.
Thank you.
Speaker 7
Thank you very much, and good morning. Dear Madam Chair, dear members of the European Parliament, I thank you for inviting the European Banking Authority to express views on this subject. The EU banking sector is characterized by a high level of diversity in banking business models, from universal banks to specialist lenders, from branch-based to digital only. This diversity helps serve the varied needs of different customers across geographies, thereby supporting the real economy in the EU. So neobank, as a term, can be used to describe several varieties of business models.
Speaker 8
For example, digital-only banks. So they are fully licensed credit institutions, but also fintechs carrying out financial services, either leveraging their own bank licenses or through a partnership with appropriately licensed third parties. Products and services provided by third party but distributed via fintech may be white labeled. So this is the term how the services and products may be offered through alternate business models. So core characteristics of the neobanks is the technology-driven operating model with extensive reliance on cloud-based core systems, digital platforms, and highly automated processes, including customer onboarding.
In some of those business models, they use aggressive growth strategies, for example, using teaser rates and rewards for customers. While many neo banks may enter the market focused on payments, expansion to a broader range of services is typical, including consumer credit, mortgage lending, and deposit taking. New banks have experienced rapid growth in customer numbers in recent years, but their overall footprint in the EU banking sector remains relatively limited. Indeed, according to the EBA estimates, digital-only banks hold around 1% of deposits of EU banks. Now I would like to cover some of the opportunities.
New banks have several benefits, as also highlighted by the previous speakers. So as for other technology-centric newer entrants, they can be more agile in developing cost- and customer-friendly digital interfaces and innovative services. This can help meet customer needs, demands for convenience in accessing products and services no matter what the geography is. Efficiencies achieved by the use of innovative technologies may also enable neobanks to operate with lower fixed costs, potentially enabling cost saving to be passed on to customers. More broadly, the emergence of innovative business models can place a competitive pressure on incumbents to integrate technologies and increase efficiency, thus fostering positive competition and digital transformation across the EU banking sector.
Overall, business model diversity and innovation can positively contribute to financial stability by mitigating market concentration and interconnectedness risks, thereby strengthening the EU banking sector resilience, including in a climate of rising geopolitical developments. Now I would cover some of the risks linked to neobanks. As for all banking sector business models, our range of core risk needs to be monitored and mitigated, including prudential, operational, and conduct risks. However, it is important to note that neobanks have a relatively higher risk profile than average, thus necessitating closer supervisory scrutiny. And I provide some of the examples.
A high growth digital first approach may result in members of a neobank's management body placing greater emphasis on rapid customer acquisition, revenues, technological development rather than our long term sustainability of the business model itself, and also the prudential risks related to that. Overall, governance and risk management arrangements may be at risk to keep pace with business expansion. Strategies aimed at rapid growth may be funded by short-term borrowing and driven by special offers for new customers. These factors can create particular vulnerabilities should customer growth slow or customer behavior be different than expected. Heavy reliance on outsourcing or third party ICT providers for application programming interfaces and other technology can lead to vulnerabilities, including from interconnectedness risks and limited substitutability.
Fast and first to market product rollouts can pose risk, including from configuration errors and limited compliance risk management in the second line of defense. Digital onboarding processes, if not sufficiently robust, may increase risks for anti-money laundering, counterterrorist financing, fraud, and other undesired activities. From cost consumer protection perspective, few of the risks could be misleading marketing materials, providing to customers the impression that some nonbanks promoting themselves as neo banks even though they don't hold a banking license, as their funds are not covered by deposit guarantee scheme. Insufficient disclosures may make it difficult for consumers to clearly understand the terms and risks of financial products and services distributed via digital interfaces. Operational outages or service disruption may have a higher impact, especially where customers rely exclusively on mobile apps or online platforms.
The digital-only nature of customer interfaces may also increase exposures to certain types of cyber threats, raising the risk of data breaches and fraud incidents. And from the perspective of supervisors, the complexity of some neobank business models can create additional challenges in monitoring compliance at all points of the value chain. And here also, I want to emphasize the importance of awareness raising, training and knowledge of different new business models, that supervisors also need to work closely with. So lastly, I would like to cover some of the EBA activities. EBA continues to monitor developments related to neo banks and support supervisory convergence across the EU in addressing the opportunities and risks associated with these developments.
For example, as part of the EBA's innovation monitoring mandate, we promote business model awareness among supervisors through thematic reports and discussions, including on digital platforms and white-labeling. Additional measures are taken as required. For instance, DBA is promoting supervisory convergence in business model regulatory classification via dedicated workshops and discussions in DBA structures. And white labeling has been embedded in the current union's strategic supervisory priorities. Also, EBA and ECB, we work closely together to develop regular reports on digital fraud.
These reports highlight a need for continued vigilance and for security measures to be adapted to combat novel types of fraud, in particular in the context of new business models. Also, EBA is updating sectoral policies where appropriate. For instance, we are currently updating the guidelines on third-party dependencies, formerly the guidelines on outsourcing. And finally, DB continues to alert supervisors to the risk that some new banks may promote themselves as banks, even though they do not hold a license as credit institution. Such promotion is prohibited under the capital requirements directive and is an unlawful activity in the fast maturity of member states and requires proactive monitoring by supervisors.
With that, I would conclude. Many thanks to Madam Chair and members for the opportunity to share those reflections, and I stand ready to respond to any questions and comments. Thank you.
Aurore Lalucq
Thank you so much. And let's now turn to the Q&A session. You have one point, minutes for the question and two minutes for the answer per speaker. So please let us know to which guest speaker you address your question. And I would start with the no, nobody from EPP.
Okay. So with the S and D and Rona's Fernandez. No? Okay. So it's Helro in Alomar.
Eero Heinäluoma
Thank you, Madam Chair. My question goes to the representative of the Neobank in 26. Of course, I would like to thank you for all the intervention, extremely important discussion today, and thanks for your interventions. Concerning N26, I have to say that it's really good that we have new companies like yours. We really need to bring innovation also more to the banking sector.
And this is urgently needed in our financial world here. However, we have to make sure, as has been mentioned here, that this innovation is done in a regulatory correct way, and we cannot afford that neobanks cut regulatory corners. Here, I have some concerns, in particular around your AML track record. NCAs in several member states are pretty concerned about your business, and you got quite a bit of fines for not reporting in time suspicious transactions and not checking properly your customers. It was further reported that sanctioned Russian banks use N26 to transfer money from Russian accounts to European ones by converting rubles to euros.
And this, of course, is really problematic. I'm wondering how this is possible. I have noticed that you have promised to put a lot more money to upgrade your financial crime detection systems. But still, I'm wondering how this could happen when you know what the official line of the European Union is and what kind of sanctions and also what kind of rules we have for banks to make sure that they know their customers.
Aurore Lalucq
Thank you. Just to make sure, this is a question your question is addressed to the first speaker, the ECB? Or you mean Aunt Schuess Hall maybe for the yeah. The first one or the second one? Okay.
Speaker 4
Thank you very much for the question. Something that is very important for us, I think we heard it before a little bit, is that a conflict between innovation and regulation. And clearly, our opinion as N26 is that this is not an inherent conflict. Quite to the contrary, how can we use innovation to answer regulatory concerns that actually exist in the overall banking market? So here, I think technology digitization helps us.
Let me go specific into the two topics that you have mentioned. SaaS suspicious account activities, and then secondly, embargo and sanctions. I think for SARS and the timing of handing in suspicious transactions, there's quite a lot of progress that N26 has seen in its history. We have clearly learned a lesson in the early days on regulatory topics on risk management and governance. So I can assure you here that those lessons are well incorporated, and the SARS filing at N26 is as good as it should be and as good as it is in the market.
When it comes to your second point, I'm surprised to hear that, that clearly the topic of embargo or sanctions is very high on our list. And the ways of detecting those, I feel that n 26 is part of helping to set the standard. And, clearly, I'm happy to take that offline if there are certain transactions you have in mind. But, clearly, I can assure you that our interest in detecting those and stopping those, especially when it comes to washing Russian money. That is not something that's happening on the N26 platform.
Thank you.
Tomáš Kubín
Thank you, Madam Chair. My question is on BEUC, it means Mr. Kaufland. New banks are often praised for their efficiency, but this efficiency is built on extreme automation and AI-driven processes. While this works during normal operations, it creates, let's say, in quotes, human vacuum when things go wrong.
We are seeing a growing number of cases where accounts are frozen by algorithms, often for compliance reasons, leaving users, including vulnerable customers and the elderly, without access to their money for days. In these moments, chatbots are simply not enough. Vulnerable cuss citizens often lack the digital literacy to navigate complex automated appeals and find themselves trapped in a loop with no way to reach a live person. As the voice of European customers, thus BEUC believes that the current EU framework, including the banking union rules, sufficiently guarantees a right to human contact, in quotes, but you know what I mean. Specifically, should we mandate that every bank operating in the EU must provide a direct life support line for emergency situations, like account freezes?
And by the way, I mentioned it here: elderly consumers. I'm one of them. One of the neobanks, which is not present here today, froze my account as well. It was not only account which I've had, but I know the case where it was really from Friday to Monday, the person from Austria was without any money. So my question is, what to do with this?
Speaker 5
Thank you. Thank you for the question. As I said, yes, this is also a problem we are quite aware of, both the account freezes and the significant difficulty that consumers have with finding customer service in such cases. And by the way, account freezes are not the only aspect of this, right? There's also the emergency to freeze an account in some cases. In which cases, it's very dangerous if there are delays like this.
The fact that this happens and the fact that our members gave this as the primary input to my input here today speaks to the fact that it is not currently well prevented. Absolutely, consumers should have an enforceable, I think that is the key problem, an enforceable right to immediate assistance in some cases, such as account freezes or the need to freeze an account or to, yes, to other such cases. However, I think it is mostly about holding to account there. By the way, another barrier that I didn't mention in my first input is that the service hotline number is very often surprisingly well hidden on the website. And so that is an additional barrier to finding help as well.
So in practice, this definitely needs to change. Thank you.
Thank you.
Gilles Boyer
Chair, panelists, thank you so much for those very enlightening speeches. Three questions from me, if you'll allow me. So first to Mr. Jorgensen from the ECB. What's your assessment? What's the best way to strike a balance between risk management and regulation on one hand and then innovation and growth on the other hand.
You know, we face the same issue when it comes to AI. Do we regulate before the industry becomes mature, or do we already, or do we wait to regulate? I'd like to hear what you think about striking that balance. Now, Mr. Sverholz, you've already partially answered my question.
So your ability to manage risk, is that increasing at the same pace as your business is growing? Basically, are you managing risk more as your activity grows? And are you channeling more means and resources into that? Now, Ms. Picarro, we have new competitors in the banking sector, and in principle, you're in favor of those new market entrants.
But in your view, is all of this happening on a level playing field? Are neo banks facing the same requirements as traditional banks? To reiterate my question, is there a level playing field?
Speaker 8
Thank you for the question. I would start with a broader question. So for whom are we doing those banks? To whom we are offering those products and services, those are for the consumers in the EU market. So that's the fundamental that rights of those customers need to be respected, which leads to the conclusion that safeguards, either customer access to their services, to the banking products, the human contact to get support, help, access to the financial system overall, that's kind of fundamental here.
Then secondly, neobanks, as said before, those are the banks who hold a license. It means that the same rules and procedures apply as for any other bank that is holding a banking license. So the different aspects come into play due to the technology, to the innovative solutions. It's a matter of interpretation how the existing rules and procedures then are applied and followed. And it needs to be mutually understood by the financial institution and by the supervisors that all rules apply.
In terms of the wider market, those who are not licensed banks may have slightly different rules to follow. But it's the role of the supervisor, either national supervisor or the European supervisor, then to ensure and check that those rules are followed. Thank you. Thank you. So now Thomas Jorgensen for the ECB.
Speaker 2
Yes. Thanks a lot. Thanks for the question. I tend to agree with my colleague from the EBA also, that you cannot solve everything with regulation here. And already, the neo banks, as long as they are licensed banks also, they are following a range of different regulations also.
In fact, I think what we have here is broadly right. Then of course, the question then, well, what more can we do? And there I would of course say is the first thing, it is the banks themselves that need to get their house in order on many of these things itself. As a second thing, I think some of that indeed can also be driven by supervision. And this is exactly what we are doing.
And there are many different things, which, of course, I cannot comment on individual cases here. But we have one overriding principle, that is no running behind the business itself. And that means on the governance, the risk management, that needs to be fully up to par with the business growth also. That means sufficient risk management, sufficient resources in the compliance function, in the internal audit function, in the Chief Risk Officer also. A good stature inside these banks also make sure that they hire seasoned people that know their stuff in whether it's AML compliance, risk management, audit also, and drive upon the experience that the traditional banks in many cases have in this case itself.
And it's important that sufficient skilled people are hired into the banks here. And this is very important for us when we supervise these banks. And the other thing, which we touched upon in an early question, is, of course, the operational resilience also, where we push a lot these banks also because indeed they are vulnerable because they rely a lot on tech groups outsourcing of these things. So there, it's also important for us that we push efficiently into are these plans tested, do they have a plan B, what would happen if that product can no longer be serviced by this third party provider itself? So that's another very important issue for us when we supervise the banks itself.
But regulation, I think we broadly have what is needed here. The neo banks themselves need to have the first responsibility to move on these things. And we as a supervisor, of course, we are pushing on all of the elements here. Thanks.
Speaker 4
Apologies for my surname. I know it is not that easy to pronounce. I think I agree with everything that has been said by the previous speakers. Clearly, neo banks, we talk about licensed institution, and the same rules apply for neo banks than for any other banks. Before I get to that point, I wanna quickly jump on that question of innovation, which we all agree on, and we heard it before, the importance of innovation.
And I know that some supervisory authorities work with a sandbox concept where they, in very early stages, let certain innovation apply, monitored very strictly, maybe outside of the rule book or special regulations just to see how that innovation would work. But let me say clearly, that's not what applies to licensed neo banks. Here, clearly, we have the same kind of ruling. And the question that has been asked, how did we apply that at n twenty six? I think we clearly have learned the lesson that growth without the respective governance, without the regulatory resilience and rigor, is not sustainable.
We at N26 have undergone a fundamental institutional transformation here. Quite a few things have been mentioned. The hiring of experienced bankers is clearly one of them. We have also used the feedback that we got from the supervisor productively to build a road map for our product and overall governance improvements. And I can clearly say here today that we are, quote unquote, a grown-up bank with a robust governance framework that allows us to perform real-time AML, anti-money laundering, monitoring and reporting with a high level of accuracy, and maybe helping here a little bit to drive innovation, the use of AI and other technological tools in the sense of preventing any fraudulent money transactions that you might see only with digital-first or digital-native banks.
So here, I think we can use it to the advantage of the consumer as well, the use of technology and the setup, the infrastructure that neo banks are using in order to prevent fraud on the platform. Thank you.
Fabio De Masi
You, Che. I just have one question. We have a very successful new bank broker in Germany called Trade Republic, which I've met myself a couple of times. And I'm aware that the Trade Republic, for example, has a full banking license. However, when it does manage orders of shares for often very young customers who are also targeted by algorithms.
And we know the effects of algorithms on young people and all that can induce. Those funds, especially if invested into money market funds, are not insured by the deposit insurance. I think they are outsourced to Clearstream. So I would like to understand from the ECB in that case, whether you see any risks related to that kind of architecture for those funds invested there. And whether you would see some need to address that regulatory and as well, like the kind of, let's say, algorithmic targeting of young customers? Thanks.
Speaker 2
Yes. The ECB is a parental supervisor also. We don't supervise consumer issues. And it sounded to me a bit like the question was targeted more, is this sufficiently advertised to the client? What is the coverage of the DTS or not?
I think that is, of course, very important. We, as far as I understand the question, this is more a consumer question itself. So it's not a topic that we directly supervise. Nonetheless, of course, it's important that the client is fully aware of what is the coverage of the funds itself. And if it's not covered by the DTS, well, what is the possibility that one can do so on the investments also?
I am aware that, of course, the natural legislation does contain, for example, traffic lights on investments also, what is a very risky investment, what is not risky. So investment itself, this I find personally a good idea. But again, it's a consumer issue and something we don't supervise from the DCB.
Speaker 8
If I may say a few words. So if this institution has a banking license, then they are part of a deposit guarantee scheme. So, it means consumer assets are protected up to the limit of €100,000, currently effective. If they are not part of or they don't hold a banking license, then consumer assets are not protected. I mean, there could be other safeguards, etc., but it's not part of the deposit guarantee scheme by default.
So here, it's important that I was referring also in my speech that the marketing materials and the information towards customers need to be clear. Is it a neobank or an institution that holds a banking license? Or it's an innovative organization that operates in some other form in the financial services. Thank you.
Speaker 5
If I may still comment on the previous question. So I don't think it is a consideration that consumers can meaningfully manage counterparty risk with their bank. So I don't think that the bank or service provider, the account manager, whoever, collapsing is definitely from the consumer perspective, prudential risk, and should be treated as such. Obviously, I understand that the mandates of different supervisory authorities can, through legal constraints, see this differently. But definitely, the deposit insurance guarantee is not a thing that you can inform a consumer about that it's not there, and then assume that their decisions will be rational in dealing with this additional risk.
That is not outside the scope of consumer engagement. A consumer, by definition, is not a financial professional, and most will not be able to make decisions like this. So if you have an investment account somewhere, it should be under the deposit guarantee scheme or a similar legally different but functionally the same system.
Thank.
Aurore Lalucq
you. Thank you to all four of you for your comments. Now this is the subject you just talked about, deposit guarantees, and that's quite a worrying issue. And as you've said, I don't think consumers are fully aware, and it's very difficult to be. So it's something that's quite technical.
And so many are quite concerned that these new banks can exist in countries where we don't have deposit guarantees, as you have in others. And I have a very specific example, which is very fashionable, which a lot of people know about. I know this is a risk for consumers, but it's also a financial risk. I'd like to thank all four of you for your comments. Perhaps you can have a minute to conclude, all of you.
Pluto.
Speaker 8
Yeah. EVA. So thank you, and thank you for once again inviting us to cover this important topic. So innovation is very important to Europe, to the EU and our societies, our customers, our citizens. However, innovation cannot come sacrificing compliance or sacrificing rules, particularly that are protecting consumers themselves, but also financial integrity and sustainability in Europe.
Neo banks are much welcomed in Europe. They bring a lot of value, a lot of benefits to the consumers. And here, I would only welcome new neo banks that are applying for or holding the banking license to develop in the EU market. Thank you.
Speaker 2
Yes. Well, I don't have much more to add. I think it's important that, of course, the innovation and the scaling of all of this technology in the neo banks is also matched by resilience and the appropriate governance and risk management. Not, of course, you can have situations where neo banks become a more risky institution than a normal bank also. So I find it all important that the neo banks are balancing both of these legs, innovation growth, but also having sufficient governance, sufficient risk management, sufficient board oversight also.
And if this is the case, then for certain, there can be a number of advantages in the neobanks. And in fact, I think traditional banks can learn quite a lot of these things. Neo banks are often more client focused than what we have for the traditional banks, also. And the traditional banks, of course, have a need, some of them at least, to invest more in digital infrastructure also. That's also a possibility to navigate the fragmented banking union in a more cost-efficient way also.
And there is more to do also for the traditional banks here. So as long as these two things are met for the neo banks, the growth is complemented with sufficient governance and risk management, I think that's a good way forward.
Speaker 5
I think what we just heard about prudential supervision needs to apply to conduct supervision as well. That's the consumer perspective, is that consumers need to be equally protected regardless of which variant of service they use for the same purpose. This applies to, as we previously heard, the deposit guarantee, but it also applies to my initial statement about being able to find assistance at the service provider in the case of emergency, but also in nonemergency cases. So the requirement for consumers to find help here and to find service in unusual situations must be the same as with all the other banks. And that is also part of the level playing field, and that is also the part, and it is an analog to the prudential considerations we just heard before.
Aurore Lalucq
Thank you. And our last speaker online, Anto Sisol, do you want me to conclude?
Speaker 4
Yes. I'm happy to. And I think we heard the advantages of neo banking, is clearly the client focus and driving and delivering an innovation. Also, the financial inclusion looking especially at driving the financial literacy of the younger generation. I clearly heard today also the concerns that do exist in the area of consumer protection, in the area of risk management, and the area of operational resilience.
I want to reach out to regulators and supervisors to maintain this dialogue and to ensure the highest standard possible here. And then maybe lastly, I would love to see that neo banks are fostering, are helping to engine the European single market and driving European financial autonomy in a cross-border seamless way and help to drive technological innovation in Europe, made in Europe for Europeans. Thank you.
Aurore Lalucq
Thank you, and thank you to all the panelists. It was very useful for us. Thank you for this debate. Okay. I think that now everyone is here, so we can start with our next item on the agenda.
The consideration of the draft report on the amending directive excise duty in respect of tobacco and tobacco-related products, and the draft report on the directive on the structure and rates of excise duty applied to tobacco and tobacco-related products. These two files are packaged with the same report and shadow. And I will now give the floor to the reporter, Thomas Kubin.
Tomáš Kubín
Thank you, Madam Chair. I will speak in the Czech language, so please use your headphones.
Madam chair, colleagues, in the econ committee, we usually discuss issues which, for the public at large, are difficult to grasp: macroeconomic stability, banks, capital buffers, or reporting obligations. The revision of the Tobacco Directive, however, is an exception in this regard, because it deals with issues that will affect millions of Europeans in their daily lives. Now, of course, smoking is harmful to health, and it's the legislator's task to try and protect public health and to set the taxation levels of tobacco products in such a way that consumption drops, but that taxation in member states is improved. And there are three different objectives that are to be reconciled. One is to take account of public health, to make sure that there are tax revenues, and also the third is the functioning of the internal market.
If you get this right, then smoking prevalence will decrease, the number of new smokers will decrease, especially amongst young people, and tax revenues will be collected properly and will be able to cover health and social costs associated with smoking. However, if you get it wrong, then the black market will grow, and you won't be protecting public health. Now with the latest review, the last revision of the tax of the Tobacco Directive took place almost 15 years ago, and the EU minimum excise duty rates are gradually losing their regulatory effect because of inflation, wage increases, and so on. So it is legitimate and justified that there'd be an increase in those minimum levels of taxation. But of course, we also need to make sure that alternatives to smoking are borne in mind, and therefore, the minimum rates of taxation need to be increased.
But it's really about striking a balance. Raising minimum rates of taxation is something that needs to be well thought through, and we also need to look at the side effects of this. We need to look at how quickly these changes can be introduced, what the structure will be, and how predictable all of this is, because if you don't approach it in the right way, then it might jeopardize the objectives we're trying to pursue, which is why I suggest that we take a pragmatic approach and a gradual approach in my report. Now for most of the product categories, I lower the minimum rates compared to the commission proposal, and I also lengthen the transitional period by one year. This will give member states an opportunity to gradually adapt to this new legal framework, and it also reduces the risk of there being market shocks, any market turbulence.
And this is also in line with the position of a number of member states, and ultimately, they will have the responsibility for implementing all of this. And that's why I believe this member state has to be listened to. Now from studies, we know that smoke-free products present a lower risk than traditional cigarettes and can contribute to reducing the consumption of the most harmful products. And that is something that should be taken into account. We can't have a one-size-fits-all approach.
And I would like to briefly comment on or look at the commission proposal. There's an automatic adjustment of minimum rates to inflation every three years, but I think that encroaches on subsidiarity, and that's why I suggest two changes. First of all, I don't think we need to look at the overall index for inflation, but core inflation and the core indicator, and we also need to cap the rate change at 12%, which means it becomes more predictable and there is greater certainty for everyone involved. The second mechanism is the price level index, which ensures that the level of the minimum rate of taxation reflects the general price level in a given member state. I agree with the second mechanism contained in the commission's proposal.
And closing, let me just mention two points. First of all, if we increase the minimum rates of taxation, that does not automatically lead to tax revenue increasing. If you approach this in an all-too-aggressive way, it can lead to parallel imports, counterfeiting, and illegal trade. And these phenomena are a threat to public health, but also to the fiscal objectives being pursued under this directive. A striking example of this is Australia.
They've had repeated sharp increases in excise duties on tobacco products, and that has led to a significant increase in the illegal market share and criminal activity. Secondly, differentiating our approach is not a concession, but a rational approach to regulation. Different products present different risks, and that should be reflected in tax legislation. Now the European Parliament is only consulted on tax matters, so plays an advisory role only, but we should nonetheless give our views and send a clear signal to both the Council and the Commission. And I look forward to cooperating with you on these matters.
Thank you.
Giusi Princi
Thank you, madam chair. I'll be speaking Italian. As you were saying, I'm speaking on behalf of our colleague Marco Falcone who is the EPP shadow rapporteur in relation to the revision of the excise duties on tobacco products. Now the proposal from our colleague Mr. Kupin represents a very good point of departure to arrive at a final tax that is balanced and pragmatic, which is also the objective that the EPP pursues.
Let's start with the increase in taxation levels, the first point. The proposal puts forward a first reduction and wants to introduce a degree of flexibility for member states, but more could be done. It is necessary for the new taxation levels to reflect the impact that the products have on health, and the fact that this differs without penalizing innovative products. Now we're going through a very complex and delicate economic stage, and any union initiative therefore needs to move in the direction of promoting competitiveness and strengthening our manufacturing sector. We cannot run the risk of introducing new taxes and contributing to inflation in doing so, and rendering the protection of public health null and void in doing so.
And there are two further aspects that need to be taken into account. We wouldn't want to push consumers towards the illegal trade in these products or towards products that come from outside the EU. Secondly, we don't want an increase in taxation levels to have an impact on the competitiveness of our industries and the agricultural sector to do with the production of tobacco products. And we also believe that through amendments, there are two further structural issues we need to tackle. The first is the definition of products.
There, we need greater clarity. The second is the commission's power to act. As we see it, this throws up serious issues when it comes to member state prerogatives. They are limiting governments' capacities to adjust their policies to take account of social and economic realities. Thank you.
Thank you for the S and T.
Gracias. Thank.
César Luena
You, chair. For the socialists, we are going to support the commission's proposal. That's where we feel the most comfortable because it updates taxation, and the rapporteur talked about that this hasn't been done for over 15 years. And, also, it brings in new products to this taxation, and this should be the spirit. I don't know if it will be, considering what I've heard, but this should be the spirit of this reform or this negotiation.
Updating taxes, bringing in new products to be covered by taxation. The position of the rapporteur, well, I've listened closely. He said that he was going to be pragmatic and talked about the adequate balance. And from what we've listened to, it is lowering the ambition of the directive presented by the commission. Yes.
So I'm putting my name here, just in case you didn't know who I was. Now this is the period transition periods, the indexation mechanism, mister Rappatore. He's lowering everything. And then the person also spoke on behalf of mister Falcone. It would appear that the EPP will be supporting this for us, the socialists. The architecture of this is the most important.
And we are putting forward our priorities, the types and periods of transition, inflation mechanisms, and also price adjustment per country, and also preserving a legal procedure taking account of the upcoming tobacco directive. And I think this is what underpins it. Let me conclude. In the spirit of negotiations that we always have, we believe we should maintain the level of ambition. The far right and their friends, yeah.
I was looking at the chat. I don't know if it's the ultra chat or the fan chat. The with regards to the directive on Brabaco, they already seem to be in agreements and everything. When they're talking about the adequate balance, the euphemism to say that we're going to lower everything we have in the ambitions of the commission, where we are going to maintain this ambition. We need to update tobacco taxation, and we should bring in new tobacco products.
And we will work and negotiate with the Liberals, the Greens, and the Left. And we hope that the EPP can also take part in this and not go down this dangerous road of the far right, which I think really is problematic. Thank you.
Aurore Lalucq
Thank you. I think that Francesco Ventola is not here. Okay. Nor is. Okay.
So. Mister. Okay. But first, Pampy. No?
We will start with Pampy. Jean, we start with Pampy first. So.
Pierre Pimpie
I will speak in French. I would just like to refer to the issue of fraud. We certainly should help people to end their addiction to cigarettes, but constantly increasing the taxes will not do anything. And the figures show this with regards to the consumption of tobacco in France. The fact that the price has doubled in a very short time has only marginally reduced the number of smokers, and has not created any new taxation income.
Increasing taxes has only increased fraud all across Europe, with all types of different problems that this brings in its wake. Sales to minors, the fact that the public space is suffering from negative impacts, well, this is a source of revenue for the mafia. We should stop encouraging contraband and set the taxation of products in a proportional manner with regards to the dangers they pose. And this is the only way to get smokers to stop smoking. Thank you.
Thank.
Marlena Maląg
Thank you very much. I'll speak Polish. Debate on the review of this directive is very important. I'd like to ask the rapporteur for a very reasonable approach to the issue that is of such importance. I'd like to focus on new nicotine products.
Heaters and other related products affect health in a different way than tobacco itself. Now, the proposal by the commission does not differentiate between these different tobacco-related products. We should focus on that and have solutions that would discourage taking up these new tobacco-related products. Next, definitions. Clear definitions and differentiation of different products are important not only from the point of view of tax imposition, but also for the functioning of the market.
And some definitions of tobacco products are not precise, and therefore leave space for interpretation. And this can lead to different treatment of the same product in different member states. Next is tax sovereignty, democratic control, and predictability. Our report takes up the issue of national sovereignty. So we should define the respective powers.
And next is the question of the issue of correcting tax rates. We should base them on price rises. And next question of new own resources. This could amount to some €15,000,000,000 for the European Union, and €11,200,000,000 would end up in the coffers of the European Commission.
Enikő Győri
PFC, Miss Kyory. Thank you, madam chair. I will speak as a heavy nonsmoker, but in Hungarian.
Ladies and gentlemen, I believe that we need to cut back smoking and we need to prevent health problems and nobody discusses this question, especially with respect to the new electronic tobacco products with a certain taste and therefore being really harmful for young people. In Hungary, these products are prohibited, so we do want to protect the health of our children. On the other hand, I do agree with the commission to raise taxes, but as usual, they go beyond the desired limit. They do not take into account the specificities of certain countries. So, they want to raise the taxes in such a manner that actually gives way to the black market.
And we, on the eastern end of the European Union, have experience in this respect. We know what it's like when the black market takes over, so we had to tolerate Ukrainian mafia networks, and finally, we managed to put an end to that. So the situation is under control right now. I really do not want European rules that bring back the black market. Yes, this is a very flexible business, so I think we should not experiment with it.
I also understand why Brussels want to raise taxes in such a way, because in another legislation on own resources, they would take this income away from the member states and they would make it into a European tax. And that actually is a loss of income for the members. So this would be a super project for the left. They would take money out of our wallets, and the market, the black market, would obtain a certain space. So we are not going to be partners in this project.
I'd like to take into consideration the reality. We want to protect our children and have rational legislation, and we do not need WhatsApp groups for that.
Aurore Lalucq
Before I give the floor back to the reporter, I will give the floor to the European Commission.
Speaker 33
Thank you, Chairman. The recast of the tobacco taxation directive is a unique opportunity to achieve our public health goals by reducing smoking rates and associated costs, protecting young people, and bringing Europe closer towards the objective of a tobacco-free generation. In this respect, the impact assessment accompanying the proposal shows a number of things. Ambitious EU minimum rates are needed to embrace convergence in tax rates and prices, to address current distortions in the single market. New tobacco products and tobacco-related products act as a fiscal substitute for traditional tobacco products.
Speaker 35
The extension of the directive's scope to these products will guarantee the sustainability of much-needed tax revenue over time. And finally, there's no direct correlation between tax rates and the level of illicit trade. The additional measures introduced on raw tobacco will enhance the existing enforcement tool to fight against illicit manufacturing in the EU. Thank you.
Tomáš Kubín
Thank you, madam chair, again in the Czech language.
Let me start by thanking all of the colleagues who've participated today, both the shadows and the other colleagues. Now, as a rapporteur, I want to find a balanced, acceptable compromise. That is my ambition in relation to this report. Now if certain people don't want to cooperate, then that's not something I can do anything about. But I'm the rapporteur, so I need to try to strike a balance on behalf of this parliament.
And for me, it's not discussion about left or of the spectrum. This is a taxation proposal, which is trying to influence consumer behavior, and it ties in with a very important issue, which is public health. And if you look at the structure of the commission's proposal, then it's a good proposal, and we're simply trying to improve it. And during our negotiations, through amendments that are tabled, we'll add to what goes into the report. But it's not really about playing games with, you know, what is a left wing issue or a right wing issue.
It's really about public health, the health of our citizens. And I do think that what we have to work with is balanced. And we've looked at over 100 documents. We've consulted scientific literature, stakeholders, and the commission before drafting this report. And as soon as I became a reporter, I also stopped having any dealings with the industry.
And the information that we used and that has fed into this report, I'm happy to share once we move on to more specific provisions and more technical discussions over the next few weeks. If you have any amendments, then I'm happy to consider them and to continue working on that basis. And I'm convinced that the final outcome will work to the advantage of our citizens, unlike tobacco products.
Aurore Lalucq
Yeah. Okay. Normally, the last one is for the rapporteur. I don't know if the rapporteur allows you to say something. I don't think so.
Okay? All right. So thank you to all of you for this discussion. The deadline for amendment will be April 13. Consideration of amendment May 4 for committee June 3, and plenary adoption in July.
Thank you to all of you. The next second committee meeting will take place on March 24 and the eighth and ninth of April in Brussels. Thank you.
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