Action is required to update how cross-border financial services are regulated and monitored to protect consumer amid rapid digitalization, European Union (EU) regulators said.

People are turning to social media and using smartphones to buy and sell shares, move money around bank accounts and make payments, a trend accelerated by the COVID-19 pandemic, leaving regulators playing catch-up.

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"Digital finance has unlocked new synergies between financial and non-financial activities that potentially introduce systemic risk into the market for financial services," said a joint report from the EU's banking, insurance, and markets watchdogs.

Cloud computing, or banks and other financial firms using outsourced providers for services, is booming, the report said.

It is sometimes unclear how to categorize some digital financial services under existing rules, creating uncertainty over data privacy, anti-money laundering safeguards, and how much capital they should be holding, the report said.

It called on the bloc's executive European Commission, which has opened a public consultation on digital finance, to take a "holistic" view of supervising financial services.

'Big Tech' targeted

New "supervision structures" may be needed to capture transactions spread across "mixed activity" groups or MAGs, such as Amazon, Google, Meta's Facebook, Apple and other Big Tech firms offering financial and non-financial services.

The crash of German payments company Wirecard demonstrated that complex arrangements within a group providing both financial and non-financial services create specific challenges for supervisors.

"The growing digitalization and datafication of financial services necessitate closer cooperation between financial and relevant non-financial authorities," the report said.

The report also said that regulatory action might be warranted, given that some posting on social media is effectively advertisement.

"In securities markets, in particular, the growth of digital trading platforms has coincided with new trends, such as 'social trading' or investment advice shared over social media – which brings new opportunities but risks as well."