Address by Bernard Sheridan, Director of Consumer Protection, at the FinCoNet AGM 2016

15 November 2016

Consumer Protection and Fintech - Role of the Supervisory Authority

I would like to take this opportunity, in my capacity as Chair of FinCoNet, to highlight the importance of the role played by supervisory authorities in helping to protect the interests of consumers and to look at a number of the challenges we face in delivering on our mandates in an environment where the pace and scale of innovation, through increasing use of new technologies, is increasing.

Supervisory authorities, including the Central Bank of Ireland, play such an important role in helping to protect the interests of consumers of financial services. Financial products and services enable consumers to go about their daily lives, from making payments to saving or taking out a loan; from taking out insurance to protect them against risks, to making an investment in a pension to provide for the future. Our lives as consumers are, in many ways, dependent on financial services and the providers of them. That is why most countries require financial firms to be regulated and to be supervised by a supervisory authority with a core objective to ensure that such firms are treating their customers fairly.

Since its formal establishment just three years ago, FinCoNet has been providing a very useful forum for supervisory authorities to engage with and learn from others on how best to meet these challenges. It provides a forum for sharing current and emerging risks and challenges to consumer protection. The supervisory toolbox will be a very useful resource for members as they develop their approach to monitoring and oversight of firms. FinCoNet has also been working on key areas of responsible lending practices as it is such an important consumer issue across countries. I believe its work, including the upcoming guidance on sales incentives, will help supervisory authorities shape a more consumer-focussed culture within lenders. Considerable work has also been done by FinCoNet on the emerging consumer risks in the area of payments with the recent publication of the Report on Online and Mobile Payments which focuses on how regulators and supervisors are responding to emerging risks particularly security risks and are keeping up with the pace of innovation.

One important emerging challenge for supervisory authorities and consumer protection is the extent of innovation taking place, through greater use of modern technology (fintech). Fintech can have a really positive impact on society, helping to make products and services more accessible, improving service delivery, providing greater convenience for consumers and increasing choice. For firms it can help reduce costs, enable new products and services to be developed as well as improving the quality of service delivery. Fintech can also help markets become more competitive by enabling new firms to enter a market and compete with existing firms in a viable way. However new innovations bring new risks for consumers and new challenges for supervisory authorities and it is important that supervisory authorities remain focussed on their core responsibilities for consumer protection while recognising the potential benefits for consumers. FinCoNet, at its Open meeting in Amsterdam in April 2016, acknowledged the growing importance of the digitalisation of financial products and distribution channels and the specific challenges that digitalisation can pose for supervisory authorities. It is in this context, that I think it is both timely and appropriate that FinCoNet has identified the digitalisation of high cost lending and the practices and tools that are required to support risk-based supervision in a digital age as two of its priority themes for 2017-2018.

Supervisory authorities are a key part of the overall consumer protection framework. We are the gatekeepers in controlling which firms enter, and also stay in, the market. In our role as gatekeeper we seek to ensure that the senior people setting up and running firms are fit and proper to do the job. We have to determine if the proposed service falls to be authorised under relevant legislation. With the pace and scale of technological innovation it is becoming increasingly difficult for firms and regulators to determine what falls to be regulated and what falls outside, and for us all to be consistent in how we are interpreting the rules. This is particularly noticeable in the provision of payment services as well as other areas such as crowdfunding. It is important that supervisors work closely with one another and the relevant law makers to be clear on what is in and out of scope. Where innovation relates to services which fall outside of our scope, we need to be aware of the risks they may pose to consumers and have a forum for engaging with government and other policy makers to consider the appropriate response.

Supervisory authorities can also play an important role in influencing and shaping the consumer protection framework by working with governments, standard setting bodies and other international bodies. We have the expertise and knowledge of what is happening in the market to inform wider policy developments and it is important that we proactively input into such developments. Clearly it is a challenge for supervisory authorities to keep up with the pace of change in order to ensure that the consumer protection framework is fit for purpose. FinCoNet aims to help its members to identify emerging issues through the sharing of current and emerging risks.

In most countries, it is important to note, a consumer protection framework is already in place, which can be based on domestic (national legislation/codes), regional (European directives) or international standards (OECD/G20 Principles). Even where such frameworks are not in place the OECD/G20 high level consumer protection principles, developed by the G20/OECD Task Force on Consumer Protection, set out clearly the key elements of what is necessary for consumer protection. Therefore, innovators working with regulated firms or developing unregulated financial products or services need to take these existing consumer protection standards into account. They should not be starting with a blank canvas! Other international bodies are also looking at the impact that fintech is having in the market. The G20/OECD Task Force has identified fintech as one of the key areas for examination. FinCoNet needs to work closely with the Task Force to help inform its work and to influence how the wider consumer protection framework can be enhanced to address these emerging risks.

Also there is a growing recognition among supervisors of the need to focus more on product development, oversight and governance in order to seek to pre-empt problems. This is particularly timely as fintech increases in importance. By developing standards on how products and services should be developed, tested, rolled out and monitored, supervisory authorities are providing the framework within which consumer-focussed innovation can happen. Regulated firms need to really think through and test their ideas before launching them and be able to demonstrate that they are meeting the needs of consumers in a fair and transparent way. Changes to distribution channels and how firms communicate with their customers also need to be fully considered by firms as to the impact they will have on customers.

Market conduct authorities also work closely with other authorities which have responsibility for prudential regulation and financial stability as we recognise the interdependence between these functions and market conduct supervision as well as the critical role they play in consumer protection. Managing risks which impact on consumers, on individual firms as well as on the wider market, needs to be done in a coordinated way across all relevant responsible bodies including market conduct supervisory authorities. For example, the need for authorities to work closely together to deal with the threat and impact of cyber attacks is becoming even more important in the digital age.

And critically we monitor and enforce these standards to ensure consumers are benefitting from them and that firms are acting in their best interests. This is a core function for any supervisory authority and one on which the focus needs to be retained. It is important to say that first and foremost it is the boards and senior management of the firms themselves that have primary responsibility for ensuring they are acting in their customers’ best interests and behaving in a compliant way. They need to have the appropriate resources, controls and procedures in place. Innovation cannot be an excuse for lowering standards or for not focussing on consumer outcomes. However, it is also important that there is close monitoring and oversight of firms’ activities and that supervisory and enforcement actions are taken when necessary.

But how do we know if we are doing a good job or not? This is where FinCoNet can and does provide real ‘added value’. By sharing best practices and engaging with other authorities we can learn and develop. Helping supervisory authorities deal with the challenges posed by fintech will, in my view, be a priority for FinCoNet for a considerable time.

It is fair to say that much of our work may go unnoticed or not be recognised. We, as supervisory authorities, often intervene to prevent consumer detriment from happening; we can be prohibited from disclosing the firm-specific supervisory actions we take; and we may face criticism from the media, politicians or consumer advocates for the actions we take or for not acting sooner. We need to inform the public of our role, what we do and what we don’t do, in a way that helps them understand. We need to listen to our stakeholders and in particular, consumer groups to understand their issues and how we can best intervene. It is important that we are not only delivering for consumers but that we also have the trust and confidence of the public.

In conclusion, as we focus on our future priorities, it is important to remind ourselves of the critical role supervisory authorities play in protecting consumers, of consumers’ reliance on us and the onus that is placed on us to act effectively, in an open and transparent way and to strive for improvement. It has been a privilege for me to act as the first chair of FinCoNet which reflects the importance that the Central Bank of Ireland places on its consumer protection role and the need to deliver to the highest standards. The Central Bank will continue to support the work of FinCoNet as it grows and develops with the aim of helping its members as they strive to protect the interests of consumers.

ENDS