Hubs and spokes: remarks on innovation and outsourcing - Gerry Cross, Director of Policy and Risk

Remarks at Industry event: Authorisations & Consumer Protection

Welcome

Good morning, ladies and gentlemen. It is a pleasure to welcome you to the Central Bank for our first Innovation Hub event. We are happy to see so many of you here early Monday morning, representing such a wide variety of FinTech stakeholders. It confirms to us, if confirmation were needed, the level of demand for this type of event and for engagement with the Central Bank on innovation and technology matters.

I would like to start today by discussing the thinking behind our events programme, and our perspective on engagement more generally. After which I will briefly update on our forthcoming outsourcing report.

The Central Bank’s approach to engagement on innovation

The Central Bank of Ireland launched its FinTech and innovation engagement initiative earlier this year. A key feature of this initiative is the Central Bank’s Innovation Hub. As well as ongoing engagement with individual stakeholders, we have developed an events programme to provide for enhanced opportunities for, and modes of engagement with, innovators and stakeholders. These will allow us to address matters of general interest that we are seeing arise through the Innovation Hub and elsewhere.

We established the Innovation Hub to achieve a number of objectives in line with our mandate to safeguard financial stability and regulate financial firms so that they are well run, financially sound and acting in the best interests of their customers. Our approach to innovation and technological development is always firmly embedded in this mandate to ensure a well-regulated financial sector contributing to a well-functioning, sustainable economy.

The Innovation Hub enables entities engaged in innovation to contact the Central Bank with questions on navigating the Irish regulatory landscape. At the same time, it provides us with the opportunity to become better sighted on relevant technological developments and innovations. Something that is important for any regulator looking to tomorrow and not just today. It is important that we know how the firms we regulate are changing so that our regulation and supervision is able to respond accordingly.

Over these past initial few months, we are very pleased to find that the Innovation Hub is already operating as intended. We have seen a steady flow of enquiries from and engagements with a significant number of entities involved with innovation and technology. This is good success in itself. It also provides a strong platform to build on as we go forward.

The Central Bank’s engagement with innovation, of course, pre-dates the establishment of the Innovation Hub. Many functions across the Central Bank have long been engaging with innovating entities to understand well new technologies and new ways in which financial services are being designed, developed and delivered. However, as the impact of new technologies becomes more pervasive and the appetite for engagement with the Central Bank stronger, we are seeking to further enhance and coordinate this engagement.

By providing an easily accessible, transparent, clear point of contact for stakeholders and innovators, the Innovation Hub gives those stakeholders and innovators a means to engage with us in an easy-to-use, and informal manner, and it gives us a more complete view of how innovation is unfolding and likely to impact financial services and our role and responsibilities. We want to be talking to innovators, hearing their perspective and seeing where new ideas and technologies are taking us.

The Innovation Hub is supported by an internal FinTech Network drawing on expertise from over 20 different divisions across the Central Bank. This ensures that we bring the right resources to bear, and helps us to effectively disseminate relevant intelligence across the organisation.

Innovation has the capacity to bring many benefits for consumers, the economy and society in general. And it is essential to the effective functioning of a competitive economy. And here is where a challenge lies for financial regulators. As I have said before, but I think it is worth saying again: innovation is good, but not all innovations are good, and not all good innovations are done well. So for regulators the challenge is to facilitate good innovation, to seek to prevent or limit innovations that are detrimental to the goal of well functioning financial services and markets, and to ensure that the associated risks are well-managed. Again, our role here is driven by our mandates of financial stability, well run, sound financial firms, and consumer protection.

One of the benefits of the Innovation Hub is that we are able to look across our engagements to date and start to identify trends and common issues. For example, payments and RegTech businesses account for the largest number of engagements with the Innovation Hub. This is consistent with our research into the Irish FinTech landscape back in 2017. We are also seeing engagement with firms across financial services, including InsurTech firms, funds service providers, and intermediary platforms.

Another initial observation is that we are seeing less engagement through the Innovation Hub from incumbent firms. Here, I would like to reiterate that the Innovation Hub is not just a resource for start-ups, but is open to all firms innovating in financial services.

Among the FinTech firms engaging with the Innovation Hub, we are starting to see a loose distinction between earlier stage firms with broad questions about the regulatory landscape, and more developed firms with more focused, practical questions. Both are appropriate and welcome.

In addition to individual firms and other stakeholders, we see the value in engaging with the industry more broadly. Hence the start of our events programme today. This gives us an opportunity to share experiences and perspectives with, as well as hear questions and feedback from, a wider audience of stakeholders.

Within the European Union, the three European Supervisory Authorities (ESAs) are currently reviewing the different approaches taken in the EU with respect to facilitating innovation. The goal being to facilitate innovation without sacrificing a level playing field both between incumbents and new entrants, and between individual Member States. The question being how best to do this. The Central Bank of Ireland has been, and continues to be active in this work. 

For the Central Bank, our perspective and the approach we have adopted has been informed by our engagements with a wide variety of stakeholders. It has been driven by a view to enhancing the manner of fulfilment of our mandates as discussed above. What we learned is that the real value—and where we can achieve the most—is in being open and accessible and providing a straightforward and easy-to-use way for people to engage with us. It is in engaging, listening, and answering questions. That is what we learned and what we continue to hear. The Innovation Hub, and now this the start of our events programme, have been enabling this engagement in a very open and impactful way.

Finally on this point, let me mention that your feedback as users of the Innovation Hub and as innovators and facilitators generally, is very important to us. While ensuring that we obtain feedback from users is in itself one of the working features of the Innovation Hub and our approach, we welcome and indeed want to receive feedback from all interested parties. So please let us know what you think.

Outsourcing

Now, I would like to turn briefly to a topic which is very relevant both to innovation and to the ever deepening and changing role of information technology in financial services provision. That is the topic of outsourcing.

Outsourcing of activities is a significant and increasing feature of the financial services landscape. Allowing for economies of scale and centres of excellence to be harnessed, it can bring many efficiencies and deliver benefits to customers. As such it can add real value to how firms run their business and to the functioning of the financial sector in support of the economy. However it also introduces complexities, challenges and risks. And these, if not very well managed, can not only eliminate the benefits, they can result in outcomes that from the overall perspective are negative. Put frankly, outsourcing that is not well managed, can result in more harm than good.

With that in mind, over the past year, at the Central Bank we have been undertaking a project to consider the outsourcing landscape across the broad range of financial sectors in Ireland including Asset Management, Banking, Insurance and Payment Institutions and to review our supervisory experience in this regard. The resulting report, setting out the Central Bank’s main findings and further issues arising in the context of this review, will be published in the coming weeks.

Here is not the place to get into this work in great detail but let me call out a few key points. First of all, it is a clear finding of this work, that the area of outsourcing is one where in general terms there are significant weaknesses to be found. The quality of governance, oversight and risk management of outsourcing has not kept pace with the expanding significance of the practice. In the report we will discuss some of the key areas of weakness - governance, risk management, and business continuity - and we remind firms of our minimum expectations in respect of these crucial aspects.

Secondly, the report will consider some of the evolving trends and key developments that are currently underway in the area of outsourcing together with their associated risks. This includes the area of cloud outsourcing and some of the key risks to which this gives rise - risks related to the secure and proper management at all times of sensitive data, risks around the potential for concentration in a limited number of service providers, risks associated with significant distance outsourcing etc. In respect of this broad topic of current developments, the report sets out the thinking of the Central Bank while also seeking further input from stakeholders so that our collective understanding of the risks and how they should be regulated and managed can be enhanced.

Conclusion

I will conclude here. As a final thought, I would like to reiterate that this is our first Innovation Hub event. We are looking to host a variety of FinTech and innovation events going forward, with different formats and covering different topics. And we will continue to draw on all of our engagements to identify ideas for future events. In that vein, we are happy to hear your feedback as to what type of events would be of value.

Thanks to Scott Hanson for his contribution to this speech.