Digital Finance in Europe – CBI views on technological innovation and digital finance
In a recent address on Digital Finance in Europe, the Director of Financial Regulation, Policy and Risk at the Central Bank of Ireland (CBI), Gerry Cross, shared some of the CBI's thinking on the current and timely topic of technological innovation and digital finance.
Director Cross was speaking to the Department of Finance and the Directorate-General for Financial Stability, Financial Services and Capital Markets Union, at a virtual outreach event relating to the European Commission’s consultation on digital finance in the context of the Commission’s current EU digital finance consultation.
The address was delivered on 14 May 2020.
Recent CBI measures
Director Cross briefly mentioned some of the range of relevant measures recently taken by the CBI in this area, including:
- the establishment in 2018 of an Innovation Hub for engagement with Fintech companies
- the creation of internal structures such an Innovation Steering Group and a FinTech network
- the CBI's significant engagement in the relevant work of the European Supervisory Authorities (ESAs) and the Single Supervisory Mechanism (SSM) particularly, in the context of the European Commission’s FinTech Action Plan
FinTech and technological innovation: CBI priority issues
The Director of Financial Regulation, Policy and Risk then continued to set out some of the priority issues that the CBI sees in the area of FinTech and technological innovation:
1. Promotion and protection of consumer interests
This includes the delivery of enhanced outcomes for consumers. Technology has the potential to both significantly improve, but also to materially diminish, how firms engage with and treat their customers. The Commission’s new Digital Strategy / Fintech Action plan should seek to drive forward the realisation of the positive aspects while reducing the room for negative dynamics. The aim must be to see technological development increasingly harnessed to benefit consumers’ including in their engagement with financial services providers, while ensuring that aspects such as the speed, penetration and power of analysis that go with such developments are not deployed to the disadvantage of consumers.
2. Fight against money laundering and terrorist financing (AML/FT)
While innovation and advances in digital finance opens opportunities for new products, services and ways of interacting with consumers and the market and for enhancing the fight against financial crime, it also has potential for additional ML / TF risks.
Firms must ensure that:
- they effectively mitigate any increased ML/TF risks inherent in innovative products/services prior to launching them
- before adopting any innovative compliance systems or products, they have been rigorously tested and are fit for purpose in this regard
The new EU Digital Strategy / Fintech Action plan should seek to ensure that technological innovation considers ML/TF risks at a design stage, so that effective AML/FT mitigants can be built into technologically innovative products, services, or compliance systems prior to their launch.
3. Challenges to the regulatory perimeter
Technology advances are resulting in material changes to business models, applications, processes and products. There is rapid evolution which impacts what the financial services market and its participants will look like in the future. In this context, an important challenge for regulators is the maintenance and surveillance of the regulatory perimeter, so that the protections of financial regulation are not eroded by new ways of doing things.
In the CBI's response to the recent European Commission consultation on crypto assets, the CBI considered both the question of the regulatory perimeter and the specific question of so-called stablecoins:
- the CBI suggested that there would be benefits in a harmonised taxonomy of crypto assets – so that security tokens are consistently regulated, while allowing genuine utility tokens to remain outside the perimeter
- the CBI made clear its view that the issuing of currency should firmly remain under the remit of the relevant public authorities (i.e. central bank). Where the reach and other features of so called stablecoins issued by private actors risk their being perceived as currency, or operating as quasi-currency, then they should be prohibited.
4. New types of participants
It will be important to pay attention to the role of new types of participants in the Financial System. On the one hand, ensuring that disruption can operate effectively and safely (from a systemic point of view) is important from the overall functioning of the financial system. Here, giving real effect to technological neutrality – both in principle and in practice - is very important.
5. Increased participation of large global non-financial participants in the financial sector
Where this is currently manifesting most is in the area of cloud outsourcing. This should be an ongoing focus of attention and consideration, from both a benefits and risks perspective. It is something that the CBI has been recently considering, including in its November 2019 Discussion Paper on Outsourcing.
6. Big Data Analytics
The area of Analytics Technologies and Big Data Analytics (BDA) are enabling new ecosystems and serving as a foundational technology for AI. Such advances can bring significant benefits to assessment processes such as for creditworthiness and underwriting, pricing processes and fraud detection.
There are however implications for consumers as BDA and telemetry techniques have the potential to:
- impact financial inclusion
- contribute to increased information asymmetries
- support unfair or undesirable pricing practices
The CBI is currently conducting a review of differential pricing in the personal motor and home insurance industries, to assess the extent to which these pricing practices lead to outcomes that are consistent with the Consumer Protection Code 2012. The CBI's consumer code requires that firms act honestly, fairly and professionally in the best interests of their customers and make full disclosure of all relevant material information. The CBI's review will look to establish the facts around the use of Big Data in differential pricing and will result in a report or consultation on proposals for reform, if appropriate. The CBI's interim report on this work is due at the end of year 2020 with the full report due for completion in H1 2021.
Heightened Information and Communications Technology (ICT) security issues
The Director of Financial Regulation, Policy and Risk noted the CBI is looking forward to the Digital Finance Strategy supporting progress in this area. At the same time, he noted the increased embedding of technology in financial services presents heightened Information and Communications Technology (ICT) security issues, with the potential for significantly increased impact from the crystallisation of ICT risks. The Director stressed, as the Commission’s recent consultation paper on operational resilience recognises, that it is of the utmost importance that the increased digitalisation of financial services is accompanied by concomitant enhancement in risk management and resilience.
Massive technological innovation – key to coping with and emerging from current crisis
The Director concluded by stating that it is clear that the massive technological innovation that has taken place over recent years has been, and continues to be, central to our ability to cope with and ultimately to emerge from the current COVID-19 crisis. "As we look to the future, technological innovation in financial services will remain more important and consequential than ever. The European Commission’s consultation provides a good opportunity to consider the path ahead which will allow us to manage the risks, meet the challenges and realise the benefits of that ongoing rapid innovation".
Director Cross's recent speech on digital finance aligns very closely with the CBI's Enforcement and Supervision Priorities for 2020: in particular, the focus on Consumer Protection and the emphasis on:
- supervising how firms manage technological risks
- the use of technology and the information imbalance between consumers and firms
- the issue of AML
Please see our recent articles on (i) the CBI's priorities for 2020 here and (ii) differential pricing in the insurance sector here.
For more information, please contact Elizabeth White, Knowledge Lawyer – Finance or Sinéad Prunty, Knowledge Lawyer – Financial Regulation, or any member of the A&L Goodbody Finance or Financial Regulation teams.
Date published: 27 May 2020