Home Policy & Governance Irish central bank preps sandbox launch after ‘broadly positive’ feedback

Irish central bank preps sandbox launch after ‘broadly positive’ feedback

Central Bank of Ireland: has opted against using a third party to operate the sandbox - which will launch later this year - after industry concerns | Credit: Central Bank of Ireland

The Central Bank of Ireland has announced how its proposed ‘innovation sandbox programme’ will operate after ‘broadly positive’ feedback in a consultation that attracted responses from 27 organisations.

The Dublin-headquartered authority opened a three-month consultation in November 2023 on ‘innovation engagement’ as it looks to launch a sandbox – a controlled environment for firms to test innovative propositions – and improve its existing Innovation Hub. Its call-for-feedback set out how the central bank wants ‘deeper engagement’ with fintech initiatives – a move described as ‘necessary to our public policy aims’.

It has now (4 June) published its reaction to the responses, including a ‘feedback statement’ covering its approach to engagement with financial services innovation more broadly, stating that it has ‘carefully considered’ suggestions and ‘has made some adjustments where appropriate’. Among the changes is that the sandbox will be managed in-house instead of ‘delivered in conjunction with a third-party innovation programme’, as had been proposed.

Most elements proposed in the initial consultation, however, remain on track, including that the sandbox will take a thematic approach; work via an annual ‘call for proposals’; operate on a cohort basis; and become operational in 2024.

The Central Bank of Ireland states it will issue a call for potential participants in the sandbox between July and September, with the first sandbox cohort starting between October and December. It plans to undertake further ‘broad engagement with the innovation ecosystem‘ as it prepares to launch the sandbox and ‘develop appropriate theme(s).’

RELATED ARTICLE Ireland’s central bank kicks off innovation consultation ahead of sandbox launch – a news article (9 November 2023) on the opening of the consultation

Sandbox to be managed in-house

A growing number of financial authorities have launched sandboxes, with 111 ‘regulatory sandboxes’ in existence worldwide, according to the ‘Global Regulatory Innovation Dashboard’ (an interactive website rub by the Cambridge Centre for Alternative Finance).

Central Bank of Ireland stated in its consultation document that ‘there is a diverse range of sandbox features internationally’ and that it had ‘identified a range of best practices from existing sandbox models that we believe will deliver effectively within our mandate, will support our regulatory and supervisory objectives and will address the feedback we have received from our stakeholders.’

The Central Bank of Ireland originally suggested thatthird-party innovation support may be required to support the innovation sandbox programme and provide participants with access to funding and business model expertise in addition to access to physical space.’

But it states this week that it had observed ‘mixed views’ on this approach. ‘In addition, respondents did not call this out as a key enabler of the innovation sandbox programme,’ it continues. ‘Some respondents were not in favour of having a third party involved, as it would potentially reduce the attractiveness or intent of the programme. Their concerns focused around potential conflicts of interest, significant lead times and risks to the confidentiality of the engagement.’

As a result, the central bank states that it will ‘manage the innovation sandbox programme in-house to ensure there are no conflicts of interest or confidentiality issues’; and that the central bank will handle ‘programme management and participant engagement throughout the duration of the programme’. It does, however, ‘remain open to work with innovation facilities across the central bank innovation agenda and in support of the innovation ecosystem for all programmes and projects operated in the innovation sandbox programme.’

RELATED ARTICLE Ireland hosts public sector fintech pioneers in Dublin for third ‘Lab’ – an on-the-day event summary of Global Government Fintech Lab 2024 (held in Dublin on 25 April)

First theme: to be decided

The 25-page feedback statement summarises responses to four questions, as well as addressing additional comments received and setting out what it terms ‘final enhancements’ to its engagement models. The 27 consultation responses came from 12 industry groups and professional bodies; 10 individual companies; two innovation facilitators; two consumer advocacy/civil society groups; and one academic institution (Global Government Fintech lists the 27 respondents at the end of this article).

In addition to shelving the proposal for an external party to manage the sandbox, the central bank states that it has also increased the proposed duration of sandbox participation to a minimum six months. The consultation document did not state a specific duration – merely that ‘successful applicants will be brought through a specific programme over a pre-defined period of time’.

Many respondents suggested an ‘always open’ approach. But the central bank states that its ‘engagement with peers globally would highlight that the most efficient and effective use of resources and minimisation of costs, while still supporting innovation across the ecosystem, is to provide the innovation sandbox programme via a programmatic approach.’

The main themes proposed for the sandbox were: artificial intelligence (AI) and its application in financial services; climate/sustainable finance; financial crime including areas such as cyber-security, fraud and identity; open finance; distributed-ledger technology (DLT) including blockchain; and financial inclusion.

The central bank states that the first theme will be chosen ‘to ensure outcome(s) that inform our policy work (and other work as relevant) and future approach to the area of innovation and/or solutions that support our public policy mandate’. It explains that the chosen theme ‘will be cognisant of’: ‘ensuring clarity of outcomes for applicants in the programme and the central bank resulting in benefits for consumers and the financial system’; ‘ensuring both the need and demand from the innovation ecosystem to deliver for the selected theme in the innovation sandbox programme’; and ‘added value to participants through the operating model’.

RELATED ARTICLE Evolving engagement: governments forge new frontiers with fintech – a write-up of from the opening panel session of the Global Government Fintech Lab 2024 featuring representatives from Ireland, Austria and Slovenia

IMF: sandboxes could ‘amplify problems’

An analysis published by the International Monetary Fund (IMF) last year urged authorities to think carefully about whether devoting resources to new mechanisms such as sandboxes to help with private-sector engagement is worthwhile, stating that for most authorities existing structures will likely do a better job.

‘There are several ways to strengthen surveillance and respond to the challenges of fintech,’ noted the 58-page ‘Institutional Arrangements for Fintech Regulation: Supervisory Monitoring’ analysis. ‘For most authorities, existing supervisory structures will allow them to effectively monitor new fintech developments and respond to challenges. Using existing resources and infrastructure can allow authorities to monitor new fintech developments and identify risks while saving cost and time on the design and implementation of new structures.’

‘Sandboxes may not be the most effective way for many authorities to monitor fintech developments because they are resource-intensive and costly, and engagement extends to a relatively smaller number of firms over a longer period,’ the report concluded. It went on to add that ‘sandboxes are not a sensible fix to underlying problems with supervisory structures and could amplify existing problems as well as allow authorities to carry out risk-washing’.

The paper also included a typology of sandboxes, specifying six types: product-testing sandboxes; policy sandboxes; digital sandboxes; thematic sandboxes; cross-sector sandboxes; and cross-border sandboxes.

At the Global Government Fintech Lab 2024 event, held in Dublin on 25 April, Fintech Ireland founder Peter Oakes (speaking on the opening panel) was cautiously positive about the Central Bank of Ireland’s decision to create a sandbox. ‘It depends on what the sandbox is going to do, how it’s going to be measured and how transparent it will be with its findings,’ Oakes told the audience. ‘I do think that, overall, if there’s a budget and resources, it should be created. But I think those who run sandboxes need to prepare [their expectations] that they may not be inundated from day one with applications.’

RELATED ARTICLE Sandboxes could ‘amplify problems’: IMF analysis questions many test-spaces’ impact – a news story (11 September 2023) based on an IMF paper titled ‘Institutional Arrangements for Fintech Regulation: Supervisory Monitoring’ (see below)

Feedback specifics

Among the comments to the consultation, the company Squareup referenced the IMF paper, stating that the central bank should be wary to ‘avoid duplication of efforts already covered by existing structures’. The company was among those advising against the central bank using an external party to run the sandbox. 

The submission from Ireland-headquartered fintech company Fexco opined that the ‘lean design for the sandbox is appropriate because the costs are borne by existing regulated firms, and good innovation supports tend to incorporate lean, flexible structures.’

Reitigh Software was positive about the thematic approach. ‘But it is important that the approach allows for a multiple themes in a given 12-month period,’ stated the Dublin-based firm. ‘Also it is very important that the datasets/inputs and outcomes are easily accessible by all companies – not just those who participated in a given “cohort”.’

The respondent from the Financial Services Innovation Centre (FSIC) at University College Cork (UCC) wrote that they were ‘a little suspect [on] how the cohort model will work – topic selection, size of cohort, how often cohorts are scheduled, whether cohorts will run on demand, the staffing to support specialist cohorts’, adding that ‘expectations from industry and others could be hard to satisfy’.

Napier Technology, meanwhile, was of the view that ‘considering public sector-led innovations is likely to accelerate the achievement of the central bank’s objectives’.

RELATED ARTICLE UK’s FCA engages fintech company to run permanent digital sandbox – a news story (28 April 2023) about the UK’s Financial Conduct Authority (FCA) handing a three-year contract to a London-based company (NayaOne) to run its digital sandbox as it moved the test-space onto a permanent footing

Innovation Hub improvements

Separately to the sandbox announcement, the Central Bank of Ireland also published an ‘Innovation Hub Update for 2023’.

The central bank has operated an Innovation Hub since April 2018, using it to engage with both established and smaller companies. But it has acknowledged last year that ‘feedback [is] that there is a lack of awareness of format/purpose of the Innovation Hub.’

Its 2022 review recorded that the Innovation Hub ‘engaged with 56 firms who innovate in financial services’ during the year – a fall from 83 firms in 2021. Last year, however, the number rose to 66, showing an increase in engagement from ‘small early start-up innovators’, according to the newly published annual (2023) review. In line with previous years, enquiries from firms in the crypto and blockchain sector were the largest sector for enquiries.

The 13-page document (for 2023) states that the central bank will ‘continue to enhance’ the Innovation Hub ‘to facilitate deeper engagement with the innovation ecosystem’.

It states that, in March, it launched a ‘new application form to engage with the Innovation Hub to ensure a more structured and productive engagement for both innovators and for the central bank; in April, launched new Innovation Hub content on its webpage; and has ‘updated our approach to engagement with the Innovation Hub, including timelines, so that innovators are clear in advance on what to expect from the Innovation Hub’.

RELATED ARTICLE ‘Your entire organisation needs to be an “innovation lab”’: Australia central bank data chief – a write-up of a panel session at the European Central Bank-organised ‘Supervision Innovators Conference 2023’ on 20 September

ECB-bound Donnery: ‘transformation’ ambition

Central Bank of Ireland deputy governor for financial regulation, Sharon Donnery, said in the announcement that the authorities’ launch of the sandbox and Innovation Hub improvements were part of the its strategy to “transform its approach” to regulation and supervision.

“They will help foster innovation in financial services, supporting better outcomes consistent with our public policy objectives. And they will help firms to build safeguards into their early-stage development, embedding a regulatory culture to ensure they are properly prepared for the responsibilities that come as regulated firms,” she said.

She was speaking a day before it was announced (5 June) that she would be leaving the Central Bank of Ireland later this year after accepting a senior role at the European Central Bank (ECB).

The ECB’s Governing Council has appointed Donnery as one of three new representatives to the Supervisory Board of ECB Banking Supervision, each for a five-year non-renewable term. She currently serves as the Central Bank of Ireland’s representative on the ECB’s Supervisory Board. The Supervisory Board is chaired by Claudia Buch. 

Donnery will remain at the Central Bank of Ireland until ‘late 2024’ before starting her new role at the Frankfurt-headquartered authority.

Central Bank of Ireland consultation: who responded?
* Bank of Ireland
* Blockchain Ireland
* Credit Union Development Association
* Credit Union Managers Association
* Dogpatch Labs
* E-Money Association
* Fenergo
* Fexco
* Fintech and Payments Association
* Financial Services Ireland
* Financial Services Innovation Centre UCC (University College Cork)
* Irish Funds
* Insurance Ireland
* Instech
* Irish Fund Directors Association
* Irish League of Credit Unions
* Irish Life
* Kayna Innovation
* Napier Technology
* Revolut
* Reitigh Software
* Stripe
* South East Financial Services Cluster
* Seeblocks
* Squareup
* Safeguarding Ireland
* ‘The People and their Banking Industry’

The 27 entities/organisations above, which are listed alphabetically, responded to the Central Bank of Ireland’s ‘Consultation Paper 156: Central Bank approach to innovation engagement in financial services’