Home Policy & Governance Ireland’s central bank kicks off innovation consultation ahead of sandbox launch

Ireland’s central bank kicks off innovation consultation ahead of sandbox launch

Central Bank of Ireland governor Gabriel Makhlouf: launching the consultation at the ‘Financial System Conference’ at Dublin’s Aviva Stadium | Credit: Robbie Reynolds Photography

The Central Bank of Ireland has opened a consultation on ‘innovation engagement’ as it looks to enhance its existing Innovation Hub and launch a sandbox.

The Dublin-headquartered authority has this week published ‘Consultation Paper 156: Central Bank approach to innovation engagement in financial services’, which sets out how the authority is seeking ‘deeper engagement’ with fintech initiatives – a move described as ‘necessary to our public policy aims’.

The three-month consultation was launched by the European Union (EU) member state’s central bank’s governor, Gabriel Makhlouf, at a Central Bank of Ireland-hosted ‘Financial System Conference’ in the Irish capital (8 November).  

Makhlouf said that the “financial system has changed significantly in recent years bringing new entrants, new products and new ways of serving consumers and the economy” – changes that “provide many opportunities but, if not adequately managed, […] can also pose many risks.”

“Our engagement to date has helped us to develop our public policy aims, but in a changing financial system, we need to continuously assess and evolve our approach,” he told the audience at the Aviva Stadium. “The proposed innovation sandbox programme will engage innovators with relevant central bank experts. This will help firms to understand the potential regulatory implication of their innovations, while fostering innovation to meet the needs of households and businesses into the future.”

REGISTER NOW Global Government Fintech Lab 2024 will take place in Dublin on Thursday 25 April and is free to attend for all public servants

Innovation Hub improvements

The central bank has operated an Innovation Hub since April 2018, using it to engage with both established and smaller companies.

Its most recent annual Innovation Hub review document (a 12-page analysis of 2022) records that the Innovation Hub ‘engaged with 56 firms who innovate in financial services’ last year – a fall from 83 in 2021. Most were firms in the payments, blockchain and crypto sectors.

The 20-page consultation document states that feedback already received by the central bank has been that the ‘ecosystem would welcome an evolved engagement approach in line with the continued development of the innovation ecosystem’ and that ‘innovators have asked for greater structure in engagement with’ the Innovation Hub. ‘Feedback [is] that there is a lack of awareness of format/purpose of the Innovation Hub,’ it admits.

It mentions that the central bank is already ‘creating a structured engagement process for the Innovation Hub submissions’; ‘enhancing outreach and engagements with stakeholders to discuss learnings and trends, with an increased focus on regional engagements to support innovation across Ireland’; and ‘launching a Digital Centre for knowledge-sharing of dedicated content with all stakeholders in the innovation ecosystem’.

The consultation document provides four overarching motivations for the overall review, which are: ‘deepening understanding of innovation in the financial services sector [to] better understand the opportunities and risks for consumers and the economy’; ‘better inform[ing] our regulatory approach, allowing us to ensure that our regulation is aligned with a well-functioning financial system based on good levels of competition and innovation’; ‘better explain[ing] to innovative firms what being regulated entails – so firms can build regulatory requirements and safeguards into their early-stage development’; and ‘embed[ding] a regulatory culture in fledgling and fast-growing firms – to ensure they are properly prepared for the responsibilities that come as regulated firms, as well as properly run once authorised.’

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

Sandbox: industry should fund it

A growing number of financial authorities worldwide have launched sandboxes – controlled environments for firms to test innovative propositions – with 111 ‘regulatory sandboxes’ now in existence, according to the ‘Global Regulatory Innovation Dashboard’ (an interactive website launched by the Cambridge Centre for Alternative Finance earlier this year).

Central Bank of Ireland states in its consultation document that ‘there is a diverse range of sandbox features internationally’ and that it has ‘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.’

It proposes to establish an ‘innovation sandbox programme delivered in conjunction with a third-party innovation programme’; that the sandbox will take a thematic approach; will work via an annual ‘call for proposals’; operate on a cohort basis; and become operational in 2024. There will not be any digital testing of products with consumers.

It also proposes that the private sector will fund the sandbox – as well as the ‘enhanced’ Innovation Hub. ‘Since 2004, the total cost of financial regulation has been funded by a combination of regulatory levies and fees paid by the financial services industry and a subvention from the Central Bank (and ultimately the taxpayer),’ the consultation document explains. ‘In 2015, the Central Bank signalled our strategy to move towards full industry funding and in line with this continuing strategy, we propose that the cost of our enhanced approach to the Innovation Hub and the sandbox and associated supports will be funded by the industry.’

The central bank has set a deadline of 8 February 2024 for consultation respondents to tackle four questions, which include whether there are ‘specific themes or areas of innovation’ that the sandbox should address.

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

IMF paper’s caution on sandboxes

An analysis published by the International Monetary Fund (IMF) earlier this 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.

RELATED ARTICLE Co-ordinating collaboration: financial authorities lean into fintech – a write-up of a panel session at Global Government Fintech Lab 2023 (18 May) that featured the Central Bank of Ireland’s Denise Delaney

Innovation review well trailed

Central Bank of Ireland’s head of the policy and risk horizontal function, Denise Delaney, was among the speakers at Global Government Fintech Lab 2023 – hosted by Ireland’s Department of Finance in Dublin on 18 May – when she discussed the role played by the Innovation Hub. 

Delaney told the Lab audience that the Innovation Hub had engaged with 319 firms or innovators in total (by end-December 2022), with some being projects being beyond financial services (she referenced fashion and livestock projects ‘that thought non-fungible tokens might have been relevant’). This number has now risen to 375, according to the consultation document.

Ireland’s financial services ‘action plan’ for 2023, published by the Department of Finance in March, had already stated that the central bank was to undertake a ‘detailed review’ of the Innovation Hub ‘including peer comparisons, to expand its impact and functionality’. The action plan followed the release six months previously of an updated ‘Ireland for Finance’ strategy that referred to a ‘plan to consult on proposed enhancements to [the] Innovation Hub in 2023 with any changes to be implemented over the course of the current central bank strategic cycle: 2022-2026’.

Speaking at the Global Government Fintech Lab 2023, Delaney described innovation as ‘relevant across the entire organisation’, which has about 2,100 staff. The central bank has a ‘leadership-level’ innovation steering group and an (internal) fintech network, consisting of a ‘very large’ group of subject-matter experts spanning the ‘vast majority’ of the authority’s functions, she said, explaining that this ‘helps us to share skills, knowledge, experience, case studies, but it’s also a support to our Innovation Hub.’

Gavin Curran, head of Central Bank of Ireland’s markets supervision division, was also a speaker at the Global Government Fintech Lab 2023. He joined a panel addressing the topic of How can financial authorities capitalise on data to improve what they do?’.

RELATED ARTICLE Irish financial services ‘action plan’ sets out fintech priorities – our news story (28 March 2023) on six priorities for fintech and digital finance included in the financial services ‘action plan’ for 2023

Sandbox in demand

The updated ‘Ireland for Finance’ strategy is a whole-of-government strategy charting the development of international financial services to the end of 2026.

It ceded greater prominence to fintech and digital finance, as well as to sustainable finance, than the strategy’s first iteration. This was published in 2019 (and due to run until 2025).

‘In the past year, fintech and digital finance have continued to grow in importance in Ireland and are becoming a strong driver of growth in employment,’ the updated action plan’s ‘fintech and digital finance’ section noted.

The action plan also mentioned the exploration of the creation of a sandbox. ‘A number of industry representative associations have recommended in submissions for both this Action Plan and for the Update to Ireland for Finance strategy that a regulatory sandbox be considered by the Central Bank of Ireland,’ the document stated. ‘This is in keeping with the engagement with the Retail Banking Review [whose report was published in November 2022], which reported that participants in the public consultation in the review expressed the view that fintech providers and other firms could benefit by an expansion of the Central Bank of Ireland’s Innovation Hub to include a regulatory sandbox.’

The action plan stated that ‘consideration will be given to the types and benefits of sandboxes adopted in other countries’ (a form of words also used in the Retail Banking Review).

GLOBAL GOVERNMENT FINTECH LAB 2024: REGISTER NOW

The Global Government Fintech Lab 2024 will be taking place in Dublin on Thursday 25 April. The Lab, our one-day event for senior public servants, is being organised in partnership with Ireland’s Department of Finance. The event is free to attend for all public servants.

 

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Ian is editor of Global Government Fintech and also writes for media including City AM and #DisruptionBanking. He is former UK director for the pan-European media network Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in Bulgaria at English-language weekly the Sofia Echo.