knowledge 17 August 2023 |

Ireland: Trends and Developments in FinTech Growth

The FinTech sector in Ireland benefits from a skilled, highly educated, English-speaking talent pool with direct access to the EU labour market and EU regulatory passporting. As a result, Ireland hosts a number of FinTech hubs, including Aon’s Centre for Innovation and Analytics, Citi’s Innovation Lab, Bank of Ireland’s Innovation Lab, and Mastercard’s European Technology Hub. In addition, as part of the European Commission’s Digital Europe Programme, an AI Innovation Hub will be established in Ireland to act as a National First Stop for AI, providing expertise and guidance to enterprises on their AI adoption journey.

FinTech growth is facilitated by the Irish Government which has prioritised FinTech and digital finance in its ‘Ireland for Finance Action Plan 2023’¹. Key deliverables of the plan include:

• The establishment of a FinTech steering group which works with industry stakeholders to provide strategic guidance on FinTech from an expert industry perspective in order to inform the state on skills and education requirements. It also acts as a forum for the private and public sectors to engage on policy developments at a domestic and EU level.

• Participation in international FinTech events by Enterprise Ireland (EI), the government agency responsible for the development of Irish enterprises in world markets. EI will showcase Irish FinTech companies, support attendees and host networking events. In addition, EI will assist FinTech firms in scheduling relevant business-to-business meetings and itinerary generation, as well as market entry and market research consultancy to support international growth.

• The rolling-out of a new pre-seed funding offer for early stage FinTech innovators to undertake research and development and progress along their technology and international services roadmap.

The Role of the Regulator

Ireland benefits from a robust regulator, the Central Bank of Ireland (the Central Bank), which recognises the importance of FinTech in advancing financial inclusion, supporting better access to online services to give consumers more choice and enhancing the competitiveness of the European and Irish economy². The Central Bank operates within the European FinTech regulatory environment and values its role as a contributor to wider European initiatives. The Central Bank has emphasised the view that there is a need to avoid solutions or approaches that are focused solely within national boundaries³.

In 2018, the Central Bank established an Innovation Hub to provide a direct point of contact for FinTechs to facilitate access and engagement, and to allow the Central Bank to gather information on innovative products and services. A broad range of firms approach the Innovation Hub to discuss the regulatory framework, including firms at the stage of considering Ireland as a base for establishment and early stage start-ups engaged in mid to long-term forward planning. Since 2018, the Innovation Hub has engaged with more than 300 firms, with the majority of enquiries originating from firms in the payments and blockchain/crypto sectors⁴.

A number of recent trends and developments can be identified in Ireland which we have summarised in further detail below.

Crypto-assets

All virtual asset service providers (VASPs) established in Ireland are required to register with the Central Bank for anti-money laundering/countering the financing of terrorism (AML/CFT) purposes. The Central Bank does not supervise VASPs from a prudential or consumer protection perspective. However, in line with other EU jurisdictions, the Central Bank has warned consumers in respect of the risk of investing in crypto-assets.

In assessing a VASP registration application, the Central Bank conducts a review of a firm’s AML/CFT policies and procedures and a firm’s management and ownership structure. The Central Bank has stated that it expects the firm to have a physical presence located in Ireland and at least one employee in a senior management role to be located physically in Ireland. This employee is expected to act as the contact person for engagement with the Central Bank. A dedicated VASP section on the Central Bank’s website provides details of the VASP registration process, and the Central Bank offers prospective applicants an optional pre-application meeting.

In 2023, the registered VASPs in Ireland for AML/CFT purposes includes major operators in the sector Coinbase, Gemini, Kraken and Zodia Custody.

Payments and E-Money Sector

The payments and e-money sector forms the largest sub-sector of FinTech in Ireland and has grown substantially in recent years. The number of authorised firms in the payment and e-money sector has grown by circa 250 per cent since 2018, while users’ funds safeguarded have increased by over 700 per cent to €7.56bn by end September 2022⁵.

The Central Bank in January 2023 noted that in the preceding 12 months there was intense supervision of the sector, beyond what was expected. This was on the basis of significant deficiencies identified in the governance, risk management and control frameworks of some payment and e-money firms.

The Central Bank set out its supervisory findings and actions to be taken by firms under 5 five headings:

• Safeguarding of users’ funds;

• Governance, risk management, conduct and culture;

• Business model, strategy and financial resilience;

• Operational resilience and outsourcing; and

• AML and CFT.

In respect of safeguarding in particular, the Central Bank outlined there is a significant potential for consumer detriment if a firm has not adequately safeguarded users’ funds where required to do so. Inter alia other safeguarding measures, in 2023, the Central Bank requested all payment and e-money firms required to safeguard users’ funds to obtain a specific audit of their compliance with the safeguarding requirements under the European Communities (Electronic Money) Regulations 2011 and the European Union (Payment Services) Regulations 2018.

More generally, the Central Bank expects payment and e-money firms to take proactive measures to ensure robust and appropriate governance and control arrangements are in place, such that firms can grow safely and sustainably. Given that the January 2023 letter is the Central Bank’s second ‘Dear CEO’ letter to the payment and e-money sector in a relatively short space of time (the former dated December 2021), firms should continue to expect a high-level of regulatory engagement from the Central Bank.

Nonetheless, while the Central Bank takes a robust approach to ensuring that risks are managed and mitigated, they have emphasised their focus on striking a balance in order to allow the benefits of innovation and growth through the FinTech sector to be realised.

Individual Accountability Framework

The new Individual Accountability Framework (IAF) is intended to confer powers on the Central Bank to strengthen and enhance individual accountability in the management and operation of regulated financial service providers (each an RFSP).

Inter alia, the IAF is intended to impose obligations on RFSPs with respect to expected standards of conduct (Standards for Business); and expected standards of conduct for every person carrying on a Controlled Function role (Common Conduct Standards); and certain additional expected standards of conduct for so-called ‘persons in senior roles’ (Additional Conduct Standards).

Key themes arising across the various standards under the new regime are the obligations:

• to act honestly, ethically and with integrity;

• to act with due skill, care and diligence;

• to act in the best interest of the customer;

• to avoid conflicts of interest;

• to maintain and follow adequate controls and procedures;

• to engage with the regulator openly and in good faith; and

• disclose to the Central Bank any information of which the Central Bank would reasonably expect notice.

EU Legislative Developments

As an EU member state, EU legislation is implemented into Irish law and/or is directly applicable. The European Commission launched a Digital Finance Package in 2020, including a digital finance strategy and legislative proposals on crypto-assets and digital resilience, for a competitive EU financial sector that gives consumers access to innovative financial products, while ensuring consumer protection and financial stability.

The Markets in Crypto Assets Regulation (MiCA), which entered into force at the end of June 2023, will introduce a new regulatory framework for European crypto-assets, will come into effect between mid-2024 and early-2025. The Distributed Ledger Technology (DLT) Pilot Regime, which will allow operators of market infrastructure to test DLT in the issuance, trading and settlement of tokenised financial instruments, came into effect in March 2023. The Digital Operational Resilience Act (DORA), which sets out rules for financial institutions to follow for the protection, detection, containment, recovery and repair capabilities against ICT-related incidents, will come into effect in January 2025.

Gender Diversity

In 2023, the Central Bank released a report⁶ which presented data from 2022 on the gender diversity of applications for senior positions in regulated firms which require pre-approval from the Central Bank. The report showed mixed progress, although overall, the percentage of female applicants increased to 32 per cent, compared with 31 per cent in 2021 and 22 per cent in 2017.

Gender diversity in senior positions should hopefully continue to improve following the launch in 2022 of the ‘Women in Finance Charter’⁷, a collaboration between industry and Government under the Ireland for Finance strategy. Signatories of the Charter commit their organisations to improving the number of women in management and board level positions to achieve better gender balance and a more inclusive working environment. The senior management teams of signatory firms will be accountable for progressing the yearly targets.

Signatories will report current levels of female participation in their workforce, which will be broken down by seniority, in order to establish a baseline against which future progress will be measured. Each signatory will then provide targets to increase the number of women working throughout its business and publish progress it makes against these targets.

Future Trends

Following a challenging year globally in 2022 for FinTech, some key trends for 2023 may be as follows:

• AI – 2022 was a groundbreaking year for AI, with OpenAI’s ChatGPT taking the world by storm. In 2023, we expect to see AI technology begin to revolutionise the way financial institutions operate, such as through AI-powered financial planning and Chatbots.  On the regulatory side, the EU’s AI Act will introduce a risk-based framework for the governance of AI systems, with extra-territorial reach and significant sanctions. In parallel, the EU's AI Liability Directive will lay down uniform rules around civil liability for damage caused by AI systems. Both pieces of legislation are yet to be finalised, and it remains to be seen how they will operate in practice.

• DLT – With increased regulatory expectations for FinTechs managing operational and other risks arising from uses of DLT, we expect to see increasingly mature DLT financial market infrastructure. Furthermore, the EU DLT Pilot Regime will provide a sandbox for innovative DLT use cases, such as trading venues and securities settlement systems, allowing operators to experiment with DLT in issuance, trading and post-trade processes. Lastly, we expect to see DLT used in the context of sustainable finance, helping to develop a transparent and verifiable carbon credit market, by monitoring commitments to projects as well as broadening access to more investors through tokenisation.

• Metaverse – With a potential to generate up to $5 trillion in global market impact by 2030⁸, increasing regulatory attention is being directed towards the metaverse. The European Commission has launched an ‘Initiative on Virtual Worlds’⁹ in an attempt to provide some regulatory oversight, and while concrete legislative proposals have yet to be provided, it is clear that in launching this initiative, the EU are taking the lead globally in developing a regulatory framework for metaverses.

Also contributed to by Kieran Mulligan

*This article was first published by the IFC Review on 11 August 2023.