This article first appeared in The Irish Times on 17/11/2023.
The financial regulation team at business law firm Mason Hayes & Curran, who operate at the forefront of the evolving fintech scene in Ireland, talk through the industry insights they see as important to fast-scaling disruptive fintech.
Artificial intelligence (AI) is the hot topic of the moment, seeping into all sectors, and fintech is no different.
Its applications for fintech companies range from automating everyday tasks and enhancing the quality of service and customer experience, to identifying threats and preventing fraud by analysing suspicious transactions.
Sarah Cloonan, financial services partner at Mason Hayes & Curran, sees her fintech clients looking to use AI to create a seamless user experience: “Especially in the fintech space, the key thing is to make sure that consumers’ experience with a product is frictionless,” she notes.
“AI being interwoven into products will remove any perceived friction, and my clients see that as a competitive advantage in producing products that people actually want to use.”
The exponential spread of AI is leading to an understanding of it becoming as intrinsic to C-suite and board level as a knowledge of finance, according to Liam Flynn, head of the financial services sector team at Mason Hayes & Curran.
“The trend in European regulation in the AI space is that the board has to have ownership of the deployment of AI, and to have visibility on where AI is being used and how the data is being used, stored and processed.”
No firm that is looking at setting up a pan-European business in financial services nowadays is talking to just one jurisdiction
The EU continues to negotiate the forthcoming AI Act. In June of this year, 150 executives of companies ranging from Siemens to Heineken signed an open letter to the European Commission, the parliament and member states. In it, they urged that the regulations should not stifle competitiveness, stating: “In our assessment, the draft legislation would jeopardise Europe’s competitiveness and technological sovereignty without effectively tackling the challenges we are and will be facing.”
In many ways, the concerns voiced in that letter echo concerns that exist here in Ireland around our financial sector regulatory landscape.
While Ireland has built a strong reputation as a global technology hotspot with a strong fintech ecosystem – eight of the top ten global software companies have their European headquarters in Ireland; we are also home to more than 250 of the world’s leading financial services firms, and Enterprise Ireland currently supports over 200 Irish fintech companies – the strength and severity of our financial services regulation can deter some new entrants to the market.
The trend in European regulation in the AI space is that the board has to have ownership of the deployment of AI
Flynn points to the UK’s Edinburgh Reforms (a substantial set of tax and regulatory initiatives intended to advance the competitiveness of the UK financial services sector) as a positive model, that could be emulated here, “giving the regulator a mandate to take into account economic growth and development as part of the development of regulatory policies”.
He continues: “It’s not a regulator’s job to pick winners and losers. There is a risk that if you allow regulators to drive public policy in a particular industry there will be no evolution, there will be no innovation. And slowly it will consolidate down to a relatively small number of large operators, who are the ones that can afford the inflated cost of compliance. This is a big policy issue that Ireland needs to grapple with.”
Implementation proposals from the Central Bank on the new EU rules on Markets in Crypto-Assets (MiCA) is another area that the team hope to see moving at pace, in order to bolster Ireland’s competitiveness in the fintech area.
Rowena Fitzgerald, co-head of financial regulation, says: “That needs to be overlaid by the Central Bank’s rules and the authorisation process. We just don’t have that yet to allow firms to really get stuck in and prepare.
“Crypto is a global discussion at the moment. Europe is taking steps to regulate it with the MiCA regulation. The US is taking a different approach. Some would say they are trying to regulate it by enforcement rather than trying to regulate the space itself.
“When it comes to crypto, there isn’t a one-size-fits-all global solution, but then there isn’t a global solution for any financial service.”
Cloonan adds: “From a European context, and as a result, an Irish context, I think it’s important that we capitalise on where we are at the minute with MiCA coming down the line.” She sees the UK as “trying to market themselves as a crypto hub, but they are slightly behind us in terms of timelines and coming up with a framework”.
She adds: “We need to capitalise, at the European level, on the steps we’ve already taken with MiCA, and then from an Irish perspective, attract firms to Ireland to get their licence here so they can passport across the EU.”
However, although working from European regulations may give us a head start against the UK, it doesn’t give us any advantages when it comes to our better-prepared EU neighbours, some of whom are, according to Flynn, “positioned very aggressively in the fintech space”.
Especially in the fintech space, the key thing is to make sure that consumers’ experience with a product is frictionless
With clients making approaches to consider which domicile may suit them to set up in, Ireland is competing against other EU countries which have already published interpretations on the incoming MiCA regulations.
“In the absence of any ability to give a steer of the authorisation process and timeline … we can give them an educated guess, but that isn’t concrete enough for them. No firm that is looking at setting up a pan-European business in financial services nowadays is talking to just one jurisdiction,” warns Flynn.
He notes that there are typically six or seven other domiciles in the mix, from Luxembourg and the Netherlands to Malta and the Baltic states. “Ireland’s regulatory oversight of every type of financial institution is at a higher end of the European scale.”
While the Central Bank is playing an important role in protecting consumers, Flynn warns: “The flip side of that is if you raise the barriers to entry into the market too high, then you lose competition, and that doesn’t benefit consumers.
“If we want to lessen our dependence on the three pillar banks and introduce neobanks as competitors, we have to be a friendly jurisdiction for fintechs.”
For more information and expert advice, contact a member of our Fintech team.