Thanks NewsTalk for radio interview this morning on Brexit & "Regulatory Arbitrage" and the fintech opportunities for Ireland. LISTEN TO AUDIO HERE

Background to this piece, thanks to Donal O'Donovan, is Irish and international media over the past few weeks reporting claims that Ireland is becoming a victim of 'regulatory arbitrage' and 'dangerous competition' for 'Brexit Spoils'.  The Irish Minister for State (Financial Services), Eoghan Murphy has been moved to raise concerns with Valdis Dombrovskis, the EU financial services commissioner.  Murphy informed Reuters that “We are hearing from various sources that companies are being offered certain incentives, that they are offering a back door to the single market, without the requirement to have capital to back up their entities in the European Union.”   In a sign that there may be more to come, the Financial Times reported that "against the background of the risk to stability in the European financial system. The heads of Esma and EIOPA, two key EU financial regulatory agencies, are believed to have raised similar concerns [to those of Eoghan Murphy] in recent days." [source FT, 14/03/2017 - Irish complain about rivals in Brexit race for London’s business].  

This post is also carried at LinkedIN - https://www.linkedin.com/hp/update/6249557917670862848 

PDF format here  

Conor McMahon, Reporter at Fora talks to Peter Oakes, Founder of Fintech Ireland about how automated financial advice is expected to shake up the wealth management sector

SO-CALLED ‘ROBO-ADVISORS’ already manage billions of dollars in the US, but they have yet to make their way to these shores.

Traditional wealth management has been largely untouched by the march of digital on this side of the Atlantic, and the sector is still overwhelmingly burdened by paper and admin work.

But not for much longer. Automated financial advice is already making waves in the UK, and Ireland could see a surge of robo-advice firms setting up shop in a bid to access investors in Europe.

Fora spoke to fintech expert Peter Oakes, founder of Fintech Ireland and a former director at the Central Bank, to get the lowdown on what exactly robo-advisors do and how they might shake things up in 2017.

What are robo-advisors?

Robo-advisors are basically online money managers or “investment intermediaries”, Oakes says. They offer financial advice based on an algorithm.

Users supply them with financial and personal information that they use to make recommendations on where to invest. In a nutshell, they offer low-cost financial advice.

“We all know that the biggest expense of a portfolio is all the administration,” Oakes explains. ”The thinking behind a robo-advisor is that there must be a large portion of people out there that actually just need very simple advice.”

Independent financial advisors take a big bite out of returns on investments in fees. Robo-advisors basically do away with that money trail.

What kind of advice do they give?

The user fills out an online form and the robo-advisor firm feeds that data into their technology. The robot uses that information to create an automated series of investment recommendations based on the user’s appetite for risk.

For instance, somebody close to retirement would be categorised as having a low-risk appetite, Oakes explains.

Based on the details furnished to the robo-advisor, it would most likely recommend that a user invests in money markets and avoids property ”because you really want your funds to be liquid because you’re coming up close to retirement. The same should apply in the case of equities, as there is greater risk there – and that’s want you probably wish to avoid when you are about to get the golden watch.”

Will they do away with humans?

The answer is no, but they still pose a potential threat to traditional wealth management firms and financial advisors.

Much like any industry that robotics and automation have affected – car manufacturing, media, customer service to name but a few – the humans won’t be completely wiped out, but their functions change.

“There still will always be a need for a human intervention from time to time,” Oakes says.

“Because it’s a regulated service, you’ll still have human interaction, especially if you’re lodging a complaint – maybe (the robo-advisor) has moved your money into the wrong fund even though you have proof of confirmation.”

It’s worth noting that the some users might be nervous about a complete lack of face-to-face interaction. A wholly automated experience might spook them from putting their trust in an algorithm.

“It may just be that the robo-advisor actually just gives advice and then leaves it to the individual to execute how they get that investment exposure,” Oakes suggests.

The benefits

The pros of robo-advisors outweigh the cons – on paper at least.

“If you look at your investment portfolio and you have a pension fund for example, even when you’re returning 5% a year, after the financial advisor starts taking out charges at the current rate, you’re probably only getting a 1.5% return on your money,” Oakes says.

“This is an opportunity to increase that 1.5% to maybe 3%, so you’re doubling your return.”


Who will they appeal to?

Oakes thinks robo-advisors will be targeted at people who are already involved in passive investments, like exchange-traded funds (ETFs), as these kinds of investment porfolios are easier for individuals to invest in without the need for financial advisors.

A robo-advisor would suit those types of investments because an algorithm can easily identify trends.

“There are tracker funds out there and they’re doing very well,” Oakes says. “You could set up a robo-advisor that predominantly puts people into tracker funds or recommends tracker funds.”

Robo-advisors will also appeal to anyone who is used to doing their banking online.

When will they come to Ireland?

It’s hard to say for certain, but robo-advisors are tipped to enter the market in 2017.

One of the possible motivations for coming to Ireland is access to the European Union’s investment management licence, MiFID, short for the Markets in Financial Instruments Directive. It’s the regulatory licence that non-banks use for investment management services. 

A robo-advisor firm that wants access to EU member-state markets might look to set up shop here and avail of the MiFID directive.

“If you were an Irish investment adviser or wealth manager, there are threats and opportunities here – in equal amounts,” Oakes says.

What does it mean for the heavyweights?

A recent PwC report suggested that traditional wealth fund managers are asleep at the wheel when it comes to robo-advisors.

It described the global wealth management industry as “one of the least tech-literate sectors of the financial services industry” and warned that it was falling behind non-financial services industry.

“Client expectations is sharply at odds with what’s currently being provided,” it said.

According to the report, what is currently on offer in the wealth-management industry is sharply at odds with what their clients, high net worth individuals (HNWIs), expect.

In her commentary on the report, PwC’s Olwyn Alexander said that the “sector is now acutely vulnerable to digital innovation from fin-tech newcomers, including robo-advice services” – and that firms that didn’t respond wouldn’t survive in the medium- to long-term.

Evaluating Ireland as the overseas location for your Fintech business
Peter O'Halloran, Fintech Ireland Collaborator, @p_ohalloran 

Choosing a location of strategic importance, whether a headquarters or a regional office for your Fintech business is a fundamental decision and must be taken with the benefit of real insight.  There are a number of requirements which are of key importance to consider.  These include the availability of a skilled workforce, market access, a stable regulatory environment and a functioning ecosystem.

Ireland's ability to meet these requirements is underpinned by membership of the European Union, the Central Bank Reform Act of 2010 (which created a new single body called the Central Bank of Ireland responsible for both central banking and financial regulation) and by the scale of indigenous success which is evidenced in the Fintech 20 Ireland longlist (1).

It is therefore extremely encouraging for a Fintech business in start-up or expansion phase to find a country which has these fundamentals in place and in addition has a political administration with a stated objective to actively lead growth in that industry.  In March 2015, the Irish Government released a strategy for Ireland’s International Financial Services sector for 2015 to 2020, IFS2020.  The vision outlined in IFS2020 is for "Ireland to be the recognised global location of choice for specialist international financial services, building on our strengths in talent, technology, innovation and excellent client service, while focussing on capturing new opportunities in a changing marketplace and embracing the highest standards of governance" (2).  5 strategic priorities are set out in IFS2020 and one of these focuses on Fintech and is as follows: "Drive Research, Innovation & Entrepreneurship in the IFS sector, with a particular focus on financial technology & governance, risk & compliance".   Furthermore, there is real activity in this space in Ireland, with $631 million invested in Fintech in 2015 which represented 22% of the $2.897 billion investment in Fintech across Europe in 2015(3).  

How we can help
At Fintech Ireland our objective is to advance Ireland's unique ability and leverage its capacity, to become and remain a global centre for Fintech and we can help you make an informed decision by bringing the ecosystem to life.  We host seminars where we invite members of the Irish Fintech ecosystem to share their experiences and learnings with you at DogPatch Labs, Ireland's leading co-working space for scaling technology start-ups and the incubator for the Enterprise Ireland Fintech fund.  Through this collaborative interaction, with oversight from the Fintech Ireland team, companies gain a real understanding of how the ecosystem works and gather invaluable network contacts which can be drawn upon into the future.  Fintech Ireland can guide you (free of charge) in reaching your decision and help maximise your potential for long-term success.  How you decide execute is up to you - i.e. whether you do the leg work yourself or need a professional adviser.  If the latter, we know a lot of good people locally.

Multinational Fintech presence in Ireland
Some leading multinational corporations have established Fintech Innovation labs in Ireland in recent years such as Accenture, Citibank, Liberty, MasterCard and Zurich.  There are also numerous global Fintech companies who have established and strengthened their presence in Ireland over the past few years such as Elavon, First Data, Global Payments, PayPal, Stripe, Vesta and YapStone.  This is a clear indication that the ecosystem is functioning and that the talent pool and business environment are conducive to success.

Indigenous Fintech success in Ireland
There are numerous successful Fintech companies which were founded in Ireland and have remained indigenous.  A selection of these include Currency Fair, Ding, Fexco, Fineos, Orca Money and Sysnet Global Solutions.  These companies have all scaled globally whilst continuing to invest in research and development in Ireland.  

Access to investment
The availability of investment for Fintech in Ireland is growing.  In Ireland, there are no Venture Capital firms that focus exclusively on Fintech but there are quite a number which invest in in the space and this is set to grow given the success of companies in the sector and the overall investment in Fintech in Ireland.  A selection of Venture Capital firms in Ireland which focus on Fintech Investment include ACT Venture Capital Limited, Atlantic Bridge, Enterprise Equity Venture Capital, Frontline Ventures, MML Growth Capital, NDRC and Pentech Ventures.  In May 2016, Enterprise Ireland announced a €500,000 fund for Fintech Start-ups. Successful applicants can be awarded up to €50,000 each in equity support and will also get membership to Dogpatch Labs in the International Financial Services Centre (IFSC) and access to the Ulster Bank Innovation Solutions team and industry  masterclasses.  The fund which was setup as a result of IFS2020 was launched by the Minister for Jobs, Enterprise and Innovation Mary Mitchell O’Connor who commented that “Ireland is recognised as a key hub for Fintech innovation and this new fund will make a real contribution to supporting more start-ups and ultimately more jobs in Ireland”.

Reference
Fintech Ireland has held a number of these events in the past and one of the participants, Credit Agricole, kindly provided a reference: "Back to France, after a great stay in Dublin, full of amazing meetings, I would like to thank you for the nice moment you gave to the Credit Agricole delegation.  The participants mentioned the interest in your speeches and the passion transmitted.  You contributed to the success and satisfaction of this learning expedition", Sylvain Potier, Chargé D’Affaires, Banking, Scoop. [NB: Neither Peter Oakes, Peter O'Halloran, Fintech Ireland nor any fintech company we showcased at the Credit Agricole event  received any fee or other consideration for our work on the day!] 

Find out more
To understand what Fintech Ireland can do for your business, please visit www.fintechireland.com  and get in touch.  Sign-up to the free Newsletter at http://www.fintechireland.com/get-involved.html 

(1). Irishtechnews.net - Fintech 20 Ireland
(2). IFS2020 - A strategy for Ireland's International Financial Services Sector 2015-2020.
(3). Accenture.com - Global Fintech Investment Growth Continues in 2016 Driven by Europe and Asia.

Get in contact with the author here Peter O'Halloran, Fintech Ireland Collaborator, @p_ohalloran  

Thanks to John Gilligan and Joe Singer of NovitasFTCL for sharing with Fintech Ireland this research on Growth, Profits and Valuations of Fintech Companies with us.  

By analysing the historical financial performance of 819 fintech companies, the research provides guidance to owners and managers of Fintech companies on their relative performance, enabling them to see how others in the sector are doing in terms of growth and profitability

It examines the relationship between financial performance and valuations by considering the correlations:

• between share price movement and underlying performance for public companies,
• between the valuations achieved for private companies and their underlying performance prior to exit  
  

Complimentary copies of the research can be downloaded from www.novitasftcl.com

I think that the research will be well received by owners and managers of, and investors in, Fintech companies on their relative performance, enabling them to see how others in the sector are doing in terms of growth and profitability.  It should also prove useful to regulators trying to understand the burgeoning fintech industry.  The Report covers 22 topics, see below:

• Private Fintech Financial Overview
• Private Fintech by Company Age
• The Performance Of Publicly Listed Fintech
• The Performance Of Public Vs Private Fintech: Revenue Growth
• The Performance Of Public Vs Private Fintech: Profitability
• What about the Performance of Individual Companies?
• Software Including Banking & Liquidity, Capital Markets And Wealth & FundsTech
• Data & Analytics
• Payments: Including Cross Border Payments
• Services & Other: Including BPO & Consultancy
• Does Performance Vary By Company Size?
• Does Performance Vary By Company Age?
• And What About By Ownership?
• Growth of Small Fintech
• Individual Performance Of Small Fintech Vs Established Fintech
• Individual Performance Of Small Fintech
• Individual Performance Of Small Fintech By Ownership
• How is New Fintech Doing
• Individual Performance Of Small Fintech Vs Established Fintech Vs New Fintech
• Correlation Between Growth In EBITDA And Share Price is strong
• Financial Performance Drives Valuation Multiples
• Performance Of Acquired Private Fintech

Complimentary copies of the research can be downloaded from www.novitasftcl.com

 NovitasFTCL - has been advising the shareholders of European financial technology companies for over a decade and we hope you will find the information in our research interesting and informative.  NovatisFTCL is Authorised and Regulated by the Financial Conduct Authority.

Yesterday (13 September), the Central Bank issued through its Policy & Risk Directorate, a Cross Industry Guidance in respect of Information Technology and Cybersecurity Risks.  

The Directorate falls under the leadership of Gerry Cross.  A short video about the Central Bank’s thinking on the topic was released in conjunction with the Guidance – see You Tube channel. While its great to see the Central Bank embrace the use of social media, it seems to have a long way to go to have this recognised - at the end of the day on 14 September there had been only 131 views of the video.  That is quite remarkable given that the Central Bank regulates about 10,000 financial service providers and funds in Ireland and protects directly and indirectly a population of 4.8million. 

The Central Bank’s concerns are being driven by the potential impact of inadequate cybersecurity controls on the firms themselves, their customers and the risks for financial stability.

Given that Information technology is now at the heart of the supply of financial services and that the incidence of cyber-attacks and business interruptions is on the increase, the Central Bank is saying that firms should assume that they will be successfully targeted. Its view is that the security and resilience of IT systems, their governance and management must improve to reflect this reality.


Summary of Central Bank inspection findings:

• Alignment between firms’ IT strategy and the overall business strategy is weak. IT capabilities are not matched to the business ambitions.
  
• Firms are not taking a holistic view of IT risks across the business, which results in poor identification, monitoring and mitigation of IT risks.
  
• Shortcomings in IT risk assessment and identification with many firms not maintaining comprehensive IT risk registers and risk identification being backward rather than forward looking.
  
• Older technology supporting key business operations and requiring significant resources and/or investment to manage associated risks.
  
• Non-existent or inadequate data classification frameworks and policies.
  
• Staff not sufficiently trained on cybersecurity risks.
  
• Ineffective firewall management/inadequate intrusion detection processes with weak IT security monitoring.
  
• Deficiencies in governance of IT related outsourcing including a lack of thorough due diligence on prospective service providers, poorly documented/constructed outsourcing agreements and inadequate monitoring of service delivery.
  
• Inadequate and untested disaster recovery and business continuity plans.
  

Expectations of the Regulator

The Central Bank expects that:

• Boards and Senior Management of regulated firms fully recognise their responsibilities for these issues and put them among their top priorities.
• Firms must robustly address key issues such as alignment of IT and business strategy, outsourcing risk, change management, cybersecurity, incident response, disaster recovery and business continuity. 
• Firms make sure that they understand these risks and that they are managed effectively. 
  

The Central Bank's supervisory engagement will reflect the new Guidance when it assess firms.

Director of Policy & Risk, Gerry Cross, said: “Developments in technology have fundamentally changed business processes and models in financial firms.  These advancements have resulted in benefits for firms and their customers.  However, they also bring significant risks as firms become increasingly interconnected and more reliant on complex IT systems, including outsourcing service providers.”  

“The Central Bank is demanding increased effectiveness in this area.  We are undertaking considerable work to require improved IT risk management and cyber resilience across regulated firms. This includes enhanced supervisory capabilities and increased focus on these risk areas."

So what’s in the Guidance? 

Here’s the table of contents:

• Executive Summary
  
• Purpose
  
• Background
  
• Supervisory Issues Identified To Date.
  
• Next Steps.
  

1. GOVERNANCE

• Board of Directors and Senior Management Oversight of IT and Cybersecurity Risks 
  
• IT Specific Governance.

2. RISK MANAGEMENT 

• IT Risk Management Framework 
  
• IT Disaster Recovery and Business Continuity Planning 
  
• IT Change Management
  

3. CYBERSECURITY

4. OUTSOURCING OF IT SYSTEMS AND SERVICES 

• Appendix 1: Glossary 
• Appendix 2: Key International Guidance for Firms
  

If you need to know more or wish to discuss, please contact Peter Oakes at [email protected] / +353872731434.  Peter Oakes is a board director of regulated firms which too must implement this Guidance, he is a former Director of Enforcement at the Central Bank and works across cross-industry in financial services in London and Dublin.