March 2019

In the last five years, Ireland has transformed from a centre of financial services outsourcing to one of innovation. flow’s Janet Du Chenne reports from the Financial Times’ European Financial Forum on how the country has embraced technological disruption and regulation has shifted from being domicile-driven to becoming more data-driven

On January, 22, 1922, following the Irish War of Independence the Viceroy of Ireland handed Dublin Castle, formerly the seat of British Rule to the government of the newly independent Irish state. Nearly 100 years later, in February 2019, the Castle fittingly hosted the FT’s European Financial Forum to hear how the country is again reinventing itself, this time amidst regulatory and technological change and its erstwhile governor’s imminent break-away from the European Union. 

That reinvention happened a decade ago when, as a domicile for 5.5% of worldwide investment fund assets, over 40 fund administrators, 20 depositories, as well as legal and specialist advisory firms Ireland began to attract a different breed of service provider: companies with new technologies and talented individuals who could analyse data on those assets. Over the last 10 years, they have inserted themselves into the financial ecosystem to add even more value.

Today, in addition to the 40,000 people within financial services in Ireland, a further 100,000-plus work within technology 1 , making it an established financial services centre for data analytics and technology. Providers such as Deutsche Bank have already seen the benefits of insourcing these new technologies and data scientists in its data lab. “We have really pivoted away from being just a home to outsourcing to a place where, because of these developments in technology, data and talent, we’re investing a lot in these areas. Our bank footprint is now very international and it’s about being much smarter about what we do here. We’ve gone from outsourcing to outsmarting,” shared Fiona Gallagher, country head of Deutsche Bank Ireland and head of the bank’s Securities Services business. Speaking on an asset administration panel, Gallagher shared how providers of these services were evolving via a skilled workforce and a growing Fintech hub.

Image of Kevin Byrneр
Left to right: Kevin Byrne (Millennium Management); Sean Páircéir (BBH); Fiona Gallagher (Deutsche Bank) and Arthur Beesley (Financial Times)

Ireland’s got talent

These providers are benefitting from Ireland’s strong domestic talent pool and an increasingly growing international one: more than 535,000 non-Irish nationals live in Ireland, with persons born abroad accounting for just over 17% of the country’s population, according to the Irish Development Agency (IDA) Ireland. Ireland also has one of the most educated workforces in the world. The share of 30-34 year olds in Ireland with a third level qualification is 53.5%, compared to an EU average of 40%. Dublin is home to three internationally-ranked universities – Trinity College Dublin, University College Dublin and Dublin City University – and a number of tech institutes including the Dublin institute of technology 2 . Many of them have recruitment schemes with city companies. And with ongoing initiatives to attract even more talent, a further 8,000 IT jobs in Ireland are forecast to open each year 3.

Growing technology hub

In addition to attracting the best talent, the government is also keen to assert itself as a globally-oriented Fintech hub. In doing so it has created a €500 m Disruptive Technologies Innovation Fund for investment in the research, development and deployment of disruptive technologies, and an IFS 2020 FinTech Working Group which is working on the FinTech strategy. According to the IDA, approximately 8,800 people were employed in FinTech in Ireland at the end of 2015, a rise of 7 per cent on a year before and 40% up on 2008. In addition, nine of the 10 top global software companies and the likes of Google, LinkedIn, Facebook and Twitter have their European headquarters in Ireland. Companies benefit from the 12.5% corporate tax rate and R&D tax credit at 25% for all qualifying R&D activity.   

These two themes have enabled service providers such as Deutsche Bank to transform what they can do to meet changing client demand for more actionable insights from data. “Whether its global custodians or the asset managers, everybody is asking for data, not just what the data is but can they get it more quickly, can it be informative and how can we improve manual processes, not just by using AI but by taking a step back to look at the process first,” said Gallagher. “Everyone is looking for more information, more quickly and trying to match their financial lives to their normal lives with the apps they use.”

Doing more with data

The interplay of talent, technology and regulation is also enabling Deutsche Bank to enhance what it can do with data in terms of intraday liquidity reporting and predictive fails in securities settlement. As an example, settlement efficiency will continue to be a key focus area for data analytics to assist in understanding the impact of the penalty regime of the Central Securities Depositary Regulation (CSDR). Under the penalty regime, failing transactions in the market will be subject to fines and a mandatory buy-in introduced after a trade has failed for four days. Working with the Data Labs in Dublin, the bank’s securities services business can provide data insights into patterns in pending or failed transactions, enabling clients to identify the key drivers behind failures and directly address the root cause, avoiding the potential penalty impact. Another example is using the data to provide intraday liquidity insights at the client level to prove to the regulator they have the required sources of liquidity and capital reserves in the event of a crisis.
Outsourcing vs outsmarting
Collaboration in action: Data scientists in Deutsche Bank’s Analytics Centre of Excellence in Dublin visualise what they can do with data

This interplay has also changed the value that asset managers can provide to their investors. Kevin Byrne, CFO at hedge fund manager Millennium Management explained that with 50% of the company’s 3000 employees focused on technology and research, “in many ways hedge funds are becoming technology companies with some managers added due to the importance of data management, technology and speed,” he opined during the panel. Together with the pragmatic common law framework, which is based on UK law’s flexible approach to new business, and the availability of talented data scientists, a strong fund administration base has been built in Ireland. And with an EU passport for funds distribution, there is an opportunity to do even more in future. “There’s a huge opportunity for those in administration to take on more functions in a post Brexit world - not just administrative functions but management functions,” Byrne predicted. “Because of the ecosystem outlined around custody there are huge opportunities to climb the value chain.”

From disruptors to inserters

To this end, Sean Páircéir, Global Head of Investor Services, Brown Brothers Harriman (BBH), commented on the value of FinTechs in bringing in more new funds into the regulated investment world. With the service expertise in Ireland currently available it’s about taking an unregulated investment process with a complex algorithm into a regulated entity. This is the external expertise that Ireland can provide, along with the correct regulatory infrastructure and the competence of counterparties who clients want to deal with. With the speed of new technologies FinTechs can facilitate more of those introductions.  “Many times we talk about disruptors - I often think disruptors are inserters - they are creating participation in the regulated part of the banking and investment world”,” he said. “Together with a common law approach, which has a favourable approach to new business, those are problems that can be solved in a jurisdiction like Ireland.”

Lessons from Brexit

Panellists debated the opportunities that might follow Brexit with a handful of multinational companies having already moved their European headquarters from London to Dublin. Byrne noted that while the Irish regulator, the Central Bank, “is in favour of building the right type of scale” there would be a danger if banks suddenly decamped from London to Dublin post Brexit resulting in an even bigger ecosystem that would be a struggle to regulate. “Everyone likes to see a strong regulator and thinking ahead, when the UK Financial Conduct Authority (FCA) is no longer around the ESMA table there is an opportunity for Ireland to fill some of that void that the FCA leaves behind. I think there is an opportunity for Ireland to learn from the UK’s shadow. A lot of the regulation in Ireland is FCA based and a lot of the financial services regulation in Europe is also FCA based so I think aligned with what the government does around the tax and the talent pool, that is very good for our position.”

An understanding of the complex distribution models should also stand Ireland in good stead in a post Brexit context, asserted Páircéir. Preserving that capability and the interplay of public policy, legislation and then action is hugely important in a common low jurisdiction, he said 4 . “What we’ve dealt with is the pragmatic reality of the infrastructure that we have put in place here,” he said. “We have an extraordinary ecosystem in the Irish market place and that needs to consistently build in links into the European framework. The UK has been an extraordinary proxy for us in the European Union in terms of implementing the regulation that supports independent business.”

Where distribution and technology meet

For administrators in Ireland, the development of that expertise and how they take advantage of the adjacent nature of technological innovation that’s in place is where it’s interesting, said Páircéir. “What we have now is domain expertise and the concept in the FinTech space of how to apply those technologies capably within a one-year time frame to investment processes. Some of these technologies are being applied within the banks and within the innovation labs that are being set up here. This is because they have an understanding of a more complex distribution channel and more complicated operational process. It allows people so solve for that complexities differently and understand the interplay of an appropriate regulatory model to think about how we deliver those services more capably.”

Live projects

To aid this innovation, the Central Bank of Ireland has spearheaded a number of initiatives to integrate technology into financial services. One of them is the regulatory sandbox, a controlled environment in which FinTechs are permitted to live test innovations. Launched in April last year, the sandbox accepted applications including in areas covering blockchain based payment services, RegTech propositions, general insurance, AML controls, biometric digital ID and Know Your Customer (KYC) verification 5. The industry has welcomed this initiative, with Páircéir expecting it to reduce the enormous amount of redundant work custodians do on KYC/AML if the industry is ready to work on digital identify and the type of algorithms that would be acceptable to clients in terms of the complex holding of assets, finality of settlement and crypto coin. “There is a lot of interesting value do be had if we have the operating capacity here to do that,” he said.

As a sub-custodian service provider to BBH, Deutsche Bank sees FinTechs sitting side by side these service providers to improve operational processes for those clients. “Rather than seeing them as competitors it’s about utilising them and bring the data analysts across,” said Gallagher. “When I look at the projects we are running here, whether its KYC, or whether its liquidity or treasury management that will give the financial system here in Ireland a very positive future, building on the experience that Sean has highlighted”.

The next opportunity

With technology summarised by panellists as the next big opportunity in asset administration, the challenge will be how institutions manage and mine data in an effective way and put strategies in place that are effective for investors. “The companies that can solve that will be the winners in the future,” said Byrne. Gallagher added that with many global roles moving into Ireland due to Brexit that broke the link to global roles being in global hubs. Now, having strengthened its position, service providers here need to be data mastered. “That is what we need to strive for – from the sub-custodian to the custodian to the client, I’ve got to make sure the data that is going in is polished and we can actually look for analysis and trends. It’s about shifting from global centres and what we can derivate from technology.”

 

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1 www.fsi.ie
2 www.idaireland.com
3 dbei.gov.ie
4 Law of the Republic of Ireland
5 financefeeds.com

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