Rapid Technology Developments and Conduct Risk – What does the Future look like through the Regulator’s Eyes.’’ - Director General Derville Rowland

24 October 2018 Speech

Derville Rowland

Speaking at the European Insurance Forum, Trinity College Dublin

Good Afternoon Ladies and Gentlemen.

I am pleased to be with you at the European Insurance Forum. I will talk to you first of all about the opportunities and risks posed to consumers by technological developments, our regulatory approach to conduct and consumer protection risk in a rapidly changing environment and new Central Bank proposals to drive conduct standards and enhance individual accountability.

It is almost 40 years since Bank of Ireland introduced the first ATM with the promise that it would allow bank customers to do many of the basic daily banking transactions both during and outside banking hours.

But if we thought back in 1980 that the ATM would change the face of financial services, it pales in to insignificance when compared with what has happened since.

We have already seen that widespread internet, smartphone and tablet use has changed how people manage their finances - with many now choosing to bank, invest and insure through digital channels rather than engaging with a branch.

Many of us have already embraced digital innovation. We open a bank account over the internet, without physically visiting a bank. We link to the account on our smartphone and use it to monitor our transactions. We turn our smartphones into a “digital wallet” and use it to pay for things using money in our account.

We buy “telematics-based” insurance where our driving is monitored using data collected via our smartphone or a “black box” fitted in our car. This data can then be used to determine how much we pay for our insurance policy.

But that was just the beginning.

The Fourth Industrial Revolution is bringing intelligent robots, self-driving cars and a range of new technologies that are fusing the physical, digital and biological worlds.1

The Central Bank is aware that firms in the banking, payments, insurance and investment sectors are examining the potential use of innovative technologies - including artificial intelligence and machine learning, blockchain, biometrics, robotics and even virtual and augmented reality.2

Firms now gather vast volumes of data about consumers who leave an information trail behind them when they go online. Firms can then use that data to target products and services more effectively. The use of data analytics is already apparent in the advertising of products and services to consumers in Ireland. Data analytics enables firms to target ads more effectively, particularly on social media platforms. More profoundly, the use of a consumers’ “pattern of life” data has the potential to drive the development of personalised financial products and services. This includes, for example, using consumer data to assess a consumer’s creditworthiness or suitability for a range of products from mortgages to motor or health insurance.

You only have to look around you to see how rapidly change is happening as traditional underwriters and technology ‘start-ups’ seek to combine the regulatory and underwriting expertise of incumbent insurers with the innovative solutions provided by technology companies. Often the tech firm provides a digital platform such as a website or app that allows consumers to access a traditional insurance product. In other cases, technological solutions are applied to other parts of the insurance value chain such as claims.

Just last month, for example, US insurer John Hancock said that in future all of its life insurance policies would come with a digital fitness tracking technology that incentivises healthier choices linked to physical activity and nutrition.3 The move came after the US insurer said it had found that users of the technology lived longer and generated lower hospitalisation costs than the rest of the population. UK operator Revolut has developed an innovative travel insurance offering. When the customer’s phone containing the Revolut app is activated in a foreign country, the user is prompted to activate a per-day travel insurance product.

Consumers will likely welcome many of these developments. Just as we embraced the ATM back in 1980, many will see that the new technology brings benefits including speed and convenience, greater choice in products and services, cheaper deals and more personalised products.

The late Professor Stephen Hawking once said: “Our future is a race between the growing power of technology and the wisdom with which we use it.’’4

Indeed, some worry that the future will not necessarily be a consumer utopia. Already, there are concerns that firms are using personal data to charge customers a loyalty penalty for failing to shop around; there are concerns that airlines are using algorithims to separate family groups if they refuse to pay for allocated 5 and there are concerns that technological advances potentially challenge the fundamental idea of insurance provision itself, i.e. the pooling of risk, as underwriting becomes more and more personalised through the use of data.6

As the nature of insurance business changes due to technological innovation, regulators also need to adapt their resources and activities to ensure that they understand these new developments and are in a position to regulate them in line with their respective mandates. In that regard, we have taken practical steps to ensure we are keeping pace with technological development in FinTech.

Individual divisions across the Central Bank have a long history of engaging with innovative firms to understand new technologies, new business models, and the potential risks that these present to consumers.

As the impact of new technologies continued to increase, we sought to enhance and coordinate this engagement in a more pro-active way. The result is the Central Bank of Ireland’s Innovation Hub, which enables innovative firms to contact the Central Bank with questions on navigating the Irish regulatory landscape, and enhances our sight of where financial services are headed.

We are connected in to European and international work on digitalisation, Fintech and InsurTech developments. For example, in the European Insurance and Occupational Pensions Authority (EIOPA) and elsewhere we look at the benefits and risks of digitalisation, impediments to innovation and the use of Big Data by insurers and intermediaries. EIOPA has incorporated InsurTech into its on-going priorities in order to assess the impact that digitalisation is having on both consumers and industry, with a view to identifying supervisory approaches that allow innovation to flourish and consumers to benefit while remaining protected.

The Central Bank’s mandate is the proper and effective regulation of financial services providers and markets, while ensuring that the best interests of consumers of financial services are protected. We seek to achieve a trustworthy and resilient financial services system that sustainably serves the needs of the wider economy and its customers, where regulated firms and individuals adhere to a culture of fairness and high standards. From the perspective of conduct regulation, we want to make sure that consumers and investors are, and continue to be, protected irrespective of the technology they are using to engage with regulated firms. This means that the same principles of regulation, including the rules of the Consumer Protection Code, apply equally to both digital and traditional delivery channels.

Every year our Consumer Protection Division carries out a review of the risks facing consumers which informs our regulatory and supervisory focus. This includes both traditional and digital channels. While there are certainly cases where digitalisation has the possibility of conferring great benefits, we need to monitor certain risks including that digitalisation may lead to the exclusion of certain groups of customers – such as the elderly, the visually impaired and rural consumers without access to robust broadband. It is within the gift of firms to mitigate these risks. Of course, there are risks too when firms don’t keep up with technology developments - including the risk posed by legacy IT systems in the form of errors and outage.

Both traditional and digital sales channels can contain risk for consumers and both need to be managed. Algorithims and robo-advice need to conform to the regulatory framework in the same way that is required of traditional channels so that customers interests are best served. To address any conduct risk, robo-advice must have responsible oversight. Separately, firms must manage the risk that increased volume of transactions taking place online creates - like vulnerability to cyber-attacks and the theft of personally and commercially sensitive information.

But the greatest risk to consumers comes not from technological developments, but from the people in charge of the technology. If you put new technology in the hands of people and firms who have the best interests of customers at heart, it is far more likely to result in positive consumer outcomes.

And that is where culture comes in. It is hard to define culture, but you can think of it as a system of shared values and norms that shape behaviours and mindsets within an institution - the unwritten rules or “the way things are done around here.’’7 At the Central Bank, we believe that the absence of a consumer-focused culture presents the greatest risk to achieving positive outcomes for consumers - irrespective of the channel through which the consumer engages with the firm.

From a regulatory and supervisory perspective, there has been an increased focus on conduct and consumer risk since the onset of the financial crisis. However, the principle of acting in the best interests of your customers has consistently been at the heart of the Central Bank’s consumer protection codes since 2006.

Consumers need help and protection when making financial decisions. They must be able to trust that you, as the professionals who design and sell insurance products, will have their best interests at heart. This requires your firm to understand the drivers of consumer risk throughout your entire relationship with your consumers and to have in place a framework to formally manage those risks.

Insurance products are not visible in the way that other physical consumer goods are. Because consumers cannot see or touch the product they are purchasing, it is difficult for them to understand whether it meets their needs now and in the future. Any flaw may not surface for a number of years. This makes it all the more important that the professionals who do understand and sell the products, ensure that they meet consumers’ needs and expectations.

Last year, we published a detailed guide to our Consumer Protection Risk Assessment model (CPRA) which sets out our expectations of firms.8 We have made it very clear that we will be assessing how a firm designs and assesses the suitability of the products, services and distribution channels it offers to consumers. We will also be focusing on the extent to which a firm ensures that consumers understand the product they are offered, that it meets their needs and that it is sold in the right way. Crucially, we will also focus on how firms design and review their complaints procedures.

Last year also, we published a discussion paper on the Consumer Protection Code in light of the digitalisation of financial services. We will be taking account of the feedback we have received on this paper when we update the Code again next year.9

But we are already very clear that we are technology neutral. By that I mean that we expect customers to be protected to the same high standard whether they are buying insurance from Alexa in the cloud or from Seán on the high street.
Internationally, it is recognised that culture must be continually addressed and monitored at a senior level within firms. Regulators and policy setters have therefore focused increasingly on individual responsibility and accountability, particularly at senior management level. Some of you will be aware that the Central Bank published a review10 in to the Behaviour and Culture of the Irish retail banks earlier this year following the tracker mortgage controversy.

In that report we recommended to government an Individual Accountability Framework, similar to the Senior Managers Regime in the UK. For the avoidance of doubt, let me be very clear that we are recommending that these proposals would apply, beyond banks, to certain insurance undertakings and investments firms – those which represent a higher risk from a prudential and/or conduct perspective.

We are also proposing Conduct Standards, which set out the behaviour the Central Bank expects of firms and the people working in them. In the case of individuals working in regulated financial services providers, we are proposing that they would be required to:

  • Act honestly, ethically and with integrity;
  • Act with due skill, care and diligence;
  • Be open and cooperative with the Central Bank and other regulators and deal
    with them in good faith;
  • Act in the best interests of customers and treat them fairly and professionally;
  • Observe proper standards of market conduct.

Additional standards would be imposed on individuals at a senior management/executive level recognising the additional responsibilities which fall to them.

The increased focus we are now placing on people, conduct and culture is particularly apt in the context of rapid technology developments. For depending on whose hands it is in, technology can be used for the benefit or the detriment of consumers and investors. I would like to think that the people in this room today will use the amazing array of technology now at their disposal to nudge consumers to make the right choices.

Thank you.


[1] https://www.weforum.org/about/the-fourth-industrial-revolution-by-klaus-schwab

[2] https://www.centralbank.ie/docs/default-source/publications/discussion-papers/discussion-paper-7/discussion-paper-7-digitalisation-and-consumer-protection-code.pdf?sfvrsn=0

[3] https://www.prnewswire.com/news-releases/john-hancock-leaves-traditional-life-insurance-model-behind-to-incentivize-longer-healthier-lives-300715351.html

[4] https://www.newsweek.com/stephen-hawking-warns-artificial-intelligence-could-end-humanity-332082

[5] https://www.ft.com/content/5dbd98ca-c491-11e8-bc21-54264d1c4647

[6] https://www.theguardian.com/commentisfree/2018/sep/27/the-guardian-view-on-big-data-and-insurance-knowing-too-much

[7] https://www.apra.gov.au/sites/default/files/CBA-Prudential-Inquiry_Final-Report_30042018.pdf

[8] https://www.centralbank.ie/docs/default-source/regulation/consumer-protection/compliance-monitoring/reviews-and-research/a-guide-to-consumer-protection-risk-assessment.pdf?sfvrsn=4

[9] https://www.centralbank.ie/docs/default-source/publications/discussion-papers/discussion-paper-7/discussion-paper-7-digitalisation-and-consumer-protection-code.pdf?sfvrsn=0

[10] https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-banks.pdf?sfvrsn=2