On 29 February 2024, Mary-Elizabeth McMunn, Director of Banking, Payments and Credit Union Supervision at the Central Bank of Ireland ("Central Bank") delivered a speech at the Payments and Electronic Money Institutions event hosted by the Central Bank. We set out below a brief note on the contents of this speech.
Ms McMunn opened the speech with reference to the January letter Governor Makhlouf addressed to the Minister of Finance setting out the Central Bank's regulatory and supervisory priorities for 2024 and the newly published Regulatory & Supervisory Outlook report setting out the Central Bank's perspective on key trends and risks that are shaping the financial sector operating landscape. Ms McMunn confirmed that the Central Bank's "overarching supervisory objective is to ensure that we have a stable, resilient and trustworthy financial sector operating sustainably … in the best interests of consumers and the wider economy."
Ms McMunn's speech highlighted that the Payment and Electronic Money ("PEM") sector is of increasing importance in Ireland and Europe, noting material levels of growth both in terms of the numbers of firms operating in the sector and their activity levels. Specifically, the number of PEM firms regulated by the Central Bank has tripled in the last 6 years (to 51 authorised firms as at end of December 2023). Further, there has been a significant increase in safeguarded funds within the sector, rising to approximately €8 billion over the same period. Ms McMunn observed that there is a strong pipeline of applicant firms seeking authorisation with the Central Bank.
Ms McMunn emphasised the importance of evolving regulation and supervision in response to technological innovation and noted the need for firms to balance the potential benefits of innovation with effective risk management. Ms McMunn welcomed the development of a National Payments Strategy by the Department of Finance, underlining the importance of the payment system to the Central Bank's mission of maintaining monetary and financial stability while serving the interests of consumers and the wider economy, noting that the Central Bank will publish its response to the Department's consultation shortly.
Supervisory Priorities
Ms McMunn spoke of the importance of the Central Bank's supervisory approach, particularly for innovative and rapidly growing firms in the PEM sector. She described the Central Bank's supervisory approach as "risk-based, led by judgment, and focused on desired outcomes" and stressed the importance of identifying and addressing unacceptable risks to consumer protection and funds, with increased supervisory intensity where necessary.
Ms McMunn outlined four key priorities for the PEM sector in the coming year:
- Safeguarding,
- Operational resilience and Outsourcing,
- Governance, Risk Management and Anti-money Laundering / Countering the Financing of Terrorism; and
- Business Model and Financial Resilience.
Ms McMunn acknowledged the diversity and the potential for rapid growth within the PEM sector, including the passporting of services across the EU, noting that engagement with peer regulators is vital. Ms McMunn added "We place an important emphasis on our role as part of the European System of Financial Supervision, the European Supervisory Authorities and our collaboration bilaterally with our regulatory counterparts across the EU, UK and wider."
Supervisory Experience and Perspective
Ms McMunn reiterated that the key messages to the PEM sector has remained unchanged over recent years, emphasising the ongoing importance of safeguarding and wind-down planning to protect consumers' funds and maintain public trust. In this regard, Ms McMunn acknowledged a higher level of misunderstanding amongst the PEM sector in comparison to the wider industry and highlighted the significance of the Central Bank's clear and unambiguous communication through various publications and direct engagement with firms. Ms McMunn emphasised the importance of firms engaging with their respective supervisors and maintaining an honest and open dialogue, both at the time of application for authorisation and during its subsequent supervision.
Ms McMunn highlighted five key areas that PEM firms should focus on to align with the Central Bank's overarching supervisory objectives:
- Substantive Presence: Firms, particularly those part of larger international groups, should be able to demonstrate in a manner compliant with its regulatory and legislative obligations:
- strategic decision-making ability and responsibility for its core activities
- oversight, ownership and management of material risks;
- financial and operational resources to deliver its strategy in a sustainable and customer centric way.
- Governance and Risk Management: Strong governance and risk management frameworks are essential for growth and innovation in the sector. Ms McMunn remarked that a functioning payments sector is one in which governance, risk and control frameworks are well-designed, embedded and overseen by suitably experienced and accountable personnel. The Central Bank has identified shortcomings in the understanding of money laundering and terrorist financing risk amongst some firms, noting specific weaknesses in AML and CFT controls include ineffective customer onboarding and monitoring systems, as well as weak processes to identify high risk ML and TF factors associated with customers and transaction activity.
- Operational Resilience: Given the PEM sector's reliance on technology, operational resilience is crucial. Firms should be prepared to identify, respond and adapt to, and recover from operational disruptions effectively.
- Entry and Exit Planning: Deliberate and detailed planning for authorisation and exit is vital. The Central Bank is mandated to ensure that public trust is maintained and therefore must ensure that authorised firms are well-governed and sustainable.
- Diversity and Culture: Diversity in governance and an appropriate organisational culture at all levels particularly senior level contribute to effective decision-making, risk management, and financial resilience. Ms McMunn emphasised the need for firms to be inclusive and promote internal challenge.
In concluding her speech, Ms McMunn restated the growing significance of the PEM sector in Ireland and Europe, noting a substantial increase in the number of firms and their operational activities. It was noted that while some firms exhibit commendable regulatory maturity and risk management practices, many others adopt a passive approach, posing risks to customer funds and system integrity. Finally, Ms McMunn explained that the recent safeguarding audit conducted within the PEM sector revealed deficiencies in some firms' practices, highlighting the urgent need for improvement in some cases. Ms McMunn urged PEM firms to prioritise customer fund security, effective business management, and timely fund returns in wind-down scenarios, stressing that "Getting it right is also good for business, so addressing these issues should been seen as an enabler for growth".
The importance of Ms McMunn's comments on the PEM industry was underscored by Vasileios Madouros, Deputy Governor of Monetary and Financial Stability in the Central Bank in his speech to BPFI National Payments Conference on 4 March 2024. Mr Madouros highlighted that the transition towards electronic payments in Ireland has been driven by several factors, including increasing internet penetration and widespread adoption of smartphones. This has facilitated a significant decrease in cash withdrawals from ATMs, with digital transactions doubling since 2015. Contactless payments, mobile wallets, and the emergence of digital banks offering mobile payment solutions have played pivotal roles in this transformation.
Mr Madouros further emphasised the diversification of payment players, which has led to the emergence of the numerous PEM institutions. Mr Madouros reported the presence of PEMs has led to an 'unbundling' of traditional banking services, providing consumers with a wider array of payment options and fostering competition in the market. It was noted that Ireland, with its conducive regulatory environment and specialised expertise in finance and technology, has become a hub for such institutions. Mr Madouros made the observation that major players have established their European headquarters in Ireland and is home to over 50 payment and electronic money institutions. Mr Mandouros further observed however that in many instances, firms established in Ireland do not provide services to the Irish market. Rather, they avail of their right to passport into other EU Member States with around 85% of PEM firms established in Ireland availing of their passporting rights in the wider European market. Mr Mandouros acknowledged that it is important to recognise that Ireland's payment ecosystem therefore largely extends to the broader European economy.
Mr Madouros concluded by stating that an innovative, resilient and inclusive payments ecosystem is essential for fostering economic growth, competitiveness, and financial inclusion in Ireland. By addressing existing challenges and leveraging emerging opportunities, Ireland can ensure its position as a leader in the digital payments landscape.
Overall, both speeches delivered in recent days emphasise significant growth in the PEM sector during recent years, warranting increased supervision from both the Central Bank of Ireland and the European Supervisory Authorities. Firms have been urged by the Central Bank to address existing challenges to ensure they have a robust and substantive presence, strong governance and risk management frameworks, good operational resilience, a detailed plan for authorisation and exit, and an appropriate and diverse organisational culture in order to maintain a stable, resilient and trustworthy financial sector operating sustainably, in the best interests of consumers and the wider economy.