BoE governor highlights cloud as source of operational risk

Central bank will be taking a closer look at risks associated with FinTech says Bank of England’s Carney.

The Bank of England’s governor, Mark Carney, identified Cloud services, as well as “common hosts of online banking”, as potential sources of operational risk in a speech he gave in Germany on Wednesday. Carney said that regulators have to be aware of new single point of failure risks.

In the speech, the governor of the Bank of England praised newly developed digital technologies for their potential to meet customer needs and to make the financial sector more efficient, but he warned that increasingly interconnected systems created vulnerabilities that did not exist before.

“As the FinTech future envisages the sharing of data across a wider set of parties, coupled with greater speed and automaticity in executing transactions, the challenges around protecting data and the integrity of the system are likely to increase,” said Carney.

Peer-to-peer (P2P) lending platforms, robo-advisors and algorithmic trading were also recognised as technologies that could have a destabilising effect. It is unclear how resilient the P2P sector is, and whether it can withstand a downturn, said Carney.

While robo-advisors and algorithmic traders “may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated,” said the governor of the Bank of England.

But Carney ended the speech on a positive note. He pointed to the FCA’s regulatory sandbox,  a ‘safe-space’ where new products could be initially shielded from unnecessary compliance requirements, as an example of policy that promoted innovation in FinTech.

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