The Bank of England (BoE) needs to “embrace the cloud”, according to the Future of Finance report it commissioned from banker Huw van Steenis. In it, he notes that cloud technologies have matured to the point “they can meet the high expectations of regulators and financial services.”
“UK banks and insurers lag global leaders, and many firms I met are keen to take advantage of cloud at scale,” van Steenis noted, highlighting a Finastra survey that found 43 percent of UK financials said they thought complex regulatory requirements were the key barrier to cloud adoption.
But the Central Bank has ongoing concerns about “concentration risk and lack of substitutability” its response reveals, pointing to lingering worries about the wisdom of putting critical financial applications on someone else’s infrastructure, which has not been immune to resilience issues.
Bank of England Cloud Response: Yes, But…
The Bank of England responded that it plans to publish a new supervisory statement this year describing the Prudential Regulation Authority (PRA)’s modernised policy framework on outsourcing arrangements, “including a focus on cloud technology, and setting out conditions that can help give firms assurance on its use.”
It will also “continue to work with firms to manage the risks associated with cloud outsourcing, including concentration risk and lack of substitutability; and to understand any tipping points for systemic risks from wider adoption”, while working with the
Basel Committee on Banking Supervision (BCBS) and International Association of Insurance Supervisors (IAIS), to develop and adopt international standards.
While a number of challenger banks, like rapidly growing Monzo, are entirely cloud-based (Monzo runs on AWS), actual adoption of cloud by most established banks has been slow, cautious and typically not involved mission critical applications.
The report came as Bank of England Governor Mark Carney announced sweeping plans modernise the bank’s approach to finance, during his annual Mansion House speech.
These include a consultation on letting “alternative payment service providers” – like major technology companies – access its £500 billion balance sheet.
That consultation, announced during Carney’s annual Mansion House speech, was one of a number of proposals to modernise its offering made by the bank, which is midway through a major infrastructure refresh.
The RTGS rebuild will also now provide API access to users to read and write payments data
Carney said: “Historically, only commercial banks were able to hold interest-bearing deposits, or reserves, at the Bank. That reflected their role at the core of the payment system. As new payment providers and systems emerge, access to the Bank’s core infrastructure should change and it makes sense to consider whether they too can hold funds overnight on the Bank’s balance sheet.”
He added: “From the Bank’s perspective, expanding access can improve the transmission of monetary policy and increase competition.”
Bank of England Modernisation
The Bank is in the midst of an ambitious rebuild of its Real Time Gross Settlement (RTGS) system, which processes £650 billion of payments on average every day. Until recently, only commercial banks had direct access to it, and alternative payment service providers (or PSPs) had to route through participating banks.
That has now changed, Carney said: “We are now making it easier for a broad set of firms to plug in and compete with more traditional providers. There is now a growing pipeline of twenty firms looking to join. Responding to demands from innovators, the RTGS rebuild will also now provide API access to users to read and write payments data, as well as implementing a system whereby each payment will be tagged with information in a standardised format across the world. This global messaging standard will speed up settlement both domestically and across borders.”