Matt Field, Policy Adviser, Digital, UK Finance
There’s no doubt that the financial services industry is waking up to the potential of ‘cloud computing’ – the practice of storing and accessing data over the internet instead of in a local server or your own hard drive. UK Finance’s Matthew Field explores what it could mean for the industry.
The cloud is increasingly the tool that provides the raw power necessary to use innovative technologies and business models that have the potential to disrupt the provision of traditional financial services. It will ultimately provide value to consumers, increase business efficiency and potentially enhancing market security. Some of the innovative technologies that cloud computing supports include data analytics, machine learning and distributed ledgers.
In addition, many of the start-ups providing technology solutions to the financial industry or directly to consumers take a ‘cloud first’ approach. Policy makers should be aware that, as a result this approach, enabling greater and more efficient uses of cloud computing will have direct benefits on innovation and competition.
Despite this ground-breaking potential, the use of cloud in financial services is governed by rather old regulation for outsourcing. The European Banking Authority, which recently concluded a consultation on cloud computing in FS (see UK Finance’s response here), borrows its definition of outsourcing from one used by the Basel Committee in 2005 (not that long ago by normal standards of regulation, but a lifetime in the realm of technology!). Much of the work by regulators recently has been trying to outline how that old regulation should be applied in the context of modern cloud computing arrangements; a necessary and helpful first step which the FCA and EBA have largely gotten right. However, in the longer term a more fundamental reconsideration of what cloud is may be necessary if regulated firms, large and small, are going to compete in the modern digitally enabled world.
So what is the future for cloud? Although regulators might not say so publicly, there is a growing expectation across the industry that cloud computing will one day be a utility. At its heart, cloud allows users to purchase a supply of computing capability rather than manage the resources needed to generate it themselves, much in the same way that consumers purchase electricity rather than running their own generator. Already, in certain cloud arrangements the financial institution is only ‘outsourcing’ the underlying infrastructure, while retaining control of the relevant business activity or process for which that underlying infrastructure is required.
While such a view may not be right for all types of cloud computing or all kinds of applications run through the cloud in financial services, the technology is unquestionably moving in that direction with a few major firms dominating market share. Although regulators and regulated firms are currently focused on laying out and adapting to new regulatory guidance, for the longer term, both regulators and firms need to keep an eye on how they can future-proof their approach to cloud to allow its use to evolve to reach its full potential.