Financial institutions ‘must learn cloud lessons’ for next tech wave

Luke Scanlon of Pinsent Masons was commenting after a new report published by Pinsent Masons in partnership with the Financial Regulation Innovation Lab (FRIL) (registration required) highlighted how financial services firms see operating a “mature cloud infrastructure” as “a prerequisite for adopting next generation technology”, such as quantum computing and AI.

Pinsent Masons and FRIL said: “The future of AI is inextricably linked to cloud… The crucial task now is to avoid repeating the mistakes of the early cloud adoption phase… This means embedding robust governance, cost control, architectural standards, and data quality management from the outset.”

“Firms must also anticipate the maturation of AI commercial models. The current phase is characterised by heavy investment and promotional pricing to secure adoption. However, once that adoption is secured and investors demand returns, history suggests the industry will see significant price rises and the emergence of the same lock-in dynamics seen in the cloud market. Applying the lessons of the cloud means planning for this eventuality now,” they added.

The report highlighted the results of a study undertaken by Pinsent Masons and FRIL which explored how attitudes, practices and regulation relevant to the use of cloud-based infrastructure and services have moved on within the financial services sector since 2016. Back then, Pinsent Masons collaborated with UK Finance on a study that highlighted the challenges that banks faced when migrating systems and data to the cloud. 

The latest study highlighted how the market has changed over the last decade. It found diminishing barriers to using cloud-based services, such as reduced concerns around data security and over legacy systems integration, as well as a shift in the primary drivers of cloud adoption in financial services – scale, security and efficiencies are now the leading drivers rather than pursuit of cost savings.

According to the report, the next stage of the “cloud journey” for financial services firms is set to be shaped not only be technological change but by changes to regulation – including through the direct regulation of some cloud providers deemed ‘critical’ suppliers of services to the industry – as well as by changing consumer attitudes to things like use of data.

The drive for improved sustainability – including on how to minimise consumption of energy and water in the pursuit of AI-enabled innovation and efficiencies – will also impact on firms’ cloud strategies going forward, the report highlighted.

The study also found that the industry still faces some challenges when looking to migrate systems and data to the cloud – with “contractual friction points” around termination rights and subcontracting among those highlighted by business leaders from organisations operating within the financial services sector.

Pinsent Masons and FRIL said learning the lessons from how the market has evolved over the past 10 years, to overcome issues associated with vendor lock-in, supply chain opacity, and complexities around data residency and legacy integration, is imperative for firms if they want to ensure cloud solutions provide them with the platform for future success,

“For financial services … the cloud investments made now are foundational for maintaining a competitive technological edge in the future, enabling access to complex modelling and computational capabilities that would be impossible to build in-house,” the report said.

Luke Scanlon of Pinsent Masons said: “Cloud is no longer an infrastructure decision but clearly the basis for the next round of financial innovation. As this report clarifies, if financial institutions want to leverage AI, they must ensure their cloud foundations are solid. Contracts that prioritise flexibility and interoperability are needed, so financial institutions do not find themselves technically or commercially constrained when the next technology matures.”

“The regulatory landscape continues to shift quickly, though not as fast as the technology. With the incoming regime for critical third parties, regulators are looking past the financial institutions to the resilience of the cloud providers themselves. When you combine this with the increasing pressure to reporting generally, there is a growing need for cloud arrangements that offer a high level of transparency,” he said.