FIG Top 5 at 5 - 05/09/2024

1. Central Bank issues Industry Letter: Consumer Protection Risk Management Frameworks in Insurance Firms

On 29 August 2024, the Central Bank of Ireland (“Central Bank”) issued an industry letter (“Letter”) following completion of a targeted consumer protection risk assessment (“CPRA”) of insurance firms’ consumer protection risk management frameworks (“Assessment”).

The Assessment considered the appropriateness of insurance firms’ risk management frameworks with specific regard being had to how the risks posed to consumers are identified, managed and mitigated. The Letter sets out follow up actions that are required to be undertaken by insurance firms and stipulates the dates that such actions are to be carried out by.

The Central Bank expects that insurance firms understand the risks faced by their consumers, not only stemming from the products and services they buy but also from the behaviour of the firms themselves and that of the wider market. With that in mind, the Central Bank stated that firms must have robust compliance and risk management processes in place in order to anticipate, avoid and manage all risks to consumers.

The Letter discusses the CPRA Guide (“Guide”) published by the Central Bank in 2017 and sets out the purposes of the Guide as follows:

• to set out the Central Bank’s approach to carrying out targeted CPRAs; and
• to describe the Central Bank’s expectations of regulated financial services firms in implementing or enhancing their frameworks for managing risks to consumers.

The Letter reiterates that such frameworks must support senior management in fostering positive conduct and behaviour, with the ultimate aim of creating a culture that has the best interests of consumers and the wider insurance market at heart.

The Assessment was focused on “Module 1: Governance and Controls” of the Guide, specifically

• Element 5: Consumer Protection Risk Management;
• Element 3: Control Functions/Consumer Monitoring; and
• Element 6: Consumer Reporting.

The Appendix to the Letter considers each of the three elements in detail setting out the Central Bank’s expectations as against the findings from the Assessment, as well as identifying notable practices. However, the high level findings are as follows:

• overall, taking into account that the insurers assessed were at differing levels of maturity, there was clear evidence that the more intrusive oversight of the insurance sector by the Central Bank and the developments initiated by the insurers since the introduction of the Guide have had a positive effect on the industry, to include how they identify and manage consumer risks;
• well-designed processes and framework improvements were evident;
• some firms are less mature in the design of their frameworks and the effectiveness of some frameworks was not as evident as others as regards clear consumer outcomes; and
• some firms have more work to do than others to reach the maturity levels required to avoid and/or manage all risks to consumers and thereby foster a culture of high standards.

Follow-up Actions required of Insurance Firms

• All firms are required to review and consider the expectations, findings and notable practices as set out in the Letter and in the Guide, in the context of their own consumer protection risk management frameworks;
• Firms must complete a gap analysis, identifying the gaps and weaknesses that exist in the design and / or effectiveness of their consumer protection risk management framework in respect of all elements set out in “Module 1: Governance and Controls” of the  Guide and put a plan (“Plan” or “Plans”) in place to mature their frameworks, where applicable;
• Following on from the previous point, the Plans must be presented to the board of directors and / or executive management as appropriate; and
• Once such Plans are approved, firms must implement the changes in line with the approved Plan.

Important Dates

• The Letter states that firms should consider the firm’s Management Responsibility Map and the prescribed responsibilities of individuals in pre-approval controlled functions  (“PCF”) roles and provide the Central Bank with the name of an individual in a PCF role with accountability for delivery of the expectations set out in the Letter, to cpinsuranceinspections@centralbank.ie by 30 September 2024;
• The Plan should be presented to the board of directors and / or executive management as appropriate, no later than the 30 November 2024; and
• Timelines for implementing the required changes are to be no later than 30 June 2025.

Additional Comments

The Letter also suggests that in their future audit and compliance plans, firms should consider including assessment against the Guide for Modules 2, 3, 4 and 5, as a matter of good practice.

The Letter highlights that, against the background of the updating of the consumer protection code (“CPC”), insurance firms must now prioritise the development, implementation and embedding of enhancements as appropriate and proportionate for the firm. Specifically, firms’ frameworks must be capable of identifying and managing the specific risks posed to consumer protection by the following:

• the firm’s external operating environment;
• the firm’s strategy, business model, behaviour, culture, and internal processes. 

2. MiFID Updates

1. Central Bank Guidelines on Breach and Incident Reporting for MiFID Firms – August 2024

On 20 August 2024, the Central Bank of Ireland (“Central Bank”) published updated guidelines on breach and incident reporting for MiFID firms (“Guidelines”).The last time that these guidelines were updated was 29 September 2015.

The following is a summary of the changes:

• Reference to  S.I. No. 60 of 2007, the European Communities (Markets in Financial Instruments) Regulations 2007 has been updated to refer to S.I. No. 375 of 2017, the European Union (Markets in Financial Instruments) Regulations 2017 (as amended);
• Reference to reporting of breaches etc under Section 1.2 of the Bank’s Supplementary Supervisory Requirements for Investment Firms under S.I. No. 60 of 2007, European Communities (Markets in Financial Instruments) Regulations 2007 has been updated to Regulation 4(2) of S.I. No. 10/2023 - Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023;
• Sections 7, 8, 13, 22 and 23 in the 2015 guidance relating to client assets related matters have been removed and now are captured by a new no. 5 in the 2024 guidance as follows:

  “Any breaches relating to Client Assets should be reported separately, further to the Client Asset Requirements/Investor Money Requirements, as set out on the Central Bank website” 

• Rather than referring to “Returns”, the 2024 guidance refers to “Forms”;
• Appendix A of the 2015 guidance, “Part 1 – Form on the Online Reporting System”, has been removed; and
• Appendix C, being the “Client Asset/ Investor Money Reporting Template”, has been removed.
  

2. Central Bank updates ANTF for Authorised MiFID Investment Firms & Fund Service Providers

On 31 May 2024, the Central Bank of Ireland (“Central Bank”) published an updated Acquiring Transaction Notification Form for Authorised MiFID Investment Firms & Fund Service Providers (“ANTF”). 

The updated ANTF is to be used to provide prior notification to the Central Bank of a proposed acquisition of, or increase in, a direct or indirect qualifying holding in respect of a number of categories of Irish authorised entities, to include, an investment firm or a market operator of a regulated market authorised under S.I. No. 375 of 2017 (“MiFID Investment Firms”).

The updated Form can be accessed via the “Forms for MiFiD Firms” section of the Central Bank’s website. 

Complaints received

• 6,182 complaints were received in 2023, representing an increase of 29% in complaints received since 2022; 
• The FSPO closed 12% more complaints during 2023 (5,184 complaints), than in 2022 (4,647 complaints);
• Banking was the highest category of complaints received, with 3,850 complaints, or 62% of all complaints received falling into this category. This represents a significant increase in banking complaints to the FSPO in 2023. In 2022, 2,640 complaints received were from the banking sector; 
• The FSPO received 1,446 (23%) complaints relating to the insurance sector, which accounted for the second largest category of complaints received in 2023. This compared to 1,129 complaints received in this category in 2022;
• The number of complaints received  in both the investment and pension categories also rose in 2023. 461 investment complaints were received and 336 pension complaints were received. This compared to 366 and 233 complaints received in these categories, respectively, in 2022;  
• As regards complaints received, the Report highlights the increase in complaints in 2023 and notes it as a matter of concern. The Report encourages financial services providers to reflect on the nature of the complaints brought to the FSPO. The Chairman of the FSPO, Mr Liam Sloyan considers that there were missed opportunities in some cases to have the complaints resolved internally at an earlier stage. Further, he encourages financial services providers to consider what measures they can take to reduce the number of complaints arising, emphasising, again, the almost 30% increase in complaints between 2022 and 2023; 
• The Report sets out that the FSPO engages with its stakeholders, in that it meets with financial services providers and their representative bodies and discusses trends in complaints received. 

Legally binding decisions

• More than 2,300 legally binding decisions were published in 2023; 
• There were 107 legally binding decisions issued concerning a complaint about a tracker mortgage rate of interest
• There were 26 legally binding decisions issued concerning declined insurance claims for business interruption losses;
• Mediation has been central to the FSPO’s efforts to resolve complaints at the earliest stage with more than 70% of complaints referred to mediation successfully resolved through the mediation process;

Other observations

• The FSPO welcomed the publication of the Financial Services and Pensions Ombudsman (Amendment) Bill 2023;  
• The FSPO launched a customer journey survey in 2023. The results allowed the FSPO to determine the extent to which its customers’ experiences align with their expectations and needs;
• The FSPO carried out its first industry stakeholder survey in 2023. The FSPO expects the results of this to prove invaluable in providing insight into its performance, as viewed by its industry stakeholders, the efficacy of its communications with them, and the impact of its data sharing; and
• During 2023, the FSPO referred nine complaints to the Central Bank of Ireland for further consideration to ensure that issues and conducts evident in complaints considered to be of concern, could be considered from a regulatory perspective.

2.  FSPO launches online survey regarding its Strategic Plan 2025-2027

The Financial Services and Pensions Ombudsman (“FSPO”)  has begun the process of developing its next Strategic Plan, focusing on the period 2025 – 2027. In developing this Strategic Plan, the FSPO are seeking the views of its customers, stakeholders and of organisations that share an interest in the role of the FSPO. They are doing this through an online survey. 

4. Minister of State Neale Richmond publishes 2023 Ireland for Finance Progress Report

On 26 August 2024,  Neale Richmond TD, Minister of State at the Department of Finance with special responsibility for Financial Services, Credit Unions and Insurance, published the 2023 progress report of the Ireland for Finance Strategy.

The Progress Report 2023 provides an update on the 12 action measures that were due for reporting last year under the Ireland for Finance strategy. The actions are focused on the five core themes of the strategy; fintech, sustainable finance, diversity and talent, regionalisation and promotion and operating environment.

The Progress Report notes that 57,600 people are estimated to be employed in international financial services sector with approximately one in four jobs based outside of Dublin.

Some notable achievements in the 2023 Progress Report of the Ireland for Finance strategy include:

• A new pre-seed funding offer for early stage fintech investors, with 21 new companies supported through Enterprise Ireland’s Pre-Seed Start Fund and High Potential Start-Up initiatives;
• A revised and updated Sustainable Finance Roadmap;
• Relaunch of the annual European Insurance Forum; and
• Promotion and participation in national and international events by enterprise agencies and other stakeholders, including the Global Government Fintech Lab, Money 20/20, and Singapore Fintech Festival.

On the publication of the Progress Report, Minister Richmond said:

“ The Ireland for Finance Strategy is central to the success of the sector and the Progress Report 2023 reaffirms that this work is well underway.”

“The IDA and Enterprise Ireland continue to support growth in this sector, with the IDA supporting over 300 companies in international financial services and Enterprise Ireland investing over €80 million in companies in fintech, financial services and business services since 2018.”

“My focus is to continue this growth in 2024, to work with both the private and public sector to achieve this and ensure that Ireland continues to be a leader in international financial services.”

5. CBL Insurance Europe DAC – High Court gives directions on the treatment of insurance contracts and claims in liquidation

On 31 July 2024, the High Court delivered a judgment in the matter of CBL Insurance Europe Designated Activity Company (“CBL”).

CBL was a registered insurance undertaking and, prior to running into financial difficulties, provided a range of non-life insurance products in Ireland and in a number of other countries in the EU and the wider European Economic Area (“EEA”).

On application of the joint liquidators in the matter, the High Court was asked to provide answers to a series of complex questions concerning the status of insurance contracts or policies which were in existence at the time of the commencement of the winding-up proceedings in relation to CBL. Those questions concerned the following matters:

• the impact of the winding up on those contracts or policies;
• the admissibility to proof in the winding up of certain types of claims under insurance contracts issued by CBL and the treatment of those claims by the joint liquidators; and
• the status of claims for the return of unearned premiums under the Solvency II Directive (“Directive”) and the implementing regulations in Ireland.

Background

CBL was a registered insurance undertaking which was supervised, regulated, and authorised by the Central Bank to conduct non-life insurance business pursuant to the European Union (Insurance and Reinsurance) Regulations 2015 (S.I. No. 485 of 2015) (“Regulations”). CBL specialised in construction-related credit and financial surety insurance, professional indemnity insurance, property insurance and travel bonding.

In February 2018, owing to concerns which the Central Bank had in relation to the solvency of CBL and its ability to meet its regulatory solvency capital requirements, the Central Bank issued a number of directions to CBL pursuant to s. 45(1) of the Central Bank (Supervision and Enforcement) Act 2013 (as amended) and Regulation 145 of the Regulations. In those directions the Central Bank directed CBL not to dispose of any assets without the approval of the Central Bank and to cease writing all new contracts of insurance and refrain from renewing existing contracts of insurance.

Relevant Dates

• On 26 February 2018, the High Court appointed Kieran Wallace as Provisional Administrator of CBL;
• On 12 March 2018, the High Court made an order for the administration of CBL and Kieran Wallace was appointed as administrator (“Administrator”);
• On 9 November 2018, the Administrator informed the Central Bank that the CBL’s minimum capital requirement (“MCR”) was no longer being complied with by CBL, contrary to the Regulations;
  
• On 28 January 2019, the Central Bank informed CBL that, if compliance with the MCR was not restored by 9 February 2019, it was minded to withdraw CBL’s authorisation, if it was not possible for CBL to comply with its MCR;
• By letter dated 14 February 2019, the Central Bank confirmed that CBL’s authorisation was withdrawn, save to the extent necessary for the continued appointment of the Administrator and his ability to carry out the activities of an insurance undertaking to achieve the aims of the administration;
• On 9 December 2019, the Central Bank directed  CBL not to make any payments or transfer any assets in order that the status quo of CBL and its creditors be maintained;
• On 20 February 2020, the Central Bank presented a petition for the winding up of CBL;
• On 12 March 2020, an order for the winding up of CBL and for the appointment of Mr. Wallace and Cormac O’Connor as joint liquidators was made by the High Court.

Application to the High Court for Directions

The purpose of the application for directions was not to assist the joint Liquidators in determining the concrete economic outcome for any individual creditor or class of creditors in the liquidation of the Company but rather to determine the following:

• The types of claims that are admissible in the liquidation; and
• In some cases, the priority to be afforded to those claims.

Some of the questions considered by the High Court were as follows:

• Termination of CBL’s insurance contracts – date and basis for termination:

The High Court determined that CBL’s insurance contracts terminated when the Court ordered that CBL be wound up on 12 March 2020. It based this determination on the provisions of the Regulations and the related Directive.

The High Court also considered the legal basis for termination. It decided that the contracts terminated due to CBL's repudiatory breach of contract, which occurred when the Court ordered that CBL be wound up on 12 March 2020. The Court rejected the suggestion that termination was due to frustration resulting from the Central Bank withdrawing CBL’s authorisation to carry on insurance business. While CBL’s authorisation was also withdrawn on 12 March 2020, withdrawal occurred after the making of the winding-up order by which time the contracts had already terminated;

• Admissibility of proof of debts/ liabilities in liquidation of CBL:

   

  Following a lengthy analysis of the relevant provisions of the Bankruptcy Act and the Companies Act, the Court determined that CBL incurred a contingent liability to pay the insured when it entered into an insurance contract. Therefore, the relevant “obligation” was “incurred” to policyholders when CBL entered into a contract of insurance. Accordingly, any claim made under a policy of insurance should be admitted to proof in the winding up, including a claim where the insured event occurs after the relevant date (12 March 2020).

  The High Court determined that in such circumstances the joint liquidators should, as best they can, make a “just estimate” of those claims as provided for in Section 620(1) of the Companies Act. The Court accepted that this may result in underpayments or overpayments or policyholders receiving payment notwithstanding that a claim may never arise. The Court also noted that the value of claims arising from certain categories of policy falls to be determined on a basis set out in the Assurance Companies Act 1909 but that none of CBL’s policies fell into those categories.

• “Insurance Claims” under the Solvency II Regime:

The Court was satisfied that claims for the return of unearned premiums which arise on the termination or discharge of insurance contracts to which CBL was a party on the making of the winding up order ( 2 March 2020) are “insurance claims” as that term is defined in Article 268(1)(g) of the Solvency Directive (and Regulation 270(1) of the Regulations). This means that such claims are, by virtue of Regulation 277(1) of the Regulations, entitled to “absolute precedence” with respect to the assets representing CBL’s technical provisions over all other claims which are not “insurance claims” (subject to the precedence over “insurance claims” afforded by Regulation 277(3) to expenses arising out of the winding-up).

Finally, the High Court considered the case of Gable Insurance AG in Konkurs being a decision of the European Free Trade Association (“EFTA”). Noting that  a decision of the EFTA is not binding on an Irish Court, the High Court held that it does not correctly decide or address the status of a claim for the return of unearned premium which arises on the discharge or termination of an insurance contract on the opening of winding-up proceedings. The main factor leading to this position was the interpretation that the EFTA Court gave to the term “insurance claim”.