FIG Top 5 at 5 - 06/06/2024

1. Central Bank of Ireland Industry Letter – Thematic Review of Compliance with the Minimum Competency Code and Consumer Protection Code

On 29 May 2024, the Central Bank of Ireland (“Central Bank”) issued an Industry Letter setting out the findings and the actions required as a result of their thematic review of compliance with the minimum competency code (“MCC”) and the Consumer Protection Code (“CPC”) (“Letter”)

The Central Bank recently conducted a thematic review (“Review”) which examined Retail Intermediaries’ compliance with the MCC, Knowing the Consumer (“KYC”) and Suitability requirements set out in the CPC.

The findings of the Review were as follows:

• compliance levels are related to the size and scale of the Retail Intermediary;
• a number of instances of KYC customer fact-finds that were not sufficiently detailed (in particular for subsequent products/services) were identified;
• varying standards and frequencies of review of the Accredited Persons Register were identified, and some Retail Intermediaries did not adhere to the requirements as set out in the Minimum Competency Regulations 2017;
• the Central Bank implements a proportionate approach regarding Variable Remuneration Policies for Retail Intermediaries, and where appropriate (based on their nature, scale and complexity) Retail Intermediaries should implement a comprehensive policy. A number of firms reviewed in the on-site inspections were deemed to be of such a size and scale that a Variable Remuneration Policy should be in place. Half of these firms either did not have a policy in place, or their policy did not meet Central Bank expectations; and
• all Retail Intermediaries included in on-site inspections showed awareness and knowledge of how to identify vulnerable consumers and had processes in place to make accommodations once such consumers were identified. 

A number of actions required were set out in the Letter. The Central Bank has requested all Retail Intermediaries to ensure the following actions are taken: 

• review their business practices and compliance arrangements against the findings, expectations and good practices set out in the Letter and in Schedule 1 of the Letter. The review and its outcomes must be documented. This should include details of actions taken and / or planned to address findings, with reference to updated procedures, processes, controls, registers, templates and training, as well as timelines for implementation.
• This review should be completed, and an action plan discussed, approved and evidenced by the firm’s management team by 31 August 2024 . The Central Bank expects that this document will be available for review during future engagements with any Retail Intermediary; and
• on completion of the review referenced in the previous bullet point, the Central Bank expects that Retail Intermediaries will apply their improved KYC/Suitability arrangements in subsequent engagements with all consumers. Where gaps are identified in KYC/Suitability files and documents for existing consumers, Retail Intermediaries must be proactive and use the next engagement/meeting with their customer to update the relevant KYC fact-find and other related documents.

2. Central Bank of Ireland Innovation Updates – Sandbox proposal / Innovation speech

1. Central Bank of Ireland announces plans to establish Innovation Sandbox Programme in 2024

On 4 June 2024, the Central Bank of Ireland (“Central Bank”) published a Feedback Statement to its Consultation Paper 156: Central Bank of Ireland Approach To Innovation Engagement In Financial Services (“Feedback Statement”). Overall the feedback generated from the 27 submissions received was highly supportive and informative of the two proposals contained in the Feedback Statement:

• to enhance the existing Innovation Hub and to continue ongoing efforts to deliver more responsive, informative and transparent engagement process for innovators seeking regulatory advice; and
• to establish the Innovation Sandbox Programme, which will be an outcomes focused initiative as detailed and discussed previously.

On the back of the feedback received, the Central Bank has announced that it will establish an Innovation Sandbox Programme (“Sandbox”) to commence in Q4 2024. The Sandbox will provide regulatory advice and supports for participants developing technologies that align with the public interests of serving customers with newer technologies, products or services that require up-to-date regulatory advice of yet-to-be fully licensed financial services products. The announcement follows the three-month consultation on innovation in financial services with various stakeholders by the Central Bank on its engagement strategy in approving new technologies and services.

The Central Bank has outlined how its Sandbox will follow a thematic approach developed in conjunction with its potential participants who are developing innovations for the financial system. Of particular note, however, is that the Central Bank will not be providing derogations of waivers of the existing regulations under this Sandbox. The rationale given for this is that the majority of requirements are derived from EU-based legislation drafted with the primary intention of protecting consumer interests. The Sandbox will apply the present regulatory framework proportionally and transparently, with an outcome-focused, risk-based approach.

The Central Bank’s Deputy Governor for Financial Regulation, Sharon Donnery, commented that the development is an evolvement of the Central Bank's approach to foster innovation while remaining consistent with its objective of secure public policy: “[The Sandbox] will help firms to build safeguards into their early stage development, embedding a regulatory culture to ensure they are properly prepared for the responsibilities that come as regulated firms.”

On 29 May 2024, Gerry Cross, Director for Financial Regulation, Policy, and Risk at the Central Bank delivered a speech at an event at Blockchain Ireland Week on the maturing relationship between technological innovation and financial regulation. The following are some of the points which Director Cross addressed in his speech:

Innovation Engagement of the Central Bank

Firstly, Director Cross outlined the efforts the Central Bank has undertaken in recent times to encourage new entrants, new products and new ways of serving customers and the economy with technological innovation the main focus of this. The key to this has been the Innovation Hub, an informal, direct link for firms, ranging from those within the regulator perimeter to those innovating outside of it eg. RegTech firms, to engage with the Central Bank on the financial regulatory framework and its demands.

Mr Cross elaborated on the new Innovation Sandbox Programme, detailed above, concluding that the Sandbox Programme will focus on bringing together the Central Bank’s regulatory expertise with its technologically innovative stakeholders with a view to accelerating technologies that benefit the common good.

Regulatory Expectations of the Central Bank

Secondly, with regard to FinTech innovators engaging with regulators, Director Cross noted, there should be three aspects they should bear in mind when cultivating a relationship with the Central Bank as the regulator:

• the use case of the technology and its stated purpose of how, and why, a firm can and should implement it as part of its business model;
• a consumer focused culture, given the dependence of the financial ecosystem on trust and confidence, the Central Bank will insist on behaviours that align with securing customer interests; and
• “upfrontedness” as a means of open, timely, and transparent engagement with the Central Bank, under the Individual Accountability Framework, which is conducive to creating a strong, two-way relationship as innovator and regulator.

Implementing MiCA

Mr Cross provided an outline of background to MiCA and what its aim is. He explained that the Central Bank intends to open its formal MiCA authorisation process in Q3 2024 with further details to be provided at an event in June where the details of the authorisation and supervisory expectations will be unveiled. Any authorisation will be a two-way process, Mr Cross pledged, with transparency, preparedness, supervisibility, and consumer focus being of paramount importance to the Central Bank who will endeavour to improve and innovate their role as regulator of the process - “The feedback is positive, and applicants value the robust but clear process.”

Mr Cross went on to detail the examples of how Virtual Asset Service Providers, investment in crypto funds, tokenisation, and Distributed Ledger Technology (“DLT”) providers will all experience changes under MiCA this year. The Central Bank’s approach to the two former areas will be kept under review and informed by European and U.S. regulatory discussions and decisions.  For the two latter areas of concern, the Central Bank will continue to be supportive where a benefit to both investor and firm can be achieved by “directly issuing or generating a representation of an asset in the form of a digital token using DLT.” In particular, the EU’s DLT Pilot regime has been in place since March 2023, providing legal frameworks for trading and settlements of crypto transactions qualifying as financial instruments under the markets in Financial Instruments Directive.

Conclusion

In his closing remarks, Director Cross reinforced that the Central Bank will continue to act for the public interest and praised the efforts of FinTech innovators in sharing this common goal. He also praised the engagement by stakeholders in the processes discussed given the “importance of continued engagement, inclusivity, and transparency to drive innovation across the financial services ecosystem.” The Central Bank recognises its pivotal role in the financial ecosystem, Mr Cross noted, and will continue to develop and enhance its processes for innovators  so that the ultimate benefits for the consumer and wider economy can be realised.

3. Insurance Updates:  Motor Insurance Insolvency Compensation Bill 2024 / Irish Insurers call on Government and Central Bank to engage with Italian counterparts

1. Minister McGrath and Minister Richmond publish the Motor Insurance Insolvency Compensation Bill 2024

On 31 May 2024, Minister for Finance Michael McGrath and Minister of State for Financial Services, Credit Unions and Insurance Neale Richmond T.D published the Motor Insurance Insolvency Compensation Bill 2024 (“Bill”).

The Bill transposes Articles 10a and 25a of EU Directive 2009/103/EC. In doing so the Bill will:

1. establish a legislative body with responsibility for dealing with claims arising from motor vehicle accidents where the relevant insurance undertaking is insolvent (to be known as “Comhlacht na hÉireann um Chúiteamh Mótair”, or the “Compensation Body”). The Bill formally appoints the Motor Insurance Bureau of Ireland to this role;
2. provide the Compensation Body with recourse to funding from the Insurance Compensation Fund established under the Insurance Act 1964 in order to pay motor vehicle liability claims in an efficient manner in accordance with the Motor Insurance Directive;
3. set out the framework for the presentation and processing of such motor vehicle liability claims to the Motor Compensation Body, including that claimants should receive payment of compensation within three months from the date their offer of compensation is accepted;
4. provide protections and allow for timely compensation for Irish motor insurance policyholders in the event of an insurer going insolvent;
5. have a streamlining effect, in that, claimants will deal efficiently and directly with the Motor Compensation Body, rather than dealing with different liquidators or motor insurance companies; and
6. make certain amendments to the current Insurance Compensation Fund framework with respect to motor vehicle liability claims, including to meet the requirements under the Motor Insurance Directive, which sets out that motor vehicle liability should now be levied in the Member State where the insurance undertaking is authorised, i.e. on a ‘home basis’. This is also to be achieved under the Bill by authorising the Minister to introduce regulations to establish a funding mechanism in order to require Irish authorised insurers selling motor policies on a crossborder basis to contribute towards the cost of insolvency compensation as they are now within scope under the ‘home basis’

Welcoming the Bill, Minister McGrath noted that “The Bill builds upon the existing insurance compensation framework currently in place within the State. The establishment of a compensation body with a centralised function to compensate policyholders and injured parties is a positive development for consumers, making it easier for claimants to seek compensation following a motor insurance failure.”

Prior to the publication of the Bill, the Minister for Finance had made a request for an ECB opinion on the Motor Insurance Insolvency Compensation Bill 2023. The basis and outcome of that request can be found in the FIG Top 5 at 5 dated 23 May 2024.

Insurance Ireland and Financial Services Ireland (“FSI”) have contributed to a consultation by the Italian Supervisory Authority, IVASS. IVASS is seeking stakeholder input on a draft regulation limiting the freedom of investment for certain life insurance products in the Italian market.

Insurance Ireland and FSI are calling on the European Parliament, the European Commission, EU Member States as well as EIOPA and its Board of Supervisors to avoid in their view, protectionist national measures that undermine the fundamental freedoms of the Single Market and the underlying supervisory framework. 

Insurance Ireland and FSI have also stated their belief that the draft regulation will have a detrimental impact on Italian citizens seeking to save and invest for retirement.

In their response it was noted that Irish insurers are the largest providers of life insurance products into Italy. In 2022, Irish insurers provided insurance to Italian citizens for €10bn (measured in gross-written premiums) and paid out claims amounting to nearly €8bn. If the draft regulation is brought into law, it is expected that the majority of this business will be withdrawn.

It is further set out that for Ireland, that would mean a loss of nearly 10% of the market. For Italian citizens, it would mean a substantial limitation of their choice, as almost 15% of life insurance products in Italy are provided from abroad, adding to an already challenging market environment in Italy and impacting the ability of Italian citizens to save and invest for retirement.

The regulatory regime for insurers in the EU foresees that the supervision of the freedom of investments is subject to the supervisory authority in the EU Member State in which an insurer is established. For Irish insurers, this is the Central Bank of Ireland (“Central Bank”).  Insurance Ireland and FSI believe IVASS would be undermining the mandate of the Central Bank through this revised draft regulation. IVASS is basing this step on requirements which were set out by the European Commission in an Interpretative Communication in 2000. However, the Interpretative Communication only allows that IVASS overwrites the Central Bank’s mandate in very specific circumstances, which Insurance Ireland and FSI do not believe apply in this instance.

 Insurance Ireland CEO Moyagh Murdock said:

“Insurance products manufactured in Ireland and supervised by the CBI are a strong sign of excellence and quality for citizens in Ireland and across the EU. Ruling these products out of the Italian market will not only harm the Irish market but will ultimately be to the detriment of Italian citizens.”

FSI Director Patricia Callan added: 

“Across the EU institutions and governments are seeking to enhance citizens’ access to products through the EU Retail Investment Strategy. The course being proposed by the Italian supervisor will undermine these ambitions by reducing choice and competition for Italian consumers.”

4. EBA and ESMA invite comments on the review of the investment firms’ prudential framework

On 3 June 2024, the European Banking Authority (“EBA”) and the European Securities and Markets Authority (“ESMA”) published a discussion paper on the potential review of the investment firms’ prudential framework (Investment Firms Directive (“IFD”) and Investment Firms Regulation (“IFR”).

The aim of the discussion paper is to gather stakeholder feedback to inform the response to the European Commission’s call for advice (“CfA”) from February 2023 on the prudential requirements applicable to investment firms. In order to assess the impact of the possible changes discussed in the paper, the EBA also launched a data collection exercise on a voluntary basis.

The discussion paper addresses the elements highlighted by the supervisory community as priorities for possible improvements as well as several more detailed technical elements including:

• the categorisation of investment firms, with particular emphasis on the coherence in the definitions of the applicable thresholds;
• the conditions for investment firms that qualify as small and non-interconnected, including the criteria for their categorisation as well as considerations regarding the transition period from one category to another;
•  in the context of analysing the adequacy of the own-funds requirements:
  • looks into the definitions related to the fixed overheads requirements, the parameters and the mechanic of their calculation as well as the length of the wind down period; and
  • reviews the existing K-factors and recommends improvements in definitions or calculation methodologies;
• the possibility to include new K-factors;
• the implications of the adoption of the Banking Package concerning trading book, the fundamental review of the trading book and credit valuation adjustments;
• assessing the existing liquidity requirements and investigate the possibility of  improving the risk sensitivity of the requirements arising from certain activities or services;
• prudential consolidation of investment firm groups, suggesting improvements to the existing text and extending the scope in line with similar provisions of the CRR as well as a possible extension of the scope to crowdfunding and crypto service providers;
• an analysis of the interactions of IFD and IFR with other regulations;
• remuneration in relation to investment firms.

Next Steps

The discussion paper is open for feedback until 30 August 2024.

The EBA and ESMA will prepare the joint EBA-ESMA Report in response to the CfA, which will include a broad assessment of the provisions of the IFR and IFD and their interaction with other regulations.

5. ECB consults on outsourcing cloud services

On 3 June 2024, the European Central Bank (“ECB”) launched a public consultation on its new Guide on outsourcing cloud services to cloud service providers.

The Guide aims to clarify both the ECB’s understanding of related legal requirements and its expectations and best practices for the banks it supervises. The Guide draws on risks and best practices observed by Joint Supervisory Teams in the context of ongoing supervision and dedicated on-site inspections which showed in particular vulnerabilities in banks’ IT outsourcing strategies.

The expectations cover a number of areas including:

1. Governance of cloud services;
2. Availability and resilience of cloud services;
3. ICT security, data confidentiality and integrity;
4. Exit strategy and termination rights; and
5. Oversight monitoring and internal audits.

The Guide should be read in conjunction with the EBA's existing guidelines on outsourcing arrangements which also apply to cloud outsourcing arrangements. In addition, and as was to be expected, the ECB explains that the Guide cannot be read in isolation but rather in conjunction with the requirements of DORA. While the Guide was drafted taking DORA into account, impacted firms should note that where a conflict arises, DORA will  take precedence.

Next Steps

The Consultation is open for feedback until 15 July 2024. The ECB will subsequently publish the comments received, together with a feedback statement and the final Guide.