FIG Top 5 at 5 - 10/10/2024

1. Director Gerry Cross delivers speech addressing regulating for better outcomes

On 1 October 2024, Director of Financial Regulation - Policy and Risk at the Central Bank (“Central Bank”), Gerry Cross, delivered a speech at the Compliance Institute’s Annual Conference in which he considered the Central Bank’s evolving regulatory approach in light of the challenges posed by the rapidly changing environment in which financial services are operating. His speech focused on four areas as follows:

Resilience

Director Cross referenced the 2008 financial crisis and how the successful repair of the financial system was evidenced by its resilience during the recent periods of stress such as the pandemic, geopolitical events and US bank failures. Nonetheless, he emphasised that resilience must be constantly monitored and maintained. In that regard, Director Cross highlighted the need for regulation to be ‘smart’, making the point that developing new regulations in response to each new risk is not an approach to be taken. Rather, existing built resilience should be leveraged and should be adaptable to emerging risks. In that context, he cited the Digital Operations Resilience Act (“DORA”) as an example of smart regulation and noted that it has been designed in such a way that when the system is stressed in some way, it is able to bend rather than break, noting that DORA is designed to deliver significant levels of resilience in the face of ICT risk and cyber threats in a way that is sophisticated, adaptive, proportionate and evolving.

Continuing his discussion of DORA, Director Cross noted that its implementation, given DORA’s cross – sectoral nature, requires consistency across borders and sectors together with proportionality, timeliness and transparency. In that regard, he pointed to the fact that the European Supervisory Authorities (“ESAs”) and competent authorities are maintaining cross – sectoral working arrangements amongst supervisors with the aim of achieving a high quality and consistent approach to implementation. He set out that the ESAs are currently working on providing further information as to what firms can expect from DORA implementation and how best to prepare.

Director Cross referenced the Draghi Report on EU Competitiveness wherein securitisation was identified as an aspect of capital markets activity that is underperforming and that Mario Draghi called for certain aspects of the post-crisis regulatory framework to be modified. On that point, Director Cross noted that we should be willing to revisit some of the requirements in order to assess whether there is room for improvement. For more detail on the Draghi Report please see the FIG Top 5 at 5 dated 12 September 2024.

Protecting Consumers

Under this heading Director Cross continued to address the need for smart regulation stating that it should be:

• proportionate;
• targeted on outcomes; and
• adaptive to changing circumstances. 

He cited the proposed amendments to the Consumer Protection Code (“CPC”) as a good example of such regulation. Director Cross discussed the need for firms to not only simply comply with the rules but, rather, to think about securing their customers’ interests. He set out that the Central Bank has developed guidance setting out in detail what securing customers’ interests does and does not mean for firms and the expectations that consumers can have as a result of it.. 

Individual Accountability

Continuing his consideration of smart regulation, Director Cross pointed to the Individual Accountability framework (“IAF”) as another example of such regulation in that, at its core, is proportionality, noting that it is designed to tie in with whatever structural design a firm adopts and demands only what is reasonable. Adding to the smart nature of the IAF is the fact that it is targeted and dynamic, adapting to meet the changing circumstances in which a firm may find itself operating.

He touched on the concerns, that were voiced during the Central Bank’s engagement on the IAF, that the supervisory practices of the Central Bank were not sufficiently evolved such that such accountability regulations would work effectively and indeed that the IAF would be seen as an enforcement mechanism. Director Cross addressed this by stating that the Central Bank’s approach to implementation and supervision is centred on the idea that the process and quality of implementation by firms of the IAF is its central focus. 

How the Central Bank Supervises 

Under this heading, Director Cross took the opportunity to discuss the Central Bank’s move to a new integrated supervisory framework, with directorates for banking, insurance and capital markets, responsible for the supervision of all functions in their respective sectors. He reiterated that the focus on consumer protection at the most senior level of the Central Bank will not change. For more detail on the Central Bank’s transformation of supervision and regulation please see the FIG Top 5 at 5 dated 8 August 2024.

2. Deputy Governor Sharon Donnery delivers speech on the importance of good governance and risk management at the Institute of Directors

On 3 October 2024, Deputy Governor of the Central Bank of Ireland (“Central Bank”), Sharon Donnery, delivered a speech at the Institute of Directors (“IoD”) Chartered Director Programme Graduation.  The theme of the speech centred on the importance of good governance and risk management in firms, and how integral good organisational culture is in implementing this.

Deputy Governor Donnery emphasised the importance of good governance and risk management as being “a founding pillar” of business and how, in her experience, it directly relates to positive business outcomes.  She highlighted that good governance is also something that needs to continuously evolve to keep pace with the fast changing environment that businesses operate in.

The Deputy Governor reiterated that firms need to take ownership of their own governance and risk management, which includes taking a proactive approach to managing uncertainties facing their business and their customers.  She believes that this approach begins with successful firm culture, in particular, setting the tone from the top down.

In terms of what constitutes ‘good governance’, the Deputy Governor quoted the former Central Bank Governor, Philip Lane, who said that the “defining cultural test is how a firm deals with adverse situations” and that these adverse situations are the real test for a firm’s governance and risk management.  The Deputy Governor stated that good governance does not happen overnight, but that it takes time, thought, investment and commitment from senior leadership.

The Deputy Governor then went on to discuss what makes a good director.  She agreed with what the IoD believes makes a good director - being someone who is capable of seeing company and business issues in a broad perspective, with a good degree of objectivity, and capable of playing an important role in monitoring executive management.  In addition to this, the Deputy Governor added her own thoughts, that a good director should be:

• Strategic – in terms of direction - setting for the firm, and their own contribution to the firm;
• Inquisitive – curiosity to ask questions and probe for answers, particularly noting this as an important matter for independent non-executive directors;
• Forward-looking – anticipating trends in terms of growth and risk; and
• Risk-based – identifying the most important issues and risks for the firm.

The Deputy Governor concluded her speech by noting  that a good director should bring a unique and independent perspective to the business and be capable of leading in such a way that good governance, risk management and culture are truly embedded within an organisation.

3. EIOPA publishes its methodology for setting value for money benchmarks.

On 7 October 2024, the European Insurance and Occupational Pensions Authority (“EIOPA”) published its revised methodology for setting value for money(“VfM”)  benchmarks for unit - linked and hybrid insurance products following a consultation on the methodology on VfM benchmarks in December 2023. For more detail please see FIG Top 5 at 5 dated 11 January 2024.

The revised benchmarks methodology stems from stakeholders’ feedback received during the public consultation and the execution of a data pilot in several Member States. The methodology allows for an increasingly data - driven and risk - based approach to the supervision of VfM risks. It will allow supervisors to better identify products with high VfM risks and ensure that consumers are paying a fair price for their insurance product.

The revised methodology follows three main steps. In setting the three steps EIOPA has taken account of the common and differential characteristics of unit - linked and hybrid insurance products sold across the European Economic Area, as well as the need for reserving flexibility to cater for the evolving nature of the markets. The three steps are as follows:

Step 1: Features for product clusters

The first step is to cluster products with similar features into groups based on the needs of policyholders in order to assess comparability to products distributed across Europe. To accomplish this, the benchmarks methodology presents a list of minimum criteria to follow when calculating benchmarks and / or allocating products to clusters. Final clusters and benchmarks will be fully determined once the full dataset is available.

Step 2: Value for money indicators (VfM indicators) around which benchmarks will be calculated

Benchmarks will be calculated for each cluster based on a list of indicators covering costs and returns with a view to helping identify products that offer no value to customers. These indicators incorporate stakeholders’ feedback and they also take into account the data pilot exercise, including considerations on data quality and availability with the view of limiting the reporting burden.

Step 3: Data collection and calibration of the benchmarks

EIOPA will rely on the data it collects for the annual Cost and Past Performance (“CPP”) report and readjust the questionnaire and scope to ensure the collection of suitable data for both the CPP report and benchmarks. In order to limit the burden on the market, EIOPA will not request additional reporting. Data collection and benchmarks will be regularly calibrated to ensure results remain up-to-date and appropriate, with a particular focus on the first years of implementation.

Next Steps

The general benchmarks methodology will be subject to regular reviews by EIOPA and will be adjusted after one year. It will then be reviewed at least on a two - year basis until a stable methodology has been developed. Importantly, EIOPA does not plan to share the benchmarks with insurance product manufacturers and / or publish them before communication with NCAs. Instead, EIOPA will circulate the benchmarks to NCAs for supervisory purposes such as the identification of products with higher VfM risks.

NCAs will use the benchmarks as part of their regular supervisory process and they will feedback to EIOPA on how the benchmarks work, including the type of recalibration needed.

EIOPA has stated that the purpose of the benchmarks is to take a risk - based approach to supervision rather than to fully conclude if a product offers value or not. To reach this conclusion, EIOPA has stated that supervisory judgement and additional analyses are needed. While NCAs, depending on their availability of data, may use the product - focused approach of VfM benchmarks for Layer I or II, the purpose of the benchmarks is to identify products requiring further analysis and increased supervisory scrutiny.

4. ESMA launches new consultations on two RTS under the MiFIR review 

On 3 October 2024, the European Securities and Markets Authority (“ESMA”) launched two consultations under the Markets in Financial Instruments Regulation (“MiFIR”) review relating to two Regulatory Technical Standards (“RTS”) as follows:

1. Review of RTS 22 on transaction data reporting under Art. 26 of MiFIR; and
2. Review of RTS 24 on order book data to be maintained under Art. 25 of MiFIR.

The consultation paper (“CP”) is comprised of two parts – each relating to the RTS proposed to be amended.

The first part of the CP addresses RTS 22 and sets out details in relation to the following:

• the new scope of transaction reporting framework;
• details on changes stemming from the L1 revised text, in particular in relation to the most relevant market in terms of liquidity and changes to reflect the new transaction data elements and requirements;
• amendments to the list of exempted transactions from the reporting; and
• considerations on the use of transaction data for transparency and double volume cap calculations.

The second part of the CP deals with RTS 24 and sets out details relating to the following:

• the legal drafting on the proposed L2 amendments based on the new mandate in L1, particularly in relation to machine readable format empowerment;
• the changes linked to RTS 22; and
• other enhancements to the order book data elements.

Next Steps

ESMA is seeking comments on all matters in the CP particularly on the questions summarised in annex 1 of the CP. All comments are to be submitted by 3 January 2025 after which ESMA will publish a final report and submit the revised draft RTS to the European Commission for endorsement.

5. Work programmes for 2025 are published by ESMA, EBA, EIOPA and the Joint Committee of the ESAs.

1. ESMA publishes its 2025 Annual Work Programme

On 1 October 2024, the European Securities and Markets Authority (“ESMA”) published its 2025 Annual Work Programme (“Programme”). The Programme is based on the implementation of ESMA’s multi – annual Strategy for 2023 – 2028. Some of the areas of focus of the Programme include:

• contributing to making the EU Single Market in financial services deep, efficient, liquid and accessible, in particular to small and medium - sized enterprises, and to raise capital. ESMA stated this will be achieved through providing  advice, technical expertise, regulatory provisions, and working on technical standards and guidelines related to the different areas under its scope of competence and notably sustainable finance, digital finance, and in the broader context of building more effective and attractive capital markets in the EU;
• monitoring market developments and new financial activities in its remit to assess risks to investors, markets and financial stability;
• the promotion of common effective, risk - based, data - driven and outcome - focused supervisory and enforcement culture across EU supervisors to include NCAs and ESMA direct supervision;
• achieving greater convergence and consistency of NCAs’ supervisory approaches and practices in relation to investor protection taking into account technological developments and the evolution of the framework in relation to sustainable finance;
• contributing to facilitating the financing of the EU transition towards a more sustainable economy, while preserving market integrity and financial stability as well as a high level of investor protection;
• adapting to digitalisation in financial markets by developing and strengthening the single rulebook and promoting supervisory convergence; and
• the promotion of the effective use of data and ICT technologies.

Much of ESMA’s work in 2025 will comprise of policy work to facilitate the implementation of the large number of mandates received in the previous legislative cycle, together with the preparation of new mandates, such as in relation the European Green Bonds and the ESG Rating Providers Regulations.

2. The EBA publishes its Work programme for 2025

On 30 September 2024, the European Banking Authority (“EBA”) published its work programme (“Programme”) for 2025.  The Programme sets out the EBA’s work for 2025 under five stated objectives and 19 activities. The objectives are as follows:

• implementing the EU banking package and enhancing the Single Rulebook;
• enhancing risk- based and forward looking financial stability for a sustainable economy;
• enhancing data infrastructure and launching the data portal;
• the commencement of oversight and supervisory activities for DORA and MiCA; and
• developing consumer oriented mandates and ensuring a smooth transition to the new AML / CFT framework.

In Section 2 of the Programme the EBA sets out the activities and deliverables for 2025 in order to accomplish the aforementioned objectives. The 19 activities are grouped into three categories, with each activity linked to at least one of the overarching priorities, as follows:

• policy and convergence work;
• risk assessment and data; and
• governance, coordination and support.
  

3. EIOPA publishes its Revised Single Programming Document 2025-2027

On 30 September 2024, the European Insurance and Occupational Pensions Authority (“EIOPA”)  published its single programming document (“Document”) which sets out the activities EIOPA will undertake for the period 2025 – 2026. The Document includes EIOPA’s annual work programme for 2025. The Document sets out EIOPA’s strategic priorities as follows:

• contribute to building up sustainable insurance and pensions, including by addressing protection gaps, for the benefit of EU citizens and businesses;
• support the supervisory community and industry to mitigate the risks and seize the opportunities of the digital transformation, including by further promoting a data driven culture. Stated priorities under this heading include:
  • the implementation of the AI Act and the European Single Access Point;
  • supporting the proposal for a Regulation on Financial Data Access; and
  • focusing on consumer outcomes including promoting consumer - centricity in the digital transformation of insurance and pensions, and the ethical use of data to combat financial exclusion and safeguard privacy, while keeping agile to accommodate changes.
• promote sound, efficient and consistent prudential and conduct supervision throughout Europe, particularly in view of increased cross - border business. Some of the stated priorities under this heading are:
  • the promotion of products that ensure value for money, are simpler and easy to understand and correspond to consumers’ needs with a view to promoting more financial inclusion;
  • oversight activities of critical third party providers;
  • the revision of supervisory convergence tools and integration of material covering new areas especially considering the Solvency II review, continuous focus on NCAs’ implementation of the IORP II Directive, and continuous peer review activities.
• deliver high - quality advice and other policy work taking into account changing and growing needs of society as well as the effects of new horizontal regulation. Work under this heading includes the updating of technical standards and guidelines according to amendments to Solvency II and an assessment as to the possibility of reducing the number of existing standards and guidelines. EIOPA also expects to receive new mandates as a result of the Retail Investment Strategy such as regulatory technical standards, technical advice, guidelines and the development of new IT tools. It is possible that such work could commence as early as Q2 2025; and
• further enhance financial stability, with particular focus on the analysis of financial sector risks and vulnerabilities, and emerging threats. EIOPA will have a particular focus on:
  • monitoring, analysing and assessing risks and vulnerabilities; and
  • the implementation of the Insurance Recovery and Resolution Directive.

4. Joint Committee of ESAs publish joint work programme for 2025 

On 4 October 2024, the Joint Committee (“JC”) of the European Supervisory Authorities (“ESAs”) published its work programme (“Programme”) for 2025. Some of the JC’s priorities are as follows:

1. continue to have a strong focus on DORA work and coordinate its implementation, including the new Oversight Framework;
2. enhancing the protection of European consumers in relation to banking, insurance and pensions and securities products;
3. in order to streamline the reporting framework, the ESAs will monitor the practical application of the SFDR, especially the SFDR Delegated Regulation, to determine if Q&As or other level 3 tools to promote supervisory convergence are needed to give competent authorities and market participants further guidance on the practical application of the SFDR rules;
4. jointly assess key trends and vulnerabilities to financial stability and continue to produce, targeted cross-sectoral risk analysis in addition to their respective sectoral risk analysis.
5. continue work as regards fulfilling its mandate on the mapping and monitoring of external credit assessment institutions (ECAIs) under the Capital Requirements Regulation and Solvency II;
6. support ESMA’s efforts in the implementation of the ESAP based on the JC Implementing Technical Standards published in 2024;
7. start preparing a joint exercise assessment exercise on the independence of competent authorities, based on joint criteria approved in 2023; and
8. will organise the 12^th Joint Consumer Protection Day.