1. Deputy Governor Sharon Donnery delivers speech addressing regulation in a changing world
On 9 December 2024, Deputy Governor of the Central Bank of Ireland (“Central Bank”), Sharon Donnery, delivered a speech at the Embassy of Ireland in London. The theme of the speech centred on the importance of financial regulation in a changing and fragmenting world.
The Deputy Governor opened her speech by stating that we live in challenging and uncertain times, but also important ones. She highlighted that this is a time of great progress and opportunities, but also one with potential regress and great risks.
The Deputy Governor discussed the current challenges facing the global economy, including the increased number of conflicts. She noted that the conflict-affected areas across the world have increased by 65% since 2021. Whilst these conflicts are firstly human tragedies, they also have economic consequences, including market and commodity price volatility, trade disruptions and restrictions, and inflation and energy price shocks, among others.
The Deputy Governor then outlined the geo-economic fragmentation which also seems to be increasing, with new trade restrictions more than tripling since 2019. She highlighted that these conflicts and geopolitical events heighten the risks and vulnerabilities of the operational resilience of the financial sector. The Deputy Governor also discussed the ongoing challenges of climate change and cyber crime, which also increase the importance of improving operational resilience.
The narrative that central banks are uninterested in growth or bettering the public interest was strongly denied by the Deputy Governor. She reiterated that stability is a pre-condition for growth and that the Central Bank is mandated to maintain monetary and financial stability in order to deliver sustainable growth.
Financial Regulation in a fragmenting world
Against this background of these global challenges, the Deputy Governor discussed the role of financial regulation, and emphasised the continued need for global cooperation in this regard, stating:
“while countries increasingly focus on competitiveness, we should not forget the benefits of cooperation…for history has shown that divergence is not the answer to discord.”
She went on to state that de-regulation and regulatory competition is not the answer to protecting the financial system in times of challenge, and that chasing short-term growth through de-regulation rarely pays off in the longer term.
The Deputy Governor acknowledged that regulations ought to be regularly reviewed in order to ensure that they are up to date, proportionate and meet their intended outcomes. She confirmed that there is an onus on central banks and regulators to engage and explain the rationale for their decisions, and to demonstrate accountability. She further confirmed that there is a need for the Central Bank to harness its interrelated mandate through an integrated approach to risk and supervision, highlighting this as a reason behind the Central Bank’s new supervisory approach.
The Deputy Governor concluded her speech by again emphasising the role of financial regulators and policymakers in delivering stability and enabling sustainable growth, which is increasing more important in light of global fragmentation.
2. Central Bank of Ireland publishes its Investment Firm and Intermediary Newsletter
In the first week of December 2024, the Central Bank of Ireland (“Central Bank”) published the latest edition of its Investment Firm and Intermediary Newsletter (“Newsletter”), a twice yearly publication by the Retail Intermediaries supervision team of the Central Bank's Consumer Protection Directorate: Investment Firms, Intermediaries and Client Assets Division.
The Newsletter sets out that it has been expanded to include MiFID investment firms and is now called the “Investment Firm and Intermediary Newsletter”.
The Newsletter covers topics of interest, significant work and regulatory issues that retail intermediary firms and, for the first time, MiFID firms need to be aware of.
Some key highlights from this edition include:
Review of retail intermediaries operating on the basis of a fair or limited analysis of the market
The Newsletter highlights that the Central Bank is currently undertaking a thematic review (“Review”) focused on retail intermediaries and is aimed at gathering information on whether firms, when providing intermediation services under the IDR, IIA and / or CMCAR, provide services to consumers on the basis of a “fair” or “limited” analysis of the market, in line with the definition of these terms set out in Chapter 12 of the consumer protection code (“CPC”). The main goal of the Review is to enable a better understanding of the nature of services being provided in the intermediary sector and how this information is being disclosed to consumers.
The Newsletter states that the Central Bank will provide updates as to the outcome of the Review in 2025.
Launch of the New Online Application Form for Retail Intermediaries
This matter was considered in FIG Top 5 at 5 dated 26 September 2024. The Newsletter states that an authorisation webinar will be held soon and advises interested parties to register at riauthorisations@centralbank.ie.
Update on the changes to professional indemnity insurance limits
The Newsletter reminds insurance intermediaries that the changes to the minimum amount of Professional Indemnity Insurance (“PII”) cover set out by the Insurance Distribution Directive (“IDD”), which is to be held by insurance intermediaries, came into effect on 9 October 2024. Insurance intermediaries are further reminded to ensure they hold adequate PII in line with the requirements of the IDD.
As regards, investment intermediaries, the Central Bank has made updates to the Handbook of Prudential Requirements for Investment Intermediaries, to align the PII obligations for investment intermediaries with those for insurance intermediaries.
Operational resilience in small firms
The Newsletter specifically addresses this matter in the context of key person risk in small firms whereby that key person can be absent for various reasons. The Newsletter states that firms should develop, and regularly review, a succession and contingency plan to allow for appropriate continuation of essential services in such circumstances. The Central Bank expecting the following matters to be attended to:
- notify the Central Bank as soon as possible;
- nominate an alternative point of contact if needed;
- communicate any disruption of service to affected consumers to enable them to make alternative arrangements; and / or
- inform the consumer in a timely manner as to how continuity of service will be provided.
Revocation of services that are no longer required
Both retail intermediaries and investment firms are reminded that if a firm holds an authorisation or registration that is no longer needed, due to the fact that the firm is no longer providing that service, then an application to revoke the authorisation or registration should be submitted to the Central Bank. Further, in that regard, the Newsletter emphasises that the provision of accurate information should form an essential part of firms' investor protection frameworks.
MiFID insights
The Newsletter provides some MiFID – specific updates, some of which are as follows:
- Common Supervisory Action on the MiFID II Marketing Communications Requirements: the Newsletter discusses the Central Bank’s recent thematic review of investment firms’ application of the MiFID II Marketing Communications disclosure requirements by firms providing investment services to retail clients. This thematic review was considered in more detail in FIG Top 5 at 5 dated 17 October 2024.
- Client assets: the Newsletter discusses changes to the client asset requirements (“CAR”), noting that the revised CAR has been in force for investment firms since 1 July 2023 and for credit institutions providing investment services since 1 January 2024. For more information please see FIG Top 5 at 5 dated 9 February 2023.
- The Newsletter sets out some of the key changes, as regards specific matters, as follows:
- segregation;
- reconciliation and calculation;
- disclosure and consent; and
- risk management.
- The Newsletter also sets out some the observations of the Central Bank post implementation of the changes to the CAR.
- MiFID sectoral supervision strategy: the Central Bank published its regulatory and supervisory outlook report in February 2024. For more information please see FIG Top 5 at 5 dated 7 March 2024. The February 2024 report set out key drivers of risk, factors that have been considered by the Central Bank in the development of its retail conduct strategy for the MiFID investment firm sector (“Strategy”). The Strategy identifies the key MiFID Investment Firm sector risks facing retail investors as:
- governance and controls risks and inadequate investor protection frameworks;
- inducements / remuneration and ineffective disclosure;
- capability torespond to structural change and the changing operational landscape;
- financial resilience; and
- investing in operational resilience.
- Authorisations process for MIFID investment firms: in addition to outlining the application process, the Newsletter advises investment firms, intending to apply for a MiFID authorisation by the Central Bank, to have regard to the following:
- Authorisations and Gatekeeping Report. For more information please see FIG Top 5 at 5 dated 4 July 2024;
- the cross sectoral guidance on authorisation expectations; and
- the Central Bank’s authorisation guidance note.
- MiFID annual conduct of business returns 2024: the Newsletter sets out the further enhancements that will be made to the MiFID conduct of business return and investments product template as part of the 2024 annual data collection exercise. Details as to what is changing are also highlighted, together with the following:
- relevant timelines;
- access to the Central Bank portal; and
- integrity of firm data.
- Market abuse case – enforcement action: the Newsletter provides a summary of the enforcement action taken by the Central Bank whereby a MiFID authorised stockbroking firm was fined €1,225,000 for a breach of Article 16(2) of the Market Abuse Regulation.
Policy updates
The Newsletter provides updates in relation to the following:
- the retail investment strategy (“RIS”), setting out the differing proposals in respect of the RIS in respect of:
- value for money;
- inducements;
- marketing;
- disclosures;
- suitability and appropriateness assessments;
- changes to the professional investor criteria in MiFID; and
- changes to knowledge and competency requirements.
- MiCA
- The Newsletter highlights that MiCA became applicable to issuers of asset reference tokens (“ARTs”) and e - money tokens (“EMTs”) on 30 June 2024 and will become applicable to crypto - asset service providers (“CASPs”) on 30 December 2024. The Central Bank encourages firms seeking to provide services or products under MiCA to commence engagement with it.
- DORA
The Newsletter gives a brief update on DORA and the Central Bank industry briefing held on 6 November 2024. For more information please see FIG Top 5 at 5 dated 14 November 2024.
Central Bank insights
The Newsletter provides information in relation to some Central Bank insights, across a number of areas as follows:
- world investor week 2024;
- fitness and probity updates, specifically in relation to the following:
- fitness and probity guidance update of June 2024. For more information please see FIG Top 5 at 5 dated 20 June 2024;
- minimum competency code (“MCC”) for applicant PCFs; and
- CF certification and PCF annual confirmation 2025.
- the individual accountability framework (“IAF”), particularly emphasising the fact that under SEAR, the responsibilities of non - executive directors (“NEDs”) and independent non - executive directors (“INEDs”) will become effective from 1 July 2025. Further, it is highlighted that firms will be required to include all PCF role holders including INEDs / NEDs on the responsibility map to ensure clarity regarding the governance arrangements within the firm.
- the publication of the Central Bank’s annual report on 30 May 2024;
- the recent update to the Central Bank's strategy. For more information please see FIG Top 5 at 5 dated 24 October 2024.
3. EIOPA publishes second batch of consultations on technical standards and guidelines under Solvency II amending directive
On 4 December 2024, the European Insurance and Occupational Pensions Authority (“EIOPA”) published its second batch of consultation papers on technical standards and guidelines under the Solvency II amending directive.
A high – level overview of each consultation paper is set out below.
- Consultation Paper on a report on biodiversity risk management by insurers.
Considering the economic and financial impacts and dependencies on biodiversity, the amended Solvency II Directive includes a mandate for EIOPA to assess (re)insurance undertakings’ current own risk and solvency (“ORSA”) practices and identify necessary actions for undertakings to adequately consider biodiversity loss risks.
- Consultation Paper on the proposal for Regulatory Technical Standards (“RTS”) on management of sustainability risks including sustainability risk plans.
The draft RTS specify the minimum standards and reference methodologies for the identification, measurement, management and monitoring of sustainability risks, the elements to cover in the plans, and the supervision and disclosure of relevant elements of the plans.
- Consultation Paper on the proposal for guidelines on the notion of diversity for the selection of members of the administrative, management or supervisory body.
The proposed guidelines define the idea of diversity to assist insurance and reinsurance undertakings to put in place a policy promoting diversity for the selection of members of their administrative, management or supervisory bodies, as well as the quantitative objectives related to gender balance.
The final guidelines will be applicable when the review of Solvency II enters into application.
- Consultation Paper on the proposal for revised guidelines on undertaking - specific parameters.
The consultation paper presents the draft revised guidelines on undertaking - specific parameters and its explanatory text. The main objective of the review is to ensure that the guidelines are up to date and in line with the legal framework as amended by the Solvency II review. Another objective of the review is to simplify and shorten the guidelines, in particular where the guidelines are relevant for insurance and reinsurance undertakings.
- Consultation Paper on the proposal for revised guidelines on the treatment of market and counterparty risk exposures in the standard formula.
The main objective of the review is to ensure that the guidelines are up to date and in line with the legal framework as amended by the Solvency II review. Another objective of the review is to simplify and shorten the guidelines, in particular where the guidelines are relevant for insurance and reinsurance undertakings.
- Consultation Paper on the proposal for amending Commission Implementing Regulation (EU) 2015/2011 laying down implementing technical standards (“ITS”) with regard to the lists of regional governments and local authorities, exposures to whom are to be treated as exposures to the central government.
The ITS were adopted in 2015. EIOPA is reviewing them to keep the lists of regional governments and local authorities of the Member States up to date. Furthermore, following Brexit the regional governments of the United Kingdom should be deleted from the lists of regional governments and local authorities.
Next Steps
All consultations, set out above, are open until 26 February 2025. EIOPA will revise the proposals in view of the stakeholder comments received and will publish a report on all of the consultations including the revised proposals and the resolution of stakeholder comments.
4. European Updates:
1. Council reaches agreement on proposed framework for FIDA
On 4 December 2024, the European Council (“Council”) issued a press release (“Press Release”) stating that it had agreed its negotiating mandate on the proposed Regulation on a framework for financial data access (“FIDA”). The proposed framework aims to facilitate access to financial institutions to the customer data of other financial institutions with the goal of:
- highly personalised financial products and services for consumers;
- better access to finance for individuals and small and medium enterprises; and
- harmonised rules on what data to share and how to share it.
The Council’s mandate is set out in a note dated 2 December 2024 from the General Secretariat of the Council to the Permanent Representatives Committee.
The Council’s position
The Council has stated that its position, in the main, reflects the European Commission’s (“Commission”) initial proposal, taking a step – by – step approach as regards implementation. Other aspects of the Council’s position were highlighted, in the Press Release, as follows:
- clarification of the scope of FIDA by setting out what specific data sets, products or sectors, FIDA should cover and apply to, together with an implementation timeframe as regards the data sharing obligations. In this regard, the Council excluded data related to occupational pensions but gave member states the possibility to opt into the regime.
- the Council reinforced the rules relating to third country financial information service providers (“FISPs”), which are entities that are authorised to access and use customer data to offer services such as financial advice and personal financial management;
- it is proposed that entities qualifying as gatekeepers would be strictly regulated and supervised with fair competition in mind.
Next Steps
With the Council having reached this agreement, it is in a position to start trilogue negotiations with the European Parliament and the Commission as regards the final text of FIDA.
Reaction from representative associations
Separately, on 9 December 2024, various representative associations of the financial sector issued a joint statement (“Statement”) calling on the co – legislators to deliver on commitments to boost European competitiveness and to avoid concluding FIDA before a thorough assessment of its impact across the entire value chain is completed. The Statement highlighted the following:
- the framework should balance value for customers, market demand, and costs for financial institutions prior to implementation. Further, it calls for demonstrated evidence of the benefits to customers and market demand, as without this, it risks undermining the competitiveness of financial institutions operating in Europe by diverting resources;
- implications for data security and privacy need to be carefully considered, with robust regulation and supervision of FISPs being a minimum requirement. The data of European companies also needs to be protected. In the Statement, it is maintained, that neither of these concerns are addressed by the current FIDA proposal.
2. CRR Updates:
EBA consults on draft RTS specifying material changes and extensions to IRB approach under amended CRR
On 9 December 2024, the European Banking Authority (“EBA”) published a consultation paper (“Consultation”) on draft regulatory technical standards (“RTS”) amending Delegated Regulation (EU) 529/2014, which supplements the Capital Requirements Regulation (575/2013) (“CRR”) with regard to RTS for assessing the materiality of extensions and changes of the internal ratings based (“IRB”) approach.
Under the CRR, approval is required by competent authorities for institutions to be able to calculate their risk-weighted exposure amounts for credit risk using the IRB approach. Institutions must also apply for permission from their competent authorities before implementing material extensions and changes to their internal approaches. Lists of qualitative criteria for the classification of extensions and changes to the internal approaches, as well as quantitative thresholds, are contained in Delegated Regulation (EU) 529/2014.
The draft RTS have been developed according to Article 143(5) of the CRR (as amended by Regulation (EU) 2024/1623 (“CRR III Regulation”)) which mandates the EBA to specify the conditions for assessing the materiality of the use of an existing rating system for other additional exposures not already covered by that rating system and changes to rating systems under the internal ratings-based approach (IRB) Approach.
Amendments to the RTS have been driven by changes in Regulation (EU) 2024/1623 (“CRR3”) amending the CRR. The RTS aligns with CRR3 by removing outdated references (such as the use of the IRB approach for equity exposures and to the AMA approach) and also introducing changes to reflect the new CRR3 requirements. The amendments have been made to enhance the RTS by utilising a decade of supervisory insights garnered since publication of the original RTS.
The proposed amendments include:
- The qualitative criteria for the material changes related to the definition of default;
- The validation framework;
- The modelling approaches used for slotting exposures and purchased receivables; and
- Clarifications on the calculation of the quantitative backstop criteria.
Next Steps
The consultation closes to comments on 10 March 2025.
The EBA will also be conducting a review to identify potential unnecessary regulatory constraints on institutions leading to delays in implementation of model changes. This may include the interaction of the RTS on MMC with the RTS on the assessment methodology for competent authorities used to approve material model changes in accordance with Articles 144(2), 173(3) and 180(3) of Regulation (EU) 2024/1623.
EBA final report on RTS on specification of long and short positions under CRR derogations
On 6 December 2024, the European Banking Authority (“EBA”) published a final report containing final draft regulatory technical standards (“RTS”) on the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position under article 94(10) of the Capital Requirements Regulation (575/2013) (“CRR”).
The CRR includes some derogation for the calculation of the capital requirements for market and counterparty credit risks. The conditions for accessing such derogations depend on the size of the trading book business, the derivative business and the business subject to market risk. For calculating the size of the business, “the absolute value of long positions shall be summed with the absolute value of short positions”. Amendments introduced by CRR3 include additional specifications regarding the calculation of the size of the business as follows:
- the absolute value of the aggregated long position shall be summed with the absolute value of the aggregated short position;
- a long position means that the market value of the position increases when the value of its main risk driver increases, and a short position means that the market value of the position decreases, when the value of its main risk driver increases; and
- the value of the aggregated long (short) position shall be equal to the sum of the values of the individual long (short) positions included in the calculation.
To complement the additional specifications, the CRR3 mandates the EBA to develop draft RTS specifying the method for identifying the main risk driver of a position and for determining whether a transaction represents a long or a short position. The RTS propose both a general methodology which hinges on FRTB-SA sensitivities (for non-derivative and derivative positions) or SA-CCR add-ons (for derivative positions) and a simplified methodology which covers simple instruments such as fixed-rate bonds, floating-rate notes, stocks, forwards, futures, simple swaps and plain vanilla options, while more complex trades require a more advanced analysis to be performed under the general methodology
Following the EBA’s earlier consultation on the draft RTS, the simplified methodology has been further streamlined by allowing to disregard, under such a methodology, the FX risk drivers for non-FX trades (i.e. trades not considered as pure FX trades but only affected by translation risk). Also, the possibility to use the simplified methodology has been extended to all institutions, for the simple instruments included in its scope.
Next Steps
The draft regulatory technical standards will be submitted to the Commission for approval after which they will be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal of the European Union.
5. ESAs publish guidelines on explanations, opinions and standardised test for classifying crypto - assets under MiCA
On 10 December 2024, the European Supervisory Authorities (“ESAs”) published joint guidelines (“Guidelines”) with the aim of facilitating consistency as regards the regulatory classification of crypto – assets under the regulation on markets in crypto – assets (“MiCA”).
The Guidelines set out:
- a template establishing the content and form of the explanation accompanying the crypto- asset white paper referred to in article 8(4) of MiCA;
- a template establishing the content and form of the legal opinion on the qualification of asset referenced tokens (“ARTs”) referred to in point (b)(ii) of article 17(1) and point (e) of article 18(2) of MiCA;
- a standardised test for the classification of crypto - assets, recognising that MiCA applies to crypto - assets that are not:
- unique and non - fungible with other crypto – assets;
- in scope of relevant sectoral measures by virtue of their qualification as financial instruments, deposits, insurance and pensions products and other relevant financial products as referred to in article 2(4) of MiCA; and
- issued by persons excluded under article 2(2) of MiCA.
The standardised test was developed in order to ensure that market participants adopt a common approach to the regulatory classification of crypto - assets under MiCA. The templates in annexes A and B of the Guidelines provide a common format for the explanation and for the legal opinion with the aim of ensuring consistency in the submissions. The standardised test established in Annex C provides a common approach to crypto - asset classification thereby facilitating a uniform approach to the classification of crypto - assets.
The standardised test recognises that the regulatory classification of a crypto - asset requires a case by case assessment, taking account of the following:
- applicable EU and national law;
- decisions of the Court of Justice of the European Union;
- decisions of the national court; and
- any regulatory measures or guidance applicable at the national level.
Next Steps
The Guidelines will be applicable two months after the publication of their translation in all official languages of the EU.