1. “The future of customer engagement and banking channels” - Remarks by Director of Consumer Protection, Colm Kincaid at the BPFI National Banking Conference
On 11 June 2024, Colm Kincaid, Director of Consumer Protection at the Central Bank of Ireland (“Central Bank”) delivered a speech at the BPFI National Banking Conference on the future of customer engagement and banking channels. The following are some of the points which Director Kincaid addressed in his speech:
The Landscape
Director Kincaid began by emphasising the importance of quality customer service and engagement as a driver of consumer confidence particularly in light of challenges faced by the banking sector. However, despite the challenges, there were significant opportunities for the banking sector, if the transformative potential of technology could be effectively harnessed.
Emphasising the delicate balance regulators must maintain between fostering innovation and ensuring resilience, Mr Kincaid highlighted the significance of remembering and integrating lessons learned from past experiences into the regulatory framework. Addressing the future of regulatory structures, he utilised an analogy of a three-legged stool; major components he believes are essential for a robust system:
- Rules
- Education
- Culture
Leg One: Enhancing the rule book.
Mr Kincaid emphasised the importance of the European Union's uniform rules, passporting regime, and coordinated supervisory structure, which are supported locally by the Consumer Protection Code (“CPC”). Since its creation in 2006, the CPC has been critical in assuring consumer protection. The Director described the ongoing review of the CPC, which aims to modernise so that it remains relevant in an ever-changing financial landscape. This is taking place concurrently with the adoption of the Individual Accountability Framework. Together, these activities serve as the cornerstone for the Central Bank's supervisory actions, ensuring that consumer interests are prioritised in the financial sector. Mr. Kincaid echoed a remark made by Governor Makhlouf's previously, emphasising that consumer protection is key to the Central Bank's mandate, pushing the change of regulatory and supervisory policies to maintain customer welfare at the forefront of financial decisions.
Leg Two: Educating and informing consumers – a multi-stakeholder approach.
Mr Kincaid highlighted the often-overlooked importance of financial education for consumers. He underlined the need for a collaborative approach that includes different stakeholders in providing consumers with the knowledge and skills they need to navigate today's complicated financial services industry. Director Kincaid praised the government's efforts to implement the National Financial Literacy Strategy and reaffirmed the Central Bank’s commitment to assisting consumers by providing essential information, warning them of potential risks, and educating them on their rights and the complaint resolution framework.
In particular, the Director praised the efforts previously made by businesses and industry associations around financial education, such as measures addressing bank account movement and fraud protection. However, he advocated for greater proactive participation, stating that consumer education should be considered a basic service given by financial institutions. This comprises direct contact at points of sale or advice, ensuring consumers receive enough assistance in their financial decision-making, and thematic education on major topics, opportunities, and threats affecting their financial well-being. He indicated that technology should play an important part in improving consumer education. Firms that incorporate financial education into their service offerings can improve their clients' overall financial literacy and well-being.
Leg Three: Embedding a culture of effective customer service and supports.
Director Kincaid underlined the need to create a consumer-focused culture inside financial institutions as a method of reducing risk and increasing trust. He contended that, given the quick rate of change in the financial sector, a strong cultural commitment to putting customers at the centre of business choices is required. Kincaid identified basic customer service as a crucial area where organisations may swiftly make considerable progress in this respect, citing the favourable impact of such efforts on trust levels as indicated in the Irish Banking Culture Board's Éist study.
The Director further highlighted the link between customer service and consumer happiness, using the Financial Services and Pensions Ombudsman's Complaints Overview for 2023. He stated that customer service is still the biggest reason of unhappiness with banks, as proven by Department of Finance surveys and social media sentiment research. These complaints frequently result in considerable restitution payments, emphasising the need for companies to take proactive steps to enhance their services.
Finally, Director Kincaid emphasised that, while there is a favourable trend in companies responding to Central Bank actions on customer service concerns, this reactive strategy is inadequate. He advised businesses to adopt a more consumer-centric culture, providing consistent and high-quality service even in the absence of regulatory pressure. This proactive approach is critical for establishing confidence and ensuring that the financial industry performs efficiently for customers in the future.
Conclusion:
Director Kincaid emphasised that a true dedication to customer service must become an inherent component of business decision-making to assure consistent and favourable client experiences. He concluded by praising the BPFI for tackling this critical issue and expressed hope that the banking and payments sector will make considerable progress in improving its services. He urged more debate and action to better serve customers, reaffirming the Central Bank's commitment to building a more consumer-focused culture across the sector.
2. Central Bank publishes its Financial Stability Review 2024
On 11 June 2024, the Central Bank of Ireland (“Central Bank”) published its Financial Stability Review 2024 (“Review”).
The Review is one of the Central Bank’s flagship productions and it outlines the Central Bank’s assessment of the main risks facing the financial system, the resilience of the system to those risks, and policy actions to safeguard monetary and financial stability.
Bearing in mind that Ireland is host to a large and diverse financial sector incorporating international clients which have little direct impact on the domestic economy, the Review focuses on the parts of the financial sector that provide services to Irish households and businesses.
The Review is divided into three sections as follows:
1. The first section outlines the Central Bank’s assessment of the main risks facing the Irish financial system over the short to medium term. Some of the risks identified include:
- inflation has continued to fall globally but challenges remain along the “last mile” for central banks;
- heightened geopolitical instability could mean further unexpected shocks;
- geopolitical, cyber and climate risks could all compromise the global fight against inflation via supply chains or commodity markets;
- geopolitical tensions between major economies in recent years could speed up the weakening of global trade links and could result in more restrictions on trade and cross-border movements of capital, technology and workers; and
- higher for longer interest rates could expose vulnerabilities in the global financial system;
2. The second section outlines the Central Bank’s assessment of the resilience of the domestic-facing financial system to adverse shocks and its ability to absorb, rather than amplify, such shocks. The Review examines the domestic situation under a number of headings as follows:
- households to include reference to monetary tightening policy / mortgage interest rate repricing / labour markets / consumer loan performance / mortgage arrears and higher interest rates;
- non-financial corporations to include reference to trading conditions of Irish businesses / SME profit margins / export-oriented firms / finance costs for large corporates / insolvencies;
- domestic banks to include reference to profitability / net interest margins / potential rise of deposit funding costs / banks’ asset quality positions / exposure to CRE lending;
- non-bank financial sector to include reference to falling CRE prices / net investment inflows / non-bank lending to SME borrowers;
- insurance firms to include reference to aggregate solvency position of the Irish insurance sector / exposure to market risk through investment holdings / exposure to real estate investments / climate change.
3. The third section explains the Central Bank’s policy actions to safeguard financial stability and ensure that the resilience of the financial system is proportionate to the risks it faces. The Review examines the current macroprudential policies and gives an update on its three broad pillars as follows:
- macroprudential capital buffers for banks to include the O-SII buffer and the CCyB;
- mortgage measures such as LTV and LTI; and
- policies relating to non-banks, in particular investment funds to include leverage limit, liquidity guidance and Irish authorised GBP denominated LDI funds.
In his opening remarks at the press conference launching the Review, Governor Gabriel Makhlouf said that “Since the last Review in November last year, we are seeing some signs of the most acute, short-term risks moderating. Key to that is a sustained fall in inflation, alongside continued strength in the global economy, which has proven more resilient than expected in adjusting to higher interest rates. Against this positive economic news, we must remain mindful of the risk of further unexpected shocks, living as we do in a seemingly more dangerous and unstable world.”
3. The European Banking Authority (“EBA”) publishes governance regulatory products under the Markets in Crypto-Assets Regulation
On 6 June 2024 the EBA published three governance regulatory products under the Markets in Crypto-Assets Regulation (“MiCA”) as part of its ongoing efforts to foster a transparent, secure, and well-regulated crypto-assets market. They include:
1. Guidelines on the minimum content of the governance arrangements for issuers of asset-referenced tokens (“ARTs”).
These guidelines specify the various governance provisions in MiCA, taking into account the principle of proportionality. Additionally, the guidelines clarify the tasks, responsibilities and organisation of the management body, and the organisational arrangements of issuers, including the sound management of risks across all the three lines of defence.
2. Final draft Regulatory Technical Standards (“RTS”) on the minimum content of the governance arrangements under remuneration policy.
The RTS are applicable to issuers of ARTs and electronic money institutions issuing significant e-money tokens (“EMTs”), and, where Member States require to apply Article 45(1) MiCA to issuers of non-significant EMTs. The RTS set out a framework similar to the remuneration framework for investment firms that aims at achieving the same regulatory objectives including; to ensure that remuneration policies promote the sound and effective risk management of issuers, do not create incentives to reduce risk standards and ensure cross sectoral consistency.
3. Final draft RTS on conflicts of interest for issuers of ARTs.
The RTS specify the requirements for policies and procedures on conflicts of interest (“CoI”). Issuers of ARTs shall implement and maintain effective policies and procedures to identify, prevent, manage and disclose conflicts of interest. The final draft RTS underline that Issuers of ARTs should pay particular attention to CoI that could arise in relation to the reserve of assets. Where the issuer of ARTs is a member of a group, the policies and procedures must also take into account any circumstances which may give rise to a CoI due to the structure and business activities of other entities within the group.
Next Steps
The RTS will now be submitted to the European Commission for endorsement. The RTS will then be examined by the European Parliament and the Council of the EU before being published in the Official Journal of the European Union and will come into force twenty days later.
4. ESAs and ENISA sign a Memorandum of Understanding to strengthen cooperation and information exchange
On 5 June 2024, the European Supervisory Authorities (“ESAs”) announced that they signed a Memorandum of Understanding (“MoU”)with the European Union Agency for Cybersecurity (“ENISA”) with the aim to further strengthen cooperation and information exchange between both parties as a result of the Directive on measures for a high common level of cybersecurity (“NIS2 Directive”) and the Digital Operational Resilience Act (“DORA”).
Against the background of the above legislative framework, the MoU sets out the structure for cooperation and exchange of information on tasks of mutual interest to include:
- policy implementation;
- incident reporting in respect of major ICT related incidents;
- oversight of critical Information Communication Technologies (“ICT”) third-party providers; and
- the development of draft technical standards.
Additionally, the MoU seeks to:
- promote regulatory convergence;
- facilitate cross-sectoral learning and capacity building on areas of mutual interest; and
- information exchange on emerging technologies.
The MoU sets out that the parties will establish a single contact point (“SCP”). This will comprise of staff members of each ESA and ENISA. The SCP will agree on a work plan at least once a year that specifies initiatives and actions (such as workshops and discussion forums). Tasks will be allocated between the parties for the implementation of the MoU.
Chair of the Joint Committee of the ESAs and ESMA, Verena Ross stated that:
“By bringing together the ESAs working on cybersecurity risk in the financial sector and ENISA as the EU’s cybersecurity agency, we are further strengthening our commitment to safeguarding the financial system from information security risks. In an interconnected world, ICT risk does not limit itself to one geographical or sectoral area, making cooperation in this field crucial. Through facilitating collaboration and resource sharing, we continue to enhance our capability to detect and respond to cybersecurity threats.”
Next Steps
The MoU will remain valid for three years and will automatically renew for subsequent periods of three years unless a party to the MoU provides written notice of termination at least two weeks prior to the automatic renewal date.
5. ESAs publish Joint Annual Report for 2023
On 7 June 2024, the Joint Committee (“JC”) of the European Supervisory Authorities (“ESAs”) published its Annual Report for 2023 (“Report”). The Report sets out the work carried out by the ESAs during 2023 and highlights the JC’s coordinating role and its facilitation of discussions and exchange of information across the three ESAs, the European Commission (“Commission”) and the European Systemic Risk Board.
The Report focuses on areas of cross sectoral relevance. The following will be of particular interest:
- Joint risk assessments
The Report explains that the JC prepared two joint risk reports in the Spring and Autumn of 2023. Amongst other matters, the Spring report underlines that in spite of relative stable EU financial markets, supervisors, financial institutions and market participants should remain vigilant amid increased economic and geopolitical risks, a challenging market environment and market pressure in the banking sector. As part of its Autumn joint risk report, the JC identified interest rate risk, liquidity risk, and credit risk to be of high importance across various sectors within the financial industry. The report underlines that these risks pose challenges to banks, insurers, asset managers, and other financial institutions, and that their proper management is crucial for maintaining financial stability and adequately mitigating systemic risk.
- Sustainable finance
Matters relating to sustainable finance in the Report focused on the Sustainable Finance Disclosure Regulation (“SFDR”). It was noted that the Commission launched a consultation in September 2023 on the implementation of SFDR to identify potential shortcomings in the current framework. Against that background, the Report states that the ESAs are preparing a joint opinion contributing to such assessment.
- Operational risk and digital resilience
The Report highlights the important work carried out by the JC in relation to the implementation of the new Digital Operational Resilience Act (“DORA”). The JC Sub Committee on Digital Operational Resilience was assigned with the task of developing several new policy products to support the legal framework for DORA. Policies were developed in the following areas:- ICT risk management;
- ICT-related incident reporting;
- digital operational resilience testing;
- ICT third-party risk management; and
- oversight of critical ICT third-party providers.
- Consumer protection and financial innovation
The Report reiterates the importance of consumer protection in the cross sectoral work of the JC. It particularly addressed national financial education initiatives on digitalisation, with a focus on cybersecurity, scams and fraud. The ESAs also collected information from National Competent Authorities on administrative sanctions and measures imposed.
- Securitisation
The Report sets out that the ESAs published the JC final report containing the draft Regulatory and Technical Standards (“RTS”) on the Environmental Social and Governance (“ESG”) impact disclosure for Simple, Transparent and Standardised securitisations under the Securitisation Regulation. These RTS, the Report explains, aim to help market participants make informed decisions about the sustainability impact of their investments.
- Financial conglomerates
The Report highlights that the JC published its 2023 annual list of identified financial conglomerates, which includes 63 financial conglomerates with the head of group located in the European Union or in the European Economic Area.
- The European Single Access Point (“ESAP”)
The Report notes the ESAs close cooperation in respect of the development of the ESAP. The legislative package in relation to ESAP aims to facilitate access to publicly available information of relevance to financial services, capital markets and sustainability.