1. Deputy Governor, Sharon Donnery, gives remarks on "Innovation and Trust – Regulating in the interests of us all"
On 7 February 2024, Deputy Governor of the Central Bank of Ireland, Sharon Donnery, gave remarks on "Innovation and Trust – Regulating in the interests of us all". The following captures some of the key messages made during her speech.
Innovation in the digital age – the balance of benefits and risks
The Deputy Governor stated that this new phase of innovation is a digital one, within the larger context of widespread technological advancements in our economy. New entrants, new products and new customer service methods all bring real benefits, but not without risks.
- New entrants: these improve competition in the market, and can improve market functioning. However, in some instances business models develop much quicker than control frameworks;
- New products: these are important to meet consumer demands, but issues regarding suitability and utility are common, where products have a risk profile that may not be suitable for all investors; and
- New methods of customer service: this is vital to keep pace with larger societal developments, however it is integral that these methods are secure and resilient.
Engaging with the challenge
The Deputy Governor noted that the risks from financial innovation are clear, and must be adequately managed to achieve maximum benefit from the opportunities. Regulators, industry and innovators are all experiencing challenges, and the pace of digitalisation, as well as the volatility of the wider environment adds to this. However, despite these challenges, she noted the importance that regulators tackle this head on. The Central Bank has embraced this challenge, and changed its strategic outlook, by becoming more future focused and more open to stakeholder engagement. This has helped the Central Bank to deliver its mission of serving the public interest by:
- deepening their understanding of innovation in the financial services sector;
- better informing their regulatory approach;
- better explaining to innovative firms what being regulated entails; and
- embedding a regulatory culture in our firms.
The Central Bank has been continuously developing its Innovation Hub since 2018, and consultation on plans to enhance their hub and to establish an Innovation Sandbox Programme closed on 8 February 2024. In addition, the Central Bank is participating in the supervisory work of the European Supervisory Authorities.
Delivering trust through the cycle
The Central Bank's innovation engagement has helped firms to better understand their regulatory requirements and helped the Central Bank to better understand the innovations within the system. The Deputy Governor stressed that the Central Bank's engagement with innovation was in addition and as a compliment to its regulatory and supervisory roles. Regardless of the innovation, she stated that the "basic requirements of adequate risk management remain". She argued that given the complexity and speed of development it makes the basic requirements even more essential.
Trust is a central element, both for the financial system and the innovations themselves. The Deputy Governor sees this as a fundamental part of the regulator's role, noting that trust can only be delivered through supervision:
- trust that firms authorised by the Central Bank are of a sufficient standard to provide financial services in Ireland and Europe;
- trust that firms that the Central Bank supervises are well run, and that the Central Bank manages the risks to them and their customers; and
- trust that should a firm fail, they do so in a way that is orderly and that ensures consumers' funds are sufficiently safeguarded.
The Deputy Governor observed that these principles have been more acute with new and innovative firms, noting specifically that significant deficiencies have been identified within the growing payment and electronic money institutions sector. She clarified that this observation was made to better the sector and not to criticise, as getting this right was necessary to better secure customer funds and protect the integrity of the sector.
2. ESMA issues public statement on deprioritisation of supervisory actions on the obligation to publish RTS 28 reports in light of the agreement on the MiFID II/MiFIR review
On 13 February 2024, the European Securities and Markets Authority ("ESMA") issued a public statement on the deprioritisation of supervisory actions regarding the obligation to publish best execution reports required under Commission Delegated Regulation 2017/576 which supplements MiFID II ("RTS 28 Reports").
The need for this statement arose as a result of the political agreement reached on the proposed Directive to amend MiFID II ("Proposed Directive") which seeks to remove Article 27(6). Article 27(6) currently requires investment firms to specify the content and format of the information regarding the identify of execution venues and the quality of execution, and publish it annually. This is done through the RTS 28 Reports. The decision to remove Article 27(6) was made following evidence and feedback from stakeholders that RTS 28 Reports were hardly ever read and did not enable investors to make any meaningful comparisons.
As the Proposed Directive will not be required to be transposed until 18 months after it enters into force, investment firms will still be required to produce these reports during 2024 and until the date that the Directive is transposed by their respective Member State.
The statement emphasised that from 13 February 2024, ESMA expects national competent authorities "not to prioritise supervisory actions towards investment firms relating to the periodic reporting obligation to publish the RTS 28 reports". Instead ESMA emphasises the importance of "the best execution requirements under both the current and the reviewed MiFID II framework". It states that, "apart from the content of this statement, investment firms are expected to strictly adhere to the best execution requirements and NCAs are expected to supervise their compliance".
3. Payment Updates – PSD3/PSR and IBAN discrimination
ECON votes to adopt reports on proposed PSD3 and PSR
On 14 February 2024, the European Parliament's ("Parliament") Economic and Monetary Affairs Committee ("ECON") released a press release stating that it had voted to adopt draft reports on the European Commission's legislative proposals on a Directive on payment services and electronic money services ("PSD3"); and a Regulation on payment services in the internal market ("PSR"). For more details on the draft reports, please see the FIG Top 5 at 5 dated 23 November 2023.
Next Steps
The Parliament is expected to vote on both texts during the April plenary session to close the first reading without the European Council's ("Council") agreement. Following the elections, negotiations will begin between the Parliament and the Council.
For more details on PSD3 and PSR you can listen to our podcast on the topic which can be accessed here.
Commissioner McGuinness gives remarks on IBAN discrimination at the European Forum for Innovation in Payments
On 12 February 2024, the Commissioner for Financial Stability, Financial Services and Capital Markets Union, Mairead McGuinness, gave remarks on IBAN discrimination at the 4th meeting of the European Forum for Innovation in Payments. Commissioner McGuinness noted that IBAN discrimination is illegal, and while it may not seem as urgent when compared to other global events, tackling this issue will make a significant difference to people's lives.
The Single Euro Payments Area ("SEPA") implementation deadline was over 9 years ago, but there are still companies and public administrations that refuse to make or accept payments involving non-domestic accounts. Commissioner McGuinness aims to end this practice by the end of this mandate.
Commissioner McGuiness emphasises that a bank account in any Member State can be used to pay bills in any other Member State. Companies, particularly fintechs are being impacted by this practice, as they are unable to fully implement their business models. She noted that the Commission are taking action by taking enforcement actions such as infringement procedures. In addition, they are raising awareness through media, and are launching a new campaign targeting companies to remind them of their obligation not to discriminate against IBAN numbers. They also plan to increase awareness among groups such as Erasmus students or expats who are more likely to be discriminated against.
Some positive steps have been seen in certain Member States, such as tightening of sanctions on offenders and information campaigns. Commission McGuinness encouraged Member States to take more ambitious action, stating that she is "not going to listen to excuses of reasons why" this practice cannot be eradicated. She acknowledged that IT systems may not always be compatible with foreign IBANs, but referred to this as "an explanation…not an excuse". She stressed that in Member States where changes are not being made quickly enough, rather than hearing excuses, the Commission wants to deal with the issue and discuss how it will be addressed.
4. Banking Updates – SRM Vision 2028 and Speech by Chair of the Supervisory Board of the ECB
SRB launches its "SRM Vision 2028" Strategy at the SRB Conference
On 13 February 2024, the Single Resolution Board ("SRB") launched its SRM Vision 2028 Strategy ("Strategy").The Strategy is a result of the in-depth strategic review carried out by the Single Resolution Mechanism ("SRM") over the past year, and represents a move from a phase of resolution planning and preparation to include a new focus on operationalisation, resolution testing and crisis readiness, taking into consideration the evolving risk landscape. One of the overarching themes of the Strategy is to ensure the transition of the SRB in becoming an established agency. To achieve this, cooperation with national resolution authorities is vital.
The strategic review provided an opportunity to take a longer-term perspective of the SRB's work and ensure that the need to harness the potential of rapidly evolving world is integrated within the Strategy. The Strategy is based around 3 core areas: core business; governance, organisation and tools; and human resources.
Core Business
This area has 3 key objectives: powerful crisis preparedness and management; crisis-oriented resolution planning and resolvability; and SRM as reference in resolution. The aim is to adopt an embedded risk-based approach to resolution planning, and become the "global reference in the resolution field". The Strategy outlines a number of actions that will be taken to achieve this goal:
- revamp the centralised crisis management function and prepare for evolving threats; develop tools for the operationalisation of resolution strategies; and develop a comprehensive approach to crisis readiness;
- revamp the annual Resolution planning Cycle, ensure resolution plans are fully operable; develop a comprehensive plan for resolvability testing and enhance capabilities for launching enforcement action to remove substantive impediments; and
- develop a knowledge management function for the SRM; demonstrate SRM's leadership in the resolution field; and strengthen cooperation with EU bodies and relationships with third countries.
Governance, Organisation and Tools
This area has 3 key objectives: strengthened governance and streamlined structure; strong and positive organisational culture and values; and digital transformation and use of best practice technologies. The Strategy outlines a number of actions that will be taken to achieve this goal:
- streamline decision-making and increase efficiency of internal structures and processes; update existing organisational structure and increase SRM integration;
- establish managerial practices based on trust and shared values and foster a positive SRM culture and promote sustainability within the SRB work; and
- enable the SRB's transformation and reinforce the SRM and SRB's data capabilities.
Human Resources
This area has 3 key objectives: motivated and professional pool of talent; learning and development; and increased focus on diversity and inclusion.
Chair of the SRB's comments
Dominique Labouriex, Chair of the SRB welcomed the Strategy, noting that it is "a new milestone in the SRB's life". He noted that the Strategy will help to ensure that the SRN is adequately equipped to deal with various challenges, ensure that banks can be resolved and play its role in ensuring financial stability. In his foreword, the Chair noted that ensuring financial stability without any cost to the taxpayer is the mission of the SRB and the Strategy is a key tool in achieving this.
Claudia Buch, Chair of the Supervisory Board of the ECB gives a speech entitled "European banking supervision a decade on: safeguarding banks' resilience amid global challenges"
On 12 February 2024, the Chair of the Supervisory Board of the European Central Bank ("ECB"), Claudia Bach, gave a speech entitled "European banking supervision a decade on: safeguarding banks' resilience amid global challenges". The following captures some of the key messages made during her speech.
The First Decade of European banking supervision: Increasing resilience and building trust
The Chair outlines a number of ways in which the ECB has built trust and resilience in the sector over the last decade. Close cooperation between the ECB and Single Supervisory Mechanism ("SSM") supervisory teams, alongside national supervisors has been key. Common supervisory standards have harmonised banking supervision across participating countries, increasing the EU banking sector's resilience. The non-performing loans ration of significant banks have declined form over 7% in 2015 to less than 2% in 2023. Banks' capital and liquidity coverage have also increased.
In the short term, banks have benefitted from higher interest rates, seen in higher profitability and market valuations of banks. However, in the long term, the effects are uncertain as it is unclear how higher interest rates will affect credit losses and depositor behaviour, while digitalisation enables quicker withdrawals in response to news.
The Second Decade of European banking supervision: adapting to a new environment
Heightened macroeconomic and geopolitical risks: interest rates, energy prices, climate change and cyber-attacks have all increased. Many of these changes are structural, not temporary, requiring adjustments at firm and sector levels. Assessing future credit risk is difficult. High levels of uncertainty cannot be captured with classic risk models, and a holistic approach will involve scenarios, data improvements and close interactions between bank-level and macro-level analysis. SSM surveys found few risks are sufficiently integrated into banks' risk management processes. The ECB calls for improvements in risk sensitivity, and risk information systems.
Digitalisation and the competitive landscape: the market share of non-banks has increased from 15% in 2008 to 27% in 2023. While digitalisation has improved banks' technologies, they also face fierce competition which can weaken financial stability. The ECB's approach is to mitigate risks, not to restrict competition and will focus on funding and liquidity risks. Banks have become more vulnerable to IT and cyber risks due to increased reliance on outsourcing and third-party services for critical functions.
Taking Action
Once the risks are identified, action is needed to ensure banks are well governed and have sufficient capital and liquidity buffers. While important, strong capital and liquidity ratios are not enough, internal governance mechanisms and long term sustainability of business models are key to avoiding bank distress. The SSM Regulation provides a comprehensive supervisory toolkit and the ECB has also introduced guidance on climate and environmental related risks. It intends to intensify the use of escalation mechanisms with potential enforcement actions and sanctions. The Chair also stated her commitment to reforming the Supervisory Review and Evaluation Process, and recent work has been carried out on aligning the intensity of supervision with each banks' specific vulnerabilities and the ECB's overarching goals.
Outreach
The implementation of Basel III is essential to shaping the environment in which banks operate. The Chair noted that while significant progress had been made, gaps remain and she supports the crisis management and deposit insurance ("CMDI") package. She also noted the need to engage with citizens who may see high interest rates and banking profits as unjust. European banks operate globally, and close cooperation with international counterparties is vital to prevent fragmentation and regulatory arbitrage. A global approach is particularly needed in the areas of non-bank financial institutions and the risks from banks outsourcing to big tech firms.
Conclusion
Banks are better capitalised and more resilient than they were 10 years ago. However, new challenges are constantly emerging which can challenge banks' business models. Alongside this, supervisors and regulators also need to adapt to the new environment. The Chair noted that this is best achieved through closing resolution gaps, of which the CMDI review is key.
5. Council of the European Union publishes texts of political agreement on proposed AML Regulation and MLD6
On 14 February 2024, the Council of the European Union ("Council") published the texts of the political agreement reached on the 6th Money Laundering Directive and the associated Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing:
- compromise text for the proposed Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing; and
- compromise text for the proposed Directive on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (6223/24).
These texts reflect the outcome of the provisional agreement that was reached between the Council and the European Parliament ("Parliament"), as outlined in the FIG Top 5 at 5 dated 25 January 2024. To date, the text of the provisional agreement reached on the proposed Regulation establishing the Anti-Money Laundering Authority has not been published.
Next Steps
The Council and the Parliament must both approve the provisional texts before going through the formal adoption procedure.