FIG Top 5 at 5 - 23/05/2024

1. Central Bank of Ireland speeches – AML and Digital Euro

1. Deputy Governor, Derville Rowland gives a speech on the new EU Anti-Money Laundering Authority

On 16 May 2024, the Deputy Governor of the Central Bank of Ireland (“Central Bank”), Derville Rowland gave a speech at the European Anti-Financial Crime Summit, on setting up the new EU Anti-Money Laundering Authority (“AMLA”) for success.

Europe’s response to the challenges

The EU’s anti-money laundering (“AML”) framework, including the creation of AMLA was motivated by the acknowledgement that a collective and coordinated approach was needed. Fragmentation in existing  approaches was identified as a key concern and the creation of AMLA “is a significant step in the right direction to confront the challenges we face”. While it represents a unique opportunity to examine the regulatory fragmentation and eliminate the weak points, the Deputy Governor cautioned against complacency in assuming that the AMLA’s success is guaranteed.

Setting up AMLA for success

The Deputy Governor identified a number of factors that were necessary to ensure that the AMLA reaches its fill potential:

• AMLA must have a clear mandate and adequate powers which enable an effective risk-based approach to achieve its regulatory outcomes;
• AMLA needs strong governance and operational independence to carry out its tasks free of outside pressures;
• AMLA must have sufficient skills and capabilities to identify and mitigate risks and vulnerabilities in the European system; and
• AMLA can build on the strong foundations already laid regarding sharing, data and technology and innovation.

Risk based Approach

The approach taken by the AMLA must be risk based from the outset, and the approach must be holistic, but not too homogenous. In addition, the AMLA must acknowledge that financial crime risks differ across sectors, countries and regions in Europe. The Deputy Governor noted that the scale of responsibilities assigned to the AMLA, risk an overly prescriptive approach being employed to tackle fragmentation. She provided 3 reasons as to why this was understandable:

• a key driving force for the establishment of the AMLA was the divergent approaches;
• the fastest means to achieve supervisory convergence is to prescribe a more rigid approach; and
• in the short term it may be more expedient to approach risks in firms not directly supervised by the AMLA.

This, she warned risks a “one size fits all” approach being adopted which may inadvertently introduce a “tick-box approach”. The AMLA must be outcome focused, and requires a strong and robust supervisory framework to be developed, however, the Deputy Governor cautioned that process can sometimes get in the way of effectiveness, and outcomes and outputs are not the same thing.

Governance and skills and capabilities

Operational independence and technical expertise is the cornerstone of good regulatory governance. The Deputy Governor welcomed the independent and impartial Executive Board and its empowerment to impose binding decisions on national competent authorities and directly supervised entities. The composition of the Board demonstrates the importance of strong leaders with the requisite experience and expertise.

The AMLA’s mandate makes it “unique in the eco-system of EU institutions” and staff must be highly trained supervisors who also have expertise in the development of policy and enforcement investigations.

Building on Strong Foundations

The AMLA, while new, can build on work that has already been done at national and EU level. It will only be responsible for direct supervision of a small number of the highest risk firms, and therefore the responsibility for tackling the majority of ML/TF risk will fall to national supervisors. The AMLA will have to build a common supervisory culture with national supervisors to ensure that firms not directly supervised are complying with their obligations. The Deputy Governor noted that the AMLA should not try to create everything from scratch and use existing initiatives such as the European Banking Authority guidelines on cooperation and information exchange, and develop and foster new relationships with law enforcement across the EU. 

Please note that on 20 May 2024, the Council of the EU published the texts of the following:

• Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (2021/0239(COD));
• Regulation establishing the Anti-Money Laundering Authority (AMLA) (2021/0240(COD)); and
• Sixth Money Laundering Directive (2021/0250(COD)).

The next step is for the Council of the EU to formally adopt the legislation. Once this has occurred the legislation will be published in the Official Journal of the European Union.

2. “The case for the digital euro and Eurosystem developments”- Remarks by Anne Marie McKiernan, Director of Financial Operations at the Central Bank of Ireland

On 16 May, Anne Marie McKiernan, Director of Financial Operation at the Central Bank of Ireland (“Central Bank”) delivered a speech to the BPFI on Understanding the Path Forward with the Digital Euro. Ms McKiernan set out the overall case for a digital euro, the eurosystem’s preparations for a digital euro and the current state of play of the European Commission’s legislative proposal. She then went on to the consider the potential interaction between a digital euro and the financial and payments system with a particular emphasis on Ireland.

Ms Kiernan explained that at a national level, the Department of Finance is leading the development of a National Payments Strategy (“NPS”) for 2024-2030, which will set out the priorities that will help shape the future payment landscape in Ireland. In the Central Bank’s submission to the consultation on the NPS, it was stated that Ireland’s retail payments landscape lags behind other parts of Europe in some areas, which is a priority to address. Ireland is host to a growing and innovative payments sector, and the base of a very innovative technology sector. And people have shown they are willing, and eager, to embrace new technology in payments. Ms Kiernan emphasised that the Central Bank sees the digital euro as a key priority for the NPS as it would offer an additional means of payments, adding resilience and choice, value and service for consumers, merchants and businesses in the payments system.

Ms Kiernan in detailing the preparations underway in the Eurosystem and European Commission on the Digital Euro noted that across Europe, banks and payment providers are considering deeply the issues involved in potentially implementing a new central bank digital currency. Many have been involved in the Eurosystem’s trials and experiments on possible design choices, and have participated in market consultation groups, including the development of the Scheme Rulebook. She urged those in attendance to “deeply consider the issues from the point of view of your evolving business models, your planned investments and your customer relationships. A project of this scale takes years to design, develop and operationalise.” She went on to explain that the Central Bank will be stepping up its engagement with banks and other payment service providers, both bilaterally and jointly, in coming months. This is an opportunity for payment providers to build their understanding of the strategic opportunities that a digital euro presents, as well as the likely obligations to be placed on financial services firms in the draft regulation.

2. Request for an ECB opinion on the Motor Insurance Insolvency Compensation Bill 2023

On 16 May 2024, Frank Elderson, Member of the Executive Board of the European Central Bank (“ECB”) wrote to Minister for Finance, Michael McGrath regarding a letter sent by the Minister on 21 February 2024 requesting an opinion of the ECB on the draft Motor Insurance Insolvency Compensation Bill 2023 (“Bill”).

The ECB notes in its response that the main purpose of the Bill is to transpose Articles 10a and 25a of Directive (EU)2009/103/EC of the European Parliament and of the Council into Irish law which pertain to the protection of injured parties in respect of damage resulting from accidents in the case of the insolvency of an insurance undertaking. In doing so, the Bill introduces some changes to the existing responsibilities of the Central Bank of Ireland (“Central Bank”) for maintaining and administering the Insurance Compensation Fund. In this respect, the ECB notes that the existing provision of Irish law which provides that the Central Bank shall not have any liability arising from the Insurance Compensation Fund, remains unchanged. Moreover, the ECB understands that the tasks conferred on the Central Bank under the relevant provisions of Irish law as amended under the Bill, would operate such that the Central Bank will not be liable for damages for anything done or omitted in the performance or purported performance or exercise of any of its functions or powers, unless it is proved that the act or omission was in bad faith.

The ECB explains that pursuant to Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union, in conjunction with Article 2(1) of Council Decision 98/415/EC5, national authorities are required to consult the ECB on draft legislative provisions on national central banks (“NCBs”) in the European System of Central Banks (“ESCB”), including the Central Bank. However, the ECB does not automatically adopt an opinion on draft national legislation that relates to NCBs, unless the draft national legislation:

(1) impairs the NCB’s independence under Article 130 of the Treaty;

(2) breaches the monetary financing prohibition under Article 123 of the Treaty; or

(3) is otherwise of non-marginal importance to the ECB’s fields of competence.

The ECB explains that following a careful review of the Bill, it appears that the Bill does not impair the Central Bank’s independence or breach the monetary financing prohibition, and is not otherwise of non-marginal importance to the ECB’s fields of competence. Consequently, the ECB explains that it has decided not to adopt an opinion in the present case.

3. ESMA consults on three new technical standards as part of the MiFIR review

On 21 May 2024, the European Securities and Markets Authority (“ESMA”), launched a public consultation on three new technical standards relating to non-equity trade transparency, reasonable commercial basis (“RCB”) and reference data under the Markets in Financial Instruments Regulation (“MiFIR”) review. In its supporting press release ESMA explains that the proposals are aimed at “enhancing the information available to stakeholders by improving, simplifying and further harmonising transparency in capital markets.”

The consultation is seeking input on the technical standards as follows:

• Pre- and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances), which aims at ensuring trade information is available to stakeholders by improving, simplifying, and harmonizing transparency requirements, and combining the right balance between real-time transparency and the ability to defer publication;
• Obligation to make pre-and post-trade data available on an RCB intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner. Additionally, the consultation elaborates on the cost-based nature of fees and the applicable reasonable margin; and
• Obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes. It also proposes amendments to align this data with other relevant reporting frameworks and international standards.

Next steps

ESMA will consider all comments received by 28 August. After reviewing the feedback, ESMA will publish a final report and submit the draft technical standards to the European Commission by the end of Q4 2024.

4. ESMA publishes a position paper on building a more effective and attractive capital markets in the EU

On 22 May, 2023, the European Securities and Markets Authority (“ESMA”) published a Position Paper on “Building more effective and attractive capital markets in the EU” (“Paper”). The Paper explains that against the background of a need for “urgent financing” and the “necessity to boost the competitiveness of European businesses”, a renewed effort to strengthen the European Union’s (“EU”) capital markets has arisen.

ESMA, through its assessment of the state of capital markets in the EU has, it maintains in the Paper, identified ways for enhancing their effectiveness and attractiveness in the long term. In total, the Paper makes 20 recommendations. These recommendations focus on three key elements: citizens, companies and the EU regulatory and supervisory framework. ESMA stresses that such recommendations go beyond changes to financial regulation and supervision, and as a result are not only directed to capital market supervisors but also to Member States, the European Commission, co-legislators, as well as financial industry.

EU citizens

Key recommendations in this area include;

• the development of basic long-term investment products and pension systems that are incentivised and contribute to the development of capital markets; and
• efforts to improve financial education.

EU companies

Key recommendations in this area include:

• developing a conducive ecosystem for public companies;
• fostering pan-European markets; and
• addressing barriers to integration, particularly for market infrastructures.

EU regulation and supervision

Key recommendations in this area include:

• modernisation of the EU’s regulatory framework, to account for new tools such as effective forbearance powers;
• supervisory consistency amongst EU supervisors should be prioritised; and
• further centralisation of supervision at EU level should be evaluated.

Next steps

ESMA explains that it will continue to engage and collaborate with all stakeholders regarding implementation of the recommendations outlined in the Paper.

EuroGroup on the CMU

The Paper follows recent communications by the EuroGroup on the Capital Markets Union (“CMU”)  beginning with a comprehensive statement in March 2024, details of which can be found in the FIG Top 5 at 5 dated 14 March 2024 and most recently on 14 May, 2024 when Ministers endorsed what the Eurogroup describe as a high-level work programme on the CMU which will ensure that the implementation of its statement remains on the top of its agenda.

We will continue to monitor developments in this regard and update clients in due course.

5. Basel Committee publishes a report on the implications of the digitalisation of finance for banks and supervision

On 16 May 2024, the Basel Committee on Banking Supervision (“Basel Committee”) published a report on the implications of the digitalisation of finance for banks and supervision (“Report”). The Report builds on the Basel Committee’s 2018 paper – “Sound practices: implications of fintech developments for banks and bank supervisors”, and takes stock of recent developments in the digitalisation of finance. In particular, it considers:

1. some of the key technologies across various aspects of the banking value chain;
2. the role of new banking competitors and business models. To date, these developments have affected the banking system primarily through: (i) competition from new entrants (eg. in payments services); and (ii) the formation of strategic partnerships between banks and other firms;
3. the potential risks for banks and financial stability arising from the digitalisation of finance. These include greater challenges by banks to adapt their business strategies to an increasingly digital environment, potentially heightened reputational risk to banks, a larger scope of factors that could test banks’ operational resilience and operational risk, and challenges to banks’ data governance. There are also system-wide risks that could result from the ongoing digitalisation of banking, including greater interconnection nodes across financial firms, a heightened degree of contagion in times of stress and the amplification of procyclical behaviour (eg fire sales);
4. the various strategies and practices that are available for banks to mitigate risks. These include effective governance structures and risk management processes. Banks may also mitigate specific digitalisation-related risks by enhancing controls and pursuing an “across the bank” human-centric approach to overseeing the use of such technologies. Similarly, banks manage data-related risks through robust governance arrangements and enhanced security protocols. Banks may also reinforce their due diligence and operational risk management to mitigate the risks stemming from their reliance on third-party service providers. The Report observes that “in practice, many of these risk mitigants are still evolving and have not yet been tested through different phases of the business cycle or periods of stress”; 
5. a number of enhancements which supervisors have adopted to address the digitalisation of finance include: (1) expanding the scope of the regulatory perimeter in their legislative frameworks; (2) requiring new banking applications to follow the same framework applied to “traditional” bank entrants, with a few jurisdictions applying a distinct process for digital-only banks; (3) issuing specific supervisory guidance related to different aspects of the digitalisation of banking; and (4) reviewing and adjusting approaches and tools to mitigate the risks from digitalisation while also harnessing their benefits in a responsible manner;
6. the regulatory and supervisory implications for both banks and banking supervisors. At a macro-structural level, the Report states that supervisors should continue to monitor – and it is important for banks to mitigate – the risks stemming from the evolving nature of banking as a result of technological innovations. The adoption of innovative technologies and business models should be guided by a principle of responsible innovation. It is important for supervisors to strike the right balance between enabling responsible innovation while also safeguarding the safety and soundness of the banking system and financial stability. As a result of the increasingly blurred lines between banks and the provision of banking services, integrating the principle of “same risk, same activity, same regulation” in regulatory and legal frameworks may help avoid regulatory arbitrage;
7. the implications of digitalisation for capacity building and coordination. The Report reminds both banks and supervisors of the importance of having sufficient resources and staff with the necessary capabilities, knowledge and skills to assess and mitigate risks from new technologies and business models. Digitalisation raises issues that go beyond the scope of prudential supervision. Accordingly, communication and coordination among bank supervisors and other relevant authorities, within and across jurisdictions, is important to address these considerations.

Next Steps

The Committee will continue to monitor developments related to the digitalisation of finance. Where necessary, it will consider whether additional standards or guidance are needed to mitigate risks and vulnerabilities.