FIG Top 5 at 5 - 28/03/2024

1. The Capacity Building Working Group of the Climate Risk and Sustainable Finance Forum publishes its Report

On 27 March 2024, the Capacity Building Working Group ("Group") of the Climate Risk and Sustainable Finance Forum ("Climate Forum") published its report ("Report"). The Group's mandate is to assess the status of, and accelerate, sustainable finance capability in Ireland's financial services sector.  In creating this Report, the Group carried out a comprehensive desktop review of the existing evidence base, best practice at an international level, and a real economy survey of Irish Financial Market Participants. In her speech, Deputy Governor of the Central Bank of Ireland ("Central Bank") Sharon Donnery noted that this Report was welcomed by the Central Bank, but does not "represent Central Bank requirements or guidance and is, rather, the work of the climate forum".

Key Findings from the Real Economy Engagement Survey

Investment Firms

• 19 of the 37 investment firms had ESG embedded, and 5 are at early stages;
• 17 firms have an L&D Programme on ESG and 15 plan on implementing one in the next year;
• 7 firms have a dedicated Sustainability Officer;
• increased data availability was considered the most important resource; and increased knowledge of understanding of the application of sustainability metrics across ESG, was considered a very important resource that the sector needed to grow capacity on ESG/sustainable finance.

Payments and E-money Institutions

• institutions are at an early stage of readiness regarding sustainability and ESG practices;
• apart from Blockchain, there is limited consideration of risk/opportunities of climate change;
• less support is available for this sector compared to other financial services sectors; and
• upskilling of existing staff is considered the most important resource; and increased knowledge of understanding of the application of sustainability metrics across ESG, was considered a very important resource that the sector needed to grow capacity on ESG/sustainable finance.

Brokers and Intermediaries

• this landscape comprises of very large organisations on one side and one person operations on the other, and resources differ greatly;
• ESG related regulations affecting intermediaries are relatively recent and still bedding in and have been subject to clarifications by EIOPA due to confusion at a pan European level, and therefore most intermediaries are in the early stage of readiness;
• the provision of clearer guidance/information as to how ESG readiness requirements apply to differing business lines/areas is a priority; and
• upskilling of existing staff is considered the most important resource; and increased knowledge of understanding of the application of sustainability metrics across ESG, was considered a very important resource that the sector needed to grow capacity on ESG/sustainable finance.

Insurance

• 13 of 44 companies are at an early stage of readiness while the remainder are further advanced, with 10 have ESG embedded in strategy and risk management;
• as non-life companies are potentially more impacted by climate change physical risks and therefore will have had to be more proactive with their sustainability agenda;
• both life and non-life companies rely on support from their parent groups where available;
• operationalising regulatory requirements and reporting and oversight integration were identified as priorities; and
• upskilling of existing staff is considered the most important resource; and increased data availability was considered a very important resource that the sector needed to grow capacity on ESG/sustainable finance.

Banking

• 3 respondents were at the highest state of readiness, with 5 still at the early stages of readiness and 6 have ESG embedded in strategy and risk management;
• 12 respondents indicated that an L&D programme will be in place in the next 12 months; and
• data availability is considered the most important resource; and increased knowledge of understanding of the application of sustainability metrics across ESG, was considered a very important resource that the sector needed to grow capacity on ESG/sustainable finance.

Cross Sectoral Recommendations

• The Group outlined 9 overarching cross-sectoral recommendations:
• awareness raising at industry level;
• awareness raising at consumer level;
• development of a skills framework for each financial services sector;
• introductory courses;
• specialised courses by function and issue;
• integration of ESG into pipeline courses and apprenticeships;
• education on the front line;
• government initiative: enhancing sustainability across higher education courses; and
• new industry narrative.

Next Steps

The timeline proposed is that following the publication of the Report in Q1 of 2024, the Group will engage with relevant stakeholders at the beginning of Q2 of 2024, and develop detailed action plan to implement recommendations and responsibilities and timelines in Q2 of 2024.

2. Insurance Updates

Central Bank Insurance Corporation Statistics

On 21 March 2024, the Central Bank of Ireland ("Central Bank") published its Insurance Corporation Statistics for Q4 of 2023. The total assets of the Irish insurance corporations ("IC")  grew by 0.3% to €414 billion, up 6% from Q4 of 2022. The liabilities of Irish IC increased to €354 billion, up from €349 billion in Q3 of 2024.

The greatest areas of growth were:

• equities: 12.5% growth; and
• reinsurance technical reserves: 9%.

Insurance technical reserves ("ITRs") 

Irish IC ITRs grew during 2023, up 8% on Q4 of 2022. In Q4 of 2023:

• non unit linked life ITRs grew by 14.4%; and
• non-life ITRs decreased by 15.4%.

Investment funds

• holdings of investment fund shares fell by 4.5% (€7.7 billion) in Q4 of 2023;
• largest holdings for the life subsector: equity funds at 39.3%;
• largest holdings for the non-life subsector: money market funds at 29.4%; and
• largest holdings for the reinsurance subsector: bond funds at 39.8%.

EIOPA launches survey on taxonomy implementation starting dates

On 25 March 2024, the European Insurance and Occupational Pensions Authority ("EIOPA") launched a survey on taxonomy implementation starting dates. The purpose of the survey is for EIOPA to gain an in depth insight into the potential challenges that stakeholders may encounter if the taxonomy starting date was to be set as 1 January of the following year, rather than Q4 of the current year. Some of the main advantages and disadvantages identified in the document are outlined below.

Start date of Q4: Advantages

• this option has demonstrated functionality in the past;
• facilitation of simultaneous quarterly and annual amendments; and
• for European Central Bank ("ECB") reporting, quarterly reporting relies on estimates from annual data collected the previous year, and a Q4 implementation date ensures that estimates consistently align.

Start date of Q4: Disadvantages

• national reporting for institutions for occupational retirement provision ("IORPs") commences on 1 January, and introducing a new taxonomy in Q4 necessitates the nationwide implementation of amendments form the beginning of the reporting year. There is an inherent impracticality for IORPs where amendments are published in July and meant for reporting in Q4, which is not viable;
• a separate taxonomy for insurance and IORPs would be hard to implement considering some of the templates are similar to insurance and IORPs; and
• potential for inconsistency between data reported in Q1-Q3 compared to Q4 and the annual reporting.

Start date of 1 January: Advantages

• alignment with national reporting schedules for IORPs in the majority of countries, ensuring swift integration; and
• enable simultaneous alignment of reporting dates and the implementation of most legislative proposals.

Start date of 1 January: Disadvantages

• quarterly ECB reporting depends on estimations derived from annual data gathered the previous year and 1 January date introduces the risk that these estimations may need to be based on data points that have undergone alterations in the meantime; and
• existing ITS on reporting in the insurance sector dictates the implementation of a new taxonomy at the end of the year, and a plan to change the taxonomy necessitates a concurrent modification to the ITS.

Next Steps

The survey will close to feedback on 14 June 2024.

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Petra Hielkema's speech on Insurance and Pensions Supervision for a more resilient society

On 21 March 2024, the Chair of the European Insurance and Occupational Pensions Authority ("EIOPA"), Petra Hielkema, gave a speech on Insurance and Pensions Supervision for a more resilient society. She highlighted that the industry has a role to play in increasing consumer awareness and empowering informed decision making, and in building a strong single market which serves all EU consumers equally. Her speech focused on a number of potential systemic risks including natural catastrophe protection gap, cross-border business, digital transformation and AI, and the pension gap. This update will focus on the first 3 risks. 

Natural Catastrophe protection gap

Natural catastrophe losses in Europe are estimated at over €650 billion since 1980, with 75% remaining uninsured. EIOPA is working in collaboration with the European Central Bank ("ECB") to identify policy options on how to better insure EU households and businesses against climate related natural catastrophes. Alongside this, in 2023, a joint discussion paper was issued which outlined policy options aimed at increasing the uptake and efficiency of climate catastrophe insurance. Ms Hielkema noted that 4 pillars have been identified to ensure a comprehensive solution:

• policies designed with adaption and mitigation measures;
• catastrophe bonds;
• public-private partnerships at the national level; and
• partnerships at EU level to cover losses that may be difficult to insure against via marker-based solutions only.

Cross border business

Ms Hielkema noted that insurance sector is inherently cross border, with cross border business accounting for 11% of gross written premia in the Single Market, with steady growth in the non-life insurance sector. The insurance sector has a key role to play in offering savings and investment opportunities for citizens, and increased cross border activity has the potential to deepen the Single Market. EIOPA aims to ensure that consumers receive the same level of protection regardless of which Member State they live in or purchased their insurance from. Supervisory integration is vital to ensure that citizens trust that the same rules will be enforced across the EU.

A high level of harmonisation is critical to ensure a unified and integrated economic area, and Ms Hielkema noted that even in maximum harmonisation legislation such as Solvency II, there are notable differences in how supervisory authorities interpret and implement it. Internal models give insurers wide discretion and their supervision requires significant resources and expertise, and EIOPA plays a key role in ensuring supervisory convergence and fair competition. In contrast, the Insurance Distribution Directive is a minimum harmonisation directive and EIOPA has a role to play where insurance companies that operate on a cross border basis in many countries face difficulties and pose risk to consumers. In instances where national supervisors are unable or unwilling to act, EIOPA can take action. 

Ms Hielkema drew particular attention to public-private partnerships ("PPPs"), noting that citizens, insurers, governments and supervisors all had a role to play. She stressed that risk mitigation and adaption provide the basis for sound partnerships. EIOPA and the ECB are working to further promote policy options which will increase the take up of climate catastrophe insurance and developing incentives for people to adapt to and reduce climate risks. There is also a political element to making insurance policies available and more affordable, which stems from national governments. EIOPA will support the political impetus with factual assessment, which will provide sound technical findings to help in establishing successful PPPs.

Digital transformation and AI

In its Digitalisation Market Monitoring Survey, EIOPA found that AI is being used by 50% of non-life insurance, with 30% expecting to use it within the next 3 years. For life insurers 25% use AI, and 40% expect to start using it soon. While AI offers great opportunities for insurers, is also brings challenges in the form of cyber risks, and ethical considerations and it is vital that innovation should be in the interest of people. As the AI sector becomes more sophisticated, so too will the risks that evolve and there is a need for a supervisory and regulatory response.

Insurance is founded on risk pooling. Big Data will see this move from a situation where there is little to no knowledge on individual risks, to having significant amounts of granular data leading to a situation where individual risk can be monitored and assessed much more precisely. Ms Hielkema questions what the future of insurance will look like when risk pools become smaller and probability becomes certainty. She noted that granular data can support both financial exclusion and financial inclusion. The use of such data in supporting a stronger prudential system should not be at the cost of unfair treatment to some consumers. Financial inclusion can be achieved by using preventative insurance and improving transparency. While individuals need to be able to share their data, they also need to be able to revoke consent and control their data, and trust the insurance sector with their data.

3. MiCA Updates

ESMA consults on third set of RTS and guidelines under MiCA

On 25 March 2024, the European Securities and Markets Authority ("ESMA") published a consultation paper on its third consultation package on regulatory technical standards ("RTS") and guidelines under the Regulation on markets in cryptoassets ("MiCA"). The third package includes all remaining mandates with a deadline of 30 December 2024.

The consultation paper contains 4 sections:

• RTS on arrangements, systems and procedures for detecting and reporting suspected market abuse in crypto-assets;
• Guidelines on aspects of the suitability requirements applicable to the provision of advice and portfolio management in crypto-assets and the format of the periodic statement;
• Guidelines on the procedures and policies, including the rights of clients, in the context of transfer services for crypto-assets; and
• Guidelines on the maintenance of systems and security access protocols in conformity with appropriate Union standards.

Next Steps

The consultation will close to responses on 25 June 2024. Following the feedback, ESMA aims to publish a final report and submit draft technical standards to the European Commission for endorsement by December 2024.

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ESMA publishes final report on the first set of RTS and ITS under MiCA

On 25 March 2024, the European Securities and Markets Authority published its final report on the first set of regulatory technical standards ("RTS") and implementing technical standards ("ITS") under the Regulation on markets in crypto-assets ("MiCA") ("Report"). The Report follows the consultation paper that was published in July 2023, which sought stakeholders' views on 5 RTSs and 2 ITSs, and received 36 responses. Below is a summary of some of the feedback ESMA received, and ESMA's response.

Draft RTS and ITS on information to be included in the application for authorisation as a CASP

Overall most respondents agreed with the list of information to be provided with an application for authorisation as a crypto asset services providers ("CASP"). Some of the key responses are that:

• ESMA rejected requests during the consultation period to clarify in more fine detail the precise regulatory expectations that apply to CASPs when segregating clients assets under MiCA. This is a topic which is of much concern for aspiring CASPs. Article 10 (Segregation of clients’ crypto-assets and funds) was left unamended as a result and the outcome will be seen as a disappointment;
• ESMA clarified that information on prudential requirements, regarding the undertaking providing the insurance policy is required under the draft RTS;
• ESMA also clarified that information relating to the management of conflict of interest risk includes remuneration policies and practices. CASPs must address those risks and competent authorities must be able to make an assessment at the authorisation stage, whether policies and procedures are adequate;
• ESMA clarified that CASPs that are electronic money institutions, payment institutions or credit institutions do not need to provide information required in relation to the segregation of funds in their application. Information relating to the segregation of crypto-assets is required;
• ESMA clarified that only changes that could affect the assessment of the application should be notified under Article 4 of the draft ITS; and
• to ensure that an application for authorisation also contains all information required for the future ESMA public register of CASPs, ESMA proposes to include a few additional information requirements of limited extent.

RTS on complaints-handling procedures of CASPs

Feedback was mostly positive, however a few of the responses are noted below:

• ESMA has clarified that for each Member State in which a CASP operates, it must accept complaints filed:  

(i) in the languages used by the CASP to market its services or communicate with clients in such Member States, as well as

(ii) in the official languages of such Member State that are also official languages of the European Union,

and must reply to complaints in the language submitted by the customer if an EU official language;

• ESMA dismissed firm concerns by saying firms could use AI or translation tools to answer such correspondence in its feedback, and they are of the view that AI and automated translation tools may assist in reducing the costs associated with this requirement;
• ESMA has amended the language requirements applicable to CASPs under the draft RTS and requires CASPs to publish the description of the complaints handling procedure and the standard template in all languages used by the CASP to market its services or communicate with clients;
• ESMA clarified that the template in the draft RTS does not require mandatory use by clients to file an admissible complaint with their CASP;
• ESMA remains of the view that the complaints-handling should be specific, rather than high level and principle based; and
• while concern was raised about the possibility of clients of CASPs filing their complaints by post, ESMA has decided to keep it, to mitigate the risk of excluding certain groups of clients.

RTS on the assessment of intended acquisition of a qualifying holding in a CASP

Responses to this were mixed, with some respondents arguing that some of the requirements would be stricter than those required under MiFID.

• ESMA noted that while some of the requirements to assess the financing of an acquisition may impose a burden, the requirements are standard across existing financial services regulation. ESMA acknowledged the status of e-money tokens as electronic money while noting that this does not require specification in the RTS. It also agreed to add further details with regards to wallets, protocols and networks used.

Draft RTS and ITS on the notification by certain financial entities to provide crypto asset services

Overall most respondents supported the draft ITS and RTS. Some of the key responses include:

• some respondents requested higher levels of demonstrated crypto-asset expertise with respect to advice and portfolio management, while others favoured lower requirements. EMSA is of the view that CASPs are sufficiently different from traditional investment advice and portfolio management, to require CASPs to elaborate on why its personnel are qualified to provide such services;
• some respondents stated that the 3 year outlook was excessive and difficult to comply with, however ESMA is of the view that it is in line with other regulatory frameworks;
• some respondents expressed the view that the requirements to describe the impact of the provision of CASP services on other group companies was excessive. However, ESMA is of the view that where group structures are implemented, such description is necessary, as complicated group structures have proven problematic in recent CASP failures;
• ESMA clarified that CASPs that are electronic money institutions, payment institutions or credit institutions do not need to provide the information required in relation to the segregation of funds in their application. Information relating to the segregation of crypto-assets is required;
• ESMA has included a suggestion that CASPs should lay out to national competent authorities how they plan to convey the message that CASP services are not subject to the Investors Compensation Scheme to investors in the RTS; and
• ESMA also adopted a suggestion that Article 7(j) should foresee not only access by the competent authority to order books but also to any other trading system.

Next Steps

The Report noted that the final report relating to technical standards on conflicts of interest for crypto-asset service providers will be published at a later date to allow the European Banking Authority ("EBA") to conclude its consultation process, ensuring close cooperation and maximum alignment between ESMA and the EBA.

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ESMA publishes final report on technical standards on cooperation between competent authorities, ESAs and third country authorities under MiCA

On 25 March 2024, the European Securities and Markets Authority ("ESMA") published its final report on draft regulatory technical standards ("RTS") and implementing technical standards ("ITS") specifying requirements for cooperation, exchange of information and notification between competent authorities, European Supervisory Authorities ("ESAs") and third countries under the Regulation on markets in cryptoassets ("MiCA").

The Report contains 2 draft RTS and 2 ITS:

• draft RTS specifying the information to be exchanged between competent authorities;
• draft ITS specifying the relevant standard forms, template and procedures for the exchange on information between competent authorities;
• draft ITS on forms for information exchange between competent authorities and ESMA and the European Banking Authority ("EBA"); and
• draft RTS on the cooperation template with third countries.

ESMA did not conduct an open public consultation or analyse the potential cost and benefits, as these standards only address national competent authorities and not market participants and to do so would have been disproportionate considering their limited financial impact. Instead, ESMA sought advice from the ESMA Securities and Markets Stakeholder Group ("SMSG").

One modification to the draft RTS specifying the information to be exchanged between competent authorities was made following the consultation with SMSG, and involved the removal of "(i) information relating to the circumstances in which the listed information should be exchanged and (ii) information to be shared between authorities as already listed in MiCA".

SMSG supported the adoption of the other draft RTS and ITS without making further comments and only non-material changes were made to the draft RTS and ITS. 

Next Steps

EMSA will now submit the final report and the draft RTS and ITS to the European Commission ("Commission"). The Commission will have 3 months to decide whether to adopt the technical standards, and may extend the period by one month. The RTS will also be subject to non-objection by the European Parliament and Council.

4. Commission communication and ESMA public statement on the transitional provision of the MiFIR review

On 27 March 2024, the European Commission ("Commission"), published a communication and draft interpretative notice ("Notice"), set out in the annex of the communication, to provide clarity to market participants on the transitional provision set out in Article 54(3) of the Markets in Financial Instruments Regulation ("MiFIR") as amended by the MiFIR review. The European Securities and Markets Authority ("ESMA") also published a statement to complement the Commission's Notice.

The amends to MiFIR will apply from 28 March 2024. The Notice states that the aim of Article 54(3) is to ensure continuity for market participants while the new Commission delegated regulations are being prepared. In some instances, the new MiFIR provisions will need to be supplemented by new or amended Commission delegated regulations to become fully operational and cannot be supplemented adequately by existing Commission delegated regulations due to the differences between the new MiFIR provisions and the MiFIR provisions applicable before 28 March 2024. In such instances, Article 54(3) of MiFIR provides that the existing delegated regulations continue to apply together with the MiFIR provisions that they supplement, as applicable before 28 March 2024.

The following areas are noted in the Commission Notice and the ESMA statement as areas where existing provisions, applicable before 28 March 2024 will continue to apply, until new or amended Commission delegated regulations are adopted:

• single volume cap mechanism;
• deferred publication of the details of transactions in respect of bonds, structured finance products or emission allowances and deferred publication of the details of transactions in respect of derivatives;
• obligation to make pre- and post-trade data available on a reasonable commercial basis;
• quotation rules for systematic internalisers  in equity instruments; and
• the obligation to report transactions.

Next Steps

The Commission is called upon to approve the content of the draft notice, which will be published on the Commission website in English only for now. It will then by submitted for adoption in all EU languages and publication in the Official Journal at a later stage. The intention behind this is to provide timely guidance on the transitional arrangement.

ESMA will progress with the development of Commission delegated regulations in a timely and transparent manner, and, if needed, may issue more detailed guidance on the areas outlined in the statement at a later stage. ESMA also intends to develop a dedicated webspace which will track the development of the Commission delegated regulations and provide clarification on what provisions are applicable to market participants at a given time. 

5. ECON adopts draft reports on proposed retail investment package

On 21 March 2024, the European Parliament's Economic and Monetary Affairs Committee ("ECON") announced that it had adopted its final draft report on the proposed Directive on retail investment protection ("proposed Directive"). The proposed Directive will amend the MiFID II Directive, the Insurance Distribution Directive, Solvency II Directive, the UCITS Directive, and the AIFM Directive. 

Best interests of the client

ECON agreed that to ensure investment advice is in the best interests of the client, advice should be:

• transparent, understandable and tailored to the client;
• products offered should be suitable for the client's needs, considering performance, level of risk, costs, charges and qualitative elements;
• investment firms providing portfolio management or insurance-based investment products would not be allowed to accept fees or commission provided by third parties for the provision of the service; and
• clients must be informed of how the total cost of using a third-party research provider will affect their fees.

Comparable financial products

Investors should be able to compare the costs of investment products. To achieve this, the European Securities and Markets Authority ("ESMA") and the European Insurance and Occupational Pensions Authority ("EIOPA"), following a consultation with national competent authorities ("NCAs"), should develop common European benchmarks for products that are manufactured and distributed in two or more Member States. National benchmarks should apply to products that are produced and distributed in one Member State.

Better communication

The rules also aim to improve the quality of financial advice by:

• requiring financial advisors to attend professional training every year, with a part of such training dedicated to sustainability issues;
• information should be provided in a standardised manner and understandable language;
• Member States should support financial education, and establish targets on financial literacy and exchange best practices;
• NCAs must have measures in place to prevent the offering of unauthorised investment services, including crypto-assets;
• the selling of products online, particularly via social media and finfluencers must be supervised to protect younger clients;
• investment firms who use finfluencers to promote products or contracts must have a written agreement with them; and
• procedures must be in place to ensure that complaints are properly dealt with within 30 days.

ECON also announced that it adopted its draft report on the legislative proposal for a Regulation amending the Regulation on key information documents for packaged retail and insurance-based investment products ("PRIIPs") Regulation.

Next Steps

The texts, which form the Parliament's negotiating mandate, will be tabled for approval in the Plenary session in April 2024. The new Parliament will follow up on the file after the European elections in June 2024.