FIG Top 5 at 5 - 30/05/2024

1. Credit Union Updates: Central Bank welcomes Peer Review by the ICURN/ Credit Union News

Central Bank welcomes outcome of Peer Review by the International Credit Union Regulators’ Network

On 28 May 2024, the Central Bank published a peer review undertaken by the International Credit Union Regulators’ Network (“ICURN”). The review, entitled, Peer Review: Central Bank of Ireland’s Performance of its Regulatory Functions in Relation to Credit Unions, assessed the Central Bank’s compliance with ICURN’s Guiding Principles for Effective Supervision of Financial Cooperative Institutions and Enhancing Governance of Cooperative Financial Institutions (“Review”).

• The Review, which is the third peer review conducted by ICURN, found the Central Bank remains effective in performing its functions in the regulation and supervision of the credit union sector. The review provides an assessment of Ireland’s legislative, regulatory and supervisory framework for credit unions and also sets out recommendations to further improve supervisory effectiveness and achieve full compliance with the ICURN Guiding Principles. The following is a summary of some of the key findings of the Review.
• The Review found that there have been marked improvements in the way the Central Bank is performing its functions in relation to credit unions, specifically: 1) in terms of calibration of the PRISM supervisory system to be more risk focused as more credit unions become medium-high impact institutions; 2) the process for submitting information for approvals by the Central Bank has improved and 3) data shared with the sector on financial performance has improved.
• The Review found that the Central Bank was compliant with 21 out of ICURN’s 24 Guiding Principles. Two areas were assessed as largely compliant and one area was deemed not applicable related to currency risk – all other areas were found to be compliant. This is an improvement from the last peer review in 2019.
• To ensure the Central Bank achieves full compliance with the 24 Guiding Principles, the Review recommends that the Central Bank should
  • expand its oversight of risk management practices with a greater focus on operational risks (i.e. cyber security, fraud, and climate-related risks);
  • in line with the recommendation of the Retail Banking Review that the credit union sector and its leadership should develop a strategic plan that enables the sector to safely and sustainably provide a universal product and service, continue its engagement with sector stakeholders on any proposals brought forward in this regard and seek to ensure that the regulatory framework evolves;
  • adapt its approach to ensure that mission critical service providers to credit unions are prudently managing their risks.

The Registrar of Credit Unions, Elaine Byrne, on the publication of the report, commented that  “this review forms part of good governance to ensure we continue to be an effective and proportionate regulator… The Central Bank is committed to ensuring the protection by each credit union of the funds of its members and maintaining the financial stability and well-being of credit unions generally.”

The Central Bank of Ireland (“Central Bank”), has released the first of its biannual newsletters for the Credit Union sector in 2024 (“Newsletter”). In the newsletter the Central Bank provides what it describes as “updates on a range of recent publications and topical matters relevant to credit unions covering legal and regulatory developments”. The following is a summary of some of key topics addressed:

• The Registrar of Credit Unions, Elaine Byrne, while providing a high level summary of some of the Central Bank’s recent engagements with credit unions, highlights in particular, the Memorandum of Understanding which the Central Bank, the Minister for Finance and the Credit Union Advisory Committee signed in April 2024. This Memorandum of Understanding outlines all parties respective intentions on how they will cooperate with each other in the context of assisting each other to deliver on their respective statutory functions in relation to credit unions.
• The newsletter explains that the Credit Union (Amendment) Bill 2022 was enacted on 13 December 2023 (“Credit Union (Amendment) Act 2023”) On 21 February 2024, the Minister for Finance signed the Credit Union (Amendment) Act 2023 (Commencement of Certain Provisions) Order 2024 for certain provisions of the 2023 Amendment Act to commence on 22 February 2024 and 8 April 2024. The newsletter explains that the relevant chapters of the Central Bank’s Credit Union Handbook have been updated to take account of the commencement of those provisions and an updated consolidated version of the Handbook has also been published on the Central Bank website. The Central Bank flags that further amendments maybe made upon commencement of further provisions of the legislation;
• The Newsletter sets out the details of recent target engagement which the Central Bank has had as part of its follow up to CP148 (Review of Credit Union Exempt Services). It explains that the Central Bank is now in the process of finalising amendments to the 2016 Regulations with a view to publishing a Feedback Statement and the relevant updated 2016 Regulations over the coming months
• The Central Bank reminds credit unions of their obligation under section 14(3A) of the Credit Union Act, 1997 (“1997 Act”) to satisfy themselves that any proposed rule amendment is not contrary to financial services legislation before sending a copy of the amended rules to the Central Bank under section 14(2) of the 1997 Act. This obligation applies in respect of all rule amendments, including a rule amendment to amend the credit union’s common bond. The newsletter reminds credit unions of the steps which must be taken in this regard;
• The newsletter provides the details of the Central Bank’s key supervisory activities for 2024/25 relevant to credit unions, as set out in the Central Bank’s Regulatory and Supervisory Outlook Report issued in. They include:
  • Drive implementation of new legislation for credit unions, including through changes to the regulatory framework as necessary;
  • Undertake a thematic review of IT Risk;
  • Finalise the outcome of review of Credit Union Exempt Services;
  • Conclude and publish review on the impact of changes introduced to the lending framework for credit unions in 2020; and
  • Ongoing risk based supervision to continue the focus on financial and operational resilience, including engagement with credit unions considering proposed transfers of engagement.
• Finally, the newsletter provides high level summaries in respect of a number developments including:
  • the digital euro;
  • the relevance of the Central Bank’s Consumer Protection Code Review to credit unions which act as insurance intermediaries;
  • the tenth edition of the Financial Conditions of Credit Unions Report;
  • reminder of obligations regarding the necessary notifications to the Central Bank in the event of outsourcing in certain circumstances;
  • reminder regarding the obligations which arise from the outcomes of  Credit Union Climate related & Environmental Risks Survey;
  • reminder regarding the obligations on credit unions acting as retail intermediaries to file Retail Intermediary Annual Return; and
  • how the Individual Accountability Framework impacts credit unions

2. Colm Kincaid, Director of Consumer Protection at the Central Bank of Ireland delivers speech on Financial consumer protection and market conduct considerations of AI in finance

On 22 May 2024, Colm Kincaid, Director of Consumer Protection at the Central Bank of Ireland (‘’Central Bank’’) delivered a speech to the OECD/FSB Roundtable on Artificial Intelligence in Finance.

Mr Kincaid opened by explaining that in its 2024 Regulatory and Supervisory Outlook Report , the Central Bank ranked AI amongst the “technology with the greatest transformational potential”. He confirmed that over the course of 2024 and 2025, the Central Bank will be undertaking work to develop its supervisory expectations of regulated entities related to the use of AI in financial services as well as looking to how AI can assist the Central Bank in its own work.

AI Act

While Mr Kincaid welcomed the European AI Act, his comments focussed on the importance of its effective implementation and the obligation of the Central Bank to ensure, in an AI context, the standards set in financial services regulation more generally continue to be complied with. He also referenced the work the Central Bank is doing in the context of the review of the Consumer Protection Code, in which the Central Bank is setting standards on the provision of digital financial services.

Where is the Central Bank focused in its thinking as supervisors of a financial service firm using AI?

Mr Kincaid explained that the Central Bank’s key focus is on firms understanding why they are implementing AI. In his remarks he outlined the need for firms to consider whether it is an appropriate response to consumer demands and trends to use AI in the delivery of their services and to understand fully how their chosen systems will operate. He further added that as supervisors, the Central Bank will want to see that firms identify and prepare for any new source of risk to their operational resilience arising from the use of AI.

Mr Kincaid also noted that the Central Bank is monitoring the use of AI in providing financial literacy education, in conjunction with the Government of Ireland and OECD’s work on the same. This is in line with the Government’s National AI Strategy, which will assess the skills needed by AI users in finance so that the behaviours and habits of consumers are not exploited and firms are aware of the potential for design flaws and bias in their models that may suggest discriminatory actions such as the exclusion of people from financial services they are entitled to. This issue feeds into another of the Central Bank’s concerns, Mr Kincaid outlined, that AI may damage trust in financial services. Increased use of AI by consumers opens the door for an increase in fraud in the digital environment. Conversely however, the Director noted that AI has the potential to enhance the trust placed in financial services, something the Central Bank and firms have a role to play in. As both the Central Bank and firms will inevitably begin to use AI, they must be seen to publicly adhere to the established rules and allow the market to create real and sustainable long-term solutions. ‘’We need to practice what we preach and ensure our use is trustworthy’’ Mr Kincaid concluded.

 3. "Trust in Central Banks and Regulatory Bodies’’ - Remarks by Gerry Cross, Director for Financial Regulation, Policy and Risk at the Central Bank of Ireland

On 23 May, Gerry Cross, Director for Financial Regulation, Policy and Risk at the Central Bank of Ireland (‘’Central Bank’’) delivered a speech at a Central Bank event on the importance of the public’s trust in Central Banks and regulatory bodies. Mr Cross outlined the fundamental need for the public trust as the Central bank seeks to ‘’deepen [its] analysis of, and engagement with, the idea of trust in public authorities and how to secure this further in the modern world.’’

The event which was hosted by the Central Bank included a number of external speakers whose work the Director detailed in his speech. In particular, he highlighted the Professor Maria Baghramian, a professor of Philosophy in University College Dublin, who is spearheading Peritia - an EU Horizons 2020-funded project that is examining public trust in expertise from 2020-2023. The group consists of philosophers, social and natural scientists, policy experts, ethicists, psychologists, media specialists and civil society organisations from 11 partner institutions in nine European countries. The group’s work will examine how to enhance trust in public bodies and public policies, something Mr Cross believes has particular relevance for the Central Bank, quoting the Central Bank Governor Gabriel Makhlouf, as ‘’without the trust of the public that it serves, an institution will struggle to function, to be effective, and, ultimately, to persist.’’

The importance of trust, Mr Cross outlined, was that the greater the trust the public had in Central Banks and regulatory bodies, the more likely they were to accept short-term costs in exchange for long-term benefits. Consequently, trust is paramount for policy effectiveness and, on a broader scale, is demanded for the continuance of the wider financial system’s stability. From a more theoretical perspective, increased trust in financial regulatory bodies can have a three-fold impact, Mr Cross explained:

• based on current research trends, trust can be closely linked to the concept of market efficiency, in that societies with higher levels of public trust had more efficient markets with less transactions costs, resulting in higher economic growth rates;
• increases in entrepreneurship, investment, and innovation can all be linked how trust impact’s the public’s engagement in these risk-taking activities. A less risk-averse climate can be curated by a regulator who creates clear guidelines and regulations to encourage these three economic activities;
• based on a Dutch study, the trust the general public had in its Central Bank had a direct correlation to the level of trust it had in its countries banks and financial ecosystem.

Notwithstanding these evidentiary findings, Mr Cross noted, sometimes ‘’trust in central banks can decline even when they are implementing policy ostensibly in line with their mandates’’ especially in the age of misinformation with digital communications and social media, problems that may be jet-propelled with the use of AI. In summary, Mr Cross concluded, the need for the public to place its trust in Central banks and the duty to maintain and consistently build on it can be summarised into four areas: ‘’Competence; Integrity; Openness; and Fairness.’’

4. MiFIR Review: ESMA Consults on Three New Technical Standards

On 21 May 2024, the European Securities and Markets Authority (“ESMA”),  launched a public consultation, on regulatory technical standards on non-equity trade transparency, reasonable commercial basis (“RCB”) and reference data, as part of its Markets in Financial Instruments Regulation (“MiFIR”) review

ESMA has explained that these proposals are aimed at enhancing the information available to stakeholders by improving, simplifying and further harmonising transparency in capital markets.

In the consultation, ESMA are looking for input on three topics as follows:

1. 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;
2. 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
   
3. 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

The consultation is open for feedback until 28 August^, 2024. Having reviewed the feedback, ESMA will publish a final report and submit the draft technical standards to the European Commission by the end of 2024.

5. ESMA publishes its Final Report on the 2023 Common Supervisory Action and Mystery Shopping Exercise on marketing

On 27 May 2024, the European Securities and Markets Authority (“ESMA”) published a combined report on its 2023 Common Supervisory Action (“CSA”) and its Mystery Shopping Exercise (“MSE”) on marketing disclosure rules under MiFID II (“Report”). The CSA required national competent authorities (“NCAs”) to assess firms' organisation and procedures for marketing communications, including their processes and procedures concerning sustainability and the use of third parties. Additionally, ESMA also considered the contents of firms' marketing communications, including advertisements to clients and potential clients and their compliance with MiFID II requirements.

The Report found that

• marketing communications (including advertisements) comply with MiFID II requirements;
• investment firms generally have procedures in place to ensure marketing materials comply with MiFID II, including during their development; and
• NCAs raised some concerns regarding sustainability claims in marketing communications, including advertisements.

The Report also highlighted a number of areas in need of improvement, including;

• the need for marketing communications to be clearly identifiable as such, and to contain a clear and balanced presentation of risks and benefits. In cases where products and services are marketed as having ‘zero cost’, they should also include references to any additional fees; and
• the need for adequate approval and review processes for marketing communications, including advertisements, whether these are prepared by the firm or by third parties;
• ensuring compliance with legal requirements on the part of distributors for all marketing communications;
• implementation of adequate record-keeping measures for all marketing material including social media posts; and
• involvement of control functions and senior management in internal processes and procedures related to development, design, and oversight of marketing materials.

It should be noted that ESMA encourages NCAs to consider the use of sanctions in case of breaches.

Next steps

The Report explains that ESMA and the NCAs will continue working on the topic given the substantial role that marketing communications and advertisements can play in determining consumer behaviour and influencing investment decisions. As part of this continued work, ESMA will also assess whether there is a need to use supervisory convergence tools going forward.