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FIG Top 5 at 5

Welcome to latest edition of the FIG Top 5 at 5.

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FIG Top 5 at 5

The Top 5 at 5 is a weekly update in which members of the Financial Institutions Group (FIG) identify five of the key legal and regulatory developments relevant to the financial services industry from the preceding week. Priority is given, in the first instance, to Irish based developments but the update will also include important developments in European law and regulation.

The topics chosen are dictated by the developments during the relevant period but priority is given to cross sectoral developments. The FIG Top 5 at 5 is not intended to represent all developments of note for the relevant period but rather a snap shot of some of the issues which we feel are of particular importance. 

Should you have any queries in respect of the contents of the update, please do not hesitate to contact your usual Matheson LLP contact or any member of our team detailed below.

1. MiCA Updates:

1. Central Bank publishes key facts document under MiCA for CASPs

In the last week of November 2024, the Central Bank of Ireland (“Central Bank”) published its guidance note for crypto asset service providers (“CASPs”) – key facts document (“Guidance Note”). This latest development follows on from the signing of statutory instrument no. 607 of 2024, European Union (Markets in Crypto - Assets) Regulations 2024 by Jack Chambers, Minister for Finance, on 8 November 2024. For more information please see FIG Top 5 at 5 dated 14 November 2024.

The Guidance Note sets out the Central Bank authorisation process for CASPs, detailing that the process consists of two phases as follows:

1. the pre – application phase, consisting of two stages as follows:

  • an initial meeting with the applicant firm; and
  • the submission of a key facts document (“KFD”).

2. the application phase, which consists of the following stages:

  • the submission to the Central Bank of a formal application seeking authorisation under MiCA;
  • an assessment of completeness of the application by the Central Bank;
  • an assessment of the application by the Central Bank; and
  • communication of the decision to the applicant firm whereby authorisation as a CASP will be either granted or refused.

The Guidance Note highlights that the KFD is aimed at providing the Central Bank with high – level information as regards an applicant CASP’s proposed business, operational model and associated risks to include details in respects of the applicant CASP’s:

  • background / ownership;
  • number and type of clients;
  • capital projections;
  • governance and staff resourcing arrangements; and
  • outsourcing arrangements.

The Central Bank have stated that the purpose of the Guidance Note is to set out the expectations of the Central Bank as regards the content of the KFD to be submitted. It is expected that the KFD will assist the Central Bank in obtaining a clear high – level understanding of the applicant CASP’s business and will allow the early identification of potentially material issues as regards the applicant CASP’s proposal.

The Guidance Note states that applications will be considered on a case- by case basis with a focus on the nature, scale and complexity of an application being a major consideration in terms of the actual application itself and also as regards the application of proportionality within the assessment.

Firms currently providing crypto asset services in Ireland

The Central Bank have stated, in the Guidance Note, that it will employ its prior supervisory knowledge in respect of  existing authorised / registered firms seeking a MiCA authorisation. However, all firms already providing crypto asset services in Ireland will be required to demonstrate, to the Central Bank, that they meet all of the requirements under MiCA.

Key areas of focus

The Guidance Note details the key areas of focus for the Central Bank as regards the authorisation and supervision of CASPs, some of which are as follows:

  • the independence and autonomy of the applicant firm (within a group structure);
  • protection of client assets;
  • operational resilience;
  • anti – money laundering / countering the financing of terrorism; and
  • business model and financial resilience.

The Central Bank expects applicant CASPs to have a full awareness and understanding of the relevant governing legislation, regulatory definitions, regulatory guidelines, and regulatory technical standards applying to CASPs prior to submitting a KFD.

The Guidance Note highlights that an applicant CASP should expect engagement with the Central Bank during the KFD stage to address any questions and provide any clarifications sought. The Central Bank expects constructive and timely engagement from applicant CASPs.

Post KFD stage

The Central Bank may provide feedback at the conclusion of the KFD stage as follows:

  • elements of the applicant CASPs proposal that the Central Bank  will require the applicant firm to consider and reflect in the formal application; and
  • feedback on material item(s) which the Central Bank deems necessary for the applicant firm to consider and address before the applicant CASP submits a formal application. In this regard, the Central Bank will provide clear and specific feedback to the applicant CASP.

Next Steps

While the information required to complete the KFD is very detailed, this information will form part of the main application and, as such, it is helpful for firms going into the KFD process. 

2. Commission Implementing Regulation on ITS on standard forms, templates and procedures for co-operation and exchange of information under MiCA published in OJEU

On 26 November 2024, Commission Implementing Regulation (EU) 2024 / 2545 (“Implementing Regulation”) was published in the Official Journal of the European Union (“OJEU”).

The Implementing Regulation lays down implementing technical standards (“ITS”)  for the application of Regulation (EU) 2023/1114 of the European Parliament and of the Council (“MiCA”) with regard to standard forms, templates and procedures for the cooperation and exchange of information between competent authorities.

The ITS deal with the following matters:

  • requests for, acknowledgement of and replies to requests in respect of cooperation or exchange of information;
  • urgent requests for cooperation or exchange of information;
  • procedures for sending and processing a request for cooperation or exchange of information;
  • the procedure for requests concerning the taking of a statement from a person;
  • the procedure for requests concerning an investigation or an on-site inspection;
  • unsolicited provision of information; and
  • restrictions and permissible use of information.

The Implementing Regulation was adopted by the European Commission on 24 September 2024.

Next Steps

The Implementing Regulation will come into force on 16 December 2024, being 20 days after its publication in the OJEU.

2. Progress, not regress: Financial Regulation in challenging times, remarks by Governor Gabriel Makhlouf at Financial Services Ireland 

On 20 November 2024, the Governor of the Central Bank of Ireland (“Central Bank”), Gabriel Makhlouf, delivered a speech at Financial Services Ireland on the role of financial services in society. Of particular note were the comments made by the Governor in relation to Fitness and Probity (“F&P”) and the concept of “lighter regulation”.

Fitness and Probity

The Governor touched briefly on the Central Bank’s F&P Regime providing an update on its new centralised F&P unit, stating that it will be up and running by the end of the year. He also stated that the Central Bank will be publishing consolidated and enhanced guidance on F&P standards next year.

Lighter Regulation

Governor Makhlouf referenced the growing sentiment for lighter regulation in the current period of structural economic challenge and change and sounded a note of caution about the dangers of financial de-regulation. He said that achieving growth through “’lighter touch’ financial regulation” has failed in the past with destructive long-term effects on public investment, housing markets and medium term housing supply. He has urged executives to be “sensible” when advocating for changes as “lower standards have greater costs than benefits.” Instead he proposed several more advisable alternatives that the sector should focus on as follows:

  • adopting and integrating the benefits of technological innovation, particularly in payments;
  • making more and better investment opportunities available to retail investors and providing more financing for innovative businesses;
  • more green and transition financing to allow private sector finance to perform its role in the transition to net zero;
  • pressing for the finalisation of reforms in Europe, including delivering single banking and capital market unions; and
  • leading in regulation of fintech and climate finance. 
3. Deputy Governor, Central Bank of Ireland, Vasileios Madouros delivers speech on Ireland's role as a growing financial centre in Europe 

On 20 November 2024, Deputy Governor of Monetary and Financial Stability at the Central Bank of Ireland (“Central Bank”), Vasileios Madouros, delivered a speech which focused on Ireland’s position as a financial centre in Europe. In his speech, he covered key elements of how the Irish financial sector has evolved significantly from a domestically-focused sector to a highly-globalised and diverse one, as follows:

Size

  • The size of the financial sector has increased significantly, reaching EUR 8.1 trillion in 2023 as measured by its total assets.
  • The number of regulated entities operating in the Irish financial system has grown to more than 12,000, which is more than a 60% increase over the last twenty years.
  • As a share of Gross National Income, total assets of the sector are now more than 3½ times larger than they were in the mid-1990s.

Composition

  • Non-bank financial intermediation has offered a change in the composition of the Irish financial sector with a decrease being seen in total assets of banks and credit unions since 2007. More recently, the size of the banking sector has started to reverse, driven by the expansion of balance sheets of international banks operating in Ireland.
  • The Deputy Governor highlighted that growth in the sector is particularly due to the non-bank sector, especially investment funds with total assets of the fund sector, including MMFs, increasing more than six times since 2008 due to rising assets valuations and inflows in the sector. By 2023, the funds sector accounted for around 55% of the total assets of the Irish financial sector. Other parts of the non-bank financial sector – such as insurance or special purpose entities – have also seen significant growth over the past decade, but at a slower rate than funds.

International Connectedness

  • Across various segments of the financial system such as banking, insurance, asset management and payments services, transactions have become increasingly cross-border in nature.

Complexity

  • The complexity of the sector has increased over time with regard to growing interconnections and expansion of particular financial services activities such as the establishment of the European headquarters of global investment banks in Ireland, with a greater focus on wholesale financial activities, together with the fact that Ireland has been a growing European location for international trading venues and more complex trading firms. The emergence of payment firms and crypto-asset service providers has also been significant.

The Deputy Governor noted that the Irish economy has made it an attractive destination for foreign direct investment for several reasons including but not limited to:

  • access to the single market;
  • a competitive corporate tax regime;
  • Ireland’s common law system; and
  • a global rise in asset management and increased digitalisation of finance.

Looking forward, given Ireland’s emerging internationally-focused position, the Deputy Governor highlighted the importance of the deepening of capital markets in Europe.

He emphasised the importance of implementing and developing globally-agreed regulatory standards within the EU single market as well as effective oversight, supervision and crisis management arrangements as prerequisites for success in financial centres. The Deputy Governor particularly emphasised the importance of the finalisation of Basel III, against a background of what he referred to as a waning global appetite for the implementation of reforms.  

    4. Central Bank of Ireland announces enforcement action against payment services firm for safeguarding failures under Payment Services Regulation 2018 

    On 21 November 2024, the Central Bank of Ireland (“Central Bank”) published a settlement notice (“Settlement Notice”) in respect of BlueSnap Payment Services Ireland Limited (“BlueSnap”) and imposed sanctions  for breaching requirements of the European Union (Payment Services) Regulations 2018 (“PSR 2018”) between January 2021 and December 2022.

    This is the second settlement under the  Administrative Sanctions Procedure (“ASP”) following the changes introduced by the enactment of the Central Bank (Individual Accountability Framework) Act, 2023.

    Findings

    The Central Bank has found that BlueSnap failed to comply with the PSR 2018 as follows:

    • allowing users’ funds to be mixed with non - users’ funds between 1 January 2021 and 21 December 2022;
    • failing to deposit users’ funds in its designated safeguarding account between 1 January 2021 and 1 June 2021; and
    • on dates between 20 January 2021 and 23 February 2022, failing to notify the Central Bank without undue delay that, contrary to what was stated in BlueSnap’s application for authorisation:
      • users’ funds were mixed with non - users’ funds;
      • users’ funds were not deposited in BlueSnap’s designated safeguarding account in Ireland; and
      • BlueSnap’s designated safeguarding account was not reconciled in the manner set out in its application for authorisation

    The Central Bank have stated that these failings arose due to deficiencies in regulatory awareness and understanding of reporting requirements, in addition to inadequate oversight and monitoring by BlueSnap of safeguarding operations which were provided by the BlueSnap group.

    Sanction

    The Central Bank imposed sanctions consisting of a reprimand and a monetary penalty in the amount of €324,240 (30% settlement scheme discount applied). The sanctions, which have been accepted by BlueSnap, are subject to confirmation by the High Court and will not take effect unless they are so confirmed.

    Commenting on the settlement reached, Seána Cunningham, Director of Enforcement and Anti-Money Laundering, Central Bank,  stated:

    “When firms apply for authorisation, they need to demonstrate to the Central Bank how they will meet their regulatory obligations. It follows that they must then adhere to the commitments they have made at authorisation when they provide services as an authorised financial services provider. If information provided at authorisation is no longer accurate, firms must inform the Central Bank of this promptly and take any necessary remedial action… The safeguarding of customer funds has been, and will continue to be, a key area of supervisory focus for the Central Bank." 

    5. European Updates: 

    1. Final joint guidelines issued on ESAs exchange of information system for assessing fitness and propriety

    On 20 November 2024, the European Supervisory Authorities (“ESAs”) published a final report containing final guidelines (“Guidelines”) on the system established by the ESAs as regards the exchange of information regarding the assessment of the fitness and propriety of holders of qualifying holdings, directors and key function holders of financial institutions and financial market participants by competent authorities. 

    The system developed by the ESAs consists of a cross – sectoral database (“ESAs Information System”) and the Guidelines which address how to use the ESAs Information System and the exchange of relevant data in order to promote timely exchange of information between competent authorities.

    The ESAs Information System will hold limited information relating to persons, natural or legal,  who are subject to a fitness and propriety assessment under EU sectoral provisions.

    The purpose of the ESAs Information System is to support competent authorities in identifying other competent authorities that have conducted such an assessment process for a person of interest, with the aim of improving the efficiency of the fitness and propriety assessments.

    With data protection requirements in mind, only limited and necessary information will be stored in the system and will only be accessible on a strict need-to-know basis. The actual exchange of information that is relevant to the assessment of the fitness and propriety of a person of interest will be made between the relevant competent authorities in line with the applicable regulatory framework outside of the ESAs Information System.

    The ESAs have stated that the exchange and provision of information between competent authorities does not relieve a competent authority of the requirement to make its own assessment as to fitness and propriety.

    The Guidelines are set out in section 3 of the final report.

    Next Steps

    The Guidelines will apply from the date on which the translations are published in the official EU languages except for certain provisions regarding legal or natural persons – this is to take account of the time it will take to input historical data into the ESAs Information System before using it.

    Competent authorities are required to indicate whether they intend to comply with the Guidelines, or not, within two months of the publication of the translations.

    2. Responses to European Commission consultation on macro – prudential policies for NBFIs

    In  May 2024, the European Commission (“Commission”) launched a targeted consultation (“Consultation”) assessing the adequacy of macroprudential policies for non - bank financial intermediation (“NBFI”). and was aimed at:

    • identifying the vulnerabilities and risks of NBFIs;
    • mapping the existing macroprudential framework; and
    • gathering feedback on current challenges to macroprudential supervision and consideration of areas for further improvement.

    The Consultation closed for comments on 22 November 2024, since that date a number of regulators and supervisory authorities such as the Central Bank of Ireland (“Central Bank”), the European Securities and Markets Authority (“ESMA”), and the Eurosystem have published their submissions. The responses submitted by the above focused mainly on the investment funds sector. This update however will focus on the response of European Insurance and Occupational Pensions Authority (“EIOPA”) (“Response”).

    In its Response, EIOPA sets out the following:

    • European insurers already operate under a well – established and robust micro – prudential capital regime to include macroprudential measures. Further, Solvency II has always had elements with macroprudential implications, particularly as regards the effects of long – term investors, such as insurers. Moreover, the amended Solvency II Directive will introduce further macroprudential elements; and
    • the specifics of sectorial regulatory regimes should be taken into account when drafting a macroprudential regime for NBFIs  so that duplication and / or conflicting measures are avoided. 

    EIOPA’s Response focused on replies and feedback to three insurance and pension related questions in the Consultation and ten other questions indirectly related to insurance and pensions. Some of the matters addressed are as follows:

    • the extent to which the failure of an NBFI could affect the provision of critical functions to the real economy or the financial system that cannot easily be replaced;
    • other sources of systemic risks or vulnerabilities stemming from NBFIs’ activities and their interconnectedness, including activity through capital markets, that were not identified in the Consultation;
    • systemic liquidity risk in the NBFI sectors;
    • build - up of excessive leverage in the NBFI sectors;
    • how current reporting by pension funds can be improved to improve the supervision of liquidity risks, while minimising the reporting burden; and
    • the benefits and costs of a regular EU - wide liquidity stress test for pension funds. 

    Next Steps

    The Commission will use the information gathered in the Consultation to inform the policy planning of the upcoming 2024 - 2029 College of Commissioners.

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