Financial Services Regulation
In the Summer Horizon Tracker we discussed how recent developments in the financial services sector were driven by the identified need for better protection for consumers. This observation holds true to an even greater extent in respect of the legal and regulatory developments in the interim period. In that short space of time, we have seen the publication of the long awaited Central Bank (Individual Accountability Framework) Bill 2022 ( "IAF Bill"), provisional agreement on the Markets in Crypto-assets Regulation ("MiCA") which will address the current unregulated nature of crypto-assets, and the launch of the Central Bank's review of the Consumer Protection Code ("CPC"). At the heart of each of these developments is the protection of consumers in their interactions with the financial services industry. Below we highlight specific aspects of these developments to which we feel our clients should have regard.
Key Themes in Financial Services Regulation
In response to the publication of the Central Bank (IAF) Bill 2022, Matheson LLP's dedicated, cross departmental IAF team have been actively engaging with clients on various aspects of the IAF Bill through a series of events, webinars, podcasts and articles (details of which can be found below). Our observations across these interactions have highlighted two main points in terms of preparation by Regulated Financial Service Providers' ("RFSPs") for the implementation of the legislation.
The first point relates to what might be best described as the "non-SEAR" elements of the legislation. All RFSPs will be required to comply with the balance of the legislation upon commencement. While changes to the administrative sanctions programme ("ASP") will not require specific actions by RFSPs, compliance with the new conduct standards will. These new conduct standards will apply to an extremely broad range of staff. RFSPs will need to consider who is in scope, notify those individuals of the applicability of the standards to them and provide training. Failure to comply will be enforced by the Central Bank through the ASP as against the individual directly or the RFSP. (For more details on the specifics of the requirements please see Matheson LLP's dedicated IAF webpage).
The second point relates to impacted RFSPs' preparations to ensure compliance with the SEAR elements of the legislation. While it is the case that some of the details relating to the SEAR await Central Bank guidance, much of the requirements do not and once commenced, the requirements will apply. As a result, RFSPs would be well advised to establish their implementation projects now to assess the extent of the work required to be done and the methods through which this will be achieved. It is Matheson's firm view that such projects should be sponsored by the CEO or at least co-sponsored by the CEO, given the fundamental nature of the regulatory requirements.
As the IAF Bill makes its way through the Houses of the Oireachtas over the coming weeks, Matheson LLP will keep clients abreast of the debate, any key changes proposed, and the likely impact of those changes to what is currently outlined.
The first of three phases in the review of the CPC has been launched. This phase comprises a Discussion Paper which is seeking engagement from consumers and RFSPs on a number of broad topics. Of particular note is the Central Bank's proposal to introduce specific cross sectoral guidance on "Consumers' Best Interests" stating that it "thinks that it might be helpful to develop guidance on what it means (and does not mean) for a firm to act in the best interests of its customers and potential customers". This decision has been largely influenced by the various interventions which the Central Bank has made as a result of actions and behaviours which have fallen short of the required standards when it comes to consumers' best interests. Examples of such interventions include the Report on the Behaviour and Culture Report of the Irish Retail Banks and more recently, and the adoption of the Business Interruption Insurance Supervisory Framework.
In the Discussion Paper, the Central Bank seeks agreement from interested parties to this proposed course of action, and goes on to broadly outline what such guidance might look like. From the perspective of RFSPs, this is one of the key areas to which they should consider responding. It should be noted that the Central Bank is not the only regulator to make the decision to provide guidance on what constitutes acting in the consumers' best interests. However approaching it from the perspective of a standard applicable to all RFSPs, is more unusual.
"Firms do not have to have exclusive regard to the interests of their consumers above all else….nonetheless, firms need to put consumer interests at the heart of all they do".
Source: Central Bank of Ireland: Discussion Paper - Consumer Protection Code Review
One of the thematic discussions in the Central Bank's Discussion Paper on the CPC Review was "Innovation and Digitalisation". Within that, the crypto sector came in for special mention with the Central Bank flagging its concerns around the unregulated nature of the industry and particular crypto- asset products "in particular where they are unbacked (or ineffectively backed), unregulated, and are promoted purely for speculative purposes". However, it went on to acknowledge and welcome the Commission's Markets in Crypto Assets ("MiCA") proposal which seeks to address this gap in regulation. In fact, on 30 June 2022, the European Parliament and Council reached a provisional agreement on MiCA.
The introduction of MiCA will ensure that the high standards of the regulated financial services sector will apply to crypto-assets. While some believe that the regulation of the sector threatens its functioning, many see it as an opportunity. In Matheson LLP we can already see that some of our clients are building up their teams, processes and procedures to a regulated level in anticipation of MiCA. Given the recent move to regulate e-money providers and Virtual Asset Service Providers, we have an insight into the likely expectations and areas of focus of the Central Bank in respect of entities that will seek to become regulated. This includes such areas of importance as prudential soundness; financial resources and regulatory capital, liquidity and the ability to withstand financial shock; governance; outsourcing; risk management; customer/consumer focus and conduct risk; market conduct (insider dealing) and resolution planning. While the finalisation and ultimate implementation of MiCA is still some time off, getting started now will ensure firms are better placed to respond to the specific requirements of MiCA and of the Central Bank in respect of authorisation and accordingly, ensure continuity of business for their consumers.
"Firms active in the sector need to gain an early understanding of the new obligations deriving from the regulatory framework, and to adopt a ‘compliance by design’ philosophy as crypto-asset products and services come to market in the transition phase."
José Manuel Campa, Chairperson, European Banking Authority, Speech on 9 September 2022.