On 31 January 2022, the Central Bank of Ireland (the “Central Bank”) published its final Guidance on the use of Service Companies in the Insurance Sector (the “Guidance”). The Guidance was accompanied by a feedback statement ("Feedback Statement") setting out the Central Bank’s views on the submissions received in respect of the August 2021 consultation paper (“CP144”) on Guidance on the use of Service Companies in the Insurance Sector (the “Draft Guidance”).
The Guidance sets out the Central Bank’s expectations of (re)insurance entities which choose to enter arrangements with separate legal entities for the provision of extensive staffing or hybrid arrangements (which involve a combination of the provision of staff and other outsourced activities). In the Central Bank’s view, these types of staffing arrangements have potential, if not effectively managed, to threaten the operational resilience of (re)insurers.
In the Feedback Statement, the Central Bank provides responses to issues raised in the CP144 submissions received, either by clarifying the Central Bank’s intention with respect to some of the provisions or by making minor adjustments to the Guidance. The Feedback Statement also highlights a number of matters raised in the submissions received in the context of the preceding discussion paper, Discussion Paper 9 - Use of Services Companies in the Insurance Sector (“DP9”) however, it does not provide any responses in respect of these.
The Guidance remains largely unchanged from the Draft Guidance. As detailed above, the changes which have been made are in direct response to issues raised in the CP144 submissions. The Central Bank explains in the Feedback Statement that “where changes have been made, they do not alter the intent or purpose of the Guidance but instead seek to provide additional context or reassurance about the intent of the Guidance”. For a detailed look at the Draft Guidance, please see Matheson’s Insight entitled “Changes ahead for Insurance Undertakings Using Service Companies for Staffing”.
The only amendment of note to the Draft Guidance relates to the section regarding Resolvability.
The Central Bank has amended the wording of section 1.4.7. (a) of the Guidance from
“e.g. consideration should be given to adequate pre-funding (e.g., equivalent to six months’ worth of working capital being ring-fenced within the service company) and contractual obligations that ensure continued service for a reasonable period of time”
“For example, an undertaking could consider taking measures to ensure adequate pre-funding (e.g., equivalent to six months’ worth of working capital being ring-fenced within the service company) and/or include contractual obligations that ensure continued service for a reasonable period of time”
This change, the Central Bank explains, has been made to clarify that it is “not a requirement” to ensure prefunding equivalent to six months’ worth of working capital is ring-fenced in the service company and was “intended to be illustrative only”. It goes on to state that other measures, that achieve similar outcomes, may also be used.
Central Bank Responses
While the extent of the changes to the Draft Guidance are minimal, we would recommend that re(insurers) carefully consider the Feedback Statement so as to better understand the Central Bank’s position on a number of matters underpinning the Guidance, as this will further support firms’ efforts in meeting the Central Bank’s expectations. The following is a brief overview of such positions:
- Interaction with the Consultation Paper on the Cross Industry Guidance on Outsourcing (“CP138”): One submission queried the need for both CP138 and CP144, explaining that if they had been combined it would reduce the administrative impact on firms and avoid confusion as to the Central Bank’s expectations. The Central Bank in its response clarified that the reasons for issuing separate consultations were due to the fact that the use of staffing arrangements is more commonplace in the insurance sector and outsourcing, while relevant in the context of hybrid arrangements, is not the focus of CP144.
- Due diligence: One submission explained that its interpretation of the Guidance was that the requirement to carry out due diligence only applied to new arrangements and not existing arrangements. The Central Bank clarified that while the Guidance does not stipulate an expectation that due diligence be carried out for existing arrangements, the Central Bank expects firms to take the necessary steps to review existing arrangements and ensure they are updated and augmented, as appropriate, to align with the expectations set out in the Guidance.
- Conflicts of Interest: One submission claimed that section 1.4.3 (c) of the Guidance had the effect of undermining the nature and use of service companies. Section 1.4.3 (c) states:
“Where the arrangement is a hybrid arrangement and a material element of that relates to other activity outsourcing, the responsibility for overseeing the delivery of that other activity by the services company, as required by Solvency II, is assigned to a person directly employed by the undertaking, i.e., not to a person employed by the service company, to ensure the performance is robustly monitored and, as necessary, challenged”
The Central Bank clarified that it considers it more appropriate for a direct employee of the undertaking to assume responsibility for this to ensure that the person responsible can monitor the performance of the outsourcing element of the arrangement objectively and raise challenge where necessary. The Central Bank explains that the relevant section seeks to recognise the distinction between a pure staffing arrangement and a hybrid arrangement and to reduce the potential increased risk where a material element of the arrangement relates to other activity outsourcing. In the final Guidance, the wording is slightly amended to remove the reference to Solvency II but otherwise remains unchanged.
- Operational resilience / Business continuity planning: One submission stated that in its view, that once a firm adequately caters for staffing arrangements in their operational resilience and business continuity planning, there should be no need for duplication of plans within the internal service company.
The Central Bank in its response noted that it expects firms to appropriately consider and incorporate staffing arrangements into their overall operational resilience framework / business continuity planning. It clarifies however, that the Guidance does not stipulate that separate or duplicate plans must be maintained within the services company.
- Resolvability: One submission flagged that the reference to “ring-fencing six months’ salary and associated costs for all employees employed through a staffing company” was burdensome and unnecessary.
The Central Bank clarified that this is not a requirement and the examples provided in the Guidance are intended to be illustrative only. As detailed above, the Guidance has been amended to reflect this.
Given that the Guidance has not changed significantly, firms which had already undertaken a gap analysis as against the Draft Guidance, will be well placed to adopt the necessary measures to ensure compliance with the Guidance. If your firm has not yet done so, the following steps detailed by the Central Bank must be taken:
- review the Guidance;
- ensure that any staffing arrangements falling into the relevant categories are reviewed in light of the Guidance;
- update and augment any existing arrangements, if necessary, to align with the expectations set out in the Guidance;
- carry out this work within 12 months of the publication of the Guidance (31 January 2023);
- be able to demonstrate how your firm has carried out this work;
- be able to demonstrate the rationale for the firm’s approach; and
- be able to provide evidence that the Guidance has been considered and approved by the firm’s board.
In addition to the foregoing, in the Feedback Statement, the Central Bank expressly details its expectation that firms “adopt appropriate measures to ensure that staffing arrangements are properly integrated in their governance and risk management frameworks”.
While a 12 month grace period is welcome to enable firms to respond to the Guidance, given that third party service companies are involved, firms should not underestimate the lead in time which might be required to adapt these arrangements to ensure compliance.
Should you require further information in relation to the material contained in this article, please get in touch with a member of the team or your usual Matheson contact. Full details of Matheson’s Financial Institutions Group together with further updates, articles and briefing notes written by members of the team, can be accessed at www.matheson.com.