1. Central Bank publishes its PCF Annual Confirmation Guidance
The Central Bank of Ireland ("Central Bank") has published its PCF Annual Confirmation Guidance ("Guidance"). The Guidance is directed at regulated financial service providers ("RFSPs") and certain holding companies ("Firms") and provides guidance on the submission of Annual Pre-approval Control Functions ("PCF") Confirmation submissions through the Central Bank's portal.
The Annual PCF Confirmation submission requires Firms to confirm, on behalf of each active PCF holder within the Firm, their compliance with the Fitness and Probity ("F&P") standards and that they continue to agree to abide by these standards. The Annual PCF Confirmation must be submitted through the Central Bank's Portal, and the Central Bank advises that:
- the F&P standards and Guidance on F&P standards should be reviewed before a submission is made;
- Firms should review the listed PCF roles, and correct any information including starting dates and resignations as the submission is final and cannot be amended;
- the user, in completing the submission, is confirming that the CEO (PCF-08) or equivalent has confirmed in writing that:
- all necessary due diligence has occurred, although the provision of evidence is not required, but should be maintained by the Firm;
- all PCF holders continue to agree to comply with the F&P standards; and
- that the Firm will take appropriate action regarding any F&P concerns.
In addition to PCF holders, the Guidance confirms that CF holders will also need to be certified via the annual confirmation from 2025.
2. ESMA Consultations on MiCA
ESMA publishes consultation on draft guidelines regarding the qualification of crypto-assets as financial instruments under MiCA
On 29 January 2024, the European Securities and Markets Authority ("ESMA") published a consultation paper on draft guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments under MiCA. The consultation paper aims to provide more clarity to national competent authorities regarding the delineation between the scope of MiCA and MiFID II. This will help to ensure a more consistent approach at national level regarding which crypto-assets should be considered financial instruments, and thus subject to sectoral regulatory frameworks, most notably MiFID II.
The consultation paper notes that under its MiCA mandate, ESMA is not expected to clarify the 'entire scope of what constitutes a financial instrument', just the products that comply with both the definition of crypto-asset in MiCA and the definition of financial instrument in MiFID II.
Alongside the other European Supervisory Authorities, ESMA must also develop another set of guidelines regarding the content and the form of the explanations accompanying the crypto-asset white paper and the legal opinion on the qualifications of asset-referenced tokens.
The consultation will close on 29 April 2024. ESMA will then consider the feedback and will publish its final report, containing its final version of the guidelines by the end of 2024.
ESMA publishes consultation paper on draft guidelines regarding reverse solicitation under MiCA
On 29 January 2024, the European Securities and Markets Authority ("ESMA") published a consultation paper on draft guidelines regarding reverse solicitation under MiCA. Previously, ESMA had stipulated that under MiCA, the provision of crypto-assets services or activities by a third country firm is strictly limited to cases where such services are initiated at the 'own exclusive initiative of a client', known as the reverse solicitation exemption. The reverse solicitation exemption only applies to third-country firms and cannot be used by European Union ("EU") based firms to circumvent authorisation and notification requirements under MiCA.
The draft guidelines aim to provide more clarity to national competent authorities and market participants, particularly third-country firms, on the limited situations where the offer or provision of crypto-asset services to clients established or situated in the EU would be regarded as initiated at the own exclusive initiative of the relevant clients.
The consultation will close to feedback on 29 April 2024. ESMA will then consider the feedback and publish its final report in Q4 of 2024.
3. European Insurance Updates
EIOPA publishes its Consumer Trends Report for 2023
On 23 January 2024, the European Insurance and Occupational Pensions Authority ("EIOPA") published its Consumer Trends Report for 2023 ("Report"). The Report assesses the financial wellbeing of consumers amid the ongoing cost-of-living crisis and examines whether all consumers are treated fairly. The Report identified 6 different trends and provided observations on each. The following is a brief account of some of the key observations made in respect of each of the trends:
Continued value for money concerns for retail investment products
Overall the trend is stable, and concerns over value for money are gradually being addressed. However the pace of this is too slow, and market turbulence and inflation increase consumer detriment. The key findings of this trend are:
- 27% of customers believe that their insurance-based investment products ("IBIPs") do not offer value for money, 20% believe that their household insurance does not offer value for money and 22% believe that their motor insurance does not offer value for money;
- concerns exist over product complexity, such as a lack of clarity on cost structures and performance calculations, as well as high costs and low performance; and
- the value for money of IBIPs and pension products have been impacted by inflation. Ireland had the third lowest percentage of consumers (57%) who believe that their IBIPs offered them value for money.
Inflation impacting insurance and pension consumers, particularly vulnerable ones
Overall this trend is increasing, and while it is expected that inflation will lessen, the impact on consumers persists. The key findings of this trend are:
- the cost of living has reduced consumers' real disposable income, resulting in some consumers prioritising other expenses over regular contributions to their pensions and IBIPs or taking out the coverage they may need creating protection gaps and old age poverty risks;
- the price of various goods and services have increased, and consequently non-life insurance policies may lead to consumers being uninsured. Additionally, increase in prices also implies increase in expenses for insurers which may lead to an increase in premiums and deductibles;
- 29% of consumers (39% in Ireland) saw an increase in the price of household insurance, 32% (35% in Ireland) in motor insurance and 27% in accident and health insurance despite their risk situation not changing; and
- in Ireland, consumers that are financially confident for their retirement dropped 3% to 48% from 2022 to 2023. 23% (2% higher than the EU average) did not buy/renew an investment/savings product from an insurer over the last 2 years, and 16% did not buy/renew household insurance over the past 2 years. 14% felt that they cannot afford the type of cover that they need, and 21% saw the deductibles of their insurance products increase.
Discriminatory practices affecting certain types of consumers in relation to exclusions/product design and pricing practices
Overall this trend is stable, but although more attention is being paid to diversity, equity and inclusion, the risks are expected to remain the same. The key findings of this trend are:
- discriminatory practices resulted from: legacy risks which no longer exist for example HIV; dismissal of pregnancy related injuries by insurers while diseases typically faced by men were covered; and automatic rejections of consumers that were not fully able to work;
- only 7% of women compared to 10% of men felt very confident, and 30% of women compared to 37% of men felt confident that they could live through retirement comfortably;
- in Ireland 11% strongly disagreed and 21% tended to disagree that they were being treated fairly and equally when purchasing insurance or pension products; while 7% strongly disagreed and 25% tended to disagree that advertised insurance policies had a high number of exclusions which in their view targeted their particular situation; and
- the Report noted the measures that had been put in place in some Member States to ensure fair treatment and in particular noted Insurance Ireland's Code of Practice to ensure fair treatment for cancer survivors applying for mortgage protection insurance.
Issues related to poor value of ancillary products, high commissions and aggressive sales techniques despite some improvements
This trend is stable, and some of the risks highlighted by EIOPA are gradually being addressed and manufacturers are also improving their product oversight and governance process. However, the increase in digital sales risk an increase in dark-patterns if not adequately monitored. The key findings from this trend are:
- risks in relation to poor value of ancillary products or products which are commonly cross-sold with other financial services continues. Some of these products are often characterised by high commissions and low claim ratios indicating poor value;
- National Competent Authorities ("NCAs") reported that they have observed the persistence of these practices coupled with aggressive sales techniques sometimes amounting to dark patterns;
- Ireland had the highest number of consumers (34%) who reported seeing statements that the price quoted was limited in time when purchasing insurance digitally; and
- the Report noted that the Central Bank of Ireland undertook a review on differential pricing practices and concluded that the practice of price walking could result in unfair outcomes for some consumers.
This trend is increasing as the digitalisation of insurance and pension-related process is expected to increase further. The key findings from this trend are:
- NCAs reported an increase in digitalisation within the EU's insurance and pensions sectors;
- enhanced digital engagement can increase adoption, bring faster claim management processes, faster purchasing experience and reduce operational costs for insurers. Challenges including digital exclusion, data privacy concerns and aggressive marketing techniques remain;
- consumers only prefer digitalisation in relation to certain aspects of the insurance and pensions lifecycle; and
- Ireland had the highest number of consumers (55%) who purchased a product from an insurance providers' website, and 73% agreed that it was easier to gather information and compare products online than in person or via phone. However 61% agreed that it is easier to receive tailored advice in person or via phone than online.
This trend is increasing but as the offering of products with sustainability features increases so does the risk of greenwashing, particularly with products that fall outside specific sustainability requirements. The key findings of this trend are:
- consumer demand for sustainable products is rising, and more consumers are directing their investments towards sustainability factors and purchasing non-life insurance products with sustainability features;
- the growing market for sustainable products has caused an increase in misleading sustainability claims, increasing the risk of greenwashing and reducing consumer trust; and
- 44% of consumers find product's sustainability documentation complex. In Ireland 16% disagreed and 34% tended to disagree that documentation about the sustainability features of insurance products is easy to understand. 15% strongly agreed and 34% tended to agree that they did not trust the sustainability related claims made by providers and distributors.
Final compromise text on proposed Solvency II amending Directive and IRRD
On 25 January 2024, the Council of the European Union ("Council") published notes setting out the final compromise texts on proposed Solvency II amending Directive and IRRD. It set out the texts, which reflect the position reached by the Council and the European Parliament ("Parliament") on 14 December 2023 and consists of:
- the final compromise text for the proposed Directive amending the Solvency II Directive regarding proportionality, quality of supervision, reporting, long-term guarantee measures, macro prudential tools, sustainability risks, group and cross-border supervision; and
- the final compromise text for the proposed IRRD establishing a framework for the recovery and resolution of insurance and reinsurance undertakings.
The final compromised text will now be sent to the Parliament for approval.
For more information on the political agreement, please see FIG Top 5 at 5 dated 21 December 2023.
4. Chair of EBA delivers speech on Digital Finance
On 30 January 2024, the Chair of the European Banking Authority ("EBA"), José Manuel Campa gave a speech entitled – Digital Finance: Confidence and resilience as a foundation for well-functioning financial markets. The below captures the key messages from his speech.
Role of the EU Financial Sector in contributing to the competitiveness of the EU
Mr Campa explained that EU banks have improved their competitive positions, with robust capitalisation levels, higher profitability, high liquidity ratios and robust asset quality, despite the impacts of the pandemic and geopolitical tensions. This has been helped by financial regulation and important reforms which have improved soundness and resilience such as the single rule book and the ECB's single supervision of Euro area significant institutions. The approval of the banking package also indicates the commitment of the EU in preserving global markets. However, Mr Campa also noted that there is more work to be done and that the single market for financial markets is still a way off. Cross-border banking activity has been stagnant for over a decade and, from a regulatory perspective, the need to complete the banking union is vital to unlocking the potential of the single market. Work on the capital markets union is also ongoing and these projects are at the top of the EBA's agenda.
Innovation in the financial sector
Mr Campa spoke of the various initiatives launched by financial institutions to address specific risks arising from technology, as well as to develop the potential of the sector via FinTech, However he stressed that to achieve the potential of such technologies, there must be common supervisory and regulatory approaches such as Digital Operational Resilience Act ("DORA"), Markets in Crypto-Assets Regulation ("MiCA"), the AI Act, the Consumer Credit Directive and the new Anti-Money Laundering ("AML") package.
EBA's thematic priorities in the area of digital finance for 2024/2025
Mr Campa noted that 2 of the EBA's strategic objectives relate to innovation, including (1) to set up and start DORA oversight and MiCA supervision and (2) to increase focus on innovation and consumers to ensure a smooth transition to the new AML/CFT framework.
With these objectives in mind, the EBA has created a crypto supervision coordination group with the involvement of all competent authorities for issuers of asset reference tokens and e-money tokens to ensure proper coordination across the market. The EBA also envisages thematic work in a number of areas, Mr Campa made the following remarks on these thematic areas of focus.
Tokenisation: In response to the trend towards issuing tokenised deposits as a settlement instrument, the EBA will carry out a stocktake of potential models for deposit tokenisation, which will inform supervisory dialogue with the aim of promoting a common understanding of opportunities and risks and to develop a common supervisory stance.
Crypto and decentralised finance ("DeFi"): The EBA will report to the European Commission on crypto assets and DeFi activities that fall outside the scope of MiCA.
Artificial Intelligence ("AI"): The EBA will assess the new AI Act and intends to map existing and upcoming prudential and consumer protection requirements on the use of AI in the banking sector. This assessment will identify areas where additional guidance and clarity on supervisory expectation on the use of AI.
5. EU Platform on Sustainable Finance publishes report on taxonomy and sustainable finance market practices
On 29 January 2024, the EU Platform on Sustainable Finance published a report which contained a compendium of sustainable market practices ("Report"). The aim of the Report is to examine how the EU sustainable finance framework ("Framework") can be used to support and inform the transition efforts of economic actors, beyond regulatory compliance. The Report focuses on seven stakeholder groups that use the taxonomy but for the purposes of this update we consider the observations relevant to credit institutions, investors and insurers.
At the outset the Report reflects on 3 market practices and provides observations as follows:
- use of the Framework for business strategy, transition planning and target setting: early evidence indicates that market actors have begun to use the framework to prepare for regulatory compliance as well as to support their voluntary sustainable business and transition planning strategies;
- finance and transitions: the trend of using EU tools and frameworks when structuring sustainable or transition finance across a range of financial products including green bonds, loans and investment funds is expected to accelerate as the availability and quality of sustainability disclosures improves; and
- reporting, monitoring and assurance: although challenges remain, market participants have begun to adapt their practices to comply with the new sustainability reporting requirements. Investors have initiated Sustainable Finance Disclosure Regulation ("SFDR") disclosures and taxonomy alignment reporting is expected to improve in the coming years as data collection and verification processes are implemented.
Peer to peer recommendations
The Report provides peer to peer recommendations to further develop the impact and enhance the value and benefits of the taxonomy and sustainable finance framework. The recommendations for investors, insurers and credit institutions are outlined below.
Investors: the Investor stakeholder group encourages peers to:
- use the EU taxonomy and the Corporate Sustainability Reporting Directive ("CSRD") and the European Sustainability Reporting Standards ("ESRS") to support the definition and implementation of entity-level net-zero targets;
- use the EU Taxonomy KPIs reported by investee companies in the development and management of green and transition financial products, and to support shareholder engagement and analysis of transition plans and targets at investee company level;
- use the EU Taxonomy framework as the basis for ESG due diligence in project financing and investments in unlisted companies;
- build capacities of sales staff regarding the Framework to enhance in a consistent manner end-investors' sustainable finance literacy, to support an effective uptake of requirements under MiFID and the Insurance Distribution Directive as well as sustainability preferences;
- engage with data providers to increase the reliability of datasets and their usefulness beyond disclosure obligations; and
- enhance the integration and uptake of the Framework within market-led initiatives.
Insurers (underwriting): the Insurers stakeholder group encourages peers to:
- develop further market guidance to support the comparability and usefulness of qualitative voluntary disclosures related to the EU Taxonomy underwriting KPIs;
- refer to the EU Taxonomy framework for product development purposes to improve comparability and reduce greenwashing concerns; and
- enhance the integration and uptake of the Framework within market-led initiatives.
Credit Institutions: the Credit Institutions stakeholder group encourages peers to:
- use the Taxonomy and wider sustainable finance framework in sustainable banking products and services to support clients in achieving their climate transition plans and strategies;
- provide high-quality and comparable sustainability-labelled or green financing products, and monitor the positive impact of these products;
- enhance the transparency of disclosures at entity-level, and ensure accountability of sustainability commitments to prevent greenwashing;
- raise awareness amongst SMEs and retail clients of the benefits of the Framework for planning their business strategies, and improving their access to sustainable finance;
- use the EU Taxonomy as a tool to measure alignment of client entities with the EU environmental objectives, for risk mitigation assessment purposes; and
- improve the integration and uptake of the Framework within market-led initiatives.