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FIG Top 5 at 5 - 06/04/2023

DATE: 06/04/2023

1. Investment Firm updates

Central Bank of Ireland - Dear CEO Letter on Targeted Reviews on Control Frameworks and Risk Appetite Statements in MiFID Investment Firms & Market Operators

On 29 March 2023, the Central Bank of Ireland ("Central Bank") published a Dear CEO Letter ("Letter") on the outcome of Targeted Reviews on Control Frameworks and Risk Appetite Statements ("RAS") in MiFID Investment Firms & Market Operators (“Investment Firms” or “Firms”).

The Letter outlines some good practices observed and the key findings identified by the Central Bank during these targeted reviews and the Central Bank's expectations in this regard.

The Central Bank acknowledges that risk is "inherent in all business models, and that Investment Firms will have an appetite to take certain risks in the execution of their strategy". However, it goes on to highlight its expectation that all Investment Firms have "appropriate capabilities and governance in place to enable the identification and management of all relevant risks".

Key Findings

The Central Bank identified differing stages of maturity across the Firms reviewed in terms of both the design and implementation of the RAS.

Areas of Good Practice observed by the Central Bank included assessments and enhancements made to risk and compliance control functions and risk management frameworks; holistic risk appetite statement dashboards; RAS linked to strategic objectives; individual responsibility and ownership of the RAS and unacceptable risks formally documented.

While good practices were observed by the Central Bank notable deficiencies were identified across the a number of areas. To read more on the Central Bank's findings and expectations of Investment Firms on control frameworks and RAS please click the link below:

Table of Central Bank of Ireland Findings and Expectations on Review of Control Frameworks and Risk Appetite Statements in MiFID Investment Firms

Next Steps and Actions Required

The Central Bank expects Investment Firms to:

  • fully consider the contents of the Letter and review their Risk and Compliance Control Frameworks, including the RAS, against the good practices and findings detailed in the Appendices to the Letter;
  • where gaps/weaknesses are identified, develop and implement actions to address these in a proactive and timely manner; and
  • discuss the Letter at the next Board meeting and record the discussion in the meeting minutes.

The Central Bank notes that the key findings set out in the letter are not exhaustive and highlights that Investment Firms should continually evaluate the effectiveness of their own Control Frameworks and associated governance.

The Central Bank also highlighted that the issues raised in the Letter may form part of future risk assessments, including inspections, carried out by the Central Bank and supervisors will discuss with individual Investment Firms matters raised in the Letter during future supervisory engagement meetings.

ESMA publishes Official translations of guidelines on MiFID II remuneration and suitability requirements

On 3 April 2023, the European Securities and Markets Authority ("ESMA") published the official translations of the:

Guidelines on certain aspects of the MIFID II remuneration requirements following publication of the  Final Report on 31 March 2022; and

Guidelines on certain aspects of the MiFID II suitability requirements following publication of the  Final Report on 23 September 2022.

Next Steps

The publication of the translations of both sets of guidelines will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines.

These guidelines will apply six months after the date of the publication on ESMA’s website in all EU official languages (i.e. 3 October 2023).

ESMA final report - Review of the ITS on cooperation in supervisory activities under MiFID II

On 28 March 2023, the European Securities and Markets Authority ("ESMA") published its final report on the Review of the implementing technical standards ("ITS") on cooperation in supervisory activities under MiFID II ("Report"). The Report provides the analysis of the proposal for the draft ITS amending Implementing Regulation (EU) 2017/980 which lay down ITS regarding standard forms, templates and  procedures for co-operation in supervisory activities, for on-site verifications, and investigations and exchange of information between national competent authorities ("NCAs") under MiFID II.

ESMA notes in the Report the reason for the review -  "practical implementation of the freedom to provide services under Article 34 of MiFID II combined with the development of the single market and the digitalisation of financial services showed some shortcomings and highlighted instances where improvements could usefully be made to the ITS to better help NCAs to fulfil their supervisory objectives through cooperation".

Next Steps

ESMA did not conduct open public consultations on the draft ITS as the addressees are solely the NCAs and not market participants, and they will have a limited financial impact.

The amended draft ITS will now be submitted to the European Commission ("Commission"). The Commission then has three months to decide whether to endorse ITS (this period may extended by one month).

2. Central Bank of Ireland publishes Draft Fitness and Probity Individual Questionnaire Application Guidance as well as new Individual Questionnaire

As noted in the Top 5 at 5 on 9 March 2023, the Central Bank of Ireland's (the "Central Bank") Portal is being updated to facilitate the submission of pre-approval controlled function ("PCF") applications. These changes will go-live on 24 April 2023.

The Central Bank has advised on a number of occasions that in advance of the go live date, a number of communications would be issued to all regulated entities advising as to the preparations required to use the new system.

On 30 March 2023, the Central Bank published a new Individual Questionnaire ("IQ") and an accompanying draft guidance document on Fitness and Probity IQ Applications which provides guidance for firms in relation to submitting IQs for PCF applicants through the Central Bank's Portal.

The principal changes to the IQ are outlined in the Top 5 at 5 on 9 March 2023 which covers the overview document published on 7 March 2023. This document also outlines the key dates for firms to be aware of. The Central Bank advised that it intends on 11 April 2023, to issue a message to industry advising that:

  • the existing system will continue to be operational until close of business on 20 April;
  • firms should consider waiting to submit non-urgent IQs until the new system is operational; and
  • any in-progress IQs will be processed in the normal way.

The Central Bank intends to issue a further communication on 24 April 2023 to confirm that the new system is operational.

3. Central Bank of Ireland publishes ninth edition of the Financial Conditions of Credit Unions Report

On 30 March 2023, the Central Bank of Ireland (the "Central Bank") published its ninth edition of the Financial Conditions of Credit Unions Report ("Report").

The Report provides an update on the financial performance and position of credit unions for the financial year ended 30 September 2022 and includes sectoral data and commentary.

The Central Bank notes that the Report's aim is to inform credit union boards in carrying out their own strategic analysis and decision-making.

The Report notes that:

  • the macro-financial environment, including tightening monetary policy, has the potential to impact the financial position of credit unions, particularly in the areas of investments, interest income, as well as loan quality;
  • positive trends have emerged, with total loans outstanding returning to pre-pandemic levels and continuation in the trend of increased loan duration. However, the report finds that sustainability challenges remain for credit unions; and
  • under the regulatory framework, credit unions have scope to provide a range of products and services to members, and that strategic business decisions should be informed by their capabilities, risk appetite and financial resources.

Key trends:

  • Lending: total loans outstanding increased to pre COVID-19 levels.  However, despite this increase, the overall loan to asset ratio at 28.4% remains close to historically low levels. Arrears have fallen to a 7-year low of 3.0%, but credit unions should be cognisant of economic headwinds. Significant capacity remains at a sectoral level for additional house and business lending.
  • Savings: while the rapid pace of savings inflows observed during Covid-19 has reduced, savings continued to increase during 2022, totalling €17bn at 30 September 2022.
  • Reserves: average sector total realised reserves as a percentage of total assets increased marginally to 16.1% at 30 September 2022, with all credit unions reporting regulatory reserves above the required regulatory minimum of 10% of assets. 
  • Return on assets ("ROA"): the viability challenges being experienced by a number of credit unions are evidenced through a declining ROA, with an average sector ROA for 2022 of 0.3% cent compared to 0.6% for 2021.

Speaking on the report, at the Spring Conference of the Credit Union Managers Association , Registrar of Credit Unions at the Central Bank, Elaine Byrne noted:

While the financial trends observed over the 2022 financial year include some positive indicators, the low loan to asset ratios,  increases in costs, and falling return on assets, if  not addressed by credit unions will continue to impact on sustainability. The maintenance of strong reserves is key to underpinning member confidence, particularly in the challenging macro-financial environment and where sustainability challenges continue.

Credit unions can offer a wide range of products and services to their members. Sectoral collaborative efforts to provide services are welcome, and forthcoming legislative changes should provide further opportunities for credit unions to expand their service offerings to members. 

It is important that credit unions clearly identify their members’ financial services needs, recognising the financial and operational requirements to deliver an expanded range of services in a prudent and sustainable manner."

4. EU AML Updates

EBA issues Guidelines to challenge unwarranted de-risking and safeguard access to financial services to vulnerable customers

On 31 March 2023, the European Banking Authority ("EBA") published two new sets of guidelines to clarify regulatory expectations, and tackle unwarranted de-risking ("Guidelines").

In January 2022, the EBA published an Opinion on the scale and impact of de-risking in the European Union ("EU") ("Opinion"). The Opinion highlighted that while decisions not to establish or to end a business relationship, or not to carry out a transaction, may be in line with the EU Anti-Money Laundering/Combating the Financing of Terrorism ("AML/CFT") framework, de-risking of entire categories of customers, without due consideration of individual customers’ risk profiles, can be unwarranted and a sign of ineffective money laundering and terrorist financing ("ML/TF") risk management.

The Guidelines are in response to the European Commission’s request following the publication of the Opinion for the EBA to issue guidelines on the steps institutions should take to facilitate access to financial services by those categories of customers that the EBA’s analysis had highlighted as particularly vulnerable to unwarranted de-risking.

The Guidelines also build on the EBA's 2016 Opinion on the application of customer due diligence measures to customers who are asylum seekers from higher-risk third countries or territories and the EBA's April 2022 statement on financial inclusion in the context of the invasion of Ukraine.

The Guidelines:

  • The first set of Guidelines are an Annex to the EBAs ML/TF risk factors Guidelines, which set out what financial institutions should do to identify and assess ML/TF risk associated with customers who are Not-for-Profit organisations.
  • The second set are Guidelines on policies and controls for the effective management of ML/TF risks when providing access to financial services. The guidelines complement the EBA’s Guidelines on ML/TF risk factors by specifying further the policies, procedures and controls credit and financial institutions should have in place to mitigate and effectively manage ML/TF risks in accordance with Article 8(3) of Directive (EU) 2015/849 ("MLD4"), including in situations where the provisions in Article 16 of Directive (EU) 2014/92 (the "Payment Accounts Directive") apply, which introduces the right of individuals to open and maintain a payment account with basic features.

Next Steps

The Guidelines will be translated into the official EU languages and published on the EBA website. Following publication of the translations, competent authorities will have two months to report whether they will comply with the Guidelines.

Both Guidelines will apply three months after publication in all EU official languages. 

EBA publishes consultation on changes to guidelines on risk-based supervision under MLD4 to include cryptoassets

On 29 March 2023, the EBA published a public consultation on amendments to its Guidelines on risk-based AML/CFT supervision.

The EBA is proposing to amend its Guidelines on Risk-Based AML/CFT Supervision to clarify how they apply to AML/CFT supervisors of crypto-asset service providers ("CASPs"). The EBA notes that "by its nature, the provision of crypto-asset services is a cross-border activity" and, therefore, it is "important that the same standards apply wherever CASPs operate in the single market".

The revised guidelines:

  • provide guidance on the sources of information competent authorities should consider when assessing ML/TF risks associated with CASPs;
  • highlight the importance of a consistent approach to setting supervisory expectations where multiple competent authorities are responsible for the supervision of the same institutions; and
  • stress the importance of training to ensure that staff from competent authorities have the technical skills and expertise necessary for the execution of their functions.

The EBA notes that specific AML/CFT guidance for CASPs will be delivered through the forthcoming amendments to the EBA’s Risk Factors Guidelines, the amendments to the Guidelines to prevent the abuse of fund transfers for ML/TF purposes, and new Guidelines on policies and procedures for compliance with restrictive measures.

The consultation is open for feedback until 29 June 2023.

European Parliament ECON and LIBE committee adopt position on AML Package legislation

On 28 March 2023, the European Parliament's (the "Parliament") Economic ("ECON") and Monetary Affairs and Civil Liberties, Justice and Home Affairs ("LIBE") committees adopted their position on three pieces of draft legislation the European Commission’s Action Plan for a Comprehensive Union Policy on AML/CFT:

  • the EU “single rulebook” - regulation -
  • The 6th Anti-Money Laundering - directive -
  • The regulation establishing the European Anti-Money Laundering Authority ("AMLA")

Next steps

The European Parliament will be ready to start negotiations on the AML/CFT package after a confirmation during a plenary session in April.

5. Insurance Updates

EIOPA staff paper on impacts of nature-related risks on insurance sector

On 29 March 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published a staff paper on nature-related risks ("Staff Paper") in relation to insurance.

EIOPA notes that the "failure to account for, mitigate and adapt to the consequences of nature loss can have economic implications that may put overall financial stability at risk". In this context, EIOPA stated that it is vital to "consider what the role of the insurance sector can be in contributing to the restoration and conservation of nature through investment and underwriting activity and to assess from a prudential perspective how nature-related risks can affect (re)insurers’ balance sheets and business more generally".

EIOPA notes that as part of its sustainable finance strategy, it aims to establish supervisory expectations for the management of nature-related risks and impacts in a "step-by-step approach" of which the Staff Paper is a first step.

The Staff Paper:

  • provides a framework to identify the key areas that need to be addressed in the treatment of nature-related risks and impacts in the insurance sector;
  • describes the transmission channels of nature-related risk into society and economy and the relation between climate and nature-related risks; and
  • identifies how nature related risks can translate into risks to (re)insurers’ assets and liabilities, how (re)insurers can impact on these and the types of approaches for assessing risks and impacts.

Next steps

The Staff Paper is the first step in this process and will inform EIOPA’s future initiatives. EIOPA’s next initiatives will focus initially on identifying the relevant data sets and tools for performing risk assessments.

EIOPA planned public consultations for 2023 

On 31 March 2023, EIOPA published a list of its planned public consultations to be published for the remainder of 2023.

  • Review of SFDR Delegated Regulation (PAI indicators) – April 2023
  • Amendments to draft ITSs on ECAIs’ mapping under CRR and Solvency II – Q2 2023
  • Opinion on captives supervision – July 2023
  • Open Insurance use case for consultation – July 2023
  • Supervisory statement on best practices on supervision of reinsurance with third country reinsurers – July 2023
  • Prudential treatment of sustainability risks – July 2023