1. Central Bank of Ireland Updates
Central Bank of Ireland Guidance on Client Asset and Investor Money Requirements
On 4 July 2023, the Central Bank of Ireland (the "Central Bank") published the final Guidance on Client Asset and Investor Money Requirements (the "Guidance") which aims to assist industry in interpreting the revised Client Asset Requirements ("CAR"), as contained in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023.
Purpose of the CAR Regime
The protection of client assets is a key priority for the Central Bank and has been since the regime was first introduced in 2007 and updated in 2015 and 2017.
The purpose of the CAR regime is to safeguard client assets by ensuring that investment firms (and, from 2024, relevant credit institutions) adhere to general principles and prescriptive requirements regarding the safekeeping and administration of assets held on trust for clients.
The core principles of client asset protection are: segregation, designation and registration, reconciliation, calculation, client disclosure and consent, risk management, client asset examination and record-keeping.
Overview of the CAR Regime
Although there was an established CAR regime in place under the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2017 ( SI 604 of 2017), the Central Bank had concerns about the current complexity of the Irish client asset landscape, especially in the event of an insolvency.
In June 2022, following consultation, the Central Bank issued its revised Investment Firms Regulations, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investment Firms Regulations 2022, containing amendments to the CARs together with an accompanying draft Guidance Note on what will be the third edition of the Investment Firms Regulations. In February 2023, the Central Bank published a draft Addendum to this Guidance Note which includes guidance in respect of the transfer of client assets as part of a transfer of business.
The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investment Firms Regulations 2023 ( SI 10 of 2023) were published by the Central Bank in final form on 3 February 2023 amending the CAR regime. These regulations came into force on 1 July 2023. The updated requirements impact MiFID investment firms, investment business firms and in certain circumstances UCITS management companies and alternative investment fund managers (collectively the “investment firms”) from 1 July 2023 and applies to credit institutions providing MiFID services and holding client assets from 1 January 2024.
The Final Guidance published by the Central Bank combines both the draft Guidance Note and draft Addendum to the Guidance Note. The latest Guidance Note includes an additional Chapter 10 Credit Institutions which is made up of guidance from various sections of the draft Guidance note, in particular Chapter 2 Designation and Registration and Chapter paragraphs 46 and 51 and Chapter 5 Client Disclosure and Consent paragraphs 200 and 223.
As noted above, the revised CAR regime applies to investment firms from 1 July 2023 and will also apply to credit institutions providing MiFID services and holding client assets from 1 January 2024.
Central Bank of Ireland Dear CEO Letter to High Cost Credit Providers on Compliance by High Cost Credit Providers with their AML obligations under the CJA 2010
On 30 June 2023, the Central Bank of Ireland (the "Central Bank") issued a Dear CEO letter to high cost credit providers ("HCCPs") regarding their compliance with their obligations under the Criminal Justice (Money Laundering and Terrorist Financing) Act, 2010 (as amended) (the “CJA 2010”) (the "Letter"). The Letter details the Central Bank's findings from its supervisory engagements with HCCPs and sets out the Central Bank’s expectations of HCCPs regarding compliance with their anti-money laundering/countering the financing of terrorism ("AML/CFT") and financial sanctions obligations.
The Central Bank's key findings and expectations are set out in Appendix A to the Letter.
All HCCPs are required to review these findings and expectations and, where gaps/weaknesses are identified, take sufficient steps to remediate the identified gaps/weaknesses in a timely manner.
The Central Bank notes that documentary evidence of this review and determination of actions to be taken may be requested by the Central Bank during future supervisory engagement.
While the focus of the Letter is on HCCPs the content may be general interest to all regulated firms. Firms should note in particular the Central Bank's comment's in relation to breaches of the CJA 2010. The Central Bank notes that it is essential that the implications of non-compliance with CJA 2010 are understood by firms' directors and senior management and that all reasonable steps are taken to ensure compliance. The Central Bank stresses that where firms do not comply with the CJA 2010 it is prepared to "use the full range of its regulatory powers, which may include the use of enforcement powers up to and including revocation of a firms licence".
2. Courts and Civil Law (Miscellaneous Provisions) Bill 2023
On 28 June 2023, the Courts and Civil Law (Miscellaneous Provisions) Bill 2023 (the "Bill") passed all stages of the Oireachtas.
The Bill introduces a variety of amendments to a number of primary legislation including to the:
- Irish Nationality and Citizenship Act 1956;
- Bankruptcy Act 1988;
- Legal Services Regulation Act 2015;
- International Protection Act 2015;
- Data Protection Act 2018;
- Arbitration Act 2010; and
- Civil Liability Act 1961.
Of key note for insurers, however, are the amendments to the Occupiers’ Liability Act 1995 reforming the duty of care. These amendments are a key action in the Government’s Action Plan on Insurance Reform and include:
- inserting into primary law a number of recent court decisions which rebalance the duty of care owed by occupiers to visitors and recreational users;
- changing the standard to clarify that when the occupier of a property has acted with reckless disregard for a visitor or customer, it is the standard of reckless disregard rather than reasonable grounds which should apply in relation to any consideration of liability;
- limiting the circumstances in which a court can impose liability on the occupier of a premises where a person has entered onto premises for the purpose of committing an offence; and
- allowing for a broader range of scenarios where it can be shown that a visitor or customer has voluntarily assumed a risk resulting in harm.
On welcoming the passage of the Bill, Minister for Justice, Helen McEntee said “These measures strike a new and reasonable balance between the responsibilities of the owner or operator of a premises to keep their customers and visitors safe, and what individuals themselves must do when entering a business, club or community building for example. The passage of this legislation marks an important step in our efforts to make insurance more available and cheaper.”
3. European Insurance Updates
EIOPA publishes changes to the minimum amount of professional indemnity insurance cover and financial capacity intermediaries need under IDD
On 3 July 2023, EIOPA published its draft Regulatory Technical Standards ("RTS") adapting the base euro amounts for the professional indemnity insurance ("PII") cover and financial capacity of intermediaries under the Insurance Distribution Directive ("IDD") together with a feedback statement on its February 2023 consultation on the draft amendments to the RTS (see FIG Top 5 at 5 of 16 February 2023 for detail).
The IDD prescribes that changes to the minimum amounts shall be based on the rate of inflation. EIOPA notes that as the Harmonised Index of Consumer Prices rose by 20.32% between 1 January 2018 and 31 December 2022, the new base amounts would be as follows:
- The base PII amount applying to each claim is to increase from EUR 1 300 380 to EUR 1 564 610 [+ EUR 264 230]
- The base aggregate PII amount per year is to increase from EUR 1 924 560 to EUR 2 315 610 [+ EUR 391 050]
- The base financial capacity amount is to increase from EUR 19 510 to EUR 23 480 [+ EUR 3 970]
EIOPA notes that while most respondents were supportive of the proposed draft RTS, some raised concerns regarding the following:
- the existing methodology used in the IDD for adjusting the minimum amounts; and
- the need to have sufficient time to adjust a large number of PII contracts to ensure that the required insurance cover will be available in time.
EIOPA advised that these issues would need to be addressed in a future review of the IDD or as part of the European Commission’s ("Commission") development of the implementing legislation.
The draft RTS have been submitted to the Commission.
EIOPA to undertake the first joint mystery shopping exercise across several EU Member States
On 28 June 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") announced it will coordinate the first joint mystery shopping exercise on sales of insurance in 8 Member States.
In January 2020, EIOPA received a new mandate for coordination of mystery shopping activities and has since been taking a gradual approach towards this coordination mandate.
Trained mystery shoppers, while acting as potential customers, will gather detailed information on how providers or distributors sell the products and provide services to consumers. This may be done through physical visits to distributors’ premises and via digital channels, phone calls or similar methods.
The results of the mystery shopping exercise will be available in H1 2024.
EIOPA speech on ensuring insurance consumers are adequately protected as retail investors
On 30 June 2023, Valérie Marriatte-Wood, Head of Consumer Protection Department at EIOPA, gave a speech at the public hearing of the European Parliament's (the "Parliament") Committee on Economic and Monetary Affairs on the perspective from the insurance and pensions sectors on the European Commission's (the "Commission") Retail Investment Strategy (the "Strategy") (see FIG Top 5 at 5 of 1 June 2023 for detail of the Strategy)
The importance of taking the needs and characteristics of insurance consumers into account
Insurance-based investment products ("IBIPs") represent over 70% of retail investments and are often the first (and sometimes only) retail investment products bought by consumers.
Ms Marriatte-Wood highlighted that EIOPA's supervisory experience shows that insurance consumers:
- often have small sums of money to invest;
- are looking for a combination of investment and insurance protection;
- are not highly sophisticated investors;
- tend to trust and rely on their local insurance intermediary or bank manager; and
- tend to prefer human advice over digital options for the more complex financial products.
Ensuring that retail investors are adequately protected when buying IBIPs
Ms Marriatte-Wood noted that there are issues in the market at product level (e.g. high costs) and distribution level (e.g. quality advice, conflicts of interest) and action is needed to ensure fair treatment for customers. In particular she noted that it is essential that IBIPs are "designed with the interests of consumers in mind" so they offer value for money ("VfM"). This involves looking at costs, insurance protection needs, and returns (while not interfering with market freedom).
She noted that EIOPA is pleased that the Commission followed it’s advice on how to promote cost-efficient and simple products and incorporated its’s work on VfM into the Strategy. EIOPA also welcomes the proposal for benchmarks as reference points for supervisory intervention. She highlighted that good data is required for this and, therefore, "proportional and adequate reporting will be indispensable to develop good benchmarks".
Building trust in financial advice and in financial markets
Ms Marriatte-Wood noted that EIOPA has not changed its position on banning on commissions as set out in its technical advice to the Commission on Retail Investor Protection. In particular she highlighted that:
- EIOPA sees no regulatory silver bullets to effectively resolve conflicts of interest and while a ban will solve some issues, it may create others;
- Data shows that even in countries where a ban is in place, over 50% of consumers are not confident of getting unbiased advice, while this rises to 64% in countries where there is no ban. This demonstrates that consumers do not believe that a ban is the perfect solution to remove bias; and
- Unbiased advise is only one element, if products are bad products and if supervisors do not have sufficient tools and enforcement powers to act when issues arise then "advice counts for nothing".
Ms Marriatte-Wood concluded by stressing that it is "critical that adequate consideration is given to the needs, objectives and characteristics of consumers" and the answer to addressing the issues in the IBIPs market lies in "improving the regulatory framework and in ensuring robust supervision".
4. Provisional political agreement reached on proposals to enhance market data transparency, optimise orderly trading and prohibit receiving payments for forwarding client orders
On 29 June 2023, European Parliament's (the "Parliament") Economic and Monetary Affairs Committee and Council of the EU reached a provisional deal on the proposed amendments to Regulation 600/2014 ("MiFIR") and Directive 2014/65/EU ("MiFID II") to enhance market data transparency, optimise orderly trading and prohibit receiving payments for forwarding client orders.
The Parliament, in its press release, noted that:
- EU-wide consolidated tape: ESMA is required to assess whether the consolidated tape has delivered on its aims by June 2026, and based on that assessment, the European Commission (the "Commission") may present a legislative proposal for venue-attribution of the best bid and offer volumes and for additional data to be added to the consolidated tape.
- Regulated trading venues will have to provide pre- and post-trade information to a consolidated tape provider ("CTP") as close to real time as possible. The data quality provided to the CTP should be monitored by competent authorities who can take action where their quality is insufficient. CTPs should provide free access to the information provided.
- Ban on payments for order flows: The practice of receiving payments for forwarding client orders for execution (payment for order flows) will be banned across Europe immediately. An exception is provided for certain countries where payment for order flows is more common who will have until 30 June 2026 to implement the ban.
- Investor protection, commodities and orderly trading: The focus of the Commission’s review of position limits and position management controls and the review of the ancillary activity exemption were decided. The provisionally agreed text also mandates that regulated markets must be able to temporarily halt or constrain trading in emergencies or if there is a significant price movement and be able to cancel, vary or correct any transaction in exceptional cases.
The provisional agreement now moves to the Council's Committee of the Permanent Representatives of the Governments of the Member States to the EU and the Parliament's Economic and Monetary Affairs Committee for approval before it goes to a plenary and Council vote. No published timeline for these next steps is available yet.
5. European Commission – Single Currency Package
On 28 June 2023, the European Commission (the "Commission") published two proposals:
- A Proposal for a Regulation on the legal tender of euro cash to safeguard the role of cash, ensuring it is widely accepted as a means of payment and remains easily accessible across the euro area; and
- A legislative proposal establishing the legal framework for a possible digital euro as a complement to euro banknotes and coins which includes:
Legal tender of euro cash
This proposal aims to set out in legislation what legal tender means and safeguard the acceptance of and access to cash throughout the euro area.
The proposal overall aims to ensure that citizens in the euro area are free to choose their preferred payment method and ensure the financial inclusion of vulnerable groups who rely on cash payments.
Member States will need to monitor and report on access to or acceptance of cash and take measures to address any problems identified.
This proposal sets out the legal framework for a digital euro, which would enable the European Central Bank ("ECB") to introduce a digital euro that is widely usable and available. A digital euro would be a central bank digital currency issued by and directly backed by the ECB and available to the general public. Under the proposal a digital euro:
- would be available alongside existing national and international private means of payment;
- would work like a digital wallet where users could pay anytime and anywhere in the euro area both online and offline;
- would be distributed by banks and other payment service providers across the EU;
- basic services would be provided free of charge to individuals and those who do not have a bank account would be able to open and hold an account with a post office or another public entity, such as a local authority;
- would be required to be accepted by merchants across the euro area (with an exception for small merchants who choose not to accept digital payments and the cost of set up would be disproportionate); and
- would allow for enhanced privacy for users when using the offline function.
As reported in the FIG Top 5 at 5 of 5 May 2023, the ECB is currently in the investigation phase of the Digital Euro project assessing the possibility of introducing a digital euro, as a complement to cash in the euro area. While this proposal would establish the legal framework for a digital euro, it will ultimately be for the ECB to decide if and when to issue a digital euro.
The Governing Council of the ECB is set to review the outcome of the investigation phase in autumn 2023 and will decide, on this basis, whether to move on to a subsequent project phase to develop and test the appropriate technical solutions and business arrangements necessary to provide a digital euro.