1. Presentation to the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach on the General Scheme of the Financial Services and Pensions Ombudsman (Amendment) Bill
On 10 May 2023, Mr Liam Sloyan, the Financial Services and Pensions Ombudsman ("FSPO") gave a presentation on the General Scheme of the Financial Services and Pensions Ombudsman (Amendment) Bill ("Bill") to the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach ("Committee")
At the outset of the presentation the FSPO gave the Committee an overview of the work of the office of the FSPO and then discussed the impact of the Supreme Court decision Zalewski v the Workplace Relations Commission ("Zalewski case") and outlined the key provisions of the Bill.
The Zalewski Case
In the Zalewski Case, the Supreme Court held that the exercise of powers by Adjudication Officers pursuant to the Workplace Relations Act 2015, as amended (“2015 Act”), was an administration of justice within the meaning of Article 37 of the Constitution. The FSPO noted that while the Financial Services and Pensions Ombudsman Act 2017 (“FSPO Act”) contains provisions on the quasi-judicial role of the FSPO and fair procedures, the Zalewksi case requires quasi-judicial bodies to examine their processes and procedures to ensure they are consistent with the Constitutional requirements. To that end, the FSPO has engaged with the Department of Finance on proposed legislative amendments, to address the Zalewski case issues, including a specific consultation process in respect of the proposed provisions of the General Scheme of the Bill.
Key provisions of the General Scheme
The proposed amendment to subsection 2(1) of the FSPO Act, once enacted, will clarify the FSPO's statutory power to investigate complaints against a financial service provider, which was regulated at the time of the conduct complained of, even if the provider has ceased its regulated status before the complaint was made to the FSPO, or before the FSPO’s investigation of the complaint has been concluded.
Head 5 clarifies that the Credit Reviewer holds a different role to the FSPO. This provision, and similarly, the proposed amendments to section 50 of the FSPO Act, clarify that a complainant may not make a complaint to the FSPO about a matter that falls within the jurisdiction of the Credit Reviewer. The Department of Finance is currently preparing legislation to put the Credit Review Service on a statutory footing.
Head 6 and Head 10
The proposed amendments to sections 47 (3) and 59(1) of the FSPO Act, as provided for in Head 6 and Head 10, address the Zalewski case issues regarding the cross-examination of a person being examined on oath, and the potential obstruction of the FSPO's work.
The FSPO notes that the potential for a hearing to be held in public must only be considered where appropriate, rather than introducing public hearings as the default position. The following should be taken into account:
the confidential and sensitive personal data generally in FSPO complaint investigations;
the risk of discouraging potential complainants from making complaints against financial service providers due to risk the disclosure to the public of their private financial details;
the FSPO's functions to investigate complaints in “an appropriate manner proportionate to the nature of the complaint”, should allow hearings in public or in private, having consulted with the parties.
the various forms of investigation under the FSPO Act includes mediation. It would be contrary to the FSPO Act, and to the well-established procedures for conducting mediations, for any FSPO investigation by way of mediation, to be conducted in public.
Head 9 of the General Scheme of the Bill seeks to ensure that mediation is conducted in private for confidentiality and clarifies that mediation under the FSPO Act, does not constitute the administration of justice.
2. European E-money and Payments Updates
José Manuel Campa, EBA Chairperson delivers speech "Digital Currencies: Implementing the guard rails for responsible innovation in payments "
On 11 May, 2023, José Manuel Campa, (Chairperson of the European Banking Authority ("EBA")) delivered a speech at the Official Monetary and Financial Institutions Forum on the implementation of guard rails for responsible innovation in payments. The following is a summary of some of the key messages which Mr. Campa delivered.
Central Bank Digital Currencies ("CBDCs"):
Mr.Campa began by contextualising his paper amidst the current era of CBDCs and stablecoins. He acknowledges that it is not only the guard rails for the technology that are changing rapidly but also the units or instruments of payments.
The preliminary focus of his speech is the digital euro. The European Central Bank ("ECB") is now entering the final phases of the investigation stage for the digital euro. The next stages – design and legislative – are anticipated to advance in parallel this year. It is expected that the European Commission ("Commission") will, this summer, adopt a legislative proposal for a regulation establishing the digital euro. Mr. Campa argues that any digital euro should be seen as a complement to existing instruments for payment in the context of a rapidly digitising economy. He expects the Commission to adopt a legislative proposal to preserve the role of cash as legal tender in our economy and to ensure sufficient access to cash and its acceptance in payments. As an additional unit for payments, Mr. Campa is optimistic that a digital euro would have a strong potential to facilitate innovation in payments in view of its pan-Euro Area reach.
Mr. Campa underlines the need for a careful and balanced approach to CBDCs explaining that "they should not come at the expense of financial stability and nor should they impede banks' intermediation capacity".
Mr. Campa then turned his attention to stablecoins (tokens issued outside the public sector). He explained that he sees a context in which stablecoins become even more relevant as a means of payment. As the development and integration of CBDCs will not occur overnight, the market will continue to innovate in relation to stablecoins and different use cases for stablecoins can be envisioned. Overall, and in the right conditions, CBDCs and stablecoins have a potential to fulfil complementary functions, providing useful optionality. With the implementation of some reasonable guard rails, stablecoins can serve as a facilitator for responsible innovation.
Regulation on Markets in Crypto-Assets ("MiCA"):
Mr Campa highlighted that the European Union ("EU") is ahead of the international curve when it comes to regulating crypto assets, with MiCA expected to be entered into force in July 2023 (See update below on this). Under MiCA, the EBA will establish supervisory colleges for all significant asset-referenced tokens ("ARTs") and electronic money tokens ("EMTs") to ensure effective supervisory cooperation in relation to these tokens, and the wider ecosystems in which they are transacted. Mr. Campa points out that regulatory supervisory convergence internationally is a prerequisite for responsible integration of stablecoins as a means of payment. He encourages jurisdictions to accelerate steps to strengthen the regulation and supervision of stablecoins in view of the likely co-existence with existing payment instruments, and potentially CBDCs.
Payment Services Directive ("PSD2"):
Mr. Campa spoke of the need to revisit some elements of PSD2 and confirmed that the Commision will be publishing a proposal for PSD3 later this summer. However, he also stressed the need to continue to work to improve the traditional payments infrastructure, alongside any experimentation or roll out of CBDCs and regulatory efforts for stablecoins in order to maximise benefits from all potential avenues for payments innovation.
What to expect of the EBA in the remainder of 2023/early 2024:
Mr. Campa explained that much of the EBA's focus will be on DORA and MiCA-related activities and highlighted the following:
- in relation to DORA, the EBA has commenced work, jointly with the other European Supervisory Authorities, on the policy mandates and on the broad parameters of the oversight framework for critical ICT third-party service providers, working also in close cooperation with the European Union Agency for Cybersecurity;
- in relation to MiCA, the EBA expects its entry into force in early summer. The consultation phase on the vast majority of the technical standards and guidelines under MiCA will begin in October 2023. The EBA will also be commencing activities to expand its market monitoring and supervisory capacity to prepare for its supervision tasks in relation to significant issuers. The EBA is promoting convergence in supervisory expectations toward ARTs and EMTs issuance activities in the transition phase to the application of MiCA;
- for both DORA and MiCA, the EBA is preparing responses to the Commission's Calls for Advice on issues such as oversight and supervisory fees, and significance criteria for issuers;
- the EBA is taking actions to ensure the money laundering and terrorist financing risks are tackled holistically across the crypto-asset sector. This will include revisions to the EBA's existing AML/CFT guidelines;
- the EBA is continuing to engage in the work of the Basel Committee on Banking Supervision, to ensure a prompt and consistent implementation of the prudential standard on banks' exposures to crypto-assets;
- the EBA will continue to monitor innovation trends, in particular focusing this year on AI use cases in the financial sector, tokenisation in relation to new financial products and services, digital identity management, decentralised finance and crypto-asset staking and lending; and
- the EBA will continue to support its European counterparts on issues relating to the digital euro and will continue to engage proactively in ongoing policy work at the EU and international levels, including the work of the FSB and the Financial Action Task Force.
Mr. Campa concluded his speech by confirming "that this is very much a work-in-progress that will change in real-time as a consequence of continued discussions and consultations with central banks, regulators, supervisors and industry."
Council of the EU adopts proposals on the proposed Markets in Crypto-Assets Regulation and the Transfer of Funds Regulation
On 16 May 2023, the Council of the EU voted to adopt the proposals for a Regulation on Markets in Crypto-assets ("MICA") and for a Regulation on transfer of funds and certain crypto-assets (the "Transfer of Funds Regulation").
- MiCA will provide legal clarity and certainty for crypto-asset issuers and providers. The new rules will allow operators authorised in one Member State to provide their services across the EU. Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer. Issuers of significant asset-backed crypto-assets (so-called global ‘stablecoins’) will be subject to more stringent requirements.
- The Transfer of Funds Regulation intends to repeal and recast Regulation 2015/847 (the “Wire Transfer Regulation”) which currently imposes data collection and transmission requirements on payment service providers with respect to wire transfers to include transactions involving crypto-assets for the first time.
The proposals now await publication in the Official Journal of the EU. As reported in the FIG Top 5 at 5 of 20 April 2023 it is hoped that publication will occur by the end of June 2023.
3. EBA publishes draft RTS on the scope and methods of consolidation of an investment firm group under the IFR
On 12 May 2023, the European Banking Authority ("EBA") published its draft Regulatory Technical Standards ("RTS") on the scope and methods of consolidation of an investment firm group under the Investment Firms Regulation ("IFR").
The primary focus of these RTS is to enhance the harmonisation of prudential consideration across the EU and they are the last regulatory products issued by the EBA pursuant to the EBA Roadmap on Investment Firm ("Roadmap") which was publish in 2020. Although the EBA has completed its final report in the context of the Roadmap, they are continuing to work on the implementation of the IFR package and will conduct an IFR review as requested by the European Commission ("Commission").
The RTS detail the following four key points:
- scope and methodology for prudential consolidation;
- the methods of consolidation;
- methodology for the prudential consolidation of capital requirements; and
- the rules for minority interest and additional Tier 1 and Tier 2 instruments issued by subsidiaries in relation to prudential consolidation.
While drafting these RTS, the EBA sought to achieve alignment, as far as possible, with the corresponding framework for credit institutions. However, the scope of consolidation for Investment Firms remains more limited than those of credit institutions due to differences existing in the legal framework covering each sector (i.e. Article 7 of the IFR is not as wide in scope as Article 18 of the Capital Requirements Regulation which covers credit institutions).
The draft RTS will now be submitted to the Commission for endorsement before being published in the Official Journal of the European Union. The technical standards will apply 20 days after the entry into force.
4. Goldman Sachs Bank Europe SE sanctioned by ECB for breach of credit risk reporting rules
On 15 May 2023, the European Central Bank ("ECB") published a sanction imposed against Goldman Sachs Bank Europe SE ("Goldman Sachs").
The ECB imposed an administrative penalty of €6.63 million on Goldman Sachs for reporting inaccurate information on risk weighted exposure amounts and capital ratios in the quarterly individual common reporting on own funds and own funds requirements for eight consecutive reporting periods from 30 September 2019 to 30 June 2021.
The ECB notes that Goldman Sachs:
- reported lower risk-weighted assets for credit risk than it should have done to the ECB as it had misclassified corporate exposures and applied a lower risk-weight to them than what banking rules prescribe; and
- had deficiencies in its internal controls which prevented the mistake from being detected in a timely manner.
Regarding the sanction, the ECB assessed that the:
- impact of the breach was ‘high’ due to the fact that the breach impacted the prudential situation of the entity and its effective supervision;
- degree of the misconduct was ‘medium’ as Goldman Sachs did not act with the necessary diligence in implementing its internal policies, which led to the misclassification of a considerable number of corporate exposures and the miscalculation of its risk-weighted exposure amounts and own funds requirements for approximately two years, while its internal controls failed to detect this during the relevant reviews.
- Out of the severity categories ‘minor’, ‘moderately severe’, ‘severe’, ‘very severe’ and ‘extremely severe’, the ECB classified the breach as ‘severe’ since the impact and the misconduct were determined, respectively, as ‘high’ and ‘medium’.
However, a number of mitigating factors were considered when calculating the sanction including that Goldman Sachs:
- notified the ECB about the reporting errors;
- cooperated with the ECB; and
- took measures after the breach was identified to prevent similar breaches from happening in the future.
Goldman Sachs may challenge the ECB’s decision before the Court of Justice of the European Union.
5. European Commission adopts draft Memorandum of Understanding with the United Kingdom on Financial Services
On 17 May 2023, the European Commission ("Commission") adopted a draft Memorandum of Understanding ("MoU") establishing a framework for structured regulatory cooperation in the area of financial services with the United Kingdom ("UK").
The MoU was last discussed by the relevant parties in March 2021 but has recently been reconsidered in light of the adoption of the Windsor Framework. The MoU was initially referenced in the Joint Declaration on Financial Services Regulatory Cooperation between the European Union ("EU") and the United Kingdom ("UK") ("Joint Declaration"), which sat alongside the Trade and Cooperation Agreement ("TCA"). The Joint Declaration agreed to a MoU which would establish a framework for regulatory cooperation on financial services between both parties.
From an EU perspective, the Commission has explained that the MoU, a Union Non-Binding Instrument, is subject to final political endorsement by the Council, before it can be signed by the Commission on behalf of the EU.
Once signed, the MoU will, in the words of the Commission create an "administrative framework for voluntary regulatory cooperation in the area of financial services between the EU and the UK, outside of the TCA structures". One of the first elements of this framework will be the establishment of a Joint UK-EU Financial Regulatory Forum. The forum will allow for dialogue on financial services issues.
Crucially it should be noted that the MoU does not deal with the access of UK-based firms to the Single Market – or EU firms' access to the UK market. Additionally, it does not "prejudge the adoption of equivalence decisions".
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union in the Commission's press release has said that she is "confident that our relationship and future engagement in financial services will be built on a shared commitment to preserve financial stability, market integrity, and the protection of consumers and investors."