1. Central Bank of Ireland Consultation Paper on enhancements to the Administrative Sanctions Procedure
On 22 June 2023, the Central Bank of Ireland ("Central Bank") published a consultation paper ("CP154") entitled "Consolidated Guidelines in respect of the Central Bank’s Administrative Sanctions Procedure". The guidelines incorporate enhancements to the Administrative Sanctions Procedure ("ASP") required pursuant to Part IIIC of the Central Bank Act 1942 ("1942 Act"), as a result of the enactment of the Central Bank (Individual Accountability Framework) Act 2023 ("IAF Act"), as well as additional safeguards.
Executive Summary to CP154
In the Executive Summary to CP154, the Central Bank notes the following:
- the purpose of CP154 is to both seek views from stakeholders on the fourth component of the Individual Accountability Framework ("IAF") - the enhancements the ASP - and to "provide guidance in an open and clear manner as to how the Central Bank proposes to operate these revised procedures";
- regarding the additional safeguards included in the guidelines, the Central Bank states that these are necessary to "further fortify" the existing process and are in "recognition of the expanded population of individuals coming within the scope of the ASP";
- the proposed changes will apply (subject to the transitional arrangements) to the enforcement of any obligations under the ASP "whether those matters are related to existing obligations under financial services legislation, new obligations introduced as part of the IAF or otherwise become subject to the ASP"; and
- the draft composite guidelines found in Appendix 1 update and consolidate the Central Bank's existing published guidance documents – (1) the ASP Outline 2018, (2) Inquiry Guidelines 2014 and (3) ASP Sanctions Guidance 2019 into draft composite guidelines (the " draft ASP Guidelines")
CP154 contains a useful table which outlines the key changes, the following is note of some of those changes:
Key legislative changes
- extension of ASP scope to include ability to take direct enforcement action against all individuals in controlled functions ("CFs") for breach of individual obligations;
- statutory ASP investigative process, including a new role of responsible authorised officer ("RAO") and an investigation report process;
- a duty to provide reasons for discontinuance of investigation;
- amended disqualification sanction for individuals;
- new sanction of imposition of conditions on individuals;
- non-exhaustive prescribed sanctioning factors for individuals inquiry member appointments to be made from a panel established by the Minister for Finance;
- requirements in relation to functional separation and the independent performance of certain Central Bank functions under the ASP;
- codification of the civil standard of proof in ASP inquiries;
- three distinct ASP settlement processes;
- provisions for confidentiality, absolute privilege from defamation and disclosure agreements for privileged material; and
- revised provisions in relation to court confirmation and appeals.
Key policy changes
- earlier disclosure of documents to subjects of an enforcement action;
- the stage at which discounts on monetary penalties are potentially available as part of settlement;
- articulation of factors where no admissions settlements will likely be unsuitable;
- more detailed guidance on procedures pertaining to the running of inquiries;
- Central Bank’s enforcement division to exercise functions at inquiry of making submissions, leading evidence and examining witnesses;
- publication of the Central Bank’s general approach to the determination of sanctions; and
- publication of methodologies for the determination of monetary penalties for firms and individuals.
Appendix 2 to CP154 contains details of the practical impact of the transitional arrangements in the IAF Act on investigations and inquiries, in particular for new and ongoing investigations and inquiries:
- New Investigations: All of the new or amended provisions of Part IIIC of the 1942 Act will apply to investigations commenced after the commencement date;
- Ongoing Investigations: Subject to certain exceptions, all of the new or amended provisions in Part IIIC of the 1942 Act apply in full to ongoing investigations. Pursuant to section 93 of the IAF Act, the following amendments do not apply to ongoing investigations:
- The requirement for a RAO of the Central Bank to provide an ASP investigation subject with a notice in writing, as soon as practicable after a decision is made by the Central Bank, to investigate the commission of a prescribed contravention;
- The requirement for the Central Bank’s RAO to provide an ASP investigation subject with amended Notices of Investigation, to reflect any change, extension or partial discontinuance of an ASP investigation; and
- Any other obligation concerning investigations set out in section 33ANJ of the 1942 Act.
- New Inquiries: All of the new or amended provisions of Part IIIC of the 1942 Act will apply to inquiries where the Notice of Inquiry was given by the Central Bank after the commencement date.
- Ongoing Inquiries: Subject to certain exceptions, none of the new or amended ASP provisions in Part IIIC of the 1942 Act apply to ongoing inquiries. Pursuant to section 94 of the IAF Act, the amended provisions in Part IIIC and Part VIIA of the 1942 Act relating to High court confirmation of inquiry decisions and Appeals to the Irish Financial Services Appeals Tribunal apply to ongoing inquiries where the inquiry decision is made after the commencement date.
Appendix 2 also includes clarifications on Disqualification and Conditions Sanctions and the Impact on EU Law Regulatory Frameworks Subject to the ASP.
Stakeholders are requested to answer the series of 25 questions which are included in CP154, as part of any submission. Submissions can be submitted up until 14 September 2023. The Central Bank will then review all feedback submitted and publish the feedback statement to the consultation on its website.
The Central Bank have advised that on 5 July 2023 a launch event on CP154, jointly hosted by the Central Bank and the Law Society of Ireland, will be held outlining the proposed approach to implementation of key aspects of the updated ASP. We will be in attendance at this event and will update clients in due course.
Additionally, a full insight on CP154 which will consider key components of the updated and consolidated guidance will be published by Matheson's dedicated IAF team in the coming days.
2. Central Bank of Ireland Insurance Updates
Gerry Cross, Director of Financial Regulation, Policy & Risk Speech "Insurance, regulation, and the transition to a net zero economy"
On 22 June 2023, Gerry Cross, Director of Financial Regulation, Policy & Risk at the Central Bank of Ireland ("Central Bank") gave a speech entitled "Insurance, regulation, and the transition to a net zero economy". The speech addressed the role of insurance in society, the risk of increasing protection gaps, greenwashing, risk management, supervisory observations and the Central Bank's Guidance for (Re)Insurance Undertakings on Climate Change Risk ("Guidance").
The following is a brief summary of the points made:
Role of insurance in society and the risk of increasing protection gaps
Mr Cross noted that "Ireland is not immune" from climate change risk as the scientific consensus is that Ireland will face increasing and more severe flooding events. Insurers with domestic risks also need to consider appropriate action. Expanding on this, he noted that the impact of climate change could lead to increased protection gaps. Protection gaps are a "systemic issue that require system wide consideration" and insurers as key participants in the financial system must take a joined up perspective in respect of the functioning of the insurance system as a whole.
Sustainable finance - getting it right
Mr Cross noted that while there are significant benefits to sustainability disclosures, as required by the Sustainable Finance Disclosures Regulation ("SFDR"), there are also challenges, including in relation to data, will be addressed through the implementation of Corporate Sustainability Reporting Directive ("CSRD"). However he also stressed that "further work is required to make sure disclosures work for consumers and for the system".
The Central Bank welcomes the European Commission's ("Commission") comprehensive assessment of the SFDR looking at legal certainty, usability, and the SFDR's role in greenwashing. He added that the approach adopted by regulated firms should be "founded in outcomes, consistency of language and substance, and in an underpinning high quality culture".
The Central Bank also welcomes the Network for Greening the Financial System report on transition planning. Mr Cross noted that transition plans are not currently mandatory, however, they are one of the "key forward-looking tools that firms can use to translate climate targets into actions".
Mr Cross noted that the Central Bank is conscious that a lot is being asked of all firms at the moment, however, the ultimate goal in mind of moving to a more sustainable, climate neutral society should remain front and centre and responding to sustainable finance legislation "should not be seen as a compliance exercise, it should trigger actions that have an impact".
Mr Cross noted that currently the supply of sustainable assets is not sufficient to meet demand, consequently this increases the risk of firms mis- or over-stating their sustainability credentials to gain a competitive advantage. The challenge for the Central Bank and the insurance industry is to ensure that sustainable financial services and products deliver on their claims and retain consumer trust in sustainable products. He cautioned insurers to be vigilant and make sure that any sustainability claims they make are "accurate, evidence based and clearly communicated".
He highlighted insurers significant role in developing products that support the green transition and "greenwashing concerns should not become a reason for reducing that product offering". He noted that Insurers should be proactive in understanding and providing products that meet the needs of consumers and should be thinking about selling products that "enable sustainable actions, and facilitate sustainable economic activity".
Risk management and supervisory observations
Mr Cross noted that the Central Bank has observed the positive work that insurers are doing, however, many insurers are still treating climate change as an emerging risk. In relation to risk management, he highlighted work to be done in the following areas:
- Addressing climate risk: some insurers are only starting to consider the implications for their business and the insurance cover they provide;
- Risk to insurers’ business models: a key focus for the Central Bank’s climate change guidance is the risk to insurers’ business models which has generally not been properly addressed;
- Reinsurance: insurers are generally not considering the impact climate change will have on reinsurance availability, product design, or their own operations;
- Groups: Irish insurance rely significantly on their groups for reinsurance, expertise and capital. While the Central Bank encourages firms to leverage the significant climate change expertise at group level, insurers should make sure that anything done at group level is appropriately tailored for the Irish insurer. Insurers should also appropriately understand and manage any risks arising from reliance on the group entity.
- Stress tests and scenario testing: The Central Bank highlights that many insurers do not appear to be conducting sufficient stress and scenario testing, and it is often unclear how stresses have been developed and how they align with climate science.
Climate change guidance
Mr Cross noted that the Central Bank’s climate change guidance for the insurance sector was published to increase clarity for the sector as discussions with the sector showed a willingness to take action, but uncertainty on how to start. The Central Bank acknowledges that insurers are at different stages of development, however, the Central Bank does expect all insurers to take action, and while simplified methods may be appropriate initially, the Central Bank expect that these "methods will develop and improve over time".
Central Bank of Ireland Insurance Quarterly Newsletter- June 2023
On 27 June 2023, the Central Bank of Ireland ("Central Bank") published the latest edition of its Insurance Quarterly Newsletter.
The Insurance Quarterly Newsletter is a very important communication tool used by the Central Bank and includes news and insights relevant to the insurance sector and the Central Bank’s expectations and priorities around existing requirements and views on future developments.
Some key highlights from this edition include:
Outcome of the Central Bank's Thematic Inspection of Product Oversight and Governance ("POG")
In H2 2022, the Central Bank carried out a thematic inspection of POG arrangements in a selection of non-life insurance undertakings to assess the current level of controls, processes and systems in place in relation to POG arrangements. The inspection centred on five key control areas (1) POG policies & procedures; (2) underwriting controls; (3) post implementation reviews; (4) risk management oversight; and (5) board oversight. The outcome of this inspection is addressed in the Newsletter is available in this Matheson insight.
Unit-Linked Products Charges Survey
On 29 July 2022, the Central Bank issued a Unit-Linked life assurance products ("UL products") Survey ("Survey") to all life assurance undertakings authorised by the Central Bank, that currently sell UL products. The survey found that in general the deductions being made by life undertakings are not undue. The Central Bank is, however, following up with a number of undertakings that were identified as potential outliers in this regard.
The Central Bank noted that it should not be concluded, however, that the Central Bank will not consider a review of commission levels, or consider other issues such as benefits in the context of UL products, in the future. In addition, the Central Bank continues to engage with EIOPA and its peer NCAs on the subject of value for money ("VfM") of UL products, and further considerations are likely to arise in this respect in due course. The Central Bank:
- reminds undertakings of their obligations under POG and local conduct requirements;
- encourages Boards to continue to drive and embed a culture of customer centricity within key processes within their undertakings, including propositions; and
- recommends that Boards consider VfM not only in the interests of their clients, but also to ensure their undertakings remain competitive into the future.
Supervision of Reinsurance Activities
The Central Bank notes increasing engagement with undertakings on reinsurance transactions and encourage undertakings to continue to do so sufficiently before the conclusion of the reinsurance agreement. The Central Bank noted the following practices:
- where an undertaking is subject to Standard Formula capital requirements, some undertakings have produced a document setting out appropriate justification against each of the requirements of Articles 208-215 of the Commission Delegated Regulations before allowing for the benefit of a risk mitigation technique in their solvency capital requirements ("SCR");
- where the Central Bank viewed that consideration of whether capital relief is commensurate to risk transferred was not thorough enough, the Central Bank has asked undertakings to revisit it;
- good practices were observed where undertakings consider the risk of lack of availability or price increase of Risk mitigation techniques ("RMT") in adverse events and consider cancellation triggers in the RMT contract. The Central Bank reminds undertakings of the need to include the default of a material counterparty when considering the recovery actions needed in adverse scenarios under the Central Bank's Guidelines on recovery plans; and
- a number of undertakings did not have reinsurance treaties signed by year-end 2022 due to last minute negotiations which created doubt as to whether or not those treaties are fully incontrovertible. The Central Bank plans to discuss this with undertakings on a bilateral basis.
The Central Bank highlighted that:
- more work is expected from EIOPA in this area to build on its 2021 Opinion on the use of RMTs, and to further align supervisory practices among member states;
- it may provide further commentary in this area if needed; and
- EIOPA is considering whether to disseminate good practices relating to third country reinsurance, through a supervisory convergence tool.
Industry Workshop on Revisions to the Reporting & Disclosure Requirements
The Central Bank will host an Industry Workshop on the revisions to the reporting and disclosure requirements under Commission Implementing Regulation (EU) 2023/894 and Commission Implementing Regulation (EU) 2023/895 on 17 October 2023. The workshop will be a practical session, and the Central Bank encourages attendance by a representative from each (re)insurance undertaking who has significant involvement in the compilation of Solvency II regulatory returns.
The Central Bank will issue information requests on the following in the coming weeks:
- a financial sanctions questionnaire to determine firms’ awareness of and actions in relation to their obligations;
- a follow up on the previous review of under insurance in the home insurance market; and
- information requests may also be issued to firms within scope of any planned thematic inspections e.g. in the areas of investment risk, IT risk and claims management, in order to assess the impact of the Personal Injuries Guidelines.
Financial Sanctions update
The Central Bank reminds firms of their ongoing obligations to comply with financial sanctions requirements and highlights the importance that firms have appropriate controls and processes in place to comply with financial sanctions requirements "in relation to all of their business activities". The Central Bank stresses that compliance with financial sanctions "must remain at the forefront of the risk management agenda in firms".
Conduct Risks in the Insurance Sector
The Central Bank's Retail Conduct Strategy identifies the following as the key insurance sector risks facing consumers:
- Lack of consumer focused culture: The Central Bank expects:
- boards and leadership teams to "drive effective cultures that put consumers at the heart of their business"; and
- regulated undertakings to achieve a sustained improvement in culture by "focusing on values and conduct that are the building blocks of culture" and for these standards to be reflected in every business area.
- Risk that the sector is not adequately meeting consumers’ needs: The Central Bank notes that the risk the sector is not adequately meeting consumers’ needs has increased since the onset of the pandemic, in particular due to turnover of staff in the sector, and stresses the importance of customers having a positive experience throughout the lifecycle of the relationship in order to build consumer trust in the sector. The Central Bank also highlights the lack of availability of insurance for certain events or lines of business as a risk to certain groups of customers and businesses. The Central Bank highlights the importance of approaching the POG process "through both the prudential and consumer lenses, and working to mitigate potential detriment to both undertakings and consumers, where possible".
- Pricing and related disclosure risks: The Central Bank notes that pricing-related risks, including differential pricing and VfM, are a continued focus and stresses that undertakings "must not exploit information asymmetries or behavioural vulnerabilities in their pricing practices". The Central Bank notes that, as part of their decision-making process, undertakings should consider how:
- their product offerings will ensure good value for consumers; and
- to disclose this information to the consumer in an informative way.
- Changing operational landscape:
- Increasing focus on digitalisation: The Central Bank notes that undertakings must navigate the potential conflicts, risks and implications from increasing digitalisation in a manner that "places the best interests of consumers at the heart of their business models and decisions and avoids creating risks to consumers".
- The impact of climate change: the impact of climate change on consumers of certain insurance products is particularly relevant given the increased frequency of severe weather events due to climate change.
The Central Bank also highlights that the cost-of-living crisis has resulted in a more challenging and uncertain economic outlook, which can cause further risks to consumers.
3. EU Banking Updates
EU institutions reach provisional agreement on the implementation of Basel III regulatory reforms
On 27 June 2023, the trilogue negotiations between the European Parliament ("Parliament"), Council of the EU ("Council") and the European Commission ("Commission") reached a provisional agreement on amendments to the Capital Requirements Regulation ("CRR") and the Capital Requirements Directive ("CRD"). These amendments will largely reflect the Basel III regulatory reforms agreed by the Basel Committee on Banking Supervision.
The following is a high level summary of the agreed positions as set out in the press releases of the Commission, Parliament and Council:
- the "output floor" calculated by banks using internal models should be applied at an entity level;
- banks should take into account environmental, social and governance risks when assessing the value of collateral;
- lower risk weight for exposures to EU Emissions Trading System (40%) to fight climate change and to support the role of banks in financing the green transition;
- banks will have to disclose their exposure to crypto-assets;
- a transitional prudential regime for cryptoassets;
- a harmonised "fit and proper" framework which will avoid unsuitable persons on the management of boards of large financial institutions, promote diversity and gender balance at board levels and detail processes around the sharing of information on the suitability assessment made by large entities of candidates for their boards;
- a framework for access to the EU markets for third country banks;
- improvements to the areas of credit risk, market risk and operational risk; and
- provide additional proportionality in the rules for small and non-complex institutions;
From the Parliament's perspective, the agreement will firstly be approved by the Economic and Monetary Affairs Committee and then followed by a plenary vote. The Council will also need to approve the agreement.
Current indications on implementation dates are that the revised CRR will apply from 1 January 2025 and the revised CRD will be required to be transposed by 30 June 2026.
ECB consults on its revised guide to internal models
The ECB's Guide was first published in 2019, but is being reviewed to account for the ongoing developments in regulatory requirements, to include additional topics so as to facilitate better understanding of such requirements and to reflect the experience of the use of the Guide.
The revised Guide will include various amendments, including;
- clarification on how institutions account for material climate-related and environmental risks in their internal models for the calculation of own funds requirements for credit, market, and counterparty credit risk, where these risks are deemed by the institution as both relevant and material;
- the inclusion of new supervisory expectations regarding the implementation of a new or changed internal model in the institutions’ IT systems. Additionally, a new section on the definition of default has been introduced;
- clarifications on how to treat instruments lent out or repo'ed out under the internal model approach for the calculation of own funds requirements for market risk. Additionally, it is now the ECB's view that funding risk embedded in own liabilities held in the trading book should be modelled under the internal model approach; and
- clarifications on the ECB's understanding of a number of terms and definitions relevant to counterparty credit risk. Additionally, a new subsection has been introduced on the potential upfront implementation by institutions of material model extensions and changes for the purposes of internal risk management as part of the use test, before receiving the ECB’s permission.
The ECB invites submissions from banks and other stakeholders involved in internal models. The deadline for the submission of comments is 15 September 2023. Thereafter, the ECB will publish the comments received along with feedback and the updated guide.
4. Other EU Updates - Insurance and Sanctions
EIOPA publishes June 2023 Financial Stability Report
On 22 June 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published its June 2023 Financial Stability Report which considers the key developments and risks in the European insurance and occupational pensions sectors ("Report").
From the perspective of insurers in particular, the following should be noted:
The Report cited that insurers should be aware of;
- the challenges resulting from the sudden and sizable rise in yields;
- the potential threats of the growing trend of digitalisation. In particular, insurers should be cognisant of cyber-underwriting risks; and
- based on surveys conducted by National Competent Authorities, insurers considered macro-risks driven by geopolitical instability to be the most significant macro-risks facing the firm.
Overall Market Performance
EIOPA made the following observations in relation to general market performance during 2022;
- stagnation in the growth of life business premiums across the sector and continued growth in premiums in the non-life sector;
- decline in general profitability in 2022 due to higher inflation and interest rates across Europe;
- decrease in underwriting profitability primarily down to higher claims which was particularly noticeable in the transport sector such as marine and aviation;
- weaker investment returns in general, with the median return on assets falling from 0.56% (reported in 2021) to 0.40%;
- growth in insurer's exposure to alternative assets to 5.6% of total investments in 2022;
- clear indications of the peak in the European real-estate market with several risk-factors for near-term prospects; and
- reinsurance sector remained strong despite high inflation, high catastrophe losses, and uncertainty.
In the Report, EIOPA indicates that monitoring the effects of inflation and climate change and ensuring that there are sufficient safeguards in place against cyber-risks and other macro-risks are "very high" on its agenda over the coming year.
EU adopts 11th package of sanctions against Russia
On 23 June 2023, the Council of Europe ("Council") published its 11th package of sanctions against Russia in the Official Journal of the European Union ("EU").
This package largely comprised of a variety of trade, transport and energy measures. With respect to direct impacts on financial services firms the following should be noted:
over 71 individuals and 33 entities have been added to the list of individuals and entities subject to the EU's asset freeze measures, which includes two additional banks - the MRB Bank and the CMR Bank; and
the introduction, in stipulated circumstances, of additional grounds for authorisations to release certain frozen funds or economic resources belonging to a designated person.
The Central Bank of Ireland ("Central Bank") has updated its International Financial Sanctions webpage to account for the new sanctions.
5. European Commission legislative proposals on reform of payment services
On 28 June 2023, the European Commission ("Commission") published a number of legislative proposals relating to reforms to the treatment of payment services in the European Union ("EU") and the implementation of a framework for financial data access.
The proposals include the following:
- a Directive on payment services and electronic money services in the internal market which will repeal the revised Payment Services Directive ("PSD2") and the second Electronic Money Directive and amend the Settlement Finality Directive. This is commonly referred to as the proposed PSD3;
- a Regulation on payment services in the internal market. This is commonly referred to as the proposed Payment Services Regulation ("PSR"); and
- a Regulation on a framework for financial data access amending a number of existing regulations including DORA ("FIDA")
The Commission also published a package of supporting documents including a number of impact assessments, reports on reviews of the legislation which are proposed to be amended as well as a Factsheet and Q&As document.
Proposed PSD3 and PSR
The PSD3 and PSR proposals are, in the words of the Commission, intended to "represent an evolution not a revolution of the EU payments framework" and will "bring payments and the wider financial sector into the digital age". At a highlevel the proposals will:
- combat and mitigate payment fraud;
- improve consumer rights;
- further levelling the playing field between banks and non-banks;
- improve the functioning of open banking;
- improve the availability of cash in shops and via ATMs; and
- strengthen harmonisation and enforcement.
This proposal will establish clear rights and obligations to manage customer data sharing in the financial sector beyond payment accounts. The Commission also maintains that it "will lead to more innovative financial products and services for users and it will stimulate competition in the financial sector". At a highlevel the proposals will:
- possibility but no obligation for customers to share their data with data users;
- obligation for customer data holders to make this data available to data users;
- full control by customers over who accesses their data and for what purpose to enhance trust in data sharing;
- standardisation of customer data and the required technical interfaces;
- clear liability regimes for data breaches and dispute resolution mechanisms; and
- additional incentives for data holders to put in place high-quality interfaces for data users.
The proposals will now proceed through the usual legislative process. We will monitor this closely and update clients in due course.