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Trading with transparency
The Central Bank continues to enhance its approach to supervision and enforcement, writes Joe Beashel and Eoin McManus.
Financial regulators have become far more stringent since the financial crisis. There is now a strong pattern of increased oversight and more rigorous enforcement in the Irish financial services industry and, indeed, worldwide. This is consistent with the approach of other regulators across Europe and beyond.
The Central Bank of Ireland continues to enhance its enforcement mechanisms and develop new approaches to the supervision of regulated firms. It now categorises firms into various risk categories, based on the Probability Risk and Impact SysteM (PRISM) it developed to ensure firms receive the appropriate level of oversight. These new approaches to supervision are backed by the bank’s increasingly robust approach to enforcement.
Since 2011, the bank has used the PRISM risk-based regulatory framework to promote compliance through tougher enforcement. Each firm is assigned a PRISM risk categorisation, based on information provided by the firm and information about the sector it operates in. The rating assigned to each firm is based on the impact that would be caused by failure of that firm.
To ascertain the appropriate PRISM rating, the Central Bank undertakes detailed PRISM reviews, which include desk-based assessment of available information and interviews with key staff. The focus for PRISM tends to be on the firm’s business model, governance, financial risk, stress testing and its capital adequacy assessment.
In 2013, the Central Bank gained a new legislative power to require firms to engage a so-called ‘skilled person’ to produce a report. These reports are a kind of outsourcing, where the bank issues a notice instructing an independent skilled person to prepare a report into issues of concern to it. The bank may pursue any issues identified in the report as an enforcement action and the cost of the report is borne by the firm.
The Central Bank requisitioned its first such report in June this year and Matheson was appointed as the first skilled person. The Central Bank has an option to issue guidelines for the production of skilled person reports, but this has not yet been done.
The equivalent ‘s166’ reports in the UK have been used by the UK regulator for over 12 years. If the UK experience is anything to go by, we can expect these reports to become a common part of the Central Bank’s supervisory toolkit.
To date, the Central Bank has settled all administrative sanctions it has initiated, rather than proceeding to hold an inquiry. However, in a sign that it intends to invoke its power to hold an inquiry, the Central Bank has appointed an inquiry panel made up of retired judges, regulators and international experts. It has also published inquiry guidelines which set out the inquiry process.
The process will involve a formally appointed panel who will decide if a prescribed contravention has occurred and, if so, it will determine the appropriate sanctions. The subject of an inquiry may resolve the matter at any time before a decision is reached by entering into a settlement with the bank. The Central Bank’s ‘credible threat of enforcement’ means that clients are now seeing aggressive timeframes set by the bank for responses to information requests.
Meanwhile, the number of on-site inspections is increasing significantly. This increasingly formal and legalistic approach means that firms require increased resources and expertise to navigate these new processes.
This article originally appeared in Business and Finance.