Financial Services Regulation and Compliance - Banking Dec 2021
Central Bank publishes "Dear CEO" Letter outlining its supervisory expectations for payment and e-money institutions
On 9 December 2021, the Central Bank of Ireland (CBI) issued a "Dear CEO" letter (the letter) in which it sets out its supervisory expectations for payment and e-money firms. The letter clearly sets out the CBI’s expectations for all payments and e-money firms and further sets out the actions expected of Boards and senior management to ensure their firms are in compliance, on an ongoing basis, with their regulatory requirements and any conditions imposed on the firms' authorisation. The letter details the CBI's expectations in the following seven areas:
- governance and risk management
- conduct and culture
- business model and financial resilience
- operation resilience
- financial crime
- resolution and wind-p
The CBI expects Boards to conduct a comprehensive assessment of the firm's compliance with their legislative safeguarding obligations and the conditions of their authorisation, having due regard to the contents of the letter. A Board approved attestation confirming the completion and conclusion of this assessment must be provided to the CBI by 31 March 2022.
CBI commences public consultation in next phase of mortgage measures framework review
On 16 December 2021, the CBI launched a public consultation related to its ongoing framework review for mortgage measures. The mortgage measures were introduced in 2015 with the aim of supporting a sustainable provision of mortgage finance, strengthening the resilience of borrowers and lenders and guarding against the risk that another credit-fuelled housing boom emerges.
As part of the framework review, the CBI is assessing this overall approach, toolkit and strategy for the measures, to ensure they continue to remain fit for purpose in light of the evolving financial system and broader economy. The public consultation marks the second phase in public engagement as part of the overall review.
EBA issues report on the application of the guidelines on the remuneration of sales staff
The EBA published a report on the application of its guidelines on the remuneration of sales staff in force since 2016.
The EBA assessed a sample of 70 financial institutions from 12 EU Member States, finding that financial institutions focus more on prudential requirements and commercial interests than on meeting the interests of consumers. In particular, the report found that in terms of governance structures, the design, approval and monitoring of the remuneration policies and practices are often handled by the same function, thereby increasing the risk of an inaction bias when reviewing the remuneration policies and practices.
However, the EBA also identified a number of good practices that are considered to be compliant with the guidelines. Examples of these favourable practices include:
- involving human resources, compliance and risk management functions in the design of the policies
- involving shareholders before granting variable remuneration in excess of 100% of fixed remuneration
- the application of a mix of quantitative and qualitative criteria when determining the variable remuneration of sales staff
The EBA concluded by stating that institutions should pay more attention to consumer protection and better incorporate consumers’ interest into their corporate culture. The EBA and relevant competent authorities will continue to monitor how institutions apply these guidelines and whether they make use of the good practices identified in this report.
ECB publishes supervisory priorities for 2022 - 2024
The ECB, in co-operation with national competent authorities, has performed an assessment of the main risks and vulnerabilities faced by the significant institutions under its direct supervision and has set its strategic priorities for the next three years accordingly.
The ECB has identified three priorities to be addressed by banks over the coming three years:
- emerge from the pandemic healthy
- seize the opportunity to address structural weaknesses via effective digitalisation strategies and enhanced governance
- tackle emerging risks, including climate-related and environmental risks, IT and cyber risks
For each priority, the ECB has developed a set of strategic objectives and underlying work programmes which aim to address the most material vulnerabilities identified in this year's risk and priorities exercise.
The supervisory priorities provide guidance to the Joint Supervisory Teams in order to promote both effectiveness and consistency in supervisory planning for the significant institutions the ECB directly supervises. They also provide important input for the supervisory review and evaluation process (SREP), bearing in mind that vulnerabilities and challenges may differ from bank to bank.
EBA publishes the updated guide to "fit and proper" assessments
On 8 December 2021, the EBA published a revised version of the guide to fit and proper assessment (the guide), which will replace the previous version from May 2018.
The guide is directed at management bodies of ECB supervised entities, which must be suitable in order to carry out its responsibilities and be composed in such a way that it contributes to the effective management of the credit institution and balanced decision-making. The updated guide describes the policy stances, supervisory practices and processes applied by the competent authorities within the Single Supervisory Mechanism (SSM). The guide is not legally binding, but rather it is designed as a practical tool which will be updated and developed over time.
EBA publishes final report amending the RTS on credit risk adjustments
On 13 December 2021, the EBA published its final report on the draft regulatory technical standards (RTS) amending its RTS on credit risk adjustments used in the calculation of the risk-weight of defaulted exposures under the standardised approach to credit risk. The draft standards amend the Delegated Regulation 183/2014 on prudential requirements for credit institutions and investment firms. The proposed amendments follow up on the Action Plan of the European Commission to tackle non-performing loans (NPL) in the aftermath of the COVID-19 pandemic.
The proposed amendment to the existing RTS introduces a change to the recognition of total credit risk adjustments to ensure that the risk weight remains the same. The implementation of this change via an RTS amendment is to ensure clarification of the regulatory treatment of sold NPL assets.
The final draft RTS will be submitted to the EC for endorsement before being published in the Official Journal of the European Union.
For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.
Date published: 18 January 2022