Financial Services Regulation and Compliance - Cross Sectoral and Other September 2023

Domestic

Central Bank Act 1942 (Section 32D) Regulations 2023

On 6 September 2023, the Central Bank Act 1942 (Section 32D) Regulations 2023 [S.I No 438 of 2023] came into force. Under section 3, all regulated entities are liable to pay the Central Bank of Ireland (CBI) a levy contribution in respect of each authorisation and in accordance with the Schedule, one or more supplementary level contributions for each authorisation held during a relevant levy period. The Regulation sets out the framework for this year’s levying process and the basis on which individual regulated entities’ levies will be calculated.

This year’s levy has been set at €178,142 and details of the calculation method are included in the Regulations. The calculation details also include a supplementary levy for enforcement by the CBI. The Regulation contains a schedule setting out the levies to be paid depending on the type of regulated entity.

Governor Gabriel Makhlouf delivers the Opening Statement at the Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

On 20 September Gabriel Makhlouf, Governor of the CBI, delivered the opening statement at the Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach. Mr Makhlouf’s statement covered:

• the economic outlook of the Irish economy
• the impact of monetary policy on lending, deposits and consumers
• the resilience of Irish households

Of particular relevance in the statement, Mr. Makhlouf touched on pass-through and provided an update on the CBI's progress with mortgage providers and their representative bodies in supporting customers.

On pass-through, Mr. Makhlouf noted that household deposits demonstrate the slow rate of pass-through, both in relation to euro area peers and the CBI's experience in the last tightening cycle. Mr. Makhlouf attributed slow pass-through to a number of factors including deposit to loan ratios, competition dynamics and consumer inertia.

In respect of the measures introduced by firms to support their borrowers Mr. Makhlouf highlighted the following:

• the development of early warning indicators to improve the identification and promote proactive engagement with customers who are in, or in danger of, falling into arrears
• the introduction of new measures to help support borrowers where the circumstances described above arise
• the introduction of fixed rate alternative repayment arrangements options
• enhanced borrower communications initiatives in relation to switching
• the introduction of a system wide initiative to support mortgage switching for the first time and increased coordination with the Money and Advice and Budgeting Services and mortgage brokers to enhance how the mortgage market operates for consumers

CBI speech on “Dynamic change in uncertain times: Balancing opportunity and risk”

On 28 September, Derville Rowland, Deputy Governor Consumer and Investor Protection, delivered a speech at the Association for Financial Markets in Europe, as part of the 7th Annual European Compliance and Legal Conference.

Of particular relevance from the speech are Ms. Rowland’s remarks in relation to the CBI's stance on culture. Ms. Rowland noted that the CBI believes that firms must first look to culture in order to pursue dynamic change and still maintain the best interests of their clients and customers.

On culture in general, Ms. Rowland noted that:

• culture is essential for any firm looking to navigate change in an efficient manner
• an indicator of effective culture is a demonstrated commitment to diversity and inclusion in a firm’s organisation
• a culture that truly serves the needs of investors will prosper, this can be facilitated by supporting consumers to build a diversified portfolio

Ms. Rowland also touched on the introduction of the Individual Accountability Framework (IAF) in Ireland, which will include a Senior Executive Accountability Regime (SEAR) as well as Conduct Standards for all staff. Ms. Rowland emphasised that most firms and individuals already adhere to high standards and have nothing to fear respect of IAF as they already adhere to the IAF principles.

Mr. Rowland highlighted that the successful implementation of SEAR will hinge on firms engaging and embedding the framework properly. Proper implementation of the framework will result in fewer issues in the sector and accordingly over time this will lead to less enforcement actions from the CBI.

CBI updates its beneficial ownership Q&A

On 26 September 2023, the CBI updated its beneficial ownership Q&A following on from the Courts of Justice of the European Union’s (CJEU) ruling last November on Article 30(5)(c) of the Fourth Anti-Money Laundering Directive, which lead to the introduction of the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) (Amendment) Regulation 2023 (S.I. No. 308 of 2023).

In the landmark ruling last November the EU's Court of Justice held that the provision of a right of indiscriminate public access to beneficial ownership information constituted a serious interference with the fundamental rights to respect for private life and to the protection of personal data. Such interference was neither limited to what was strictly necessary nor proportionate to the objective being pursued (prevention of money laundering and terrorist financing) and the legislative provisions permitting such access were therefore invalid.

The updated Q&A now takes into account S.I. 308 of 2023, which provides that members of the public can no longer access the register of beneficial ownership in Ireland unless they can demonstrate that they have a “legitimate interest” in anti-money laundering and countering terrorist financing to justify receiving access.

European

European Commission consults on SFDR disclosures

On 14 September 2023, the European Commission announced its launch of a targeted consultation and a public consultation to seek feedback on the Sustainable Finance Disclosure Regulation (SFDR). SFDR sets out how financial intermediaries have to communicate sustainability information to investors.

The targeted consultation is primarily aimed at stakeholders who are familiar with the SFDR in order to explore how the regulation is working in practice and its interaction with other parts of the European framework for sustainable finance. The public consultation is aimed at a broad range of stakeholders and the potential issues they may face implementing it.

Both consultations will run until 15 December 2023.

ESMA publishes its 2024 Annual Work Programme

On 28 of September 2023, European Securities and Markets Authority (ESMA) published its annual work programme for 2024. In the programme, ESMA sets out its 2024 objectives. These include;

• developing rules on sustainable finance as part of the European Green Bonds Regulation
• finalising technical standards for the European Single Access Point and developing the IT infrastructure needed to support it
• concluding the work on technical standards and guidelines in relation to Markets in Crypto-Assets Regulation (MiCA) and the Digital Operational Resilience Act (DORA)
• assisting in the finalisation of the new retail investment and assessing whether national competent authorities (NCAs) have sufficiently improved their supervision of investment firms’ cross border activities

European Council and European Parliament reach provisional agreement to empower consumers for the green transition

On 19 September 2023, the European Council and European Parliament reached a provisional agreement on the directive to empower consumers for the green transition.

The provisional agreement amends the Unfair Commercial Practices Directive and Consumer Rights Directive and adapts them for the green transition. This aims to enhance consumer rights and prevent unfair practices that stop consumers choosing greener products and/or services.

The agreement introduces important improvements to realise these aims. These include improving credibility of sustainability labels by defining the key elements the certification scheme they are based on, increasing transparency and monitoring of claims related to future environmental performance, and including unfair claims based on offsetting greenhouse gas emission in the list of banned commercial practices.

The provisional agreement reached with the European Parliament now needs to be endorsed and formally adopted by both institutions in order to come into effect.

The ESAs issue their Autumn 2023 Joint Committee Report on risks and vulnerabilities in the EU financial system

On 18 September 2023, the European Supervisory Authorities (ESAs) issued their Joint Committee Report on risk and vulnerabilities in the EU financial system. The report underlines the continued high economic uncertainty due to the Ukraine crisis, energy crisis, and US mid-size banks turmoil.

The ESAs warn national supervisors in their report of theses financial stability risks stemming from the heightened uncertainty and call for vigilance from all financial market participants. Specifically, they should take several policy actions including, closely monitoring the broader impact from strong increases in interest rate and remaining prepared for a deterioration in asset quality in the financial sector.

ESAs publish report on the landscape of ICT third-party providers in the EU and issue technical advice on criteria for critical ICT third-party service providers

On 27 September 2023, the ESAs as well as other Member State competent authorities carried out a high-level analysis of the provision of information and communication technology (ICT) services to EU financial entities by ICT third party providers (TTPs).

The results of the report include the identification of around 15,000 ICT TPPs directly serving financial sector entities across the EU and found that their most common use was to support critical or important functions for their clients. The report also identified that the most crucial services were classified as non-substitutable by financial institutions which exacerbates concerns over concentration risk in the sector. The report will assist in the preparations for the application of DORA (the Digital Operational Resilience Act).

Further, on 29 September, the ESAs issued their technical advice to the European Commission’s call for advice on two delegated acts that the Commission is empowered to adopt under Articles 31 and 43 of DORA, in order to specify further criteria for critical ICT third party service providers and determine oversight fees levied on such providers.

On criticality criteria, the ESAs propose 11 quantitative and qualitative indicators together with the necessary information to build up and interpret such indicators. The ESAs also put forward minimum relevance thresholds for quantitative indicators, where possible and applicable. The ESAs plan to define the details of the designation procedure and the related methodology no later than six months after the adoption of the delegated act by the Commission.

The second part of the report contains a proposal for determining the amount of the fees to be levied on critical ICT third-party service providers and the manner in which they are to be calculated and paid.

European Systematic Risk Board (ESRB) advice on the prudential treatment of environmental and social risks

On 27 September 2023, the European Systemic Risk Board (ESRB) published its advice on the prudential treatment of environmental and social risks with a specific focus on the risks related to climate change. The key advices given by the ESRB are:

• There are clear shortcomings with the conventional risk management methods used by financial institutions and supervisors, and they may not be suitable for properly capturing the full range of climate-related financial risks.
• Some forward looking elements can and should be used for the calibration of micro-prudential requirements although macroprudential tools may also be needed to deal with the uncertainty caused by climate change and the associated environmental, social and political risks.
• The ESRB are of the opinion that the macroprudential framework can be used in its current for to address climate risks, through tools such as systemic risk buffers and borrower-based measures.

The ESRB makes clear that it welcomes that the EBA is assessing the prudential treatment of environmental and social risks well before the date stipulated in Article 501c of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (Capital Requirements Regulation), and Article 34 of Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014.

Date published: 25 October 2023