Financial Services Regulation and Compliance - General Cross Sectoral Feb 2021
CBI updates Beneficial Ownership Register FAQs
The Central Bank of Ireland (CBI) has updated its FAQs on the Beneficial Ownership Register. The updates provide clarity as to the purpose of the Central Beneficial Ownership Register for certain financial vehicles. It notes that the objective of the register is:
- to deter money laundering and terrorist financing
- to identify those who seek to hide their ownership and control of corporate or legal entities by ensuring that the ultimate owners/controllers are identified
- that this information is readily accessible to law enforcement, regulators and obliged entities
The register will be updated to include two additional categories of funds in 2021 – investment limited partnerships and common contractual funds. The updated FAQs also provide additional information in relation to access to the register.
CBI consultation on enhancing engagement with stakeholders
The CBI has launched a consultation paper on its proposals for enhancing stakeholder engagement. It is intended that these proposals will build on the measures the CBI currently has in place in order to facilitate increased discussion of cross-sector, strategic issues in relation to the CBI's oversight of the financial system.
The consultation paper calls for interested parties' views in relation to the following key proposals:
- Build on existing engagements, including through the Civil Society Roundtable and Consumer Advisory Group, to enhance engagement with consumers and users of financial services and mutual understanding of cross-sector issues across the financial system.
- Formalise the current industry roundtables by hosting a senior level, cross-sectoral industry stakeholder forum, which would bring together key financial sector industry stakeholders to engage with senior people from the CBI.
- Provide an opportunity for the CBI to engage with industry, civil society, consumer and business representatives at the same time, it is proposed that the CBI will host a public Financial System Conference in 2022.
- Enhance engagement with business and “real economy” representatives.
The aim of these proposals is to give interested parties the opportunity to raise issues relating to how financial regulation, and the financial system as a whole, operates, including issues in relation to policy development. The deadline for submitting responses to the consultation is 11 May 2021.
CBI consultation on cross-industry guidance on outsourcing
The CBI has launched a consultation paper (CP138) on the CBI’s proposed cross-industry guidance on outsourcing, which follows on from the paper ‘Outsourcing – Findings and Issues for Discussion’ which was published in November 2018 and the industry Outsourcing Conference which was held in April 2019. The key objective of the draft guidance is to assist firms with the development of outsourcing risk management frameworks. The guidance outlines the CBI's expectations in relation to the discretions afforded to national competent authorities under the EBA, EIOPA and ESMA guidelines. In addition, the guidance provides clarification in relation to issues raised by respondents to the CBI’s discussion paper including:
- application and proportionality (Part A Section 4 of the guidance)
- identification of critical or important arrangements (Part B Section 1 of the guidance)
- applicability to intragroup arrangements (Part B Section 2 of the guidance)
- the relevance of the guidance to delegation arrangements (Part B Section 3 of the guidance)
The guidance is intended to support rather than to supersede the existing legislation, regulations and guidance on outsourcing. The closing date for submissions to the consultation is 26 July 2021 and it is proposed that the finalised guidance will be published in 2021.
CBI updates COVID-19 – Regulated Firms FAQs
The CBI has updated its COVID-19 – Regulated Firms FAQs. The FAQs provide an overview of the measures being taken by the CBI in relation to the regulation of the financial services industry during the COVID-19 pandemic. The FAQs provide guidance as to the payment breaks available during COVID-19 and set out the CBI's expectation of lenders in relation to supporting borrowers who are experiencing financial difficulties as a result of the pandemic. Guidance as to the reporting requirements applicable to regulated firms is also provided in the FAQs. The FAQs also provide guidance as to the implications of COVID-19 for anti-money laundering / countering the financing of terrorism and the securities market. In addition, the FAQs clarify the CBI's expectation of firms in relation to dividends and remuneration during COVID-19.
"Governance and risk in a time of uncertainty and change" - Deputy Governor Ed Sibley
CBI Deputy Governor, Ed Sibley, gave a speech at a virtual Lunch Bites webinar at the Institute of Directors webinar on 17 February 2021. Mr Sibley noted that COVID-19 has resulted in increased focus on the levels of preparedness and thinking on emerging risks such as climate change and technological innovation. Mr Sibley discussed the implications of uncertainty on how organisations are governed, led, and managed, and emphasised the importance of good governance and risk management for regulated firms. Mr Sibley outlined that the CBI's strategic priorities for financial regulation in 2021 include:
- maintaining supervisory focus on financial and operational resilience of firms and markets to ensure they continue to support households and business through the economic disruption caused by COVID-19
- focusing on strong governance and risk management capabilities in firms and markets to improve culture and decision-making and ensure that risks are identified and effectively mitigated
- seeking to ensure that detrimental consumer outcomes are identified, prevented or mitigated, such as business interruption insurance, where extensive supervisory engagement continues to ensure firms pay valid claims
- resolving both pandemic related and longer term distressed debt in the system
In relation to governance and risk management, Mr Sibley outlined some of the main issues which have undermined effective governance and risk management including:
- weaknesses in connecting strategy with risks and financial resources
- deficiencies in board oversight of director and senior management
- a lack of effective challenge of the executive by the non-executive directors
- weaknesses in the governance of firm’s risk appetite, including a lack of appropriate reporting to the board
- inadequate resourcing of the risk management and compliance functions and poor quality governance of compliance activities and assurance work
- weaknesses in understanding and approach to IT related risk management
In light of these issues, Mr Sibley outlined the CBI's to improve accountability and decision making in the financial services sector, a key part of which is the introduction of an enhanced individual accountability framework (IAF). The IAF is based on four key components; conduct standards; the Senior Executive Accountability Regime (SEAR); enhancements to the current Fitness and Probity Regime; and a unified enforcement process.
Mr Sibley stated that diversity and inclusion is also a key priority for the CBI and that several initiatives are underway to address this topic including thematic reviews and ongoing research in relation to issues and progress (or lack thereof) in improving diversity and inclusion in regulated firms.
Mr Sibley also discussed advancements in the financial sector in terms of technology and innovation and noted that while digitalisation offers many benefits, it can also lead to additional risk. It is hoped that the EU Digital Operational Resilience Act (DORA) and the revised EU directive on security of network and information systems (NIS2) will strengthen the governance and oversight frameworks of IT risk.
Mr Sibley concluded his speech by outlining the CBI's approach to climate change and sustainability and noted the CBI's intention to enhance supervision in relation to climate change risks.
Ireland for Finance Action Plan 2021 launched
Following Cabinet approval, the Ireland for Finance Action Plan for 2021 was launched by Minister of State for Financial Services, Credit Unions, and Insurance Seán Fleming TD on 11 February. The 2021 Action Plan has four main priorities which include sustainable finance, diversity, regionalisation, and digital finance. The plan contains 16 new measures which seek to build on the resilience demonstrated by the IFS sector in the last year, and also set out a variety of ongoing initiatives.
European Commission seeks technical advice from ESAs on digital finance and related issues
The European Commission has issued a request to the European Supervisory Authorities (EBA, EIOPA and ESMA, ESAs) seeking technical advice on digital finance and related issues. The ESAs have been invited to provide technical advice on the following issues:
- regulation and supervision of more fragmented or non-integrated value chains
- platforms and bundling of various financial services
- risks of groups combining different activities
- non-bank lending
- protection of client funds and the articulation to the deposit guarantee scheme directive
The EBA in consultation with ESMA is required to submit an interim report on the protection of client funds by investment firms by 31 July 2021 and a final report by 31 October 2021. Interim and final reports on the value chains, platformisation, and mixed activity groups are required to be delivered by the three ESAs by 31 October 2021 and 31 January 2022 respectively. Interim and final reports on non-bank-lending should be submitted by the EBA by 31 December 2021 and 31 March 2022.
ESAs publish final report and draft RTS on disclosures under SFDR
On 4 February 2021, the ESAs published a final report with draft RTS on the content, methodologies and presentation of disclosures under the EU regulation on sustainability-related disclosures in the financial services sector (SFDR). The purpose of the proposed RTS is to strengthen protection for end-investors by enhancing environmental, social and governance disclosures on the principal adverse impacts of investment decisions and on the sustainability features of a diverse range of financial products. It is hoped that this will assist with responding to investor demands for sustainable products and mitigate the risk of greenwashing.
The RTS propose that the principal adverse impacts that investment decisions have on sustainability factors should be set out on the entity's website. The disclosure is required to show how investments adversely impact indicators relating to climate and environment, social and employee matters, respect for human rights, anti-corruption and anti-bribery aspects. The RTS also provide that the sustainability characteristics or objectives of financial products must be disclosed in an annex to the sectoral pre-contractual and periodic documentation in mandatory templates and on providers’ websites. Additional proposals include:
- pre-contractual information should include details on how a product with environmental or social characteristics/ sustainable investment objective/ meets those/ that characteristics/ objective
- information on the entity’s website on the environmental or social characteristics of financial products/ sustainable investment objective of the product and the methodologies used
- information in periodic reports specifying the extent to which products met the environmental and/or social characteristics by means of relevant indicators; and for products with sustainable investment objectives, including products whose objective is a reduction in carbon emissions
- information in relation to the ‘do not significantly harm’ principle: specifying the details for how sustainable investments do not significantly harm sustainable investment objectives
The RTS set out a harmonised approach to all financial products as the ESAs were not empowered to differentiate the disclosure between financial market participants and products. It is expected that the European Commission will endorse the RTS within three months of their publication, after which the RTS will be adopted by means of a delegated regulation subject to the non-objection by the European Parliament and Council of the European Union. The proposed application date of the RTS is 1 January 2022.
ESAs issue recommendation on the application of the Regulation on Sustainability-related Disclosures
The ESAs have published a joint supervisory statement on the effective and consistent application and national supervision of the SFDR. The ESAs have recommended that the draft RTS be used as a reference tool when the provisions of the SFDR are being applied in the period between the application of SFDR (10 March 2021) and the application of the RTS at a later date.
The annex to the statement provides specific guidance in relation to the application of timelines of certain specific provisions of the SFDR including the application timeline for entity-level principal adverse impact disclosures and for financial products’ periodic reporting. The annex also sets out a table summarising the relevant application dates of the SFDR, the Taxonomy Regulation and the related RTS. This statement complements the final report and draft RTS issued by the ESAs Joint Committee on 4 February 2021.
ESAs letter on proposed Digital Operational Resilience Act
The chairs of the ESAs have published a letter on the proposed Digital Operational Resilience Act (DORA). The letter notes that the ESAs are in agreement with the key principles of DORA and that they fully support the goal of establishing a comprehensive framework on digital operational resilience for EU financial entities by streamlining and strengthening the existing patchwork of relevant provisions across EU financial services legislation.
The letter also notes that the ESAs agree with the call for enhanced collaboration and cooperation among authorities within the EU and internationally. The letter notes that the operational resilience of critical third party providers (CTPPs) is a primary concern for the EU financial sector. Given the lack of an overarching regulatory and supervisory framework to monitor the digital operational resilience risks stemming from CTPPs, the ESAs strongly support the establishment of a framework to oversee the ICT services that CTPPs provide.
The letter set out the challenges which may arise in relation to the governance and operation of the proposed sectoral oversight framework and notes that there is a need for more streamlined and effective governance. The ESAs suggest that this might be achieved by the creation of a joint-ESAs executive body, responsible for the overall oversight of cross-sectoral CTTPs. The letter also emphasises the need for coherence between oversight recommendation and follow-up, adequate resources, and the principle of proportionality to be incorporated in a flexible way in the DORA.
Capital Markets Recovery Package: Council adopts first set of measures to help companies access funding
The Council has adopted targeted amendments to the markets in financial instruments directive (MiFID) II and the prospectus regulation to facilitate the recapitalisation of EU companies on financial markets following the COVID-19 crisis. The measures are part of the Capital Markets Recovery Package agreed between the Council and the European Parliament at the end of last year. The objective of the package is to help capital markets to support economic recovery from the pandemic.
Amendments have been made to the MiFID II rules in order to simplify information requirements in a targeted manner, while safeguarding investor protection. The changes include:
- reduced information will be required to be provided to professional investors and eligible counterparties
- paper-based investment information will be phased out, except where it has been specifically requested by retail investors
- banks and financial firms will be allowed to bundle research and execution costs when it comes to research on small and mid-cap issuers
- adaptations to the position limit regime for commodity derivatives to support the emergence and growth of euro-denominated commodity derivatives markets
Amendments have been made to the prospectus regulation in order to establish a new ‘EU recovery prospectus’. This shorter prospectus will assist companies in raising capital to meet their funding needs, while providing adequate information to investors. The recovery prospectus will be available for capital increases of up to 150% of outstanding capital within a period of 12 months. The new regime will apply until the end of 2022.
EBA publishes final draft technical standards on indirect exposures arising from derivatives underlying a debt or equity instrument
The EBA has published final draft regulatory technical standards (RTS) outlining how institutions should determine exposures arising from derivative and credit derivative contracts not entered directly into with a client, but whose underlying debt or equity instrument was issued by a client. The aim of the draft RTS is to ensure appropriate levels of consistency through different pieces of the regulatory framework for the calculation of large exposures.
For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.
Date published: 9 March 2021