Financial Services Regulation and Compliance - General Cross Sectoral June 2021
Financial Services Regulation and Compliance - General Cross Sectoral June 2021
CBI publishes its Annual Report and Annual Performance Statement for 2020
On 2 June 2021 the Central Bank of Ireland (CBI) published its 2020 Annual Report and Annual Performance Statement. The Report outlines what the CBI achieved last year and provides a summary of the key activities that are aimed at safeguarding financial and monetary stability. Governor of the CBI, Gabriel Makhlouf, outlined the following at the launch of the Annual Report:
Resilience was emphasised as being a pivotal theme, as the CBI has an objective to ensure that the financial system absorbs the shock of the pandemic.
In order to allow the banking sector to keep a sustainable supply of credit to the economy, in March 2020 the CBI announced a reduction in the countercyclical buffer from 1% to 0%.
The CBI are working closely with the ECB to develop and operationalise a more comprehensive macro-prudential framework, including for market-based finance.
A key focus of the CBI for the coming years is to develop its new strategic plan.
On the same day, the CBI also published its Protected Disclosures Annual Report for 2020. Under the Protected Disclosures Act 2014, public bodies are required to prepare and publish a protected disclosures report each year. During the reporting period 1 January 2020 to 31 December 2020, the Central Bank received 202 protected disclosures.
CBI publishes a Fitness and Probity Interview Guide
The CBI has launched a Fitness & Probity Interview Guide to assist firms and PCF applicants about attending at assessment interview and also where the CBI invites an applicant for a "specific" interview.
The guide outlines that assessment interviews are regular in nature, unrecorded and of short duration, usually an hour or so. In contrast, specific interviews are more formal, are recorded and can be a precursor to a "minded to refuse" notification.
CBI updates AML/CFT Guidelines for the Financial Sector
The amendments resulting from the transposition of 5AMLD into Irish law are as follows:
The requirement for firms to apply specific enhanced due diligence (EDD) measures when dealing with a customer established or residing in a high-risk third country. This obligation relates to those third countries identified by the European Commission as having strategic deficiencies in their AML/CFT regimes (Section 38A CJA 2010);
The broadening of the sources of information, which can be used by a firm to identify and verify a customer's and their beneficial owner's (where applicable) identity, with the explicit recognition of information obtained through electronic identification means as set out in Regulation (EU) No. 910/2014 (the eIDAS Regulation) (electronic identification) (Section 33 CJA 2010);
Prior to the establishment of a business relationship with a customer, which has a beneficial owner, firms are required to confirm that the relevant information concerning the beneficial owner has been entered into the applicable beneficial ownership register before the firm can allow any transactions to be conducted on behalf of the customer or the beneficial owner (Section 33 CJA 2010).
The requirement to continue to apply EDD measures to a customer who is a Politically Exposed Person (PEP) for as long as is reasonably required until the customer is deemed to no longer pose a risk, arising from their previous PEP status (Section 37 CJA 2010).
The guidance on Internal Governance Requirements has been amended as follows:
The CBI made a number of amendments to Chapter 6 (Governance) of the guidelines, which better reflect the legal requirements set out in the CJA 2010, while at the same time set out the CBI's expectations in relation to firms' approaches to their AML/CFT internal governance structures.
In response to a parliamentary question, the Minister for Finance Pascal Donohue has provided an update on when draft legislation can be expected in relation to the Individual Accountability Framework and Senior Executive Accountability Regime (SEAR). The Minister stated that Heads of Bill are promised in July, subject to the Attorney General's advice on the adequacy of safeguards included to protect the constitutional rights at stake.
The importance of effective culture in firms
On 10 June 2021, the CBI's Director General, Financial Conduct, Derville Rowland spoke at a webinar at the Institute of Directors where she outlined the importance of effective culture in firms and the link between good culture and an effective fitness and probity (F&P) regime. Derville Rowland reflected on ten years of the F&P regime and noted that the forthcoming Individual Accountability Framework would complement the existing regime and further improve governance practices across financial services. She also launched the CBI's Fitness & Probity Interview Guide which is designed to assist applicants and firms in navigating the F&P assessment and interview process.
FSPO makes a submission to the CBI on the review of the Consumer Protection Code
The Financial Services and Pensions Ombudsman (FSPO) has made available on its website the two submissions it has made to the CBI on the proposed review by the CBI of the Consumer Protection Code (CPC).
Note that there is no open consultation on the CBI's review of the CPC as yet. The FSPO appears to have taken the initiative to make these submissions based on the announcement of the CBI's priorities in March. These priorities flagged the CBI's intention to review the CPC this year, amongst other things.
The matters covered by the FSPO submissions include:
online purchase of insurance policies
auto-renewal of motor insurance policies
the use of branding
the use of data analytics to calculate a premium
providing clarity on the application of the CPC to oral and written communication
mandatory communications should disclose that they are being disclosed in compliance with a regulatory obligation
joint accountholders or joint policyholders should receive clear information on how communications will be issued
expanding the application to further services provided by credit unions
requirements of the final letters issued to meet the requirements of the CPC
terms of business issued to meet the requirements of the CPC
Regulating Fintech: Is an activity-based approach the solution? – Speech by Chairman of the Financial Stability Institute
Fernando Restoy, Chairman of the Financial Stability Institute, Bank for International Settlements, has delivered a speech to the fintech working group at the European Parliament on the future of fintech regulation. Mr Restoy noted that while regulators have been gradually adjusting their policy frameworks in response to the increased presence of fintechs and big techs, a more comprehensive approach to regulation is required. In particular he highlighted the need to address the competitive advantage enjoyed by big techs as a result of their less stringent regulation compared to that of commercial banks.
One proposal which is gaining momentum is the concept of 'same activity-same regulation.' This would mean that instead of entities being granted a specific license, a system of rules would be applied to all types of entities involved in a specific activity. Mr Restoy cautioned however that crucial policy objectives such as financial stability underpin the current entity-based rules and that these must continue to be protected. Mr Restoy also examined the differences in regulatory application in policy areas such as competition and consumer protection, and highlighted how various global initiatives have recently introduced new entity-based rules for big techs.
Mr Restoy concluded that he does not support a move to activity-based regulation based on the following key considerations:
The majority of fintechs and big techs are already subject to activity-based rules in areas which would warrant a move from entity-based regulation such as consumer protection and AML/CTF.
Replacing entity-based rules in areas such as prudential regulation may jeopardise fundamental policy objectives such as financial stability.
EBA report on ESG risk management and supervision for banks and investment firms
The EBA published a report on environmental, social and governance (ESG) risk management and supervision and proposes how ESG factors and risks should be included in firms' regulatory and supervisory framework.
Assessment - ESG risks across time should be carefully assessed.
Impact - the report outlines impacts of ESG factors on counterparties and invested assets. The report also illustrates indicators, metrics and evaluation methods needed for effective ESG risk management.
Recommendations - the EBA provides recommendations for ESG related risk considerations to be incorporated into strategies, objectives, governance structures and the management of these risks in relation to a firm's risk appetite and internal capital allocation process.
Phase-in proposal - supervisory assessment of resilience will be assessed over a minimum of a ten year time horizon. The supervision of these risks will begin with the inclusion of ESG risks in the supervisory model and internal governance analysis alongside encouraging data gathering and tools to develop quantification approaches.
The report should be considered alongside the EBA and ESAs disclosure publications under the Capital Requirement Regulation, the Taxonomy Regulation, and Sustainable Finance Disclosure Regulation. The EBA will publish Pillar 3 disclosure requirements on ESG risks later this year.
ESAs publish amended technical standards on the mapping of credit assessments of ECAIs
On 10 June 2021 the ESAs (the EBA, ESMA, and the European Insurance and Occupational Pensions Authority) published two amended implementing technical standards (ITS) in relation to the mapping of credit assessments of external credit assessment institutions (ECAIs). The ITS are included in the EU Single Rulebook for insurance and banking with the objective of creating a safe and consistent framework that is applicable across the EU.
The amendments recognise two new credit rating agencies and the results of a monitoring exercise on the adequacy of existing mappings and the deregistration of a number of credit rating agencies.
ESMA recommends changes to supervisory fees for credit rating agencies
ESMA has published its final report providing technical advice to the European Commission on the supervisory fees that are charged to credit rating agencies. The proposed changes include a fixed registration fee of €40,000 and an annual supervisory fee of 0.5% of turnover to credit rating agencies with annual revenues of between €4m – €15m. ESMA also recommends that a requirement be included for supervisory fees to be paid in a single instalment in the first quarter of the financial year.