Financial Services Regulation and Compliance - General Cross Sectoral Nov 2021
Financial Services Regulation and Compliance - General Cross Sectoral Nov 2021
Central Bank sets out supervisory expectations of regulated firms regarding climate change, and reaffirms own commitment to take action
On 3 November 2021, Governor Gabriel Makhlouf issued a "Dear CEO" letter to Chairs and CEOs of regulated financial services providers to highlight the statutory obligations and related supervisory expectations relating to climate and sustainability issues. In the letter the Governor acknowledged that addressing these issues will be challenging for firms, but climate change requires action from all participants in the financial sector, and ownership of the climate agenda by regulated financial service providers is now critically important. The CBI issued a pledge on climate change action and endorses the Network for Greening the Financial System ‘Glasgow Declaration’ made on 3 November 2021.
As the transition is made to a carbon neutral future, the financial system will play a pivotal role in serving the needs of consumers and the wider economy and addressing climate change is a strategic priority for the CBI. The Supervisory expectations stated focus on five key areas:
Governance: firms need to demonstrate clear ownership by their boards of climate risks affecting the firm and to promote a culture that places emphasis on climate and other ESG issues.
Risk management framework: firms need to understand the impact of climate change on the risk profile of the firm and to enhance their existing risk management frameworks to ensure robust climate risk identification, measurement, monitoring and mitigation.
Scenario analysis: scenario analysis and stress testing are critical to assess the impact of potential future climate outcomes, including impacts on capital adequacy, where applicable.
Strategy and business model risk: firms are expected to undertake business model analysis to determine the impacts of climate risks (and opportunities) on the firm's overall risk profile, business strategy and sustainability, and to inform strategic planning.
Disclosures: existing legal requirements on disclosure emphasise the importance of transparent disclosure to consumers and investors to protect their interests and wider market integrity. In particular, firms need to ensure they do not engage in the practice of 'greenwashing'.
Please see our more detailed note on this "Dear CEO" letter here.
Opening Statement by Gerry Cross Director of Financial Regulation - Policy & Risk at Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
On 3 November 2021, Gerry Cross, Director of Financial Regulation and Seána Cunningham, Director of Enforcement and Anti-Money Laundering spoke to the Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach on General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021 as published by the Minister for Finance in July.
The CBI's Behaviour and Culture Report into Irish Retail Banks recommended the introduction of an enhanced Individual Accountability Framework for individuals working in regulated firms. Such recommendations are reflected in the four key components of the General Scheme. These are:
senior executive accountability
enhancements to the current Fitness & Probity Regime
an improved enforcement process
The objective of the Individual Accountability Framework proposals is to ensure good standards of governance and behaviour amongst financial firms to the ultimate benefit of consumers and investors while respecting the key principles of proportionality and predictability. It will help firms identify risks before they crystallise, facilitate greater internal challenge, and ultimately should result in fewer serious issues in the sector. Where serious issues do arise, the CBI will not hesitate to take enforcement action, using the enhanced toolkit of the framework to ensure individual as well as firm-level accountability.
Anti-Money Laundering Bulletin - Issue 7, Message from Tommy Hannafin - Head of Anti-Money Laundering Division
On 9 November 2021, the CBI published its Anti-Money Laundering Bulletin. While this bulletin focuses on findings from the CBI’s supervisory engagement with the funds sector the CBI expects all firms, irrespective of their sector, to critically assess their anti-money laundering / countering the financing of terrorism & financial sanctions (AML/CFT/FS) frameworks against the CBI’s expectations. Compliance with the requirements set out in this bulletin will continue to be an area of focus by the CBI as part of the scope of future engagements with designated persons.
The CBI expects firms to have implemented effective governance, risk and control functions and to be able to demonstrate to the CBI:
sufficient oversight of the AML/CFT/FS framework to ensure compliance with the requirements of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010
the identification and management of ML/TF/FS risks to which they are exposed is an iterative and ongoing cornerstone of the firm’s AML/CFT/FS framework
continual review and assessment of existing processes and procedures to enhance the AML/CFT/FS framework on an ongoing basis, so that firms are well-positioned to respond to emerging risks, legislative changes and regulatory guidance
“Disruption in financial services: Navigating the winds of change”– Deputy Governor, Ed Sibley to the Association of Compliance Officers of Ireland (ACOI)
On 18 November 2021, Deputy Governor Ed Sibley spoke to the ACOI about some of the key drivers of change, the CBI's regulatory priorities in this regard and its associated expectations of regulated firms. The main points of Deputy Governor Sibley's address were:
That challenges and changes require effective governance and risk management to allow firms to grasp opportunities, build and evolve sustainable business models, to be sufficiently agile for changing circumstances and have the necessary operational and financial resilience.
For boards and senior leaders to recognise and deal with complex issues that we face, they must have a breadth and depth in their understanding of the issues, the complexity involved and what is required to keep pace with change to maintain sustainable models and effectively manage the risks. They cannot do this alone, and will require the support of and challenge from compliance, risk and audit functions.
Diversity in leadership has long been recognised as crucial for effective governance It is in times of change and uncertainty when qualities such as resilience and innovative thinking are essential, and the value of diversity of background, thought and experience are all the more important.
Supervisory focus will continue to evolve to incorporate assessments with a sharpening focus on how emerging risks and other developments are being considered.
It is important that technology-driven firms recognise that they need appropriate governance and risk management arrangements and demonstrate appropriate cultures that sustainably deliver for their customers and maintain trust in the financial system.
Speech by President von der Leyen at the UN Climate Change Conference (COP26) in Glasgow (SPEECH/21/5741)
On 1 November 2021, European Commission President von der Leyen spoke at the UN Climate Change Conference (COP26) in Glasgow. President von der Leyen spoke of Europe's ambition to become the first climate neutral continent and speed up the race to net zero. President von der Leyen focused on three main messages in her speech:
giving strong commitments to reduce emissions by 2030 as net zero by 2050 is good, but not enough
we need to agree on a robust framework of rules, for example to make global carbon markets a reality
we must mobilize climate finance for supporting vulnerable countries to adapt and leapfrog to clean growth
President von der Leyen stated that the EU will fully contribute to achieve global goals on adaptation. With close to US$27bn in 2020, Team Europe is already the largest provider of climate finance. Almost half of this finance is for adaptation or for both adaptation and mitigation. The EU has pledged an additional US$5bn up to 2027 from the EU budget and the EU will double its funding for biodiversity, especially in vulnerable countries.
EU at COP26: Commission pledges €100 million to the Adaptation Fund (IP/21/5886)
On 9 November 2021, at a high-level plenary session at COP26, the European Commission announced a new pledge of €100m in finance for the adaptation fund. This additional €100m contribution from the EU budget is by far the biggest pledge for the adaptation fund made by donors at COP26. It underscores the EU's determination to scale up finance to support climate adaptation objectives, and to strike a better balance between mitigation and adaptation, particularly in the most vulnerable countries and for the benefit of their most vulnerable populations.
Since 2010, the adaptation fund has committed nearly US$868m for climate change adaptation and resilience projects and programmes, including 126 concrete, localised projects in the most vulnerable communities of developing countries around the world with 31.5m total beneficiaries.
Commission to invest nearly €2bn from the Digital Europe Programme to advance on the digital transition (IP/21/5863)
On 10 November 2021, the European Commission adopted three work programmes for the Digital Europe Programme, outlining the objectives and specific topic areas that will receive a total of €1.98bn in funding. The main work programme, worth €1.38bn, will focus on investment in the areas of artificial intelligence, cloud and data spaces, quantum communication infrastructure, advanced digital skills, and the wide use of digital technologies across the economy and society, until the end of 2022. Alongside this main work programme, the European Commission published two specific work programmes; the first one focusing on the area of cybersecurity, with a budget of €269m until the end of 2022; and the second one focusing on the set-up and operation of the network of European Digital Innovation Hubs, with a budget of €329m, until the end of 2023.
Autumn 2021 Economic Forecast: From recovery to expansion, amid headwinds (IP/21/5883)
On 11 November 2021, the European Commission forecasted that the EU economy is rebounding from the pandemic recession faster than expected. The EU economy is projected to keep expanding over the forecast horizon, achieving a growth rate of 5%, 4.3% and 2.5% in 2021, 2022 and 2023 respectively. Growth rates for the euro area are projected to be identical to those for the EU in 2021 and 2022, and 2.4% in 2023. It was stated that this outlook depends heavily on two factors: the evolution of the COVID-19 pandemic and the pace at which supply adjusts to the rapid turnaround in demand following the re-opening of the economy.
This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 19 October. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 25 October.
Letter from the Chairman of the EUR Risk Free Rates Working Group to the European Commission with regards to the designation of statutory replacement rates for GBP and JPY LIBOR (ESMA81-459-31)
On 15 November 2021, James von Moltke, Chairman of the EUR Risk Free Rates wrote to the European Commission in respect of discussions on the potential designation of statutory replacement rates for GBP LIBOR and JPY LIBOR. The Euro Risk Free Rates Working Group (RFRWG) and Task Force are of the view that within the remit of the EU Benchmark Regulation, full legal certainty can only be achieved with the designation of a statutory replacement rate. To ensure alignment with the UK approach, several options to designate a replacement rate have been identified and discussed in the Task Force and the RFRWG, including referring to the methodology/components underlying the synthetic LIBOR (i.e. term RFR plus ISDA spread).
There was agreement that all of the foregoing options create certain challenges in terms of either full alignment with the UK approach or operational aspects, including the fact there is no certainty whether synthetic LIBOR will continue to be published after the end of 2022. The letter highlights the importance of having certainty about relevant action as soon as practicable, so market participants can focus on the deliverables required to achieve a successful transition away from GBP and JPY LIBOR.