FIG Top 5 at 5 - 04/05/2023

1. Central Bank of Ireland Consumer Protection Updates

Minister for Finance writes to the Central Bank of Ireland on its Consumer Protection Code Review

On 25 April 2023, the Department of Finance published a letter (dated 11 April 2023) from Minister for Finance, Michael McGrath ("Minister") to Governor Gabriel Mahklouf regarding the Central Bank of Ireland's ("Central Bank") Consumer Protection Code ("CPC") Review.

The Minister noted that the CPC Review is timely and welcomed the opportunity for the Department of Finance to provide assistance and consultation as the CPC Review progresses.

Minister McGrath notes that ensuring that "the regulatory framework supports borrowers in the switching process as they seek to minimise their borrowing costs" is a key priority and highlights the importance of addressing vulnerability and affordability in the CPC Review.

He highlighted that it is "key to strike the right balance between regulation and consumer protection" as Ireland needs a "financial services industry which attracts new providers and supports the development of new products and technological advancement" but also "strongly protects consumers especially from the new risks these changes could bring".

Vulnerability

The Minister notes the importance of paying special attention to the treatment of vulnerable customers, stressing that there is a need to move away from collective treatment of those with vulnerabilities to dealing with consumers on an individual basis.

He explained that the CPC Review offers an opportunity to:

• consider possible ways to reduce barriers to access for customers recovering from serious illness, including by embracing the principles underpinning the `Right To Be Forgotten';
• promote an enhanced focus on and understanding of vulnerability;
• strengthen how consumers are protected from scams (especially vulnerable customers); and
• review the appropriateness of the current level of protections afforded to consumers who receive advice on and/or are sold unregulated products by regulated entities.

Affordability

In relation to affordability, the Minister notes the following:

• the Central Bank should further review the existing regulatory provisions and consider whether more dedicated mortgage switching resources, such as a standalone mortgage switching code, could better encourage and facilitate switching in the mortgage market;
• the Central Bank should consider whether the general body of customers are well served in the round by cashback offers and whether they would fare better overall if banks competed on mortgage rates;
• it is important that the CPC Review takes into account the risk of new mortgage arrears cases materialising and the steps which can be taken to minimise this risk; and
• he looks forward to the outcome of the Central Bank's engagement with the non-bank sector regarding interest rates and notes that it is vital that switching from the non-bank sector to the banking sector is "fully and actively supported and facilitated by all parties where it is in the customer's interests".

Other Issues

The Minister highlighted the following:

• Retail Banking Review: The Department of Finance's Retail Banking Review made a number of recommendations which relate to the CPC, in areas such as competition, access to branches, mortgage switching, and SME Credit, which have direct implications for the CPC review. The Minister asked that these be considered, where relevant.
• COVID-19: Building on the lessons learnt from the insurance sector during the COVID-19 pandemic, the CPC should "mainstream the Central Bank's expectations of how customers are treated, including in terms of claims interpretation and handling. This Review process should also reflect recent legislative developments", including the Consumer Insurance Contracts Act 2019.
• Climate: With climate-related issues becoming more prominent and coverage gaps potentially emerging, "financial service firms including insurers should meet their responsibilities including in terms of transparency both to customers, and also the wider community through the availability of cover in flood-defended areas".
• CPC User Guide for Consumers: The Minister suggests that an accompanying consumer user-guide to the CPC would be welcome as "consumers should be able to determine how the CPC protects them in a straight forward way".  

Central Bank of Ireland publishes information note on ongoing work to ensure consumers are protected in a changing economic landscape

On 26 April 2023, the Central Bank published an information note on its ongoing consumer protection work in a changing economic landscape together with four research papers on the topic. The information note details the Central Bank's ongoing work in the area of mortgages to ensure regulated firms meet the expectations set out in its November 2022 Dear CEO Letter on protecting consumers in a changing economic landscape. 

The Central Bank notes that Phase 1 of this work has now completed. Phase 1, sought assurance that the regulatory framework is working in accordance with its terms across the banking system regarding arrears, switching and interest rate increases. Phase 1 was based on ensuring that:

• firms are operationally ready to identify and support borrowers who may face challenges meeting their repayments;
• where borrowers look to switch there is no discrimination based on where they have their current loan; and
• interest rate increases are in line with loan terms and conditions, published variable rate policy statements and the regulatory framework for which the Central Bank is responsible.

The information note addresses each of arrears, switching and interest rate increases as follows:

Arrears

The Central Bank highlights that:

• firms should take a practical approach when considering the difficulties that may be faced by any borrower where the interest rate on their mortgage has increased, and of the supports those borrowers may need. Firms should be proactive in this regard and not wait for financial distress to materialise before taking action; and
• where there are indications that the borrower’s situation will deteriorate during the time needed for the borrower to complete, and the firm to assess, a Standard Financial Statement, firms should make effective use of Provision 38 Alternative Repayment Arrangements ("ARAs") as needed:
  • firms should have clear procedures for offering and putting in place temporary ARAs at the earliest necessary opportunity;
  • firms should ensure that such ARAs are used for a limited period of time only, and not as a substitute for ensuring appropriate levels of resourcing to complete assessments of borrowers’ individual circumstances in a timely manner; and
  • firms should explain to the borrower very clearly, and before the ARA is put in place, the terms of the ARA, including how it will be recorded on the Central Credit Register, and any cost of credit implications for the borrower.

Switching

While its work on switching is ongoing, the Central Bank highlights the following expectations for firms:

• given the demand for switching may increase, firms should remain vigilant to ensure they have sufficient operational capacity and resources in place to process switching applications within the timeframes set out in Provision 5.6a of the CPC;
• switching applications are assessed based on a prudent and consistently applied borrower creditworthiness and risk profile assessment, in line with the requirements of the European Union (Consumer Mortgage Credit Agreements) Regulations 2016 ("CMCAR") and the EBA Guidelines on Loan Origination and Monitoring. Firms should continue to apply these underwriting standards and ensure they do not discriminate against a borrower solely based on who their existing lender is, or has been in the past;
• in providing advice to consumers interested in switching a mortgage, firms should be proactive in identifying any specific features where the consumer could make changes to their financial situation to either increase the likelihood of their application being approved; and
• as required by Regulation 19(7) of the CMCAR, firms must inform the borrower without delay of the reasons for refusal of a mortgage credit application. Firms should ensure the information provided is sufficient for the consumer to understand and identify what changes they may be able to make to their financial situation to increase the likelihood of a future switching application being approved.

Interest Rate Increases

The Central Bank highlights that:

• under Provision 6.6 of the CPC, firms are required to provide specific information to borrowers when notifying them of a change in the interest rate on a loan. Firms should consider what additional helpful information could be included in this letter to ensure they are fully aware of the supports available to them. At a minimum, this should include information on the options available to borrowers if they are having difficulty meeting the new repayment amount. In particular, information on MABS, the Insolvency Service of Ireland or any relevant State supports should be included in a prominent position;
• firms should consider whether a bespoke contact to specific borrowers is warranted over and above the Provision 6.6 letter notifying the borrower of the interest rate rise. Such contact would be with a view to reinforcing to borrowers that there are ARAs available to support them if needed;
• firms should have additional supports available for borrowers who may be particularly affected by interest rate rises, such as those who are currently or were previously in financial difficulties, on an ARA, and/or who may encounter difficulties with switching to another lender. Firms should endeavour to identify these borrowers/groups of borrowers where possible, and have systems to track engagement and repayment profiles, in order to support borrowers as appropriate; and
• information on the supports available to borrowers should be prominently displayed on the website of the firm.

The Central Bank is now focused on Phase 2, to "scrutinise more closely how the framework is delivering for consumers as we see rate increases begin to impact".

2. Court of Justice of the European Union delivers judgment on unfair terms in group insurance contracts

On 20 April 2023, the Court of Justice of the European Union ("CJEU") delivered its judgment in Case C‑263/22 which sought clarity on the application of Articles 3(1), 4, 5 and 6 of Directive 93/13/EEC on unfair terms in consumer contracts ("Directive") in the context of a group insurance policy.

Background to the case

The case related to a referral from the Portuguese Supreme Court stemming from an action taken by a consumer, referred to as LP, against Ocidental – Companhia Portuguesa de Seguros de Vida SA an insurance company ("Insurer"). The Insurer refused to make loan repayments under a group payment protection policy, which LP was party to and the Insurer underwrote (a condition of her loan with her bank). The Insurer's refusal arose on the occasion of LP's permanent incapacity due to what the Insurer referred to as non-disclosure of a prior medical condition, an exclusion under the policy.  LP disputed this fact explaining that at the time the contract was concluded:

• she had not completed any medical questionnaire, in fact a bank employee had completed it and presented it to her for signature; and
• none of the policy's exclusions were either read or explained to her.

Referral

The Portugese Superme Court  asked whether

• Article 5 of the Directive, which provides that the “terms offered to the consumer … must always be drafted in plain, intelligible language”, be interpreted as meaning that consumers must always have an opportunity to become acquainted with all the terms?; and
• Article 4(2) of the Directive, according to which terms relating to the main subject matter of the contract are subject to assessment unless “these terms are in plain intelligible”, be interpreted as meaning that it requires consumers always to have an opportunity to become acquainted with those terms?

There was also an additional question as to whether the consumer could rely on the bank's failure to discharge its duties in a claim against the Insurer.

Decision of the CJEU

The CJEU held that Article 4(2) and Article 5 of the Directive, must be interpreted as meaning that a consumer must always be afforded the opportunity, before the conclusion of a contract, to become acquainted with all the terms that the contract contains.

In addition, Article 3(1) and Articles 4 to 6 of the Directive must be interpreted as meaning that where a term of an insurance contract relating to the exclusion or limitation of cover against the insured risk, with which the consumer concerned could not have become acquainted prior to the conclusion of that contract, is found to be unfair by the national court, that court is required to exclude the application of that term in order that it may not produce binding effects with regard to that consumer.

3. Enforcement Action taken by the PRA under the Senior Managers and Certification Regime for failure to take reasonable steps

On 13 April 2023, the Prudential Regulation Authority ("PRA") in the United Kingdom published a Final Notice against Mr. Carlos Abarca, formally Chief Information Officer at TSB Bank plc ("TSB"), under the Senior Managers and Certification Regime ("SMCR") for a breach of the Senior Managers Conduct Rule 2. Senior Managers Conduct Rule 2 states that a senior manager "must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system". Mr Abarca was also fined £81,620.

In the Final Notice, the PRA states that Mr. Abarca failed to take reasonable steps to ensure that TSB adequately managed and supervised an IT outsourcing arrangement relating to its IT platform migration (it should be noted that TSB itself was fined by the PRA and the Financial Conduct Authority for its failures in relation to the migration). At that time, Mr Abarca held Senior Manager Function 18 (Other Overall Responsibility) under the SMCR and was responsible for TSB's compliance with the PRA’s Outsourcing Rules. Specifically, the PRA found that Mr. Abarca:

• did not ensure that TSB formally and adequately reassessed the outsource service provider's ability and capacity on an ongoing basis including in light of certain service level breaches;
• did not ensure that he or his team obtained sufficient assurance from the outsourcing service provider as to its readiness to operate TSB's new platform;
• did not take a holistic view of the risks associated with the outsourcing arrangement; and
• did not give sufficient consideration to the appropriateness of relying on the outsourcing service provider's confirmation without further investigation or challenge, and was indeed over-reliant on that confirmation.

These failings, in the PRA's view

• undermined TSB’s operational resilience;
• contributed to the significant disruption TSB experienced to the provision of critical functions;
• potentially impacted on TSB's financial stability; and
• contributed to some of the regulatory breaches by TSB, for which the PRA took enforcement action on 20 December 2022 .

In the Final Notice, the PRA states that the action it has taken "emphasises the importance of ensuring that senior individuals in a firm take reasonable steps to ensure that the firm complies with the relevant regulatory requirements and standards, in compliance with Senior Manager Conduct Rules". This we understand is the first such enforcement action taken by the PRA.

4. ECB publishes progress report on digital euro and study on possible features of a digital wallet

On 24 April 2023, the European Central Bank ("ECB") published the third progress report on the digital euro, as well as the findings of focus groups commissioned by the ECB concerning people’s views on the features of a potential digital wallet.

Third report on progress of the investigation phase of the digital euro project

The progress report presents a third set of design and distribution options, endorsed by the ECB’s Governing Council, that would feed into the overall design of a digital euro. It contains views on digital euro access, holdings and onboarding, as well as distribution aspects and digital euro services and functionalities.

The progress report notes that:

• in its initial releases, a digital euro would be accessible to euro area residents, merchants and governments (non-resident euro area citizens might also have access, provided that they held an account with a euro area-based payment services provider ("PSP"));
• in further releases, consumers from selected third countries could also have access, depending on accessibility rules to be set out in the legislative framework for a digital euro;
• cross-currency functionalities with other central bank digital currencies outside the euro area are anticipated;
• a digital euro could be distributed via PSPs, as defined in the Payment Services Directive;
• a digital euro could be made available to euro area residents via existing banking apps or via an app provided by the Eurosystem offering a harmonised entry point for basic payment functionalities provided by PSPs;
• Supervised intermediaries (e.g. banks distributing digital euro) would be required to provide a set of mandatory core services to end-users and could offer additional services (e.g. conditional payments or the ability to split person-to-person payments among multiple parties); and
• that the design of the digital euro would be adjusted, as needed, to comply with the legal framework to be adopted by European co-legislators.

Focus Group

The study, which was conducted in all euro area countries from December 2022 to January 2023, assessed euro area citizens’ payment preferences and their attitudes towards digital payments. The study found that most participants were interested in trying some of the digital wallet features presented and shows that

• person-to-person money transfers are considered an essential feature for a digital wallet;
• offline payments are deemed a useful feature when, for example, someone has limited connectivity; and
• participants also valued budget management tools and conditional payments, including payment on delivery and pay-per-use.

Next Steps

On 24 April 2023, the ECB wrote to Irene Tinagli, Chair of the European Parliament's Committee on Economic and Monetary Affairs ("ECON"), regarding the third progress report and focus group report.

The letter notes that "with the approval of the latest set of design choices, the foundations have been laid for the finalisation of the investigation phase and for building a proposal for a possible next phase".

The Eurosystem is now:

• reviewing all the design options and is bringing them together in a high-level design for the digital euro;
• continuing its analysis of distribution options and the development of a rulebook for a digital euro scheme; and
• assessing the findings from the prototyping exercise and market research.

The Governing Council of the ECB will "review the outcome of the investigation phase in autumn 2023 and will decide, on this basis, whether to move on to a subsequent project phase" (to develop and test the appropriate technical solutions and business arrangements necessary to provide a digital euro).

5. EBA Updates

EBA consultation on guidance to assess knowledge and experience of the management or administrative organ of a credit servicer

On 19 April 2023, the European Banking Authority ("EBA") published a public consultation on its draft Guidelines on the assessment of adequate knowledge and experience of the management or administrative organ of credit servicers under Directive 2021/2167 (referred to as the Credit Servicers Directive in Irish Government's consultation on transposition into Irish law but more commonly referred to as the Non-Performing Loans Directive) (the "Directive").

Why the draft Guidelines are needed:

The Directive establishes an European Union ("EU") framework for both purchasers and servicers of non-performing credit agreements issued by credit institutions. Under the Directive credit servicers are required to obtain authorisation from, and be subject to the supervision of competent authorities (this applies also to credit purchasers that are also credit servicers and service credit for other credit purchasers). This authorisation requires that credit servicers:

• ensure that the management or administrative organ, has adequate knowledge and experience, as a whole, to conduct the business in a competent and responsible manner;
• ensure that the members of the management or administrative organ are of sufficiently good repute; and
• ensure that the members of the management or administrative organ meet the suitability requirements at all times (including where the business activities or the composition of the management or administrative organ change).

While some of these requirements are directly encoded within the Directive, the requirement for the management or administrative organ, as a whole to have adequate knowledge and experience is further specified by the draft Guidelines.

The draft Guidelines:

• aim at ensuring that the organs are suitable to conduct the business of the credit servicer in a competent and responsible manner;
• specify the criteria for the assessment of the organs’ collective knowledge and experience, which will be performed based on the individual members' assessment by credit servicers, taking into account the principle of proportionality; and
• set out the main requirements of the credit servicers assessment process, including the good repute, and specify when such an assessment has to be performed. Where short comings are identified, the credit servicer must take appropriate corrective measures, including e.g. to provide induction and training or to replace members of the management body.

Next Steps

The consultation is open for comment until 19 July 2023. The EBA is aiming to publish the final Guidelines by the end of 2023. It is expected that they will enter into force in early 2024 (three months after the publication of its translations in all official languages of the EU).

As reported in the Top 5 at 5 from 26 January 2023, the Irish Government published a public consultation on the transposition of the Directive in January of this year. The consultation sought views of the public on the discretions which can be exercised by Member States for transposition into national law. Member States are required to adopt and publish the national measures to transpose the provisions of the Directive by 29 December 2023. We await the outcome of the consultation process.

EBA signposting tool for supervisory reporting

On 2 May 2023, the European Banking Authority ("EBA") published a signposting tool for supervisory reporting to assist banks in identifying and understanding the reporting requirements that are applicable to them.

The signposting tool is in response to one of the recommendations from the EBA Report on the cost of compliance with supervisory reporting requirements published in June 2021. The signposting tool aims to help institutions of different sizes and complexity identify the reporting requirements and templates that are relevant for particular credit institutions considering their type and the scope of activities.

The EBA notes that the signposting tool will particularly benefit "small and non-complex institutions by reducing complexity and establishing a common business logic" and ultimately it will reduce the time and effort needed to navigate the relevant requirements by helping institutions understand the regulation.