1. Minister for Finance, Michael McGrath TD, gives speech at launch of Matheson's IAF Directory
On 30 November 2023, the Minister for Finance, Michael McGrath TD gave a speech at the launch of Matheson's Individual Accountability Framework ("IAF") Directory. The Minster spoke about the IAF, as well as other matters relevant to financial services. He congratulated Matheson on their work on the IAF Directory which will provide streamlined access to the relevant information, noting it would be a 'valuable resource to all firms in implementing the framework'. He also commended Matheson on its 'extensive engagement with industry to provide clarity at all stages of the legislative process'.
Individual Accountability Framework
Minister McGrath stressed that in order for effective change to really take hold, it must begin at the highest level and filter down. He noted that real change will not come about through rules alone, and there must be a 'clear duty on senior management to take responsibility for and drive cultural change within the firm'. The IAF, the Minister explained, builds on existing reforms within the financial services sector and aims to introduce greater levels of accountability, not to be punitive. Improving individual accountability and the overall culture within firms is key to establishing trust within the sector.
The IAF enables the Central Bank of Ireland ("Central Bank") to use its supervisory tools to ensure that firms are well run and to deal appropriately with individuals who contradict financial services law. The Minister noted that the success of the IAF will not be based on more enforcement and imposition of penalties, but instead by the need for less enforcement, more trust and better outcomes for consumers as individuals take greater responsibility for how their firms are run, improving better consumer outcomes and better trust in financial institutions. He also noted that the Government expects the Central Bank to apply the IAF in a reasonable and proportionate manner. The aim of the IAF is to achieve better consumer outcomes, not to have a "chilling effect which would prevent people from taking up senior roles in a financial services organisation or becoming an independent non-executive director".
Other financial services matters
Funds Review
The Department of Finance is in the process of carrying out a comprehensive review of the funds sector which recognises the size, scale and significance of the investment fund sector in Ireland. It issued a consultation paper in June 2023, which received over 190 responses, including 140 from retail investors, highlighting the significant level of interest in the review from the industry.
Minister McGrath noted the length of time between the closing of the consultation and the expected publication of a final report in the summer of 2024. To address this, a progress report will now be issued in the new year which will capture work done to date.
Ireland for Finance Strategy
The Minister stated that in January 2024 he will bring the Ireland for Finance action plan for 2024 to government for approval. This will include a special edition on sustainable finance, as well as setting out the work programme for key organisations to continue growing Ireland as a hub for international financial services.
Ireland's bid to host the new Anti-Money Laundering Authority
Ireland is one of 9 countries which has made a bid to host the new Anti-Money Laundering Authority ("AMLA"). The Minister highlighted that the AMLA is an significant new European Union ("EU") institution, and that it was important that there be even distribution of such institutions across the Union, noting that the EBA is currently hosted by France. He also commented that if Ireland was successful it would make a 'powerful statement' that smaller Member States have the capacity to fully participate in creating the future of the Union.
Conclusion
Minister McGrath concluded by stating that to date, Ireland has achieved its success in the financial services sector through coordination and cooperation. He noted that Ireland has a joint committee as part of the Ireland for Finance Strategy, consisting of government, industry and other stakeholders and that keeping channels open is key. This helps to deliver to both the economy and to consumers, a stable, successful and safe financial system.
To access a copy of Matheson's IAF Directory please click here.
2. Central Bank of Ireland – MiFID and Market Abuse Updates
Central Bank of Ireland – Dear CEO Letter on Common Supervisory Action on MiFID II Costs and Charges Requirements
On 1 December 2023, the Central Bank of Ireland ("Central Bank") published a Dear CEO Letter on the European Securities and Markets Authority's ("ESMA") Common Supervisory Action ("CSA") on MiFID II Costs and Charges Requirements ("Letter"). The Letter provides feedback on the recent thematic review which examined firms' application of the costs and charges disclosure requirements ("Review").
The Letter noted that ESMA's CSA on costs and charges is integral to ensuring that key investors are better protected from risks in the investment sector. Providing information to investors in relation to what they are paying for and how much they are paying, in a simple, transparent manner when they are availing of services provided by MiFID firms, is vital. To ensure investors' trust in the financial markets, firms must adopt an approach which has their clients' best interests at heart.
In accordance with EMSA's CSA, the Review and similar reviews were undertaken simultaneously by national competent authorities ("NCAs") across the EEA. Clear supervisory expectations and the formation of a common methodology and framework were the key focus of the exercise to enable NCAs to assess the compliance of firms with relevant requirements in a consistent manner, and achieve a convergent supervisory outcome.
The Review included a representative sample of MiFID Investment Firms and Credit Institutions that provide investment services to 88% of all retail clients in Ireland, and involved a desk-based review and inspections of the firms in scope. The Central Bank then submitted its findings to ESMA, and ESMA's review integrated the feedback from all NCAs. It identified several shortcomings and areas where improvements were needed which were detailed in a public statement. For more details on the statement, please see FIG Top 5 at 5 dated 13 July 2023. Crucially, the Letter states that ESMA's findings are consistent with the findings of the Central Bank, and that the two should be read in conjunction with each other.
The Letter noted that, based on the findings, the Central Bank will continue to engage in follow up actions. Where firms require mitigation action to improve their investor protection frameworks, the Central Bank is engaging with them directly. Following the conclusion of the review's inspection phase, the Central Bank has also issued a number of Risk Mitigation Programmes which require firms to take specific action on foot of the Central Bank's findings.
Key Findings from the Review:
- Aggregated Disclosure Statement: there was limited adoption of the ESMA format for disclosure of aggravated costs by firms, which led to inconsistent and divergent approaches to disclosures, as well as inconsistencies in relation to disclosures of implicit costs and the requirement to disclose aggregated costs and charges both numerically and as a percentage;
- Itemised Breakdown: there was a lack of detail in itemised breakdowns, limited uptake of the format and heading set out in the Delegated Regulation, and inconsistent use of MiFID terminology, with firms adopting more commercial terminology; and
- Third Parties and Third Party Payments: the outsourcing of responsibility for issuing costs and charges disclosures to third parties was seen in some cases, but there was no oversight or monitoring of these disclosures by these firms. In addition, firms were over-reliant on the ex-ante disclosure and did not separately itemise that the third party payment was received.
Required Actions
In light of its findings, the Central Bank has made a number of requests to all authorised MiFID Investment Firms and Credit Institutions providing MiFID services to:
- review and document their costs and charges practices in light of the ESMA public statement and the Central Bank's findings outlined in Schedule 1 of the Letter, including details of actions to be taken. By 31 March 2024, this Review should be completed, as well as a discussion of the action plan and approval by the Board; and
- where in scope firms have received formal mitigating actions, those firms should consider the ESMA public statement and the Letter in conjunction with it.
The Letter also emphasises that the findings are not exhaustive and firms must continue to comply with all their obligations under MiFID II. The Central Bank has seen limited self-initiated improvements to investor protection frameworks across the investment sector, indicating that an appropriate risk and compliance and consumer centric culture is not embedded within the firm. For the most part, enhancements were only seen following the identification of the Central Bank's concerns, and on foot of Risk Mitigation Programmes.
The Letter outlines the Central Bank's expectations that firms are more proactive in their approach to continuous evaluation of the effectiveness of its practices and measures, including those relating to costs and charges disclosure requirements in order to achieve high investor protection standards and fair outcomes where consumer interests are at the centre.
Where there is non-compliance with regulatory requirements, the Central Bank may, in its supervisory enforcement, have regard to the consideration given to the ESMA statement or the Letter by the firm.
Director of Securities and Markets Supervision, Patricia Dunne, delivers speech on 'Navigating Market Abuse and Regulatory Surveillance'
On 28 November 2023, the Director of Securities and Markets Supervision at the Central Bank of Ireland ("Central Bank"), Patricia Dunne, gave a speech at a Bloomberg Vault and Central Bank seminar, titled 'Navigating Market Abuse and Regulatory Surveillance'. In her speech, the Director spoke about the mission of the Central Bank, the difficulties posed by hybrid-working and initiatives launched by the Central Bank to ensure effective mechanisms in identifying and combatting market abuse.
The Central Bank's Mission and Principles
The Director noted that the Central Bank's mission is to safeguard monetary and financial stability in order to serve the public interest and ensure that the operation of the financial system is in consumer's and the wider economy's best interest. She outlines 5 principles that the market must satisfy:
- high protection levels for investors and market participants;
- a transparent market that ensures unambiguous disclosures of all relevant product features and prices;
- a well governed market that consists of firms which uphold the highest ethical and governance standards;
- trust from those seeking to invest and those seeking to raise funds; and
- a resilient market which is capable of continuing to operate its core functions under stressed conditions.
At EU level, MiFID and market abuse regimes are comprehensive regulatory frameworks which are designed to ensure transparency and integrity across EU financial markets.
Hybrid-Working
Hybrid-working can exacerbate conduct related risks due to the use of unmonitored, unauthorised and unencrypted communications. Supervision is key to identify the intention behind trading, while access to complete, accurate communication records is vital to assess compliance with firms' obligations.
In October, the Central Bank published its findings following an assessment of conduct risk associated with telephone and electronic communications in firms engaged in securities market activity. It found that
- none of the firms amended their policies and procedures when moving to a remote or hybrid-working model post-Covid, and did not fully consider the conduct risk that could arise from this working model or identify deficiencies in the existing policies;
- deficiencies in the monitoring of electronic communications were also identified, and firms had not properly calibrated the lexicons used for electronic communication monitoring, relying heavily on the default lexicon words and phrases; and
- most firms did not provide formal and regular management information to senior management regarding telephone and electronic communications, and senior management were unable to make changes if necessary.
A number of positive areas were also identified in the report:
- electronic and telephone communications were recorded and retention periods were set in line with MiFID requirements;
- to avoid employees communicating on unauthorised channels, many firms provided corporate devices to employees; and
- all firms had the requisite IT infrastructure to ensure record keeping and recording of electronic communications.
The Director noted the significant development in communications technology in the last few years. She conceded that it a difficult task for firms to ensure that employees are not communicating over platforms such as WhatsApp or Snapchat, but noted that firms must take reasonable steps to prevent 'unauthorised communications over unapproved channels'. She noted that a conduct focused culture is key to achieving this, and encouraged firms to:
- review their relevant policies and procedures;
- assess their electronic communication monitoring; and
- ensure that staff have been given adequate training.
Central Bank Initiatives
The obligation on market participants to ensure effective mechanisms to identify, mitigate and manage market abuse risk extends to the Central Bank, which has introduced a number of initiatives.
Enhanced Central Bank Surveillance capabilities
Post-Brexit, the Central Bank carried out a risk assessment of its own trade surveillance capabilities and introduced a new surveillance tool which is embedded in their market integrity surveillance framework and enhances the Central Bank's capabilities in order book and price manipulation monitoring.
Suspicious Transactions and Order Reports ("STORs") Submissions
Since 2021, the Central Bank has launched a number of initiatives which emphasise the importance of effective surveillance and the need for high quality STORs. The Director noted that more STORs are being submitted which are more detailed and provide additional information, giving clear rationales.. She confirmed the Central Bank's expectation that it should be in receipt of more STORs particularly from buy side firms.
Central Bank engagement with Garda National Economic Crime Bureau ("Bureau")
The Central Bank and the Bureau have enhanced their relationship over the past few years due to a strong collaboration inter-agency approach to identifying, investigating and taking action against market abuse. This involves the referral of a market abuse case from the Central Bank to the Gardaí where extensive investigations take place, supported by detailed assessments from the Central Bank. Such work has seen several cases being investigated by both authorities, and others where work is also underway.
3. A New Direction: First Central Bank Enforcement against a Fund under EMIR
The Central Bank of Ireland ("Central Bank") has fined GlobalReach Multi-Strategy ("the Fund") €192,500 pursuant to the European Union (European Markets Infrastructure) Regulations 2014, as amended ("EMIR Regulations") for a breach of Article 9 of EMIR arising from a failure by one of the Fund's sub-funds to report over 200,000 derivative trades between January 2018 and May 2020. This enforcement is the first time the Central Bank has imposed a fine against a fund and demonstrates the Central Bank's determination that funds and their boards retain effective responsibility and accountability for compliance with applicable legislation and regulatory requirements. This enforcement is also the first time that the Central Bank has taken an enforcement action under the EMIR Regulations.
The Fund appointed a management company ("ManCo") to act as its manager and the ManCo in turn delegated responsibility for investment management to an investment manager ("Investment Manager"). As this is a standard operating model for regulated Irish investment funds, the Central Bank's commentary on it is noteworthy for all funds; it said (our emphasis added) that "these delegations did not remove the ICAV's legal responsibility to comply with its regulatory obligations or the Board's ultimate responsibility for all activities of the ICAV".
Central Bank Findings
The version of EMIR in place at the relevant time obliged the Fund to ensure that in-scope derivatives transactions were correctly reported to an EU trade repository. In fact, the Fund had over 200,000 non-reported trades between 2016 and 2019. In addition, this non-compliance was only identified by the Fund following the Central Bank's industry letter on EMIR reporting of 20 February 2019 in which it reminded firms of EMIR reporting obligations.
This non-compliance was a fairly simple case – the reports were not filed at all – and as such the Central Bank had clear grounds to issue a sanction. However, there are two aspects of it that are noteworthy.
First, at the time of the contravention, Article 9 of EMIR applied directly to the Fund itself and not the ManCo. Since June 2020, the EMIR reporting obligations have been updated by EMIR refit to apply to ManCos and AIFMs rather than funds. This approach is in line with all other major legislative regimes relevant to funds which apply the obligations to fund managers rather than funds, though it is interesting to note that EMIR remains an outlier, as all EMIR obligations other than compliance with Article 9 still remain the responsibility of the fund[i]. As such, while this sanction does demonstrate a willingness by the Central Bank to enforce financial regulations which apply to funds directly, the fact is that, outside the context of EMIR, the majority of regulatory obligations relevant to funds apply to the ManCo rather than the fund itself.
The second noteworthy aspect is that the Central Bank said that the Fund board has "ultimate responsibility for all activities of the ICAV". While this suggests that even where obligations fall on the ManCo (as the Article 9 EMIR reporting obligations do today), the Central Bank expects the Fund board to take responsibility for compliance, we would expect, where the relevant legislation imposes the regulatory obligation directly on the ManCo, the Central Bank to focus its enforcement actions directly on the ManCo, rather than on the relevant Fund.
Central Bank expectations as regards EMIR
From an EMIR compliance perspective, the Central Bank emphasised that firms must have appropriate oversight of data reporting from board level down, including where data reporting is delegated or outsourced. The delegation of reporting obligations must be appropriately managed in order to avoid confusion between the delegates as to their respective reporting responsibilities.
The Central Bank also outlined that it expects firms to bring material failures to the Central Bank's attention at the earliest opportunity and to act expediently to address identified issues. This investigation found that, despite the Fund identifying in May 2020 that thousands of its derivative trades had not been reported to a trade repository in breach of its EMIR reporting obligation, the Fund only notified the Central Bank of this failure in March 2021 and only following engagement which was initiated by the Central Bank. This was viewed as an aggravating factor by the Central Bank in assessing the quantum of fine payable by the Fund.
Since the coming into force of EMIR in 2012, the Central Bank has issued a number of guidance statements and recommendations in relation to EMIR. In its EMIR reporting letter of 20 February 2019, the Central Bank recommends that compliance with the transaction reporting rules under EMIR should be a standing agenda item at all board meetings for Irish entities trading derivatives. Moreover, in its third Securities and Markets Risk Outlook Report published on 2 March 2023 the Central Bank stressed that it expects derivatives users to "have appropriate oversight of data reporting from Board level down (including where data reporting is outsourced)". In particular, the Central Bank expects formalised policies and procedures to be in place to ensure compliance. This enforcement action represents further evidence of the Central Bank's focus on this issue and the importance of compliance with EMIR, including the transaction reporting rules contained therein.
Given this background and the forthcoming new reporting rules under EMIR Refit (which will apply from 29 April 2024 for both new and outstanding derivatives transactions and which you can read about in our separate insight here), we have seen a number of our clients putting in place formal EMIR compliance policies, which are approved at board level. These policies cover compliance with the EMIR transaction reporting rules, as well as compliance with EMIR more generally. It is anticipated that the news of the first sanctions issued under the EMIR Regulations will lead more firms to adopt formalised and board approved policies and procedures, in line with Central Bank expectations.
Conclusion
Although this sanction is very specific to the factual scenario in question, it is indicative of the views of the Central Bank that boards retain responsibility for ensuring that sub-funds maintain compliance with all relevant regulatory requirements and that the delegate model will not automatically result in accountability being delegated.
This update was originally published as a Matheson Insight authored by Barry O'Connor, Karen Reynolds, Richard Kelly, Niamh Mulholland and co-authored by Aishlinn Gannon, Darragh Casey and John Adams
4. Commission adopts Delegated Regulation on RTS adapting base euro amounts for PII and financial capacity of intermediaries under IDD
On 5 December 2023, the European Commission ("Commission") adopted a Delegated Regulation which sets out regulatory technical standards ("RTS") adapting the base euro amounts for professional indemnity insurance ("PII") and for the financial capacity of intermediaries under the Insurance Distribution Directive ("IDD") ("Regulation").
Article 10(4) of the IDD requires (re)insurance intermediaries to hold a certain amount of PII or a comparable guarantee against liability arising from professional negligence. Article 10(6) of the IDD requires intermediaries to have financial capital of 4% of the sum of the annual premiums received, subject to a minimum euro amount. These amounts are regularly reviewed to take account of the changes outlined by Eurostat in relation to the European index of consumer prices ("Index"). The Commission has the power to adopt a delegated regulation adapting these base amounts by the percentage change in the Index.
Reflecting the increase of 20.32% in the Index from 1 January 2018 to 31 December 2023, the Regulation will amend Articles 10(4) and (6) to the following:
- Article 10(4): intermediaries must hold PII cover or equivalent guarantee of at least €1,564,610 per claim or in aggregate €2,315,610 per year for all claims, unless such insurance or comparable guarantee is already provided by an insurance undertaking, reinsurance undertaking or other undertaking on whose behalf the insurance or reinsurance intermediary is acting or for which the insurance or reinsurance intermediary is empowered to act or such undertaking has taken on full responsibility for the intermediary’s actions. Previously the amounts have been €1,300,380 and €1,924,560 respectively; and
- Article 10(6): intermediaries must have financial capacity amounting, on a permanent basis to 4% of the sum of annual premiums received, subject to a minimum of €23,480. Previously this amount had been €19,510.
Next Steps
The European Parliament and the Council of the European Union will now examine the Regulation, and if there are no objections, it will enter into force 20 days after its publication in the Official Journal of the European Union, and apply 6 months after it enters into force.
5. Basel Committee consults on a disclosure framework for climate-related financial risk
On 29 November 2023, the Basel Committee on Banking Supervision ("Committee") published a consultation on a Pillar 3 disclosure framework for climate-related financial risk as part of its holistic approach to address climate-related financial risks to the global banking system.
The Committee is evaluating how such a framework would further its mandate to strengthen the regulation, supervision and practices of banks worldwide with the aim of enhancing financial stability. This consultation paper seeks responses from stakeholders on its preliminary proposal for quantitative and qualitative Pillar 3 disclosure requirements. These views would complement its work on other standard setters, such as the International Sustainability Standards Board and provide a common disclosure baseline for internationally active banks.
The Committee acknowledges that climate-related data such as quality, accuracy and consistency is still evolving, but disclosure requirements will speed up the availability of such information. Feedback will help the Committee to determine what features should be mandatory and what should be left to national discretion.
Next Steps
The Consultation will be open to submissions until 29 February 2024.
[i] The Securities Financing Transactions Regulations (SFTR) applies to securities financing transactions (such as securities lending and repurchasing agreements) and, like EMIR, also provides that responsibility for compliance with SFTR (other than SFTR reporting obligations) sits directly with the fund.