FIG Top 5 at 5 - 16/03/2023

1. Central Bank of Ireland publishes Consultation Paper, draft Regulations and draft Guidance in relation to the Central Bank (Individual Accountability Framework) Act 2023

On 9 March 2023, the Central Bank (Individual Accountability Framework) Act 2023 ( "IAF Act") was signed into law by the President of Ireland, Michael D. Higgins.

On 13 March 2023, the Central Bank of Ireland ("Central Bank") published a consultation paper entitled "Enhanced governance, performance and accountability in financial services - Regulation and Guidance under the Central Bank (Individual Accountability Framework) Act 2023" (" CP153").

CP153 annexes draft regulations and supporting draft guidance on the operation of the Individual Accountability Framework ("IAF") as contained in the IAF Act. The draft regulations and guidance aim to provide clarity on the Central Bank’s expectations for the implementation of three aspects of the IAF (1) the Senior Executive Accountability Framework ("SEAR"); (2) the Conduct Standards; and (3) certain aspects of the enhancements to the Fitness & Probity ("F&P") regime.

The Central Bank's proposed approach to implementation seeks to "balance the need to maintain momentum by introducing the framework while allowing appropriate time for in-scope firms to ensure a high quality and consistent implementation". Accordingly, the Central Bank is proposing the following implementation timeline for the below elements of the IAF:

• Conduct Standards including accountability of senior individuals for running their parts of the business to apply from 31 December 2023;
• F&P Regime – Certification and inclusion of holding companies to apply from 31 December 2023; and
• SEAR - Regulations prescribing responsibilities of different roles and requirements on firms to clearly set out allocation of those responsibilities and decision making to apply to in scope firms from 1 July 2024.

The Central Bank is seeking views from “the public, regulated firms, staff, representative bodies, consultancies, and service providers." The consultation is open for 3 months from 13 March 2023 to 13 June 2023.

Speaking on publication of CP153, Deputy Governor Derville Rowland said: “As regulators, our approach to implementation of the framework will be founded on the principles of proportionality, predictability and reasonable expectations, underpinned by effective enforcement".

High level points of note from CP153

• Scope: In-scope firms for SEAR are confirmed
• Approach to investment firms and third country branches under SEAR: The Central Bank notes that having regard to nature, scale and complexity, it is taking a proportionate approach in respect of low PRISM rated investment firms and third country branches, explaining that a reduced number of Prescribed Responsibilities will be applied to them but that all other elements of the SEAR will apply.
• Prescribed Responsibilities: One of the key messages regarding SEAR in CP153 is that, as the Central Bank is not going to be overly prescriptive in terms of the allocation of Prescribed responsibilities, this will give firms flexibility which will accommodate different business models and organisational structures.
• Spirit of SEAR: While not all firms are within the initial scope of SEAR, the Central Bank explains that until such time as a firm is within scope "there is much in the spirit of the SEAR that firms(….) should consider".
• Other Responsibilities: "Other Responsibilities" are to be identified by firms and allocated to individuals in PCF roles.
• Statement of Responsibilities: Included in the draft regulations is a template statement of responsibilities. Additionally in CP153 the Central Bank maintains that having to produce statements for each PCF will assist in developing Management Responsibility maps.
• INEDs and NEDs: Regarding the application of SEAR to INEDs and NEDs, CP153 confirms that their responsibilities under SEAR are "consistent" with those under the corporate governance frameworks.
• Reasonable Steps: CP153 sets out that in the context of reasonable steps the Central Bank will consider " what steps an individual, in that position, could reasonable have been expected to take at that point in time. This will include taking account of whether the individual is a recent appointment and their overall level of experience in the context." It also identifies that reasonable steps is "equivalent to what is expected in other areas of life such as driving a car or building a house". The draft Guidance provides non-exhaustive examples of the steps that may be reasonable in the circumstances for an individual to take to ensure the Conduct Standards are met.
• Business Standards: CP153 explains that Business Standards are captured by the Consumer Protection Code, which is the subject to a separate review and so is outside of the scope of this consultation;
• Certification Process: CP153 explains that the certification process in respect of compliance with the enhanced F&P regime will form part of the existing annual PCF return.
• Reporting: CP153 confirms that there will be no requirement to submit Statements of Responsibilities or Responsibility Maps but they must be available to the Central Bank, if requested. One form of reporting which is required to be made is where formal disciplinary action has been taken against an individual in respect of breaches of the Conduct Standards.
• Job Sharing: CP153 explains that while PCF roles cannot be split, this is not the case in the context of job sharing. The default position is that each job sharing individual will have full accountability for the relevant responsibility, this will be discharged where the person can demonstrate that s/he took reasonable steps to discharge the responsibility, including in relation to the manner in which activities and tasks were shared amongst the job sharers and in respect of their completion of that basis.
• Collective Responsibility: Regarding the potential impact on collective responsibility in firms, as a result of the introduction of the IAF, the Central Bank explains that the IAF is designed to reinforce the concept as a core aspect of a well-functioning firm.
• Training: The need for appropriate training in respect of the new requirements is addressed in CP153 it includes the need for general training on the Conduct Standards, specific training as to how the Conduct Standards apply to individual roles, as well as additional training for those captured within SEAR. In the case of SEAR firms, the PCF allocated to the prescribed responsibility for embedding the Conduct Standards in the firm, should oversee the training in respect of the Conduct Standards. In the case of non-SEAR firms, the CEO or equivalent will be responsible and accountable for embedding the Conduct Standards.
• New PCF roles: Further to the introduction of a new PCF-50 Head of Material Business Line for credit institutions in October 2020, CP153 proposes the introduction of a similar Head of Material Business Line role for insurance undertakings and investment firms.

CP153 is the first of two separate consultations on the implementation of the IAF Act. The second consultation will focus on the Administrative Sanctions Procedures which the Central Bank has indicated will commence during the summer months. CP153 also confirms that it will issue guidance and regulations on the F&P Investigative Process in March 2023.  

2. Central Bank of Ireland Demographic analysis report

On 10 March 2023, the Central Bank of Ireland (the "Central Bank") published its 2022 Demographic Analysis of applications for pre-approval controlled function (" PCF") roles within Regulated Financial Services Providers ("RFSPs").

The report presents data on the gender diversity of applications for PCF roles  as there is limited data on other forms of diversity. The Central Bank notes that while gender "is only one form of diversity, it is a critically important one and strongly indicative of wider diversity trends".

The Central Bank highlights that while "it is for each individual organisation to own its own culture and embed it", the Central Bank wants the firms it regulates to "be sufficiently diverse and inclusive, at all levels and particularly at senior level, to prevent group-think, guard against overconfidence, and promote internal challenge".

Central Bank Deputy Governor, Derville Rowland noted that the Report shows "mixed progress across the sector" with an overall increase in the percentage of female applicants from 2021. She highlighted that "there was an encouraging improvement in gender diversity in specific sectors" most notably in the banking sector and credit union sectors. However "significant progress is still required" overall across the financial services sector.

Ms Rowland concluded that as "diversity is so interconnected with risk, resilience and financial performance, it will continue to be a priority for Central Bank".

Below is a brief summary of the Central Bank's analysis:

• The overall level of applications for PCF roles increased by 3% compared to 2021.
• The most material change was in the banking and securities & markets sectors, where 36% and 34% of applicants (respectively) were female, in comparison to 28% and 26% in 2021.
• 52% of applications for management level roles within the credit union sector were from female applicants, increased from 40% in 2021.
• Female applicants accounted for 49% and 47% of applications respectively for 2nd line of defence roles such as Head of Compliance and Head of AML and CTF Compliance,
• The gender imbalance for overall board level applications improved slightly, with female applications for board positions increasing from 28% in 2021 to 29% in 2022. The largest increases were seen in the banking and securities & markets sectors and the largest decreases were seen in the asset management and credit union sectors.
• Female representation in management level applications has also shown slight improvement, increasing from 34% in 2021 to 35% with the most significant increase in the credit union sector.
• Less than one fifth (22%) of incumbents for revenue generating roles were female, this is an increase from 19% in 2021.
• Existing RFSPs continue to show higher levels of gender diversity than new RFSPs seeking authorisation which continue to show a material gender imbalance, with just 25% of applicants being female.
  

3. Central Bank of Ireland Consumer Protection Outlook Report

On 13 March 2023, the Central Bank of Ireland ("Central Bank") published its Consumer Protection Outlook Report ("Report") for 2023. The Report is a substantial document and provides details of:

• the Central Bank's risk outlook;
• the Central Bank's specific priorities in this area for 2023;
• the Central Bank's expectations of regulated financial services providers ("RFSPs") for 2023;
• what the Central Bank delivered in this area in 2022; and
• the Central Bank's engagement programme and in particular, how it benefited the production of the Report.

The Report notes that while the key cross-sectoral risks and themes remain substantially unchanged from 2022 to 2023, there are significant changes in the environment driving these risks (e.g. rise in cost of living, interest rates and continuing developments in digital financial services).

Five key drivers of consumer risk

In the Report the Central Bank explains that it has structured its expectations of RFSPs under what it has identified as the five key drivers of consumer risk. These risks are:

• Poor business practices and weak business processes;
• Ineffective disclosures to consumers;
• The changing operational landscape;
• Technology –driven risks to consumer protection; and
• The impact of shifting business models.

These risks will anchor the Central Bank's work in 2023 and beyond. Colm Kincaid, Director of Consumer Protection at the Central Bank, notes in the foreword to the Report, that the aim of this approach is to "provide a degree of predictability and certainty for regulated firms".

Central Bank's Expectations of RFSPs

The Central Bank notes that it will continue to prioritise its work to see that the expectations outlined in the Report are being met and RFSPs should "keep these expectations to the forefront of their approach".

The Central Bank highlights that in its supervisory work it will "look to see how well firms identify, mitigate and manage the five key drivers of consumer risk identified in this Report".

The following is a brief note on the comments made regarding each:

1. The changing operational landscape

The Central Bank issued a Dear CEO letter in November 2022 on its expectations of RFSPs regarding their treatment of consumers in a more challenging economic environment. These expectations, in addition to those detailed in the Report, will underpin the Central Bank's supervisory engagement with firms in 2023.

The Central Bank also highlights the work it has carried out in the area of retail credit and short term credit. In particular, it details its recently developed supervisory strategy and a new consumer targeted campaign on short term credit.

2.  Ineffective disclosures to consumers

The Central Bank stresses that RFSPs need to be "especially vigilant to ensure that their communication and advice is clear and is used to support consumers in making well-informed decisions in the specific context of this changing economic landscape and continuing pace of innovation in financial services". The Central Bank also expects RFSPs to be "proactive in identifying emerging risks to consumers and to support their customers in mitigating those risks".

The Central Bank notes that innovative products on the fringe of the regulatory perimeter and unregulated products present challenges to effective disclosure, in particular, where social media is used as a promotional platform. While these are not regulated financial services, the Central Bank expects "all firms that offer these products to make clear to consumers that these products carry significant risk".

The Central Bank also highlights the work it has carried out on the effectiveness of disclosures to consumers in the insurance sector and in particular, focuses on the communications which it required insurers to make in the context of customers not having sufficient home insurance cover.

3. Technology-driven risks to consumer protection

The Central Bank highlights the heightened risk of financial exclusion at this time when consumers are active in seeking to change their financial service arrangements. It also stresses  the importance of new digital channels not preventing access to services through other channels, such as in person engagement

The Central Bank notes that some RFSPs are revisiting their business models and the products they offer as a result of the changing economic landscape which may not prioritise consumers’ best interests. In this regard, senior management in RFSPs need to "foster a consumer-focused culture".

The Central Bank also highlights the work it has carried out in the area of crypto-assets, particularly, its warning to consumers in March 2022 about the high risk nature of these investments.

4. The impact of shifting business models

The Central Bank notes that products that previously may have been considered suitable for sale to retail clients may no longer be suitable in the current economic context. RFSPs must ensure their due diligence on products takes account of all relevant factors that may alter the nature of an investment product under certain conditions.

The Central Bank also looks particularly to the work is has been involved within the context of the departure of Ulster Bank and KBC Ireland from the Irish retail banking market. Highlighting the steps which it took to support customer needs and expectations.

5.  Poor business practices and weak business processes

The Central Bank highlights two key issues under this theme (1) RFSPs' pursuing strategies and practices that are unfair or problematic for the consumer and (2) customer detriment due to inadequate or ineffective internal processes and controls.

The Central Bank also highlights the outcomes of its review of structured retail products ("SRPs") and the issues its' review identified. In response, the Central Bank required firms to identify a sufficiently granular target market for SRPs and to drive improvements in the quality and transparency of disclosures to investors of the risks relating to these products.

4. First Action Plan from the updated Ireland for Finance strategy published

On 10 March 2023, the Minister of State for Financial Services, Credit Unions, and Insurance, Dr Jennifer Carroll MacNeill, launched the first Action Plan from the updated Ireland for Finance strategy ("2023 Action Plan") which sets out the key measures that the public and private stakeholders will take this year to support the development of the international financial services sector in Ireland.

The measures under the 2023 Action Plan arise from the five themes of the updated Ireland for Finance strategy. The 12 key deliverables under these themes are listed below together with the body responsible:

1.  Sustainable finance

• Revise and update Sustainable Finance Roadmap: Areas of focus will include, the net-zero transition, biodiversity finance, the implementation of the sustainable finance fintech strategy, taking account of new disclosure standards and international commitments, and an update to Ireland’s existing sustainable finance talent strategy – International Sustainable Finance Centre of Excellence
• Development of an updated sustainable finance value proposition: to support the existing client base of international financial services clients in the development of expertise, the securing of new mandates and the extension of existing activities in sustainable finance and attract new international investors into Ireland. – IDA Ireland

2.  Fintech and digital finance

• Deepen the work of the cross-government Fintech Steering Group and Joint Fintech Group: Continue work on priority proposals to enhance Ireland’s offering as a premier location for fintech including preparing for the transposition and implementation of the Markets in Crypto-Assets Regulation ("MiCA") and assessing industry proposals on tokenisation and digital assets – Department of Finance
• Promote and support the digital finance agenda for the industry at home and abroad: IDA Ireland will tailor a programme to support the acceleration of technology adoption for clients in the international financial services sector and work with executive leadership teams to support the strategic direction of the Irish operations and future-proof the sites – IDA Ireland
• Participation in 2023 international fintech events – Enterprise Ireland
• Communicate and roll out a new pre-seed funding offer for early stage fintech innovators: Enterprise Ireland will communicate and roll out a new pre-seed funding offer for indigenous innovative start-up companies in the fintech and financial services ecosystem. The target for new start-ups will be 12 new companies in 2023. The offer will seek an increased number of female entrepreneurs – Enterprise Ireland
• Export market seminar & peer to peer networking event focusing on International markets for indigenous fintech and financial services firms – Enterprise Ireland
• Continue to develop educational consumer resources to support consumers to engage with fintech – The Competition and Consumer Protection Commission ("CCPC")

3.              Diversity and talent

• Complete the study by the Expert Group on Future Skills Needs on the international financial services sector – Expert Group Future Skills Needs

4.              Regionalisation and promotion

• Partner with the IDA and other stakeholders on showcase events in Ireland – Department of Finance
• Relaunch the annual European Insurance Forum – Insurance Ireland

5.              Operating environment

• Review of Central Bank Innovation Hub – The Central Bank of Ireland will commence a detailed review of the Innovation Hub, including peer comparisons, to expand its impact and functionality. Consideration will be given to the types and benefits of regulatory sandboxes adopted in other countries – Central Bank of Ireland

5. European Commission requests ESAs, ECB and ESRB to conduct climate risk scenario analysis exercise

On 8 March 2023, the European Commission (the "Commission") wrote to the European Supervisory Authorities ("ESAs"), inviting them to conduct in a one-off exercise in co-operation with the European Central Bank ("ECB") and the European Systemic Risk Board ("ESRB"), on the resilience of the financial system to stress in the transition to the EU’s targets for 2030 under the Strategy for Financing the Transition to a Sustainable Economy (the "Strategy").

The Strategy, published in July 2021, laid out the Commission's plans for ensuring the resilience of the financial sector to climate risks and an orderly transition towards the EU’s climate targets of reaching carbon neutrality by 2050 and reducing greenhouse gas emissions by at least 55% by 2030.

The Commission is requesting an assessment of the "extent to which early climate risk related shocks could already generate significant stress for the financial system as a whole in the period up to 2030, taking into account contagion and second-round effects".

The Commission invites the ESAs to develop "severe but plausible scenarios" that could affect the financial system up to 2030 including:

• A scenario focused on climate-change related risks that could already materialise in the near term;
• A scenario combining such climate-change related risks with other stress factors, as far as possible consistent with scenarios for regular stress-testing exercises; and
• Adverse scenario(s) which should be compared to a baseline scenario in which the implementation of the Fit-for-55 package is progressing as planned and within the economic environment as forecast at the launch of the one-off exercise.

Next steps

The Commission requests that the:

• exercise be launched as soon as possible and be based on end-2022 balance sheet data;
• ESAs report on progress to the governing bodies of the addressees and the Commission at key moments of the exercise; and

results of the exercise be provided to the Commission ideally by the end of 2024 and not later than Q1 2025, in order to provide input to the work of the new Commission.