FIG Top 5 at 5 - 21/09/2023

1. Minister McGrath publishes the Government's Financial Consumer Protection Roadmap and the Consumer Banking Sentiment Survey for 2023

On 13 September 2023, Minister McGrath published the Government's Financial Consumer Protection Roadmap ("Roadmap").

The stated aim of the Roadmap is to ensure a coordinated focus on supporting and protecting consumers in the rapidly changing financial services and banking environment. The Government is seeking to promote innovation within the sector, while also ensuring stability and adequate consumer protection.  The Roadmap details recent developments and some ongoing and future planned work which will take place over the next few years.

The Roadmap begins by detailing the G20/OECD High-Level Principles on Financial Consumer Protection ("Principles"), the agreed benchmark for OECD Member States, which were updated in 2022 and adopted on 12 December 2022 by OECD Governments including Ireland. Ireland's commitment to these Principles forms the foundation for Ireland's policy development and the basis for the Roadmap.

Recent Developments highlighted in the Roadmap

In April 2023 the commencement of a large portion of the Central Bank (Individual Accountability Framework) Act 2023 ("IAF Act") marked a significant step in overhauling the culture within the financial services industry in Ireland.

In June 2023 the Terms of Reference for a National Payment Strategy were published indicating the development of a roadmap for future evolution of the entire payments system which considers digital payment developments, cash usage and future legislative changes.

In July 2023 the Minister for Finance announced the development of the National Financial Literacy Strategy for Ireland.

2022 Developments have also begun to take effect. These include the

• Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 which requires Buy Now Pay Later and Personal Contract Plan providers to be authorised by the Central Bank of Ireland ("Central Bank");
• Consumer Credit (Amendment) Act 2022 also limits the interest which can be charged by moneylenders, to maximum rates of 1% per week or 48% per year and the maximum rate of monthly nominal interest to 2.38% for running accounts; and
• the banning of price walking for motor and home insurance and the loyalty penalty for insurance customers cane which came into effect in July 2022.

Future Developments highlighted in the Roadmap

Ireland

• the Credit Union (Amendment) Bill 2022 which proposes to increase the services and products offered by credit unions and provides for maximum interest rates on loans issued by credit unions is currently being considered by the Dail;
• as part of the Retail Banking Review, a questionnaire seeking information on financial literacy and education incentives was open for submissions until 15 September 2023;
• Consumer Protection Code ("CPC") will consider the recommendations of the Retail Banking Review and consult on these changes as part of the Central Bank's consultation paper which is due to be published in December 2023. The revised CPC is due in 2024 with further enhancements to follow in 2025.  For more information please see FIG Top 5 at 5 dated 3 August 2023;
• the Draft Heads of Bill of the Financial Services and Pensions Ombudsman (Amendment) Bill were published on 9 April 2023 which proposes amendments, most notably to take account of the Zalewski v Adjudication Officer and the WRC [2021] IESC 24 decision;
• All sections of the IAF Act, apart from section 3-6 and section 10 of the IAF Act were commenced on 19 April. Sections 3-6 and section 10 will come into force on 29 December 2023. For more information please see FIG Top 5 at 5 dated 13 July 2023; and
• the Senior Executive Accountability Regime will apply from 1 July 2024.

EU

• EU Directive on Credit Services and Credit Purchasers is due to be transposed by the end of the year;
• Consumer Credit Directive is under review and as noted below was approved by the European Parliament on 12 September 2023;
• MiCAR which will regulate public offerings of crypto assets, came into force on 29 June 2023 with implementation dates of 30 June 2024 and 30 December 2024 for various articles;
• PSD3 and PSR were proposed by the Commission on 28 June 2023 to amend and modernise PSD2. It is currently in the trilogue process and if approved is likely to take effect in 2026. For a high level overview of the proposals, please see Matheson's recent webinar 'Payment Services Directive 3 – Revolution or Evolution? which can be found here;
• Proposal for a Regulation on instant credit transfers in euro is also being considered by the European Council and Parliament. The European Council agreed its position on 22 May 2023 and the European Parliament adopted its position at first reading on 3 July 2023; and
• Distance  Marketing  of  Consumer  Financial  Services is also being updated and the European Council and Parliament reached a provisional political agreement on 6 June 2023.

On 13 September, the Minister for Finance, Michael McGrath published the Consumer Banking Sentiment Survey 2023 ("Survey"). The findings from the Survey are set out in 3 different categories: The Banking Landscape; Experience & Switching; Channel Usage & Preference; and Fintech Providers. The following is a brief summary of the key findings:

The Banking Landscape, Experience & Switching

Within this category, it must be noted that the departure of Ulster Bank and KBC have affected the structural landscape.

• AIB holds 41% of the market share of main current accounts (up 5% from last year ("LY")), Bank of Ireland holds 33% (up 1% from LY) and PTSB holds 13% (up 1% from LY);
• 4% of those interviewed considered Revolut as their main provider (up 1% from LY), while 33% have some relationship with Revolut, up from 18% in 2022;
• 57% of Irish adults are multi-banked;
• 69% have a savings account (down 1% from LY), 1 in 3 own a credit card and 21% have a mortgage (down 4% from LY);
• Overall satisfaction levels with customers' main provider was at 82%, with 6% expressing dissatisfaction; and
• 11% have considered switching their current accounts and 15% have considered switching their mortgage account. 37% found switching accounts to be an easy process, while 20% encountered some difficulty.

Channel Usage & Preference

• contactless by Smartphone is the preferred method of payment when in a physical location for 52% of 18-24 year olds, 36% of 25-34 year olds and 30% of Dubliners;
• 85% of customers have used online banking, with 2 in 3 using it weekly with weekly usage of 55-64 year olds have risen by 9% to 55% and by 8% to 36% among those aged 65+; and
• mobile apps are the main form of contact with providers for 55% (up 14% from LY) with branch remains the main form of contact for 52% of those aged 65+.

Fintech Providers

• 1 in 3 now use non-traditional banking, almost exclusively driven by Revolut;
• 82% would endorse the proposition that the services provided are a good substitute for traditional banks; and
• the top 3 main appeals are: instant money transfers (75% agree), free banking (55% agree) and user-friendly app (37%).
  

2. Consumer Credit Directive (REFIT)

On 12 September 2023, the European Parliament held its final vote on measures shielding consumers from credit card debt, overdrafts and unsuitable loans and announced that it had adopted the proposed Directive on consumer credits ("CCD II") at first reading. The CCB II will replace Directive 2008/48/EC.

The aim of the CCD II is to ensure that credit markets run smoothly, while maintaining a high level of consumer protection. Some of the key elements of CCD II are that:

• it covers agreements up to €100,000;
• before concluding a credit agreement, Member States will require a creditor to carry out a thorough assessment of a consumer's creditworthiness to verify a consumer's capacity to meet their obligations and to prevent irresponsible lending practices;
• cancer survivors will have a 'right to be forgotten' after a certain period of time so that their former illness does not affect their insurance rates;
• non-bank creditors and credit intermediaries (except micro enterprises and SMEs) will be subject to an admission process, registration and supervision by national independent authorities;
• credit advertising must include a clear and obvious warning that borrowing money costs money;
• there will be caps on charges to ensure that consumers cannot be charged excessive interest rates, annual rates or loan charges;
• overdraft facilities and credit overrunning will be regulated;
• Member States must ensure that consumers have a right to withdraw from a credit agreement without any reason within 14 days;
• consumers will have the right to early repayment and to reduce the total cost of their credit; and
• pre-contractual information must specify how compensation will be calculated.

Next Steps

The Council of the European Union must also consider the proposal and if it adopts the CCD II, then it will enter into force 20 days after its publication in the Official Journal of the European Union. Member States will have 2 years to transpose CCD II into national law and it will apply 3 years after its entry into force.

3. ESAs publish their joint report on risks and vulnerabilities in the EU financial system

On 18 September 2023, the European Supervisory Authorities ("ESAs") published their Autumn 2023 Joint Committee Report on risks and vulnerabilities in the EU financial system ("Report"). The Report highlights the continued economic uncertainty that the financial system is facing, and warns that vigilance is needed by all market participants amid financial stability risks arising from this uncertainty.

The outlook remains fragile, with persistent geopolitical risks and high inflation. The banking events which occurred from March to May of this year, also highlighted the European financial system's sensitivity to exogenous shocks and high market uncertainty. There is a risk that 'market nervousness and bad news about parts of the financial system could spread rapidly and lead to a general jump in risk aversion'. While increased interest rates may benefit the bank's net income, there are still concerns about the potential for unrealised losses in fixed-income securities, valuation of real estate and private financial services.

The Report outlines the policy steps that the ESAs, national competent authorities, financial institutions and market participants should take as follows:

• financial institutions and market participants should monitor the broader impact from strong increases in policy interest rates and sudden risks in risk premia should be closely monitored and account for it in risk management. Higher interest rates and rising risk premia are likely to further increase funding costs and adversely affect funding conditions in the medium term;
• financial institutions and supervisors should remain prepared for a deterioration in asset quality in the financial sector and continue to monitor asset quality and loan loss provisioning. Highly indebted borrowers may struggle to meet their debts following rising interest rates and expected repricing of loans which will affect real estate lending, unsecured lending, assets which benefitted from pandemic support measures and assets whose sectors are vulnerable to rising inflation and volatile prices;
• financial institutions and supervisors should be aware of and monitor the impact of inflation risk including rising expenditure and funding costs. Insurers may be negatively affected by claims inflation depending on their ability to adjust their premia. Financial institutions and supervisors should make sure that investors are aware of the effects of inflation on real returns of assets and how this varies across asset types; and
• high importance should be placed on effective risk management and governance arrangements for financial institutions, particularly liquidity risk and interest rate risk as highlighted in the recent banking events. Institutions must remain resilient to the impacts of possible substantial interest rate changes, in particular deposits, banks and supervisors should remain vigilant to the underlying assumptions used in interest rate risk management for customer behaviour and deposit durations. As digitalisation increases, it is of greater importance that supervisory guidance is based on realistic, up to date assumptions.

4. ECB Contributions to September edition of Eurofi magazine

The European Central Bank ("ECB") published 4 articles in the September edition of Eurofi Magazine. The articles addressed the current risks within the sector, particularly digitalisation risks, transition risks, cyber risks and environmental risks. The overall consensus of the articles was that prudential governance is key to ensuring stability in the banking sector as it weathers rising interest rates, inflationary pressures and the fallout of the Russian war.

' The Integration of the EU Banking Sector and the Challenges of Global Competition'

This article was a contribution made by Andrea Enria, the Chair of the Supervisory Board of the ECB. It focused on the fragmentation that exists within the euro area banking sector and the growing need to complete the European Banking Union. 10 years later, the European Deposit Insurance Scheme and a cross-border integration of banking business are yet to be introduced. The article examined the lessons that can be learned from the banking events from March to May of this year. In particular, it noted that these events demonstrated that the stringency of a bank's prudential framework should not be judged solely on the level of capital requirements and that even well capitalised banks can quickly collapse without strong governance. Mr Enria stressed that granular disclosures by banks is the best way to address market concerns.

'Current risks and vulnerabilities in the European banking sector'

This article was written by Elizabeth McCaul, a Member of the Supervisory Board of the ECB. It stated that the euro area banking sector remained resilient as a result of prudential regulation and supervision. Recent banking events have highlighted the importance of sound and prudent asset liability management frameworks to withstand unexpected short-term liability shocks. The article also highlighted other risks faced by the banking sector such as the impact that liquidity risks in the non-bank financial sector can have on the funding of banks; the IT and cyber risks that are stemming from the pressure of digital transformation and transition risks emerging from the green transition.

'Enhancing the EU’s crisis management toolkit'

This article was submitted by Edouard Fernandez-Bollow, Member of the Supervisory Board of the ECB. It focused on the ECB's response to the European Commission's recent adoption of the EU's crisis management and deposit framework. The ECB strongly supports the package, and the article noted that a European wide harmonised framework is the 'most cost efficient way to facilitate an orderly market exit for failing or likely to fail banks'. It also noted that alongside the package, more efficient and wider access to funds of the European safety net are needed. The article stressed that the three tier depositor scheme in place in the EU is the most complicated system in any major financial centre. The ECB observed that the US general depositor scheme has not shown any particular issues, and that such an approach would likely be possible in the EU framework also. The ECB supports the proposal's aim of achieving effective early intervention and preventative measures.

Building on the diversity of European banking business models

This entry was also made by Edouard Fernandez-Bollo and considered the diversity of banking models within the euro area. The ECB Banking Supervision welcomes such diversity as it contributes to the resilience of the European banking system. However, recent events have highlighted the need for strong governance and for 'strategic steering, risk appetite and development strategies to be adapted to specific banking models'. The European banking landscape includes both large diverse players with large, varied scope as well as small niche players which provide tailored solutions to clients. Mr Fernandez-Bollo warned that further challenges are coming in the form of digitalisation risks, environmental risks and cyber risks and the sector must be prepared to react quickly. Governance will remain the key focus for the ECB, in particular the Supervisory Review and Evaluation  Process is central to this, ensuring that proportionality is applied to its framework in the form of targeted key risk indicators and assessment templates.

5. EIOPA Contributions to September edition of Eurofi magazine

The European Insurance and Occupational Pensions Authority ("EIOPA") published 4 articles in the September edition of Eurofi magazine. The articles addressed the risks that are facing the insurance industry and focused particularly on climate and environmental risks, and the need for more accessible natural catastrophe insurance. They also examined the need for harmonisation of regulation and welcomed the International Insurance Capital Standard ("ICS") as a global minimum standard which reflects Solvency II.

Climate and Environmental Risks in the Insurance Sector

This article was written by Fausto Parente, Executive Director of EIOPA. The European sector is increasingly recognising the material effects that sustainability risks can have on the business activities of insurance undertakings. European Insurance and Occupational Pensions Authority ("EIOPA") is focusing, not only on natural catastrophe and climate change risks, but also on transition risks and the physical risks associated with climate change. The 'increased frequency, severity and correlation of weather-related events will put significant pressure on non-life insurers' which will lead to increased premiums, worsening the climate insurance gap.

The lack of available data and loss models are a challenge for the sector and comprehensive open-source data is needed to improve accuracy, particularly for carrying out risk assessments. The European Supervisory Authorities ("ESAs") in cooperation with the ECB and ESRB are conducting a once-off climate risk analysis to assess the EU financial systems' resilience and its ability to fund the green transition. EIOPA's first European occupational pensions system climate stress test indicated that 'IORPs have a material exposure to transition risks'. The article also noted that the Solvency II framework can be used to address sustainability risks, and ORSA contains guidance on how climate related materiality assessments and climate risk scenario analysis can be incorporated into the existing frameworks in the long term, as well as the short term.

Climate Change Insurance Needs

This article was written by Pietra Hielkema, Chairperson of EIOPA. The article noted that climate related extreme events have caused approximately €500 billion of direct catastrophe losses in the EU between 1980 and 2020, and related losses are expected to double by 2050, even with a 1.5°C warming.

Only a quarter of natural catastrophe losses in the past were insured. The affordability and insurability of climate related risks are a serious concern for insurers and without countermeasures, the insurance protection gap will wide. Catastrophe insurance

• enables quicker economic recovery as funds are available for reconstruction;
• increases resilience by enhancing understanding and assessments of climate change and promoting risk reduction measures; and
• allows mutualisation of risks, and the transfer to private insurance companies who can provide incentives for resilience.

EIOPA's solutions to address the protection gap has three dimensions:

• supply: focus on product design and price by improving the standardisation of implementation of climate-related adaption measures in insurance contracts;
• demand: improve understanding to consumers' reluctance to purchase insurance and resolve concerns over cost, lack of clarity and misperception of natcat risks with increased risk awareness and more consumer friendly purchasing processes; and
• macro: policy actions such as alignment on risk prevention measures and sharing costs and responsibilities across relevant stakeholders should be adhered to, to reduce insurance protection gaps.

Final Boarding Call for the ICS

This article was written by Pietra Hielkema, Chairperson of EIOPA. The deadline for adoption of the ICS by the International Association of Insurance Supervisors ("IAIS") is the end of 2024. Ms Hielkema noted that EIOPA regrets that not all European IAIGs are actively taking part, and urges all EU stakeholders to actively engage in the last steps of the ICS.

The article noted that collective monitoring exercises have helped to develop the candidate ICS as a Prescribed Capital Requirement ("PCR") to capture the risk profile of Internationally Active Insurance Groups ("IAIG"). EIOPA believes that a global minimum standard which reflects Solvency II would 'enhance global financial stability, consumer protection and level playing field across IAIGs'. The article also noted the significance of the comparability exercise of the ICS with the Aggregation Method ("AM") in the US and other interested jurisdictions. The criteria were developed to 'provide a foundation to assess whether the AM delivers comparable outcomes to the ICS'. EIOPA believed that the IAIS criteria are sufficiently robust, but that a true assurance of comparability will come 'through a thorough, evidence-based, and quantitative assessment that builds upon these criteria'.

Innovation is crucial to incentivise retail investments

This article was submitted by Fausto Parente, Executive Director of EIOPA. The acceleration of digitalisation, which made delivery of products and services easier, with lower distribution costs and more tailored offers, mostly affected non-life insurance, but the availability of online platforms for insurance-based investment products ("IBIPs") is still limited.

The current regulatory framework was designed before such digitalisation occurred, and does not consider digital distribution. The article noted that simpler and more user friendly consumer disclosures are needed. Innovation is key and methods such as personal finance aggregator apps, which provide consolidated investment information for customers, will make engagement more appealing. In addition virtual agents, chatbots and oral disclosures also make investment information more interactive. Such information exchange would assist in tailoring and developing IBIP design to meet consumer needs.

Digitalisation may limit retail investments if it is not consumer-focused and EIOPA's research has found that consumers are less likely to buy complex, long-term products online.

Improvements are being made via the current Retail Investment Strategy which calls for measures to 'leverage opportunities whilst also addressing emerging risks'. It proposes to use interactive tools to present key information and prevent unqualified and unregistered 'finfluencers' from giving information about products on social media. The legislative proposal for Financial Data Access does not address all risks, such as the deceptive practice of combining the sale of financial products with non-financial goods. Risks must be monitored to ensure that regulation and supervision are 'fit for purpose in the digital age'.