1. Insurance Updates
Central Bank of Ireland workshop on Solvency II Taxonomy 2.8.0
The Central Bank of Ireland ("Central Bank") recently held a half day workshop on Solvency II Taxonomy 2.8.0 which was issued by the European Insurance and Occupational Pensions Authority ("EIOPA") in March of this year ("Taxonomy"). The Taxonomy removes certain existing templates, makes changes to others and also includes a number of additional templates. These changes will be applicable for Q4 2023 reporting. The Central Bank has released the full slide deck from the information session which can be found here.
Memorandum of Understanding for Reporting Insurance Fraud is signed
On 24 October 2023, a Memorandum of Understanding for reporting insurance fraud was signed by An Garda Síochána, Insurance Ireland and Alliance for Insurance Reform (a copy of which has not yet been made publically available). In a press release, the Minister for Financial Services, Insurance and Credit Unions, Jennifer Carroll MacNeill, welcomed the signing of the Memorandum.
The press release noted the importance of this step, both in fulfilling the Government's commitment to increase cooperation between An Gardaí Síochána and the insurance industry, as well as completing another measure of the Government's Action Plan for Insurance Reform. Minister Carroll MacNeill stated that the costs in insurance fraud should not be absorbed into people's motor, business or home premiums. Instead, the Government aims to change the culture of insurance fraud and stop the 'harmful effects of insurance fraud'.
The Minister noted that it is vital that insurers begin to expand their risk appetite and reduce premiums, and work together with customers to ensure that the benefits arising from the reforms are fully realised.
2. ECB proceeds to next phase of digital euro project
On 18 October 2023, the European Central Bank ("ECB") published a report described as a stocktake on the digital euro ("Report") along with an accompanying document entitled 'Digital Euro – The next step in the advancement of our currency'. Both confirm the decision of the Governing Council of the ECB to move to the preparation phase of the digital euro project which will commence on November 1 2023. However, no decision has yet been made on the actual issuance of a digital euro.
The ECB decision was taken following the completion of the investigation phase initiated by the Eurosystem in October 2021 and the Report details the findings of the 2 year investigation phase and is a useful summary of some of the key issues surrounding the project. These are summarised below.
- Reasons for a Digital Euro. It will be universally accepted, inclusive and easy to use while retaining a high level of privacy. It will offer greater choice of payment methods while safeguarding the autonomy and increase the resilience of the European payment systems.
- How would a digital euro work from an end users perspective? Both citizens and businesses in the euro area will automatically be entitled to avail of the digital euro, while availability outside the euro area would be subject to agreement with that country's authorities. Providing offline and online solutions will ensure that different users' preferences and needs are met.. The digital euro could be used for person to person payments; point of sale payments; e-commerce payments and payments to the government. There is currently no digital payment instrument which can offer these features.
- Role of Payment Service Providers ("PSPs"). PSPs would be responsible for
- distributing the digital euro and for relationships with end users;
- conducting necessary anti-money laundering ("AML") and combatting the financing of terrorism ("CFT");
- onboarding and offboarding of end users;
- maintaining the contractual account management relationship with the end user; and
- distributing the payment instrument to the consumer and for its maintenance.
- Limiting the use of the digital euro will ensure people have the right to convert their deposits to cash at any time, while maintaining a healthy balance between bank deposits and central bank money.
- A Compensation model would be introduced between intermediaries and merchants which would ensure incentives for intermediaries to distribute the digital euro.
- The design and distribution of the digital euro should meet the needs of vulnerable groups; and include accessibility by offering a physical card as an additional form factor.
- Privacy and data protection should be balanced against other public policy objectives such as AML and CFT. The digital euro must involve a very high privacy design which complies with the legislation. An offline digital euro would provide a higher level of privacy, and enable users to load digital euro onto a device.
- Roll out would be in two stages to mitigate risks and enable users to gradually familiarise themselves with the digital euro. The first would involve a roll out for person-to-person and e-commerce payments which are less complex. The second step would involve point of sale payments which would give more time to merchants to adapt their systems and ensure smoother implementation.
Looking forward
The ECB is ready to support the work of EU co-legislators by offering technical input. The European Commission has recommended that the European Parliament and Council of Europe consult on the proposed legislative changes with the ECB. Only after the legislative act is adopted will the ECB make a decision on whether or not to issue a digital euro. The first stage of the preparatory phase will begin on 1 November 2023 and run for a 2 year period, and will involve further consultation with stakeholders and the public. Based on the outcome of the first stage of the preparatory phase, and any legislative developments, the ECB will determine whether to move forward to the next stage which would work towards achieving operational readiness for possible future issuance and the roll out of the digital euro.
Responses to the ECB's decision to proceed to the next phase of digital euro project
In its statement, the Eurogroup welcomed the ECB decision to move to the next phase of the digital euro project. It emphasised that the preparatory stage does not prejudge a decision that a digital euro will be issued, that decision would depend on EU legislative developments. It also noted that it will work to develop a complementary political strategic anchor to the future work while legislative deliberations are taking place.
The European Commission ("Commission") welcomed the decision of the ECB Governing Council to launch the next phase of the digital euro project in a press release. In June 2023, the Commission proposed the establishment of a legal framework for a digital euro. Legislative discussions on the potential digital euro will be informed by the ECB's work on the preparation phase. The purpose of the legislation will be to ensure that a digital euro is affordable, secure and a resilient form of public money which is widely accepted. The Commission also restated that any digital euro will be a complement to cash. This is reflected in the Commission's legislative proposal on the legal tender of euro banknotes and coins in its Single Currency Package.
On 18 October 2023, the European Banking Federation ("EBF") published a press release on the decision to move to the next phase of the digital euro project. The EBF largely welcomed the decision, noting that it was both expected and necessary given the rapid development of digital payments, and supported the aim of enhancing European strategic autonomy in payments. It stressed the need for collaboration between public and private entities to ensure that opportunities are identified and that risks are efficiently and effectively mitigated, as well as a broad public debate on the project.
3. MiCA Consultation Papers
EBA and ESMA consult on two sets of Joint Guidelines on suitability assessments of the management body and holders of qualifying holdings under MiCA
On 20 October 2023, the European Banking Authority ("EBA") and the European Securities and Markets Authority ("ESMA") published a Consultation Paper on two draft Joint Guidelines on the
- suitability assessment of members of the management body of issuers of asset referenced tokens ("ARTs") and crypto-asset service providers ("CASPs"); and
- suitability assessment of shareholders and members with qualifying holdings in issuers of ARTs and CASPs ("Guidelines").
The Guidelines are issued in accordance with the Markets in Crypto Assets Regulation ("MiCA"). The aim of the Guidelines is to provide clarity and ensure harmony in relation to the criteria to assess the suitability of the management body, the shareholders and members with qualifying holdings of issuers of ARTs and CASPs thereby 'reducing the risk of arbitrage in the application of the rules'. The Guidelines provide a number of common criteria to be used to assess the members of the management body's knowledge, skills and experience, in addition to their honesty and integrity, and their ability to commit sufficient time to perform their duties.
Next Steps
The consultation will close for comments on 22 January 2024. The Consultation Paper indicates that the two final form Guidelines are expected to be available when MiCA becomes applicable.
EBA consults on RTS and guidelines under MiCA
On 19 October 2023, the European Banking Authority ("EBA"), published 3 consultation papers on regulatory technical standards ("RTS") and guidelines under MiCA.
Consultation paper on draft RTS on the approval process for white papers for ARTs issued by credit institutions.
The draft RTS aims to harmonise the approval procedure by setting out the steps and timeframes which credit institutions and competent authorities must follow. Credit institutions who intend to issue ARTs do not need specific authorisation under MiCA, and instead the national procedures regarding organisational, risk management and prudential requirements contained within the Capital Requirements Directive IV will apply. Credit institutions must submit a White Paper for approval which informs potential token holders of the characteristics and risks associated with those tokens. This consultation paper sets out the procedure for approval of white papers, which considers the proportionality principle and gives competent authorities some flexibility regarding the information they need.
Next Steps
The consultation will close for comments on 22 January 2024. Once the public consultation has concluded and the draft RTS are finalised, they will be submitted to the European Commission for endorsement. They will then be subject to scrutiny by the European Parliament and the Council of Europe before they are published in the Official Journal of the EU.
Consultation paper on draft RTS on the minimum content of the governance arrangements on the remuneration policy
The RTS contained within the consultation paper outline the main governance processes relating to the adoption and maintenance of the remuneration policy and the main policy elements that should be adopted as part of it.
Next Steps
The consultation will close for comments on 22 January 2024. Once the public consultation has concluded and the draft RTS are finalised, they will be submitted to the European Commission for endorsement. They will then be subject to scrutiny by the European Parliament and the Council of Europe before they are published in the Official Journal of the EU.
Consultation paper on draft guidelines on the minimum content of the governance arrangements for issuers of ARTs.
The purpose of the Guidelines is to ensure that risks such as operational risks, cyber risks and compliance risks are properly managed, and to provide appropriate consumer and investor protection. The Guidelines highlight that while all issuers must have permanent and effective compliance function, not all issuers must have a risk management and internal audit function, but must have respective policies and procedures in place.
Next Steps
The consultation will close for comments on 22 January 2024. The Consultation Paper indicates that, as with the consultation paper issued on the joint guidelines by ESMA and the EBA, the final form Guidelines are expected to be available when MiCA becomes applicable.
4. European Banking Updates
ECB publishes its final report on "Sound practices in counterparty credit risk governance and management"
On 20 October 2023, the European Central Bank ("ECB") published its final report on 'Sound practices in counterparty credit risk governance and management' ("Report") along with a feedback statement from its public consultation on the Report.
The Report is based on the findings of a horizontal review of how banks govern and manage counterparty credit risk ("CCR") ("Review"). The Review confirmed that progress had been made and identified 43 sound practices under 4 headings:
- sound practices for CCR governance;
- sound practices for risk control, management and measurement;
- sound practices for stress testing and wrong way risk; and
- sound practices for watchlist and default management processes.
The Report also highlighted a number of shortcomings and identified recommendations to address those shortcomings, including:
- improvements to customer due diligence procedures, which can have a significant impact on credit decisions and contractual conditions;
- institutions willing to accept complex CCR exposures should state this explicitly in their risk appetite statement, and not capture it implicitly through credit risk;
- stress testing framework should address counterparties' vulnerability to specific exposure tail events, as well as their creditworthiness; and
- static margins should be replaced with more risk-sensitive arrangements to ensure that CRR is mitigated, monitored and managed when a counterparty is in trouble.
Feedback Statement
In its feedback statement, the ECB stated that it received 4 responses consisting of 9 comments. For the most part, respondents sought further clarification, and the ECB responded by making adjustments to the wording and by adding further clarifying information. None of the respondents had concerns or fundamental disagreements about the sound practices on CCR and therefore the amendments do not contain any significant changes to the sound practices. It was emphasised that the principle of proportionality was an overarching feature of the Report, when considering the organisations, activities and risks of Single Supervisory Mechanism institutions.
EBA pubishes its 2024 European Supervisory Examination Programme
On 19 October 2023, the European Banking Authority ("EBA") published its annual European Supervisory Examination Programme ("ESEP") for 2024 which sets out its key topics for heightened supervisory attention to be implemented on an EU-wide basis to drive convergence in the related supervisory work.
The ESEP highlights 3 dedicated focus areas:
liquidity and funding risks: the banking events earlier this year resulted in volatility in the industry. Banks must 'manage liquidity and market-based funding proactively', and ensure reasonable liquidity buffers in the midst of rising costs. A diverse funding mix is vital, and care is needed when managing deposits.
Supervisor actions:
- supervisors must assess short and medium term risks, and ensure that institutions maintain adequate liquidity buffers under normal and stress conditions;
- review the institution's funding profile, including medium and long term risks in relation to its business model, strategy and risk appetite;
- assess the risks from wholesale/retail counterparties for on-balance sheet items and funding concentrations;
- assess the internal liquidity adequacy assessment process; and
- assess on an individual basis whether the 'practical impediment to sell securities accounted at amortised cost exists'.
interest rate risks: given the rising trend in interest rates, appropriate asset and liability management is essential. In order to ensure the resilience of the sector, dedicated supervisory efforts are needed.
Supervisory actions:
- ensure that all institutions have appropriate organisational framework and clearly aligned responsibilities for interest rate risk in the banking book ("IRRBB") management;
- recognise the main features of an institution's assets and liabilities, including off balance sheet exposures, deposit accounts and derivatives;
- understand clearly how changes in interest rates can have an adverse impact on an institution's economic value of equity and net interest income;
- examine the inherent level of IRRBB;
- examine and question the modelling assumptions of banks, particularly regarding customer behaviour; and
- assess and challenge institution's hedging approaches and policies; understand their concepts, underlying assumptions, valuation models and concrete implementation.
recovery operationalisation: the banking events of this year emphasised the need for institutions to be prepared to cope with potentially fast moving, idiosyncratic shocks; and efficient activation and implementation of recovery plans.
Supervisory actions:
- examine the adequacy of scenarios in the recovery plan in light of ECB guidelines on overall recovery capacity ("ORC");
- ensure the recovery plan indicators are appropriate and in line with ECB guidelines;
- examine the quality and adequacy of ORC, particularly regarding liquidity recovery capacity;
- encourage the use of dedicated dry run exercises in ensuring adequate usability and testing of recovery plans; and
- ensure that the method of communication is suitable and speedy, such as social media.
In addition, the ESEP also outlines two Union strategic supervisory priorities:
monitoring and addressing financial stability and sustainability in a context of increased interest rates: the ESEP notes the need to monitor the impact of increased interest rates and use all available supervisory tools; and
developing an oversight and supervisory capacity for DORA and MiCA: the ESEP notes that cyber risk and data security risk remain key drivers of operational risk, and that information and communication technology risks must be subject to constant supervisory review.
The EBA stated that it will follow up on how the ESEP's key topics are embedded into the competent authorities' 2024 priorities, and how they are reflected in their respective activities during the year.
5. European Legislative Updates
Council of Europe adopts Directive on financial services contracts concluded at a distance
On 23 October 2023, the Council of the European Union ("Council") issued a press release stating that it had adopted the Directive on financial services contracts concluded at a distance. The Directive repeals existing legislation and introduces new provisions into the Consumer Rights Directive. The adopted text:
- clarifies the scope of application and the safety net feature for financial services;
- improves the rules regarding information disclosure and pre-contractual information, and gives a discretion to Member States to introduce stricter rules at national level;
- introduces a right to require human intervention on sites that have automatic information tools;
- establishes a right of withdrawal from contracts concluded at a distance via a 'withdrawal function' on the service provider's interface; and
- provides additional consumer protection from dark patterns.
Next Steps
As recently mentioned in the FIG Top 5 at 5 12 October 2023, the European Parliament ("Parliament") adopted the proposed Directive on 5 October 2023. Following the adoption by the Council, the legislative act is now adopted. Once the President of the Parliament and the Council sign, the Directive will be published in the Official Journal of the European Union and will enter into force 20 days after its publication. Member States will have 2 years to transpose the Directive from the date it enters into force.
Final compromise texts on proposals to improve MiFID II market data access and transparency
On 18 October 2023, the Council of the European Union ("Council") published notes to the Permanent Representatives Committee ("COREPER") that it has reached:
- a final compromise text for the legislative proposals on Regulation on amendments to MiFIR; and
- a final compromise text on a Directive on amendments to MiFID II Directive.
The final texts are reflective of the provisional agreement that the Council and the European Parliament ("Parliament") reached on 29 June 2023 as outlined in the FIG Top 5 at 5 dated 6 July 2023.
It also included a note which confirms that COREPER has endorsed the final compromise texts with a view to agreement. It also contained a letter which was sent to the Parliament by the Presidency of the Council, that should the Parliament adopt its position at first reading, the Council will approve Parliament's position and the act will be adopted.