10 February 2023

FIG Top 5 At 5 - 02/02/2023



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On 1 February 2023, the Central Bank (Individual Accountability Framework) Bill 2022Opens in new window (the "Bill") was passed by Dáil Eireann.
Ireland Finance and Banking
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1. Central Bank (Individual Accountability Framework) Bill 2022

On 1 February 2023, the Central Bank (Individual Accountability Framework) Bill 2022 (the "Bill") was passed by Dáil Eireann.

The Bill aims to support the advancement of an improved culture in the Irish financial system through greater accountability in the regulated sector by introducing an Individual Accountability Framework ("IAF"). The four key pillars of the IAF proposal include conduct standards for firms and the individuals working within them; a Senior Executive Accountability Regime ("SEAR"); enhancements to the current Fitness and Probity Regime; and a unified enforcement process.

The Minister for Finance, Michael McGrath (the "Minister"), noted that the previous, Minister Finance, Pascal Donohoe, brought forward a number of amendments to the Bill on Committee Stage which "addressed the concerns of the European Central Bank to ensure there is clarity as to its exclusive prerogative in the supervision of significant supervised banking entities and made other improvements in how the Bill will operate". He clarified that these amendments "did not represent any substantive change in the policy objectives of the Bill".

Some technical amendments were also made to the Bill at report stage to take account of some typographical errors in the text.

Next steps

The Bill now moves to the Seanad for consideration.

Once the Bill is enacted, the Central Bank intends to publish the relevant draft regulations and supporting guidance along with a consultation paper. These are expected to be published throughout 2023 Accordingly, it is expected that both the SEAR and the Conduct Standards will be commenced in February 2024, after the Central Bank Regulations and Guidance have been finalised. The Central Bank has previously indicated there will not be a long implementation period following the publication of the final regulations and guidelines as, in its view, firms will have had a good lead in time to consider the proposals and to prepare accordingly.

The Minister noted that the Central Bank's consultation process presents "an important opportunity for all industry participants to engage with the bank on the detail of how the new regime will operate" and he strongly encouraged everyone concerned to "engage constructively with this consultation process".

2. Central Bank of Ireland's Financial Regulation Priorities 2023

On 25 January 2023, the Central Bank of Ireland (the "Central Bank") published a letter (dated 17 January 2023) to Minister for Finance, Michael McGrath on its financial regulation priorities for 2023.

The letter outlines the current macro-financial environment and financial services landscape and the Central Bank's regulatory priorities for the year.

The macro-financial environment

The Central Bank notes that the macro-financial environment remains very challenging and the outlook for the year ahead remains clouded by high uncertainty. The Central Bank's view is that:

  • global markets remain vulnerable to further shocks, in particular shocks to asset prices;
  • there is potential for disruption in segments of the non-bank financial system; and
  • while the central expectation for the Irish economy remains for positive growth into 2023, the Irish economy is facing increased downside risks.

The financial services landscape

The financial sector continues to grow rapidly. Ireland has seen significant growth in credit institutions' aggregate balance sheets and in the payments and electronic money sectors, complimented by rapid change through digitalisation and technological innovation. These changes bring both opportunities and risks and will require the Central Bank to adapt its regulatory approach. This economic context will be central to the Central Bank's regulatory focus during 2023.

The Central Bank's focus in 2023 will be on ensuring that the financial system and firms operate to support the interests of consumers and users as they cope with the challenges that arise, and on ensuring that the system itself remains robust and stable.

Central Bank projects with the Department of Finance

The Central Bank will work with the Department of Finance on:

  • addressing the recommendations of the Retail Banking Review;
  • the ongoing development of EU policy proposals and legislation;
  • taking forward the recommendations made by the International Monetary Fund following its quinquennial review of the financial sector;
  • Considerations around the opportunities and risks stemming from the further development of the international financial services sector, via the Ireland for Finance Strategy.

Central Bank 2023 priorities for financial regulation

The Central Bank's regulatory priorities for 2023 include:

  • Consulting and engaging on the development of the consumer protection framework and the operationalisation of the Individual Accountability Framework;
  • Continuing to progress actions on the systemic risks generated by non-banks (in particular advancing the development/operationalisation of a macro-prudential framework for non-banks and improvements to the legislative frameworks);
  • enhancing the governance, oversight and investor outcomes in the funds sector including the implementation of new environmental social and governance ("ESG") requirements and measures to mitigate greenwashing risks;
  • Strengthening the resilience of the financial system to climate change risks and its ability to support the transition to a climate-neutral economy, along with implementing the EU's Sustainable Finance Disclosures Regulation;
  • Publishing a consultation paper on the Innovation Hub;
  • Ensuring that the EU's Anti-Money Laundering Action Plan results in a consistent and robust EU-wide framework;
  • Contributing to the review of the Payment Services Directive and the functioning of open banking;
  • Implementing new EU regulations on digital operational resilience and markets in crypto assets.

Central Bank's 2023 supervisory priorities

The Central Bank's notes that its risk-based supervisory approach will need to continue to evolve to reflect the changing environment. The Central Bank's 2023 supervisory priorities include:

  • the assessment and management of risks to financial and operational resilience;
  • continuing to drive for fair outcomes for consumer and investors;
  • overseeing the withdrawal of Ulster Bank and KBC from the Irish market; and
  • detecting and sanctioning market abuse.

3. Central Bank Guidance for (Re)Insurance Undertakings on Intragroup Transactions & Exposures

On 30 January 2023, the Central Bank of Ireland (the "Central Bank") published its Final Guidance on (Re)Insurance Undertakings on Intragroup Transactions & Exposures (the "Guidance"). The Guidance was accompanied by a feedback statement ("Feedback Statement") setting out the Central Bank's views on the submissions received in respect of the July 2022 consultation paper ("CP150") on the draft Guidance.

The Guidance sets out the Central Bank's expectations of insurance and reinsurance undertakings regarding intragroup transactions ("IGTs") and exposures. The Central Bank is introducing this Guidance as "many (re)insurers established in Ireland are part of large international (re)insurance groups and benefit from synergies and cost efficiencies that arise from being part of a group. However material IGTs may expose a (re)insurer to high levels of concentration and other risks. Therefore, the Central Bank believes that the management and supervision of material IGTs merits special attention".

The Feedback Statement notes that the Guidance "does not introduce new requirements on (re)insurers, rather it clarifies the Central Bank's expectations in relation to a (re)insurer's compliance with existing legislation and domestic requirements".

The Guidance focuses on three key exposures intragroup assets, intragroup reinsurance and cash pooling/treasury function arrangements, these being the most significant exposures observed by the Central Bank.

The Guidance applies from the date of publication, 30 January 2023.

Changes and Clarifications

The Guidance remains largely unchanged from the draft Guidance set out in CP150. In the Feedback Statement, the Central Bank provides responses to issues raised in the submissions received to CP150, either by clarifying the Central Bank's intention with respect to some of the provisions or by making minor adjustments to the Guidance. The following is a brief overview the main changes and clarifications:

  • Scope, Definitions and Terminology: Respondents sought clarification on whether all intragroup arrangements would be captured by the Guidance and requested that certain terminology be clarified. The Central Bank clarified that the expectations outlined in the Guidance are generally in relation to material IGTs. For clarity, the Central Bank has amended references to IGTs and other terminology in the Guidance.
  • Captives and run-offs: In response to questions on whether captives and undertakings in run- off would be subject to the Guidance, the Central Bank clarified that captives are subject to Solvency II requirements and are expected to consider this Guidance in terms of material IGTs. (Re)insurers in run-off are still required to adhere to relevant Solvency II and other requirements that apply to them, and the Central Bank is required to continue to supervise these (re)insurers (it does so, in a proportionate manner).
  • IGTs vs external arrangements: Some respondents queried the distinction made between IGTs and external arrangements and whether it was the intention of the Central Bank to discourage (re)insurers from entering into these types of intragroup arrangements. The Central Bank clarified that Guidance is "not intended to discourage the practise of IGTs, rather where an IGT poses a material risk to a (re)insurer, the Central Bank has made clear its expectations in that regard". The Central Bank noted it has the same expectations in relation to transactions with external counterparties.
  • Group supervision: In response to questions on how the Guidance will operate in relation to the overall group supervision requirements, the Central Bank clarified that the Guidance applies to all (re)insurers authorised by the Central Bank. Solvency II establishes a framework for the regulation of (re)insurance groups and the Guidance does not seek to interfere with this, rather the intention is to "clearly set out the Central Bank's expectations in relation to the risks posed by material IGTs and how the local undertaking is reacting to and managing these risks".
  • Recovery and Resolution: Respondents called for the Guidance to be consistent with the upcoming Insurance Recovery and Resolution Directive ("IRRD"). Respondents also questioned the suggestion that a (re)insurer should be able to withstand a group failure and whether the Central Bank was introducing new requirements by in requiring a recovery plan to be established at local level. The Central Bank clarified that the expectation outlined in the Draft Guidance was for (re)insurers to have "at least the operational and governance capacities in business as usual to assist a Liquidator or Administrator who may be appointed by the High Court in carrying out their duties." and "In the absence of an existing resolution framework for (re)insurers in Ireland, the Central Bank has decided to remove this wording". The Central Bank noted its expectation that (re)insurers comply with existing recovery planning legislation and the Recovery Planning Guidelines for (re)insurers and advised that it is expected that domestic legislation will be updated in line with IRRD, once implemented.
  • Governance and Risk Management: Some respondents queried the expectation regarding the role of key functions in relation to the management of risk introduced by IGTs and for (re)insurers to conduct regular audits of IGT risk management. The Central Bank noted that it intends for (re)insurers to consider the Guidance where an IGT poses a material risk to the (re)insurer (but this is for undertakings to establish themselves). (Re)insurers are also expected to have clear roles and responsibilities for all key functions with regard to the identification and management of these risks. The Central Bank clarified that it does not intend for the Guidance to prescribe audits of every IGT, rather that material IGTs are included in the universe of auditable topics.
  • Risk management policies: In response to a query on whether the management of liquidity and counterparty risks could be integrated with a (re)insurer's broader risk management policies, the Central Bank acknowledged that Solvency II foresees the integration of policies, where appropriate, and has clarified the wording in the Guidance.
  • Intragroup Assets: A respondent commented that the terms of (re)insurers' existing loans cannot, in most cases, be altered unilaterally after issue. The Central Bank has amended wording in the Guidance and notes that it is important for the Board to be aware of situations where intragroup loans may not be compliant with (re)insurer's own policies and procedures and an annual assessment is appropriate in these circumstances.
  • Prudent Person Principle ("PPP"): In relation to the application of the PPP to reinsurance assets, the Central Bank clarified that it considers it appropriate that the PPP should be applied at the outset of making an investment decision (including creating or increasing asset exposure to a particular counterparty through a reinsurance arrangement) and when considering the PPP in relation to an investment decision, all other asset exposures (including any reinsurance counterparty exposures) should be taken into account.
  • The Standard Formula: the Draft Guidance outlined Central Bank's expectation for (re)insurers to be aware of the potential impact of adverse outcomes in relation to reinsurance exposures, and highlighted aspects which are not fully captured by the Standard Formula. A respondent commented that there should not be a starting assumption that the Standard Formula is inappropriate. The Central Bank clarified that its expectation in this section of the Guidance, is not in relation to the solvency capital requirement, but in relation to the risk management system of the (re)insurer, which the Central Bank would expect to include a detailed analysis of risks such as the potential downgrade of a material counterparty.
  • Group Counterparty Risk stress tests: Respondents noted that a blanket expectation to test group failure in the Own Risk and Solvency Assessment ("ORSA") is not proportionate. The Central Bank noted its agreement that this expectation should be limited to material exposures to an intragroup counterparty and has amended references to clarify that the expectations outlined are generally in relation to material IGTs.
  • Risk appetite statements: The Draft Guidance outlined the Central Bank's expectation that risk appetite statements in relation to intragroup assets and the board's consideration of same in the overall appropriateness of a (re)insurer's reinsurance strategy, and the level of cover provided by the (re)insurer, are adequate. A respondent commented that the Central Bank's expectation to have quantitative metrics is not proportionate and some respondents questioned the Central Bank's reference to EIOPA's Opinion on the use of risk mitigation techniques by insurance undertakings. The Central Bank has amended the wording in this section to reflect a more proportionate approach and to clarify the reference to the EIOPA Opinion.
  • Review of intragroup reinsurance arrangements: Some respondents requested for proportionality to be applied with respect to approving intragroup reinsurance arrangements. The Central Bank clarified its expectation that all material intragroup reinsurance arrangements should be approved by the board prior to the arrangement coming into force.

4. Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023

On 23 January 2023, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2023 [S.I. No. 10 of 2023] (the "Revised Central Bank Investment Firm Regulations") were signed by the Central Bank of Ireland and subsequently published on Irish Statute Book.

On 23 June 2022, the Central Bank published, in final form, the revised Central Bank Investment Firms Regulations containing amendments to the Client Asset Requirements (the "CAR"), which are set out in Part 6. The Central Bank also published a Guidance Note to accompany the revised CAR.

Revisions to the Regulations include broadening the scope and application of the CAR to credit institutions, targeted enhancements to include investment firms and credit institutions holding client assets in the context of conducting wholesale activities as well as other amendments applicable to all investment firms currently in scope of the CAR.

The revised Regulations will revoke and replace the Central Bank (Supervision and Enforcement) Act 2013 Section 48(1)) (Investment Firms) Regulations 2017 (as amended) with effect from 1 July 2023.

The Central Bank has granted a transitional period for compliance. The revised CAR will be applicable to investment firms from 1 July 2023 and credit institutions from 1 January 2024.

5. Guidelines on the Definition of 'prominent public functions': Criminal Justice (Money Laundering and Terrorist Financing) Act 2010

On 27 January 2023, the Minister for Justice, with the consent of the Minister for Finance, published Guidelines on the Definition of 'prominent public functions' under the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) ("CJA 2010").

The Guidelines outline the functions in the State [Ireland] that may be considered to be 'prominent public functions' under the CJA 2010. The Guidelines will assist firms to identify Politically Exposed Persons within the State.

General definition of 'prominent public function'

The Guidelines note that 'prominent public function,' in respect of such functions within the State, and where not otherwise specified, shall be an office or other employment in a public body in respect of which the remuneration is not less than the lowest remuneration in relation to the position of Deputy Secretary General in the Civil Service. For the purposes of this definition, 'public body' shall not include courts.

Application of provisions to roles in the State

  • 'a member of the administrative, management or supervisory body of a state-owned enterprise': 'state-owned enterprise' is considered to be limited to commercial bodies and includes bodies listed on the 'Non-Financial Corporation Sector' or the 'Financial Corporation Sector' within the Register of Public Sector Bodies as published and updated by the Central Statistics Office.
  • 'a head of state, head of government, government minister or deputy or assistant government minister': Includes the President, the Taoiseach, Government Ministers and Ministers of State.
  • 'a member of a parliament or of a similar legislative body': Includes members of Dáil Éireann and Seanad Éireann.
  • 'a member of the governing body of a political party': Members of the executive committee and any other executive offices (or equivalents) of any registered political party in the State which has registered under section 25 of the Electoral Act 1992 as amended.
  • 'a member of a supreme court, constitutional court or other high level judicial body whose decisions, other than in exceptional circumstances, are not subject to further appeal': Includes Judges of the Supreme Court.
  • 'a member of a court of auditors or of the board of a central bank': Includes Members of the Commission of the Central Bank of Ireland
  • 'an ambassador, chargé d'affairs or high-ranking officer in the armed forces': Includes the most senior official of a foreign embassy in the State, Officials from the State's diplomatic corps who hold an equivalent position to (1) and the Chief of Staff and Deputy Chief of Staff of the Defence Forces.
  • 'a director, deputy director or member of the board of, or person performing the equivalent function in relation to, an international organisation': 'international organisation' refers to an organisation that is established by, or on the basis of, an agreement between two or more states. 'International organisation' refers to the organisation itself, and does not refer to an individual local office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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