1. Central Bank Act 1942 (Section 32D) Regulations 2023 [SI No 438 of 2023]
On 5 September 2023, SI No 438 of 2023 was published in Iris Oifigiúil. The Central Bank Commission, with approval from the Minister of Finance introduced a number of regulations ("Regulations") regarding levy contributions to be paid to the Central Bank of Ireland ("Central Bank") by regulated entities. The Regulations came into force on 6 September 2023.
On an annual basis, the Central Bank Commission signs a statutory instrument into law which lays out the framework for that year's levying process and the basis on which individual regulated entities' levies will be calculated. From that date, all regulated entities are liable to pay an annual levy as determined in the Regulations.
Under S3, all regulated entities are liable to pay the Central Bank a levy contribution in respect of each authorisation, and in accordance with the Schedule, one of more supplementary level contributions for each authorisation held during a relevant levy period on or before the due date. For entities which were subject to regulation for only part of the levy period, the amounts will be calculated in accordance with how many days it was regulated for.
Under s5, a regulated entity must pay a levy contribution regardless of whether a levy notice has been issued by the Central Bank. Under s7, if no levy is received by a regulated entity for the levy period by 3 October 2023, then payment will be due on 31 October 2023.
S10 provides for an appeal by the regulated entity in respect of the levy or supplementary levy contribution. The grounds of the appeal must be set out in writing, and include supporting documentation, and levies due on the portion of time that is not in question must be paid. If the Central Bank believes that the payment of the levy may make that entity insolvent, or where the entity is a bankrupt sole trader, the Central Bank may waive the obligation to pay the levy.
S11 provides that interest will accrue on any late payments, recoverable alongside the levies as a simple contract debt under s12. Under s13, each regulated entity must keep full and true records of all matters affecting their liability under these Regulations, for a period of 6 years.
The schedule sets out the amount payable levies and supplementary levies, depending on the type of regulated entity and the impact category under PRISM and the basis of calculation for levies including a minimum amount and a variable amount.
2. Central Bank of Ireland publishes its Regulatory Service Standards Performance Report for January – June 2023
On 28 August 2023, the Central Bank of Ireland ("Central Bank) published its Regulatory Service Standards Performance Report for January - June 2023 ("Report"). The Report sets out the Central Bank's performance against the service standards that it has committed itself to in regard to:
- authorisation of Financial Service Providers and Investment Funds;
- approval of Prospectuses;
- assessment of Pre-Approved Control Functions ("PCF") Individual Questionnaire ("IQ"); and
- performance of its third party contact management service.
The Report found that of the 46 public service standards used to measure the Central Bank's performance, 30 were met or exceeded and 16 did not apply.
The Report was broken down into a number of tables covering service standards, and the below is a very brief summary of the very detailed statistics.
- there were no applications that fell within the scope of the service standards for investment firms;
- applicant firms under assessment in the MiFID investment firm sector remained stable in H1 of 2023, with Brexit still driving a significant number of applicants to consider Ireland as the base for their European operations;
- the Central Bank granted no new MiFID authorisations, granted 1 extension to authorisation of an existing regulated firm, and 2 firms withdrew their applications during H1 of 2023.
Retail intermediaries and debt management firms;
- all service standards were met in H1 2023 for Retail Intermediaries & Debt Management Firms (i.e. to acknowledge receipt of 95% of applications within 3 business days; to complete 95% of key information checks within 10 business days; to complete the assessment phase for 90% of applicants and notify them of the outcome within 90 business days of commencement of assessment phase; and to complete the notification of decision phase for 90% firms and notify them of outcome within 10 business days of receipt of satisfactory response to issues set out in notification of outcome of assessment phase.)
- the average turnaround time for applications was 5 calendar months, compared to 6 months in H2 of 2022;
- where comprehensive applications were submitted and minimal follow up was required, turnaround time was 3 months;
- 40 applications were returned to firms for failing the key information check; and
- 13 were withdrawn or became dormant, with the most common reason being that applicants were unable to demonstrate that the proposed appointees to PCFs met the Fitness & Probity ("F&P")requirements.
High Cost Credit Providers, Credit Servicing Firms; Retail Credit Firms and Home Reversion Firms Authorisation
- in H1 2023, all Service Standards for applications received were met for High Cost Credit Providers ("HCCP") , Retail Credit Firms & Home Reversion Firms Authorisation (i.e. to complete acknowledgement of receipt of 95% of applications within 3 business days of receipt; to complete 95% of key information checks within 10 business days of receipt of application; and to process 100% of complete renewals of high cost credit provider licences prior to expiry of existing licence);
- there were no submissions in scope for some service standards (i.e. to complete the assessment phase and notify applicant of outcome for 90% of firms within 90 business days of commencement of assessment phase; to complete the notification of decision phase and notify applicant of outcome for 90% of firms within 10 business days of receipt of satisfactory response to issues set out in notification of outcome of assessment phase);
- 8 HCCP licences were renewed;
- 2 new HCCP licences were rejected as incomplete;
- going forward the service standards will also apply to new Credit Servicing Firm applications; and
- no new Credit Servicing Firm applications were received in H1.
- in H1 2023 all Service Standards for applications received were met for Payment Firms (Payment Institutions, Electronic Money Institutions ("EMIs"), Small EMIs & Money Transmission Businesses) & Bureaux de Change Authorisations (i.e. To acknowledge receipt of 95% of applications within 3 business days of receipt; to complete 95% of key information checks within 10 business days of receipt; to complete the assessment phase and notify applicant of outcome within 90 business days of commencement of assessment phase for 90% of firms; and to complete the notification of decision phase and notify applicant of outcome for 90% of firms within 10 business days of receipt of satisfactory response to issues set out in notification of outcome of assessment phase);
- 1 firm was authorised in H1;
- 4 firms received 'Minded to Authorise' letters, compared to 6 granted in 2022; and
- the formal pre-application stage was added in 2021 which involves bespoke meetings between applicant firms and authorised personnel to discuss their proposed business model, programme of operations and governance framework and has led to decreased application numbers: 13 in H1 2023, 32 in H2 2022 and 39 H1 2022.
Insurance/Reinsurance Undertakings and Solvency II special purpose vehicles
- all service standards for applications received were met for Insurance/Reinsurance Undertakings in H2 2022 (i.e. to respond to 100% of requests made for a preliminary meeting from perspective applicants within 5 business days; assess 100% of applications for completeness and inform the applicant of the outcome within 10 business days; process 75% of complete applications for authorisation within 3 months of becoming complete; and to process 100% of complete applications and notify the applicant within 6 months of being complete);
- there were no applications within the scope of the service standard to process 100% of complete application for approval of second or subsequent arrangements from Solvency II special purpose vehicles within 10 business days; and
- the volume of applications were in line with H2 2022.
- the service standards did not apply as there was no application to establish a Third Country Branch, and the ECB is the competent authority for applications under Section 9 of the Central Bank Act 1971.
F&P PCF Applications
- all Service Standards for PCF applications received were met (i.e to provide a response to 85% of submitting entities where an IQ is incomplete within 5 business days; to assess 85% of IQs for QIAIFs within 5 business days; to assess 85% of IQs for individual previously approved by Central Bank or EEA Financial Services Regulator of applications within 12 business days; and to assess "standard" IQs within 15 business days);
- 1559 PCF applications were submitted in H1 2023, 14% less than H1 of 2022;
- 344 applications were as part of a firm authorisation, 32% less than H1 2022;
- there were 526 applications where service standards did not apply;
- 150 applications were withdrawn by their respective firms, which were mostly linked to authorisations that did not proceed, funds that did not launch or where individuals decided not to proceed; and
- 169 were returned as incomplete due to errors in the initial submission.
3. Insurance Updates
Central Bank of Ireland publishes Insurance Corporation Statistics for Q2 2023
On 1 September 2023, the Central Bank of Ireland ("Central Bank") published Insurance corporation statistics for Q2 of 2023. The total assets of the Irish insurance corporation ("IC") grew to €418 billion, which was up 3.2% from Q1 2023 and up 8% from Q4 2022.
The greatest areas of growth were:
- direct holdings of equity: 6.1% growth; and
- debt securities: 4.9% growth.
Technical reserve liabilities also increased, with:
- non-life insurance: 6.3% growth amounting to a growth of 29.2% since the end of 2021; and
- non-unit linked life insurance: 3.9% growth, remaining 16.6% down from since the end of 2021.
- the life and composite IC sectors accounted for 77% of the overall sector total assets;
- reinsurance corporations had large holdings of debt securities and loans; and
- non-life ICs had large holdings of reinsurance and debt securities.
EIOPA publishes its statistics on the assets and liabilities of (re)insurers with the EEA for Q1 2023
On 4 September 2023, European Insurance and Occupational Pensions Authority ("EIOPA") published comprehensive statistics on the assets and liabilities of (re)insurers active within the European Economic Area ("EEA").
In Q1 EEA (re)insurers held €8.57 trillion in assets. 88% of these investments were allocated to government bonds, investment funds, corporate bonds and equity. The remainder were made up of assets held in cash, or invested in mortgages and loans, property and structures notes. Ireland held €16 billion in Corporate bonds; €18 billion in Government bonds and €14 billion in equity.
Top 5 investment funds by location
- France €731 billion;
- Luxembourg €633 billion;
- Germany €592 billion;
- Ireland €188 billion; and
- Sweden €126 billion.
Q1 2023 Assets
- investments (other than assets held for index-linked and unit linked contracts): €0.09 trillion;
- assets held for index-linked and unit-linked contracts: €0.2 trillion; and
- other assets: €0.12 trillion.
Q1 2023 Liability
- technical provisions – life (excluding index-linked and unit-linked): €0.05 trillion;
- technical provisions – index-linked and unit-linked: €0.28 trillion;
- technical provisions – non life: €0.08 trillion; and
- other liabilities: €0.04 trillion
EIOPA Chairperson, Petra Hielkema, delivers speech entitled "Insured Risks in Uncertain Times"
On 29 August 2023, EIOPA Chairperson, Petra Hielkema, gave a keynote speech at the Croatian Financial Services Supervisory Authority conference "Insured Risks in Uncertain Times" ("Speech"). Ms Heilkema's speech focused on sustainability, macroprudential and systemic risks and cyber security.
Sustainability: Reducing the Nat Cat protection gap
Ms Hielkema notes that supervisors have serious concerns that 75% of climate related catastrophes in Europe are not insured. She highlighted some of the reasons that consumers have not availed of Nat Cat insurance:
- they believe that coverage is unaffordable;
- they are not aware of the magnitude of climate-related risks; and
- they believe that the State will intervene to a greater extent than they can.
Ms Hielkema suggests that many of these concerns can be addressed with better communication and more accessible information regarding risks. EIOPA and the European Central Bank developed a 4 pillar policy response to increase the uptake in natural catastrophe insurance:
- adaption and mitigation measures;
- increasing capacity in the insurance market;
- public-private partnerships at national level; and
- EU level schemes to cover losses that may be difficult to insure purely via market-based solutions.
Ms Hielkema emphasised that sustainable insurance is the ultimate goal to protect society in the long term. To achieve this, products must be accessible and affordable for both consumers and businesses, and incentivise them to mitigate against natural catastrophe risks. In order to build trust, insurers must avoid greenwashing and correctly disclose the sustainability features of their products.
The Sustainable Finance Disclosure Regulation ("SFDR") requires that market participants disclose sustainability information to investors. This provides transparency and attracts investors who wish to invest in companies and products that support sustainable objectives. The SFDR is supported by Regulatory Technical Standards introduced by the European Supervisory Authorities. These are currently being revised to include new social indicators for entity level disclosures, product disclosures on targets for reducing greenhouse gas emissions and simplification of the disclosure templates.
Macroprudential and systemic risks
While the insurance sector remains stable and resilient, factors such as higher inflation and lower purchasing power are restricting consumers ability to purchase insurance. Ms Hielkema also highlighted that unforeseen risks and geopolitical risks will affect the stability of the market, such as the Russian war and the collapse of US regional banks.
On the Solvency II Review, Ms Hielkema notes that it will likely ease capital requirements, freeing them up for more long-term investments. However, she warns that caution is required when reducing capital requirements, particularly for investments which are not truly long-term investments, as it increases risk and stability for consumers in already uncertain times. She also notes that such reduction should be linked to the green transition and that adequate monitoring of individual's companies' ability to manage stress is also necessary.
The European Parliament has reached agreement on a proposal for an Insurance Recovery and Resolution Directive which allows for trialogues to begin on this proposal. The new Directive will help to ensure a minimum level of harmonisation across the EU regarding the level of protection available to a consumer if the insurer fails.
Cyber-attacks have increased across the EU, and are becoming more sophisticated. As a result the demand for cyber-insurance is also increasing. However, many insurers have reconsidered their cyber-insurance offerings due to increased losses resulting from cyber-attacks. Consequently, this has resulted in the share of insured losses remaining quite small, causing a cyber-protection gap.
Small and medium sized businesses are disproportionally affected by the protection gap. EIOPA has launched a survey on the access to cyber coverage by small and medium enterprises. The results will help to identify the potential barriers which may lead to complete exclusion, and by identifying the problems, they can be addressed more appropriately.
DORA has been fundamental to the cybersecurity of insurance companies, by introducing harmonised governing principles for managing cyber-risks. National supervisors are affected both by the pace of technological change and the innovation in the market, and the need to upskill in order to adequately supervise. The introduction of a training programme under the EU Supervisory Digital Finance Academy will help supervisors to get to grips with the 'complex digital transformation impacting finance'.
4. Fabio Panetta, Member of the Executive Board of the ECB delivers speech entitled 'Shaping Europe's digital future: the path towards a digital euro'
In his speech Mr Panetta provided an update on the recent work done by the ECB in its final stage of investigation on the digital euro. This included:
- a holistic review to ensure consistency between all the design options;
- publishing the results of the prototype and market research exercises;
- collaboration with all sides of the market on a draft rulebook for a digital euro scheme; and
- the publishing next month of the ECB's findings of the investigation phase.
Mr Panetta explained that following this, the Governing Council will decide whether to progress to the next phase. This will involve analysing digital euro functionalities by the central banks with the euro countries, and testing technical solutions and business arrangements to start the issuing of a digital euro 'if and when it is warranted'. If proceeded with, Mr Panetta explains that the proposals would enshrine in legislation that cash will remain as a legal tender, with a new strengthened status and rights of those who use it, but there would also be a new form of central bank money. Mr Panetta highlights that the legislators must shape the proposals to ensure that the digital euro would replicate key features of case within the digital sphere. This would ensure that it is accessible to everyone, everywhere, free of charge, used offline and guarantee the highest level of privacy.
He outlined a number of elements that will ensure such availability:
Legal tender status
The digital euro should be available at customers' current bank, which is essential in enabling that everyday payments can be made. He notes that there is a risk of a closed-loop solution arising if it is left to private companies.
The draft legislation suggests that the digital euro would have enhanced privacy and data protection and that money laundering risks would be minimised. Mr Panetta notes that the ECB proposes that only the Eurosystem would be able to see the personal details of the digital euro user. Intermediaries would only be able to see information needed for onboarding and regulation compliance. Using the digital euro to pay offline would also provide similar privacy to that of cash, as neither the intermediary or the central bank would be processing the payment.
Mr Panetta commented that the European Commission's ("Commission") proposal balances the pricing objectives of public and private sectors. Under this proposal, end users can use the basic service free of charge and intermediaries are compensated in a manner similar to comparable private digital means of payment, and merchants are protected from any excessive fees that could arise from an obligation to accept digital euro.
Mr Panetta also noted the importance of ensuring that tools are developed and applied which maintain a balance between private money and central bank money. Holding limits will be essential in achieving this as they can 'pre-empt undesirable consequences for monetary policy, financial stability and the allocation of credit to the real economy'.
Mr Panetta emphasised that the digital euro is an opportunity for the financial sector, not a risk which can preserve the role of public money. In the absence of a digital euro, the private market will continue to grow, which will also impact the financial sector. He notes that, in contrast to private companies, whose aim is to expand their customer base and gain market share, and potentially attain a monopolistic share, the digital euro would be introduced under a European regulatory framework. This would be compatible with existing payment tools, retain customer relationships in banks and guarantee the highest level of privacy.
Mr Panetta advised that Europe should not shy away from this ambitious project. If successfully introduced, it will strengthen Europe's autonomy and resilience and will enable Europe to lead the international debate on central bank digital currency.
5. Frank Elderson, Member of the Executive Board of the ECB delivers speech on the risks of climate related litigation for the banking sector
On 4 September 2023, Frank Elderson, Member of the Executive Board of the European Central Bank ("ECB"), gave a speech entitled 'Come hell or high water', addressing the risks of climate environment-related litigation for the banking sector.
Mr Elderson explains that climate litigation has been central to compelling government and corporations to take action to mitigate climate change. The risk of such actions being brought are a major source of risk to both banks and supervisors, who may become the direct target of such litigation. He sets out the various litigation avenues which have been taken against corporates including:
- damages under tort law;
- breaches of corporate due diligence laws;
- greenwashing; and
- directors breaching their fiduciary duties.
Banks and the Financial Sector
Mr Elderson comments that banks will not just be indirectly affected by the knock on consequences for companies that they finance, but can also be sued themselves. He notes that the motivation behind this is to 'turn off the taps of funding to high emitters'. Lawyers are using a legal strategy which argues that private companies also have 'a duty of care under civil law to protect citizens' fundamental rights', and that companies while not bound by the Paris Agreement, should have to align their objectives with it, as seen in the case against Shell which is currently under appeal. To date, cases have been taken against financial institutes for greenwashing; against trustees of pension funds and against a bank in France under corporate due diligence legislation for its role in financing the expansion of fossil fuels. He also notes that the risk should not be underestimated as many are being taken by well-funded and well-connected NGOs hiring very experienced lawyers.
How can banks address these risks?
Mr Elderson notes that there are two trains of thought for how banks can properly address climate-related litigation risk.
Bread and butter guidance
He notes that the ECB has published a Guide on climate-related and environmental risks which includes: the need to evaluate litigation risks; define tasks and responsibilities related to climate risk; and conduct climate-relate due diligence. The ECB went further in its Thematic Review by setting institution-specific remediation timelines to meet expectations by the end of 2024; and introducing intermediate deadlines for the end of March 2023 and 2024. It also produced guidance on good practices for climate-related and environmental risk management.
Mr Elderson commented that he had recently asked CEOs of ECB supervised banks to ask their general counsel how closely they are monitoring developments in climate and environmental-related litigation and emphasised that all CEOs, general counsel and board members of banks under ECB supervision should be up to date with these litigation trends and mitigate associated risks. He gave some examples of ways in which banks have started to quantify possible losses:
- including liability risk as a factor when rating the probability of defaulting when calculating a client's credit risk;
- assessing reputational risks such as greenwashing, the financing of polluting industries by defining a set of scenarios, recording potentially affected shareholders and the area of profit and loss most affected. These were then used to quantify the possible losses that could arise;
- mitigate greenwashing risks by ensuring adequate disclosures, including adherence to the governance framework and regular compliance checks;
- developing an action plan which first asks clients to adopt the best practices in their sector, and limiting their business relationship with that client if this is unsuccessful.
Mr Elderson notes that the recent NGFS report on micro-prudential supervision of climate-related litigation outlines a number of additional options for supervisors such as the need to take a more risk based approach. This could include a materiality assessment of risks at jurisdictional level or a more granular exposure analysis at entity level. Central banks and supervisors may also be a target of climate and environmental litigation and this should ensure they are fulfilling the duties.
Paris aligned transition plans
Mr Elderson cautions that in some jurisdictions, the impact of climate-related litigation could 'dig right down into the viability of their business models' and that banks need to put their Paris-aligned transition plans in place. This means:
- ensuring accurate, granular data;
- the conducting of a robust materiality assessment;
- integrating transition planning into internal discussions and strategic decision-making; and
- establishing proper internal governance.
By ensuring a transparent and credible transition plan, and being able to communicate how they will transition to a climate-resilient and sustainable economy, it will help to significantly contribute to reducing litigation risk. There are 3 pieces of EU legislation which will require banks to put transition plans in place, and may provide additional grounds for climate litigation:
- Corporate Sustainability Reporting Directive;
- Corporate Sustainability Due Diligence Directive; and
- Capital Requirements Directive.
Mr Elderson concludes that in order to avoid climate and environment-related litigation risk, banks and supervisors must put transition plans in place. Litigation trends indicate that litigants are likely to target banks and the financial sector in order to divert funding away from carbon-intensive sectors.
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