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FIG Top 5 at 5 - 27/04/2023

DATE: 27/04/2023

1. Central Bank of Ireland Fitness and Probity updates

Central Bank of Ireland publishes updates to the Fitness and Probity Enforcement Process

As was advised in the FIG Top 5 at 5 on 13 April 2023, Part 3 (with the exception of section 10) of The Central Bank (Individual Accountability Framework) Act 2023 ("IAF Act") was commenced by the Minister for Finance, Michael McGrath on 19 April 2023.  The IAF Act amongst other things, signals a change in law to the Central Bank of Ireland’s (“Central Bank”) fitness and probity ("F&P") investigations, suspensions and prohibitions.

The changes, which amend Part 3 of the Central Bank Reform Act 2010 (“2010 Act”) required a number of consequential changes to the Central Bank's existing regulations and guidance in relation to F&P  procedures. The updated regulations and guidance apply from 20 April 2023 and include:

Additionally, as was required under Part 7 of the IAF Act, the Central Bank has issued guidance in respect of investigations that had been initiated prior to the commencement date. These investigations are subject to savings and transitional provisions.

The Guidance and changes

The Guidance, as with its previous iteration, sets out the key stages of the investigation process which includes (1) Preliminary Consideration, (2) Investigation; (3) Report; and (4) Decision but updates same to take account of the changes introduced pursuant to the IAF Act. 

The key changes are summarised in the Central Bank’s Letter to Industry dated 21 April 2023 and include:

  • the Central Bank may investigate any individual who previously performed a controlled function ("CF") role that they performed the role within the shorter of (1) the period since 19 April 2023 and (2) the 6 years before the date on which an investigation is commenced;
  • a new statutory procedure for giving notice of investigations;
  • an increase to the limit for the initial duration of a suspension notice from 3 months to 6 months with a right of appeal to the Irish Financial Services Appeals Tribunal.  Additionally, the High Court may extend a suspension notice for 6 months (previously 3 months) and the Central Bank may make subsequent applications to the High Court to further extend the suspension notice;
  • investigation reports now have draft reports, which are followed by a final report;
  • an investigation may be discontinued by the Central Bank for reasons stated in a notice;
  • prohibition notices will not take effect until confirmed by the High Court or agreed in writing. Such notices may be varied or revoked by either the Central Bank or the subject, following a successful application in the High Court;
  • the F&P regime will extend to certain holding companies after the Central Bank issue regulations for same; and
  • enhanced independence requirements in respect of investigations and associated decision-making requirements.

On 24 April 2023, the Central Bank published an updated overview document on the new F&P process following the update of the Central Bank's Portal to facilitate the submission of  pre-approval controlled function ("PCF") applications. This document is an update from the overview document published on 7 March 2023 as reported in the Top 5 at 5 from 9 March 2023.

  • These changes went live on 24 April 2023.
  • The Central Bank's overview document contains details on the:
  • process for submitting a PCF Application;
  • principal changes to Individual Questionnaire ("IQ");
  • where to locate the new IQ and guidance; and
  • actions for firms.

As reported in the Top 5 at 5 from 6 April 2023, the Central Bank has also published a new IQ and an accompanying draft guidance document on Fitness and Probity IQ Applications which provides guidance for firms in relation to submitting IQs for PCF applicants through the Central Bank's Portal.

2. Summer 2023 Legislation Programme published

The Government's Legislation Programme ("Programme") for the Summer 2023 session was published on 19 April 2023. Within the programme, there are 39 bills for publication and priority drafting in the forthcoming Oireachtas session. Looking specifically to the proposals in the Programme relevant to the financial services sector (excluding funds) there are not many updates to be noted.

As with the Spring 2023 Programme, the Financial Services and Pensions Ombudsman (Amendment) Bill ("FSPO Bill"), has been included in the list of priority legislation for drafting in the Summer 2023 Oireachtas session. The FSPO Bill amends the Financial Services and Pensions Ombudsman Act 2017 to take account of the Zalewski ruling and to update elements of the existing act where the Financial Services and Pensions Ombudsman could be viewed as administering justice. As reported in the Top 5 at 5 from 13 April 2023, the General Scheme of the FSPO Bill was published on 9 April 2023.

In relation to insurance, the Motor Insurance Insolvency Compensation Bill 2023 is listed under "All other Legislation" for the Summer 2023 Oireachtas session. This bill will transpose Article 10a and 25a of the 6th revised EU Motor Insurance Directive. The Programme notes that the Heads of Bill are currently in preparation.

The Programme also reflects legislation which is still making its way through the Houses of the Oireachtas, the Road Traffic and Roads Bill 2021 is listed in the Programme as on the Seanad Order Paper. This bill will introduce the statutory basis for a shared database of insured drivers to combat uninsured driving.

3. Recent speeches by the Governor of the Central Bank of Ireland

Opening Remarks by Governor of the Central Bank of Ireland at the Central Bank's Financial Industry Forum

On 21 April 2023, the Governor of the Central Bank of Ireland ("Central Bank"), Gabriel Makhlouf gave a speech at the third meeting of the Central Bank's Financial Industry Forum ("Forum").  In his speech he covered the key themes emerging from the Forum’s subgroups, as follows:

The current macroeconomic conjecture

The discussions at the Spring meetings of the World Bank and the International Monetary Fund were "dominated by the complex challenges facing the global economy" including:

  • economic and macro-financial implications of geopolitical fragmentation;
  • heightened financial stability risks in the wake of recent market turbulence with focus on both banks and non-banks;
  • policy making in a high interest rate environment; and
  • how to tackle soaring public debt. 

The Governor highlighted that the financial system is "being challenged by the stresses that are being brought upon it by necessary monetary policy tightening" and focus has been on potential financial stability implications, the possible indirect effects and channels of contagion from the events in the United States. He noted that risks in the non-bank sector "could adversely affect market conditions should risks materialise".

He advised that the "increased uncertainty faced by the global economy is reflected in the ongoing high uncertainty around the outlook for the euro area" and noted that the Governing Council of the ECB will be focusing on incoming data as part of its decision making process for monetary policy in the coming weeks.

The Governor noted that based on the evidence so far, it is too early to start planning for a pause in the tightening of monetary policy and "rates will need to continue at restrictive levels to help re-set the balance between supply and demand in the economy and bring down inflation".

The Central Bank's Supervisory milestones in 2023

The Central Bank has communicated its supervisory priorities on a number of occasions since the beginning of the year. The Governor reiterated that the Central Bank's principal focus will be on:

  • 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.

Transforming the Central Bank's approach to regulation and supervision 

A key priority in the Central Bank's strategy is to transform how the Central Bank regulates and supervises the financial services sector. The Central Bank's objective is "more efficient and effective regulation and supervision, better enabled by data and technology, and supported by new skills and enhanced capabilities". The Central Bank's approach to supervision will remain risk-based approach but "operate in a more integrated manner" across the Central Bank's expanding mandates. The Central Bank is currently in the design phase of this.

On the review of the Innovation Hub the Governor noted that the Central Bank is "aiming to put innovation at the centre" of its approach to regulation and supervision. The Innovation Sub-Group has provided useful insights about actions that the Central Bank can consider as part of this work.

The Governor concluded by inviting the members of the Forum to give their views on the challenges that they and their members are experiencing in managing their firms and safeguarding consumers and investors at this time.

Opening Statement by Governor Gabriel Makhlouf at the Public Accounts Committee

On 20 April 2023 Governor Makhlouf gave an opening statement at the Public Accounts Committee ("Committee") assisting in the Committee’s examination of the Comptroller and Auditor General’s separate reports on the Insurance Compensation Fund ("ICF") and the Central Fund of the Exchequer, as well as the ICF’s 2021 accounts.

The Governor noted that the Committee had previously heard Will Molloy’s, Director of Financial Operations at the Central Bank, opening statement on 23 February in respect of the same issues and, as that statement also reflects his own views, he did not reiterate these. He did, however, address a number issues from the previous Committee meeting.

4. Insurance Updates from the EU and Central Bank of Ireland

Central Bank of Ireland publishes Private Motor Insurance Mid-Year Report of the National Claims Information Database

On 25 April 2023, the Central Bank of Ireland ("Central Bank") published the first mid-year Private Motor Insurance Report ("Report") of the National Claims Information Database ("NCID").

The aim of the Report is to provide updated information on premium amounts, settled claim amounts and analysis on the impact of the Guidelines on average claim costs and it relates to data up to 30 June 2022.

Some of the key findings of the Report are as follows:

  • Average earned premium per policy was €578 during this period. This represents a decrease of 5% from the average earned premium in 2021;
  • Compare to previous years, there was an increase in the number and cost of damage claims and a decrease in the number and cost of injury claims;
  • Regarding settlements:
    • 48% of claimants settled directly, making up 15% of total costs.
    • 13% of claimants settled through PIAB, making up 6% of total costs.
    • 39% of claimants settled through litigation, making up 79% of total costs.
  • 43% of claimants settled under the Guidelines and 57% of claimants settled with reference to the Book of Quantum; and
  • average cost of claims settled under the Guidelines in H1 2022 was less than the average cost of claims that settled under the Book of Quantum in 2020.

Robert Kelly, Director of Economics and Statistics at the Central Bank has said that this "data will provide significant initial insights for policymakers and stakeholders, complementing the annual Motor Insurance Report, which will be published later this year.”

Jennifer Carroll MacNeill, the Minister of State with special responsibility for Financial Services, Credit Unions and Insurance on the publication of the Report stated that she "will continue to engage with all stakeholders in the insurance sector and work on the outstanding matters which most effect the cost of insurance for motorists, home owners and businesses. It is important we can get to a point where consumers can have access to consistent and affordable price expectations across the country.”

ECB and EIOPA publish joint discussion paper on Policy options to reduce the climate insurance protection gap

On 24 April 2023, the European Central Bank ("ECB") and the European Insurance and Occupational Pensions Authority ("EIOPA") published a joint discussion paper  ("DP") on policy options to reduce the climate insurance protection gap.

Aim of the proposed policy options

The ECB's press release notes that the policy options set out in the DP are aimed at "boosting the uptake and efficiency of climate catastrophe insurance while creating incentives to adapt to and reduce climate risks" and are designed to fulfil the following main objectives:

  • help provide prompt insurance claim pay-outs after a natural disaster;
  • incentivise risk mitigation and adaptation measures;
  • be complementary to existing insurance coverage mechanisms;
  • require the sharing of costs and responsibilities across the relevant stakeholders to ensure “skin in the game” and reduce moral hazard; and
  • lower the share of economic losses from major natural disasters borne by the public sector over the long term.

The ECB's press release notes that only about one-quarter of all climate-related catastrophe losses in the EU are insured currently. The ECB and EIOPA attribute this in part to an underestimation of the costs of climate-related damage and a preference to rely on government support.

The ECB and EIOPA highlight "the lack of climate catastrophe insurance can affect the economy and financial stability" and as natural disasters increase in frequency and severity, some insurers may reduce coverage or stop providing certain types of catastrophe insurance due to increasing costs, which "would widen the insurance gap further".

ECB and EIOPA policy options

To foster insurance coverage, the ECB and EIOPA suggest that:

  • insurers should design their policies to encourage households and firms to reduce risk, (e.g. by granting discounts for implementing effective mitigation or adaptation measures);
  • to support the overall supply of insurance, the use of catastrophe bonds could be increased to pass on part of the risk to capital market investors;
  • governments could set up public-private partnerships and backstops to partly cover the costs that insurers may incur in the event of major disasters;
  • to protect themselves and ensure that public funds are used efficiently, governments should also provide strong incentives to reduce risks; and
  • national-level insurance schemes could be complemented by an EU-wide public scheme that makes sure sufficient funds are made available to European countries for reconstruction following rare, large-scale climate-related catastrophes.

Next Steps

The DP hopes to gather feedback on the possible policy actions set out and foster debate on how to tackle the climate insurance protection gap and is open for comment until 15 June 2023.

The ECB and EIOPA will continue to undertake further analysis of these policy options, taking into account comments received on this paper.

Speaking on publication of the DP, ECB Vice-President Luis de Guindos noted “We need to increase the uptake of climate catastrophe insurance to limit the growing impact of natural disasters on the economy and the financial system. However, to reduce losses in the first place, we must ensure that a smooth and speedy green transition is complemented by effective measures to adapt to climate change.”

EIOPA Chairperson Petra Hielkema added: “Insurance plays a major role in protecting businesses and people against climate-related catastrophe losses by swiftly providing the necessary funds for reconstruction. In order to efficiently protect our society, we need to address the concern of the increasing insurance protection gap by proposing and finding appropriate solutions.”

5. Investment Firms Updates

EBA consults on guidance on benchmarking of diversity practices

On 24 April 2023, the European Banking Authority ("EBA") published a consultation on Guidelines on the benchmarking of diversity practices including diversity policies and gender pay gap under the Capital Requirements Directive ("CRD") and the Directive (EU) 2019/2034 ("Investment Firms Directive" or "IFD").

The EBA notes that these Guidelines are necessary to "ensure a harmonised benchmarking of diversity practices, including the composition of the management body, diversity policies and the gender pay gap at the level of the management body of institutions and investment firms".

The Guidelines will apply to credit institutions and investment firms and will:

  • cover the collection of data on credit institutions and investment firms diversity policies, diversity practices and the gender pay-gap at the level of the management body; and
  • include templates and instructions for the collection of diversity data.

The EBA notes that it will analyse diversity practices and publish a benchmarking report (including a country by country analysis) every three years. The rationale for this is that "the composition of the management bodies is not expected to change significantly in the short term but should change in the longer term through taking appropriate measures within institutions and investment firms".

Next steps

Participants selected by national competent authorities ("NCAs") to be part of the sample will be provided with further technical instructions on the data submission. The consultation runs until 24 July 2023. It is planned that the first data on the diversity practices under these guidelines should be reported in 2025 with a reference date of 31 December 2024.

Official translations of ESMA and EBA guidelines on SREP under IFD

On 19 April 2023, European Securities and Markets Authority ("ESMA"") published the official translations of the joint EBA and ESMA guidelines on common procedures and methodologies for the supervisory review and evaluation process ("SREP") under the IFD ("Guidelines").

The Guidelines aim to harmonise the supervisory practices regarding the supervisory review and evaluation process of investment firms. The Guidelines set out the common process and criteria for the assessment of the main SREP elements, including:

  • business model;
  • governance arrangements and firm-wide controls;
  • risks to capital and capital adequacy; and
  • liquidity risk and liquidity adequacy.

The guidelines will apply from 19 June 2023. NCAs have two months from the date of publication of the official translations to report whether they comply with the Guidelines.