knowledge 2 October 2017 |

Changes to Industry Funding Levies

Background

The CBI’s funding requirements for its financial regulatory activities is determined annually. Under the Central Bank Act 1942, the CBI is empowered to make regulations imposing levies and fees on the financial services sector to recoup the costs of financial regulation. The Minster for Finance must approve these regulations before they can take effect.

Financial regulation is currently funded by both industry and the exchequer, with each paying approximately 50%, subject to exceptions for certain industry participants. As set out in our previous briefing paper (here), the individual levy imposed on each financial market participant is determined with reference to:

• its industry funding category; and
• its impact categorisation under the CBI’s Probability Risk and Impact System (“PRISM”), which is the framework that the CBI uses to apply risk based supervision.

In July 2015 the CBI and the Department of Finance published a joint consultation paper (“CP95”) seeking views on a proposal to move towards a full industry funding model.

Subsequently, in March 2017, the CBI published a second consultation paper on industry funding, CP108, in which the CBI consulted on new levy calculation methodologies for credit institutions, investment firms and FSPs, and EEA insurance undertakings. For further information see our briefing referenced above.

The CBI has now published its feedback on both CP95 and CP108 which, among other things, outlines changes to the 2017 Industry Funding Levy and its method of calculation.

Industry Funding Contribution

In CP95, the CBI proposed introducing a 100% industry funding model for 2016.  Submissions made by industry in response to the consultations included observations regarding:

• the need for greater clarity and transparency around the levy process;
• CBI accountability in terms of cost controls and value for money;
• the methodology for attributing levies; and
• the impact on service providers and on consumers of a one-off move from the 50% funding model to a full funding model.

By way of immediate response to industry’s observations, the CBI decided to retain the 50% funding model for 2016 to enable the Department of Finance and the CBI to further consider matters around transparency, cost control and methodologies. As a result of those considerations, the CBI will provide greater clarity and transparency regarding the levy model by way of its Annual Performance Statement. As mentioned, it is also proposing the new levy calculation methodologies (see below).

The CBI has also decided in favour of a phased introduction of a full industry funding model.  Instead of an immediate move to 100% industry funding in 2017, funding will be split between industry and the exchequer on a 65% / 35% basis. Any further increases to industry funding beyond 65% in future years will need to be approved by the Minister of Finance.

Levy Calculation Methodologies

The CBI is introducing new levy methodologies for credit institutions, investment firms and FSPs, and EEA insurance undertakings.  The proposed changes will be incorporated into Regulations to be issued under Section 32D of the Central Bank Act 1942.

Credit Institutions

Following the establishment of the Single Supervisory Mechanism ("SSM"), supervisory engagement for credit institutions is largely determined by the SSM’s Information Management System, rather than the CBI’s PRISM.  As a result, the CBI has decided that it will determine each credit institution’s annual supervisory fee on the basis of an adapted version of the ECB’s methodology for determining supervisory fees, which takes into account the CBI’s broader consumer protection, anti-money laundering and financial stability mandate.

Specifically, as is the case under the ECB’s methodology, the CBI’s methodology will provide for a minimum and a variable fee component apportioned between two different categories of institutions.  However, while the ECB’s methodology distinguishes between significant institutions and less significant institutions, the CBI’s methodology will distinguish between:

• Category A entities – including significant institutions, retail subsidiaries of significant institutions and high-priority less significant institutions; and
• Category B entities – including non-retail subsidiaries of significant institutions, less significant institutions not within Category A, EEA branches and third country branches.
• Category A entities will pay 80% of the total supervisory levy, due to the fact that such entities require more intensive supervisory engagement.

Institutions that were admitted to the Eligible Liabilities Guarantee (“ELG”) scheme must continue to fund 100% of their supervisory costs, however the CBI will keep their contribution rates under review.

As a result of observations received in submissions to CP108, the CBI has agreed:

• to provide further information to industry to allow for a greater degree of predictability for institutions when calculating an estimated supervisory levy; and
• that each institution will be informed as to which category it is assigned initially, as well as to any subsequent changes to that initial categorisation.

Irish and EEA Investment Firms and Fund Service Providers (FSPs)

Irish investment firms and FSPs will be charged a single levy comprising both a flat element and a variable element set as a multiple of the entity’s PRISM impact score that exceeds a specified threshold. The flat element, the multiple and the threshold will be determined annually and will depend on the cost of supervision. The proposed levy methodology will first apply from 3 January 2018 and will not impact on the 2017 funding levy.

In relation to EEA investment firms and FSPs, the CBI will introduce, in 2017, a levy set equal to the flat levy component of Irish Investment Firms and FSPs.  This flat levy will be determined annually and in 2016, would have amounted to €6,606.

EEA Insurers

As indicated in CP108, EEA insurers writing Irish risks will be categorised into three categories for levying purposes, as follows:

• Category 1 – large non-life and life insurers, to be levied at half the rate of medium high insurers;
• Category 2 – non-life insurers not belonging to Category 1 having written motor insurance in Ireland in 2016, to be levied at half the rate of medium low insurers; and
• Category 3 – insurers not belonging to Category 1 or Category 2 to be levied as before.

The CBI intends to phase in the new levy calculation methodology for Category 1 insurers over two years, so that in 2017 branches will be levied at 25% of the medium high rate, with a further increase to 50% of the medium high rate in 2018.

While in CP108 the CBI indicated that it would start invoicing and collecting levies from certain EEA insurers operating by way of freedom of services in Ireland, it will not proceed with these changes in 2017, but intends to further consider its approach on this issue.