Financial Services Regulatory Update – April 2023 Round Up

Individual Accountability Framework – Partial Commencement

On 19 April 2023, the Central Bank (Individual Accountability Framework) Act 2023 (Commencement of Certain Provisions) Order 2023 (here) commenced Parts 1, 3 (other than Section 10), 4, 5, 6 and 7 of the Central Bank (Individual Accountability Framework) Act 2023, with effect from 19 April 2023.

The order commences all aspects of the Individual Accountability Framework (“IAF”) legislation except those pertaining to the Senior Executive Accountability Regime (“SEAR”), new conduct standards, and certain enhancements to the fitness and probity (“F&P”) regime.

Our briefing (here) provides further detail.

For further information on the IAF, please see our IAF hub (here).

Fitness & Probity Update

On 20 April 2023, the Central Bank Reform Act 2010 (Procedures Governing the Conduct of Investigations) Regulations 2023 (here) was brought into force by the Deputy Governor of the Central Bank of Ireland (the “CBI”).

These Regulations update procedures for conducting fitness & probity (“F&P”) investigations under Chapter 3 of Part 3 of the Central Bank Reform Act 2010 as a consequence of amendments made by the Central Bank (Individual Accountability Framework) Act 2023 (the “IAF Act”) The updated F&P procedures apply from 20 April 2023.

On 21 April 2023, the CBI published a number of documents relating to the updated F&P regime:

• a guidance in respect of F&P investigations, suspensions and prohibitions, addressing key stages of the investigation process and the decisions that may flow from the process (here);
• a guidance (here) outlining transitional arrangements arising from changes to the F&P regime arising from the IAF Act; and
• an industry letter, addressed to a number of representative bodies outlining updated F&P procedures (here).

A simplified guide, issued by the CBI, summarising the updated F&P application process is available (here).

CBI Guidance – Submission of IQs

On 18 April 2023, the CBI published guidance (here) for regulated financial services providers in relation to the submission of individual questionnaires (“IQs”) through the CBI portal for persons who are proposed to hold pre-approval controlled functions (“PCFs”).

CBI Regime –Service of Documents Electronically

On 20 April 2023, the Central Bank Act 1942 (Service of Notices and Other Documents) (Amendment) Regulations 2023 (here) came into operation, extending the CBI regime for the service of documents electronically, to include Part 3 of the Central Bank (Supervision and Enforcement) Act 2013 concerning F&P procedures.

For further detail, please see our briefing (here).

Financial Services and Pensions Ombudsman Bill

On 9 April 2023, the Minister for Finance published the General Scheme of the Financial Services and Pensions Ombudsman (Amendment) Bill (here).

The Bill, which is intended to be finalised in the coming months, will introduce amendments to ensure the Financial Services and Pensions Ombudsman (“FSPO”) continues to discharge its functions in a constitutional manner, as well as to safeguard access to the FSPO in circumstances where the financial service providers concerned have left the Irish market.

RTS - CCPs

On 21 April 2023, Commission Delegated Regulation (EU) 2023/840 (here) laying down RTS specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources to be used in distress situations by central counterparties (“CCPs”), in accordance with the CCP Recovery and Resolution Regulation (“CCPRRR”) was published in the Official Journal. This Delegated Regulation shall enter into force on the twentieth day following its publication.

RTS - Penalty Mechanism for Settlement Fails under CSDR

On 19 April 2023, the European Commission adopted a Delegated Regulation (here) under the Central Securities Depositories Regulation (“CSDR”) laying down amending RTS as regards the penalty mechanism for settlement fails relating to cleared transactions submitted by CCPs for settlement.

Digital Euro

On 24 April 2023, the ECB published its third progress report on the investigation phase of the digital euro project (here), as well as focus group findings concerning attitudes in respect of digital wallets (here), collated to support the development of a potential digital euro.

SFDR-Taxonomy Developments

On 12 April 2023, the European Supervisory Authorities (the “ESAs”) published a consultation paper outlining proposed amendments to Commission Delegated Regulation (EU) 2022/1288 (the “SFDR Delegated Regulation”) which lays down the Sustainable Finance Disclosure Regulation regulatory technical standards (the “SFDR RTS”) (here). The deadline for responses is 4 July 2023 via the response form (here).

On 14 April 2023, the European Commission published responses to queries raised by the the ESAs, through the Q&A tool, regarding the Sustainable Finance Disclosure Regulation. The European Commission Decision is available (here), with substantive Q&As contained in Annex I (here) and Annex II (here).

On 5 April 2023, the European Commission consulted on two draft delegated regulations and accompanying annexes establishing technical screening criteria for the remaining four environmental objectives of the Taxonomy Regulation, The deadline for responses to this consultation is 3 May 2023 (here).

Our briefing (here) provides further detail on these developments.

CJEU proceedings concerning EU Taxonomy

On 18 April 2023, several environmental NGOs confirmed via a press release (here) that they have brought Court of Justice of the European Union (“CJEU”) proceedings against the European Commission, contesting the EU Taxonomy’s designation of fossil gas as “environmentally sustainable”.

Climate-related and Environmental Disclosures

On 21 April 2023, the ECB published a review (here) in which it details the results of its 2022 supervisory assessment of the disclosure of climate-related and environmental (“C&E”) risks among significant institutions (“SIs”) and a selected number of less significant institutions (“LSIs”). The ECB noted that whilst banks in 2022 increased the amount of ESG-related information published, the ECB review found that the quality of such information remained inadequate and failed to meet supervisory expectations.

Crisis Management and Deposit Insurance Framework

On 18 April 2023, the European Commission, following its review of the EU’s bank crisis management and deposit insurance (“CMDI”) framework, published a package of legislative proposals seeking to reform the existing framework, with a particular focus on smaller and medium-sized banks. The legislative package consists of the following proposals:

• a proposal for a Directive amending the Bank Recovery and Resolution Directive (“BRRD”) as regards early intervention measures, conditions for resolution and financing of resolution action (here);
• a proposal for a Regulation amending the Single Resolution Mechanism (“SRM”) Regulation as regards early intervention measures, conditions for resolution and funding of resolution action (here); and
• a proposal for a Directive amending the Deposit Guarantee Schemes (“DGS”) Directive as regards the scope of deposit protection, use of DGS funds, cross-border co-operation, and transparency (here).

The Commission also published an impact assessment of the proposals (here), as well as a Q&A document (here) and a factsheet (here).

On 18 April 2023, the European Commission published a proposed Directive (here) that would make targeted amendments to the BRRD and the SRM Regulation relating to aspects of the minimum requirement for own funds and eligible liabilities (“MREL”).

RTS - Own Funds and Eligible Liabilities

On 19 April 2023, Commission Delegated Regulation (EU) 2023/827 (here) laying down amendments to regulatory technical standards (“RTS”) under the Capital Requirements Regulation (“CRR”), as regards own funds and eligible liabilities instruments, was published in the Official Journal.

This Delegated Regulation came into force on 29 April 2023.

RTS - Internal Default Risk Models

On 20 April 2023, the European Commission adopted a Delegated Regulation (here) containing RTS concerning the requirements for the internal methodology or external sources used under the internal default risk model for estimating default probabilities (“DPs”) and losses given default (“LGD”) under the CRR.

RTS - Non-trading Book Positions

On 20 April 2023, the European Commission adopted a Delegated Regulation (here) containing RTS in respect of:

• the calculation of the own funds requirements for market risk for non-trading book positions subject to foreign exchange risk or commodity risk; and
• the treatment of those positions for the purposes of the regulatory back-testing requirements and the profit and loss attribution requirement under the alternative internal model approach.

EBA Opinion on draft RTS under CRD IV

On 26 April 2023, the European Banking Authority (“EBA”) issued an opinion (here) relating to amendments proposed by the European Commission to final draft RTS specifying supervisory shock scenarios, common modelling and parametric assumptions and what constitutes a large decline for the calculation of the economic value of equity and of the net interest income in accordance with Article 98(5a) of the Capital Requirements Directive (“CRD IV”).

In the EBA’s view, the changes proposed by the Commission are not necessary to ensure compatibility with EU law and the fundamental principles of the internal market for financial services. The EBA also expresses concerns as to the measures’ effect on harmonisation, proportionality and legal certainty, opining that the amendments proposed would impose an undue burden on competent authorities.

Accordingly, the EBA has revised the substantive amendments to Recital 4 and Article 6 of the draft RTS.

RTS - Exposure Value of SES in Securitisations

On 24 April 2023, the EBA published a final report (here) setting out draft RTS specifying the method by which originator institutions should determine the exposure value of synthetic express spread (“SES”) under the CRR.

The final draft RTS will be submitted to the European Commission for adoption, subject to scrutiny by the European Parliament and the Council.

Climate Insurance Protection Gap

On 24 April 2023, the European Insurance and Occupational Pensions Authority (“EIOPA”) and the ECB published a joint discussion paper (here) on policy options to mitigate catastrophe risk from climate change in the EU by means of insurance coverage and adaptation measures, and to address the current insurance protection gap stemming from climate risk.

ITS - Solvency II Directive

On 4 April 2023, the European Commission adopted an Implementing Regulation (here) amending the implementing technical standards (“ITS”) under the Solvency II Directive with regard to the procedures, formats and templates for the disclosure by insurance and reinsurance undertakings of their report on their solvency and financial condition.

Remuneration and Suitability Requirements

On 3 April 2023, the European Securities and Markets Authority (“ESMA”) published the following guidelines on Directive 2014/65/EU (“MiFID II”) remuneration and suitability requirements:

• Guidelines on certain aspects of the MiFID II remuneration requirements (here).  These guidelines apply in relation to the remuneration requirements set out in Delegated Regulation (EU) 2017/565 (the “MiFID II Delegated Regulation”) as well as, conflicts of interest requirements in the area of remuneration and conduct of business rules. In addition, these guidelines are intended to clarify the application of the governance requirements in the area of remuneration; and
• Guidelines on certain aspects of the MiFID II suitability requirements (here). These guidelines apply to the provision of investment advice and portfolio management. These guidelines are principally intended to address situations where services are provided to retail clients. However, they should also apply, to the extent they are relevant, when services are provided to professional clients.

Both sets of guidelines will apply from 3 October 2023, six months following their publication.

EBA/ESMA SREP Guidelines

On 19 April 2023, ESMA and the EBA published (here) their joint guidelines on common procedures and methodologies for the supervisory review and evaluation process (“SREP”) under Directive (EU) 2019/2034 (the “IFD”).  These guidelines specify common procedures and methodologies for SREP which are proportionate to the different sizes and business models of investment firms, and the nature, scale and complexity of their activities.

These guidelines will apply from 19 June 2023.

Review of Asset Management and Funds Servicing Sector

On 6 April 2023, the Department of Finance published “Funds Sector 2030: A Framework for Open, Resilient & Developing Markets Terms of Reference April 2023” (here).

The Minister for Finance states that the review will be wide-ranging to ensure that Ireland maintains its leading position in asset management and fund servicing and ensure the funds sector is resilient, future-proofed and continues to meet international best practices. The findings from the review are due in Summer 2024.

Updated CBI Q&As

On 4 April 2023, the CBI updated its UCITS Q&A (here) to reflect a change in terminology.

On 4 April 2023, the CBI updated its AIFMD Q&A (here) to revise ID1145, which considers if a RIAIF or a QIAIF can invest either directly or indirectly in digital assets. The CBI states that the revised Q&A does not change the CBI’s position, however the CBI is increasing limits for indirect exposure to digital assets, depending on the liquidity provided by the QIAIF: where a QIAIF is open-ended the CBI states that it can gain exposure to digital assets of up to 20% of NAV. Where a QIAIF is closed-ended or has limited liquidity, the CBI states that it can gain exposure to digital assets of up to 50% of NAV.

The CBI has also made consequential amendments to the pre-submission process for a QIAIF proposing to invest indirectly in digital assets in excess of what is outlined in ID1145 or invest directly in digital assets. Details of the pre-submission requirements are set out (here).

EMIR 3 – ECB Opinion

On 26 April 2023, the ECB published an opinion (here) concerning the proposed Regulation amending the European Market Infrastructure Regulation (“EMIR”) (also known as “EMIR 3”). The ECB supports the package of amendments proposed by the European Commission and highlights specific observations, including, in respect of cooperation between authorities, amendments to CCP requirements, margin, transparency and collateral requirements and validation of initial margin models.

For further detail on EMIR 3, see our briefing (here).

Report on AML/CFT Reform

On 12 April 2023, the European Parliament published a report (here) of the Committee on Economic and Monetary Affairs (“ECON”) and the Committee on Civil Liberties, Justice and Home Affairs (“LIBE”) on proposals by the European Commission to strengthen the EU’s anti-money laundering and counter-terrorist financing (“AML/CFT”) framework.

European Parliament approves mandate - AML/CFT negotiations

On 19 April 2023, the European Parliament announced (here) that it has approved its negotiation mandate in relation to the planned reform of the EU’s anti-money laundering AML/CFT framework. The approved legislative package includes the following proposals:

• the proposal for a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (“AML Regulation”) (here);
• the proposal for a Directive on the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the “Sixth Money Laundering Directive” or “MLD6”) (here);
• the proposal for a Regulation establishing the Anti-Money Laundering Authority (“AMLA”) (“AMLA Regulation”) (here) and
• a proposed Regulation (here) on tracing transfers of funds and certain crypto-assets, which is being advanced separately.

Selected Consultations, Discussion Papers, Speeches and Reports Published

CBI – “Enhanced governance, performance and accountability in financial services: the Individual Accountability Framework” – Remarks by Derville Rowland, Deputy Governor of the CBI (here)

CBI – “Staying the course – monetary policy to avoid persistent inflation” – Remarks by Gabriel Makhlouf, Governor of the CBI (here)

Department of Finance – Consultation on Future of Banking Levy (here)

EBA – Consultation Paper – Draft Guidelines on Assessment, under the Non-Performing Loans (“NPL”) Directive, of the Knowledge and Experience of Credit Servicers (here)

EBA – Consultation Paper – Guidelines on Diversity Benchmarking under CRD IV and the IFD (here)

EBA – Consultation Paper – Guidelines on STS Criteria for On-Balance-Sheet Securitisation (here)

EBA – Consultation Paper – Proposals on Resubmission of Historical Data by Financial Institutions under the EBA’s Supervisory and Resolution Reporting Framework (here)

ECB – Report on the Supervisory Review and Evaluation Process (“SREP”) (here)

ESMA – 2022 Data Quality Report (here)

ESMA – March Markets Newsletter (here)

ESAs –  Joint Committee Report on Risks and Vulnerabilities in EU’s Financial System (here)

European Commission – Report on the Single Supervisory Mechanism (“SSM”) (here)

Government - Legislation Programme for Summer 2023 (here)

ISDA – Quarterly Review (here)

ISDA – “In Review” - A compendium of links to new documents, research papers, press releases and comment letters published by ISDA in April 2023 (here)

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Gambling Regulation Bill 2022: AML Update (here)

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Companies Registration Office filings – introduction of requirement to provide Personal Public Service Number or Verified Identity Number Delayed (here)

Bonus season: factors employers should consider (here)

CJEU rules on the right to know the identity of recipients of personal data (here)

Irish Product Liability Safety Update (here)

Regulatory Licensing: Policy can Lawfully Change (here)