Prudential regulationi Relationship with the prudential regulator
The Central Bank employs a risk-based approach to regulation, supported by its ability to take enforcement action where breaches of its requirements are identified. The risk-based approach is used so that resources are focused on financial institutions with the highest impact and risk profile.
In November 2011, the Central Bank introduced a risk-based supervisory mechanism called PRISM (Probability Risk and Impact SysteM), which allocates the Central Bank's supervisory resources based on risk to the economy. This allows the Central Bank to focus on those financial institutions that pose a greater threat to the financial stability of the economy. The SSM approach to supervision is also risk-based. It takes into account both the degree of damage that the failure of an institution could cause to financial stability and the likelihood of such a failure occurring. Where the SSM judges that there are increased risks to a credit institution or group of credit institutions, those banks will be supervised more intensively until the relevant risks decrease to an adequate level. The SSM approach to supervision is based on qualitative and quantitative approaches, and involves judgement and forward-looking critical assessment.Compliance monitoring
Central Bank compliance monitoring involves reviewing regulatory returns provided by banks, and conducting both on-site and off-site review meetings and inspections. Those institutions that carry the greatest risk to the stability of the financial system or that deal directly with customers are subject to a higher level of scrutiny.
The Central Bank has the power to impose administrative sanctions to ensure compliance with the regulatory requirements imposed on banks through the Central Bank (Supervision and Enforcement) Act 2013 (2013 Act). This legislation substantially strengthened the Central Bank's powers and increased its potential enforcement remedies. The 2013 Act also gave the Central Bank power to direct regulated financial services providers to make appropriate redress to affected customers for widespread or regular relevant defaults, and provided affected customers with a right of action if they have suffered loss as a result of a breach of regulatory requirements.
The Central Bank's Strategic Plan 2019–2021 sets out the Central Bank's strategic themes, statutory objectives and organisational objectives for the period. The Strategic Plan states that the Central Bank will engage strategically with the SSM framework and the European Supervisory Authorities in the development of regulatory guidelines, standards, methods and risk analyses, as well as with EU legislative bodies in relation to sectors regulated by the Central Bank. Among its key strategic themes are mitigating the impact of Brexit, enhancing consumer protection and strengthening resilience.Disclosure obligations
The Central Bank has broad supervisory powers and can compel licensed banks to make disclosures relating to any aspect of their business. Under the Companies Act 2014, licensed banks are also required to disclose increased levels of detail relating to certain transactions (including loans) with directors and connected persons in their annual accounts. The 2013 Act also introduced protection for persons who disclose to the Central Bank alleged contraventions of financial services legislation.
On 1 July 2013, the Central Bank's revised Code of Practice on Lending to Related Parties came into force. It sets out statutory requirements (including disclosure obligations) in relation to lending by banks and building societies to related parties, including subsidiaries and senior office holders.Principal matters in which the regulator will become involved
The most common form of enforcement issue is failure by a bank to comply with the technical requirements of a regulation or code, particularly consumer protection, anti-money laundering and regulatory capital requirements. Based on an analysis of the Central Bank's recently published sanctions, a major concern of the Bank is system and control failures by regulated entities and failure to comply with their internal policies and procedures. Sanctions are disclosed on the Central Bank's website.ii Management of banks
The Central Bank must be satisfied that the structure of the board and senior management of a bank and its internal control systems and reporting arrangements are such as to provide for the effective, prudent and efficient administration of its assets and liabilities. In this respect, it is necessary for all banks to have in place such committees of directors and management and other management structures as are necessary to ensure that the business of the credit institution is being managed, conducted and controlled in a prudent manner.
The Central Bank's fitness and probity regime, established under Part 3 of the Central Bank Reform Act 2010, came into effect on 1 December 2011 and was fully implemented on 1 December 2012. Regulated financial services providers, including banks, are responsible for ensuring that persons performing pre-approval controlled functions or controlled functions comply with the Fitness and Probity Standards (Standards), both on appointment to such functions and on an ongoing basis. Specifically, a regulated financial services provider must not permit a person to perform a pre-approval controlled function or controlled function unless it is satisfied on reasonable grounds that the person complies with the Standards and has obtained confirmation that the person has agreed to abide by those Standards.
The Central Bank must be satisfied that directors and senior executives are fit and proper persons and have appropriate competence and experience in banking and financial services to enable them to fulfil their duties.
Previously, all appointments to the board of a bank and certain senior management appointments were subject to the prior approval of the Central Bank. However, following the implementation of the SSM, the ECB is now the exclusive competent authority regarding the fitness and probity of the management boards of significant credit institutions and the management boards of all credit institutions applying for authorisation.
A proposed director or senior manager must complete an individual questionnaire disclosing details of his or her interests, background and any regulatory censures to which he or she has been subjected. A detailed curriculum vitae outlining the proposed appointee's relevant experience must also be attached. All retirements from the board must also be notified to the Central Bank.
The Central Bank requires that the ultimate decision-making body of a bank be located in Ireland and that the bank be adequately staffed to carry out its head office operations in Ireland.
The Corporate Governance Requirements for Credit Institutions 2015 (Corporate Governance Requirements) set out minimum statutory corporate governance requirements for Irish incorporated credit institutions. Compliance with the Corporate Governance Requirements is mandatory, and there is no scope to explain departures from them.
In addition to the regulatory requirements imposed on directors of Irish banks, directors must also comply with the directors' duties imposed by Irish company law and Irish common law.
The Central Bank's Minimum Competency Code 2017, and its Minimum Competency Regulations (the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(2)) Minimum Competency Regulations 2017) set out minimum professional standards for staff of regulated financial services providers (including banks) when dealing with consumers in relation to retail financial products, and with retail clients and elective professional clients in respect of MiFID investment services and activities.Remuneration
The CRD and the CRR (together referred to as CRD IV) were implemented in Ireland by the European Union (Capital Requirements) Regulations 2014 (2014 Regulations) (which transposed the CRD) and the European Union (Capital Requirements) (No. 2) Regulations 2014 (which gave effect to a number of technical requirements necessary to ensure the effective operation of the CRR). The 2014 Regulations place an obligation upon firms to have remuneration policies that are consistent with and that promote sound and effective risk management, and that place restrictions on variable remuneration in particular. The 2014 Regulations also contain disclosure requirements related to remuneration policies and practices. Remuneration practices that are not consistent with effective risk management or that run contrary to the CRD IV remuneration principles will be scrutinised by the Central Bank.
In November 2013, the Central Bank confirmed to the European Securities and Markets Authority (ESMA) its intention to comply with ESMA's Guidelines on Remuneration Policies and Practices. All affected firms (including credit institutions that provide investment services) are required to comply with the guidelines and to take the guidelines into account when formulating their remuneration arrangements. On 31 January 2017, the Central Bank published a policy statement setting out its position in relation to proportionality relating to the payout process applicable to variable remuneration for Irish less significant credit institutions and CRD IV investment firms.
The Corporate Governance Requirements also contain certain guidelines relating to remuneration, including a prohibition on remuneration policies that encourage risk-taking and a requirement that major institutions appoint a remuneration committee.iii Regulatory capital and liquidity
Under CRD IV, a bank is required to have initial capital of at least €5 million and then to comply with risk-based ongoing capital requirements. The purpose of CRD IV is to implement the Basel III global regulatory standards and to strengthen the EU banking sector to enable it to better withstand any future economic or financial crisis.
A range of sanctions may be imposed by the Central Bank to ensure enforcement of the 2014 Regulations, but in any event the Central Bank will require a bank to inject additional capital immediately should it fail to meet the minimum capital requirements.
In 2014, three credit institutions were fined €650,000, €315,000 and €100,000 for breaches of the European Communities (Capital Adequacy of Credit Institutions) Regulations 2006 (these Regulations have been revoked by the 2014 Regulations). The breaches included having exposures to sovereign bonds and clients in excess of the permitted limits. In 2015, one firm was fined €49,000 in respect of breaches of its obligations under the CRR.
The Central Bank published detailed requirements for the management of liquidity risk in June 2009, which must be complied with by Irish banks.
The Solvency II regime for insurance and reinsurance companies has been given legal effect in Ireland by the European Communities (Insurance and Reinsurance) Regulations 2015.
The Credit Union Act 1997 (Regulatory Requirements) Regulations 2016, which came into force on 1 January 2016, deal with reserves, liquidity, lending, investments, savings and borrowings for the credit union sector.Insolvency
In the event that a bank becomes insolvent, an examiner may be appointed to that bank. If a bank is, or is likely to become, unable to pay its debts, the Central Bank may present a petition to the court for the appointment of an examiner to the bank. The petition to appoint an examiner must be accompanied by a report prepared by an independent accountant, a statement of the bank's assets and liabilities, and the opinion of the independent accountant as to whether the bank, or part of it, would have a reasonable prospect of survival, and whether an attempt to continue the whole or part of the business would be more advantageous to the members and creditors than a winding up.
An examiner may be appointed for 70 or 100 days, during which time no proceedings for the winding up of the bank may be taken, no receiver may be appointed over any part of the bank's property, and no attachments, sequestration, distress or execution may be carried out. An examiner is required to formulate proposals for a compromise or scheme of arrangement in relation to the bank and may carry out such other duties as the court may direct.
In the event that a bank is unable to pay its debts, a creditor may petition the court to have the bank wound up or the shareholders may convene a meeting of the shareholders to resolve to wind up the bank. In the former case, the court may appoint a liquidator. If the shareholders resolve to wind up the bank, the creditors will appoint a liquidator.
Under the Resolution Act, the Central Bank may present a petition to wind up an authorised credit institution. Other persons may only do so if the Central Bank is notified and confirms that it does not object. If a petition is presented by a person other than the Central Bank, the Central Bank retains a key role. For example, the Central Bank must be given notice prior to certain steps in the process being taken, and a liquidator cannot be appointed without its prior approval. The Resolution Act also sets out specific objectives for liquidators of authorised credit institutions.
The EU Insolvency Regulation will also apply to an insolvency when a bank has a place of establishment in another EU Member State (other than Denmark).
The EC (Reorganisation and Winding-Up of Credit Institutions) Regulations 2011 (CIWUD Regulations) give effect to the Credit Institutions Reorganisation and Winding-Up Directive. These Regulations apply to banks whose head office is located in Ireland and to branches of those institutions located in EU Member States.
The Resolution Act, which came into effect on 28 October 2011, aims to provide an effective and expeditious regime for dealing with failing credit institutions while minimising the cost to the state. The Resolution Act has applied to credit institutions in Ireland since 31 December 2014, when the temporary emergency regime under the Stabilisation Act expired. The Resolution Act has now largely been superseded by the BRRD Regulations. The resolution mechanisms under the Resolution Act now only apply to credit unions. The Central Bank has sweeping powers to intervene where a credit institution is failing. Further details on the Stabilisation Act, the Resolution Act and the BRRD Regulations are set out below.Future developments
At this stage, there are no plans for purely domestic legislation that would alter the Irish capital adequacy requirements.iv Recovery and resolution
Ireland has introduced three specific pieces of resolution legislation following the crisis of recent years.The Stabilisation Act
The Stabilisation Act came into effect on 21 December 2010. It provided a legislative basis for the immediate restructuring and stabilisation of the Irish banking system as set out in the National Recovery Plan 2011–2014 and agreed in the Programme of Support. The powers in the Stabilisation Act were temporary and expired on 31 December 2014.The Resolution Act
The Resolution Act came into effect on 28 October 2011, and granted the Central Bank sweeping powers to intervene where any Irish credit institution is failing. The powers in the Resolution Act became fully effective upon the expiry of the Stabilisation Act on 31 December 2014. The Resolution Act was largely superseded when the BRRD Regulations came into force during 2015, but is still applicable to credit unions.
There are various preconditions that must be met before the Central Bank can intervene under the Resolution Act, which include:
- the existence of a present or imminent serious threat to the financial stability of a credit institution, or serious concerns relating to its financial stability or that of the state;
- a credit institution failing, or the likelihood that a credit institution will fail, to meet a regulatory requirement; and
- the existence of circumstances under which it is not in the public interest to wind up the credit institution immediately.
The Resolution Act established a fund for the resolution of financial instability in credit institutions. This fund is financed by a levy on credit institutions and any contribution from the Minister for Finance.
If the preconditions are met, and if it is considered necessary, the Central Bank is able to make an application to the High Court seeking an order to transfer the assets or liabilities of a failing institution, impose a special management regime on that failing institution, or both.
The Central Bank is empowered to present a petition to the High Court for the winding up of a failing credit institution in certain circumstances; further, no person is allowed to petition to wind up a credit institution without giving the Central Bank notice and receiving its approval.
The Central Bank is able to direct an ailing credit institution to submit and implement a recovery plan. If deemed necessary, the Central Bank can itself prepare a resolution plan in relation to a credit institution.The BRRD Regulations
The BRRD was transposed into Irish law on 9 July 2015 by the BRRD Regulations. The Central Bank was designated as the competent authority in Ireland under the BRRD Regulations, save as regards the specific tasks conferred on the ECB as part of the SSM, in which case the ECB will function as the competent authority. The Central Bank was appointed as the resolution authority in Ireland for BRRD purposes under the BRRD Regulations. The BRRD Regulations also require the Central Bank to publish internal rules (including rules on professional secrecy) on information exchanges between it as resolution authority and its other functional areas. These internal rules were published by the Central Bank on 17 August 2015.
The following conditions must be met for the resolution of an institution to be regarded as necessary:
- the competent authority, having consulted with the Central Bank as resolution authority, must determine that the institution is likely to fail;
- there is no reasonable prospect of an alternative private sector measure (i.e., a sale to, or merger with, a private sector purchaser) that could remedy the situation;
- resolution must be necessary in the public interest; and
- the Minister for Finance must be informed.
There are four resolution tools available under the BRRD Regulations, which can be exercised individually or in a combination of two or more:
- the sale of business tool;
- the bridge institution tool;
- the asset separation tool; and
- the bail-in tool).
To avail of one of the four resolution tools, the Central Bank must make a proposed resolution order and then make an ex parte application to the High Court for a resolution order. The institution itself, a shareholder or the holder of a capital instrument or liability affected by a resolution order may apply to the Court, within 48 hours of publication of the order, for the order to be set aside. The resolution order may provide for (among other matters):
- a transfer of shares, assets and liabilities;
- a reduction of principal under a capital instrument or in respect of eligible liabilities (or their conversion into shares);
- the cancellation of debt instruments (other than secured liabilities);
- the close-out or termination of financial contracts; and
- the removal and replacement of management by a special manager.
The BRRD Regulations provide for another resolution measure whereby the Central Bank can apply to the High Court for a capital instruments order to write down or convert relevant capital instruments into shares, or other instruments into shares or other instruments of ownership in respect of an institution that requires resolution.Stabilisation Scheme and Restructuring Support Scheme for credit unions
In November 2014, the Minister for Finance announced the introduction of two schemes of support for the credit union sector: the Stabilisation Scheme and the Restructuring Support Scheme. The Minister signed the Credit Union Fund (Stabilisation) Levy Regulations 2014 into law on 26 November 2014, giving effect to the introduction of a stabilisation levy to provide stabilisation support for credit unions under the Stabilisation Scheme. Separately, the Minister announced the introduction of a Restructuring Support Scheme for credit unions. The latter will provide financial assistance to restructuring credit unions that are not in a position to finance the process themselves for excess capital within participating credit unions.