Central Bank’s latest ‘Consumer Protection Bulletin’ published
The Central Bank has published its second Consumer Protection Bulletin this month which concentrates on the data reported by the main credit institutions providing personal credit to consumers. The key trends identified include the following:
- The number of credit card accounts has steadily declined over the past five reporting periods;
- The outstanding value of credit card and personal loan accounts has also decreased over the past five reporting period; and
- The number of credit card and personal loan accounts in arrears have each decreased by a third from the start of 2014 to the end of 2015. However, the number of credit card accounts in arrears slightly increased in the second half of 2015 compared to the first half of the year.
The bulletin can be read at this link.
Credit Guarantee (Amendment) Act 2016
The Credit Guarantee (Amendment) Act 2016 was signed into law last month. The Act introduces a number of amendments to the Credit Guarantee Scheme aimed at increasing uptake of the Scheme amongst small and medium enterprises (“SMEs”).
In particular, the Act increases the amount of the state-backed guarantee available to businesses which have been refused conventional bank credit facilities from 75% to 80% of the facility value. The Act also allows the government to give counter-guarantees which will enable the Strategic Banking Corporation of Ireland to apply for matching guarantee facilities from EU sources.
The definitions of ‘lender’ and ‘loan agreement’ have also been widened in order to capture additional financial product providers such as lessors and invoice discounters, and certain non-credit products such as invoice finance and leasing and overdrafts.
A copy of the 2016 Act can be accessed via this link.
New Conduct of Business Rules for lending to SMEs to take effect from July
The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 will impose specific requirements on regulated lenders (other than credit institutions) with effect from July 2016. The Regulations will apply to credit institutions from January 2017.
The specific requirements that will be imposed on lenders under the Regulations include:
- Giving SME borrowers greater transparency around the application process and providing them with specific reasons for declining credit;
- Providing greater protections for guarantors;
- Contacting SME borrowers who have been in arrears for 15 working days and warning them if they are in danger of being classified as not cooperating; and
- Expanding the grounds for appeal and setting up an internal appeals panel.
While the Regulations cover many of the areas addressed in the Code of Conduct for Business Lending to Small and Medium Enterprises, the Regulations are significantly more prescriptive than the Code particularly with regard to ‘Micro Enterprises’.
A copy of the Regulations is available here.
Central Bank publishes feedback on Central Credit Register Consultation
The Central Bank last month published feedback on the submissions received under the consultation process in respect of the development of new regulations associated with the introduction of the Central Credit Register (the “CCR”).
The CCR, which is provided for under the Credit Reporting Act 2013, will introduce credit reporting requirements applicable to financial lenders including banks, credit unions, asset finance houses, local authorities and money lenders. Loans exceeding €500 will have to be reported to the CCR and lenders will be required to check the register when processing applications for credit which exceed €2,000.
The Central Bank’s feedback statement proposes a two stage process for data submissions to the CCR with the first phase intended to cover all lending to consumers (other than by Local Authorities and regulated money lenders) and the second phase covering all other lending, including consumer lending by Local Authorities and regulated money lenders.
It is proposed that data reporting by relevant lenders in respect of Phase 1 will commence from 30 September 2016 while reporting in respect of Phase 2 will commence from 30 June 2017. It is then envisaged that the obligation to check qualifying applications against the register will commence from 31 December 2017 (in respect of Phase 1) and from 30 June 2018 (in respect of Phase 2).
The Central Bank feedback can be viewed by following this link.
EBA seeks national level input on FINREP and GAAP
The European Banking Authority (the “EBA”) has launched an EU-wide public consultation on reporting financial information using Generally Accepted Accounting Practices (GAAP). The consultation process is being conducted on a decentralised basis via national competent authorities in order to allow for a better informed discussion of issues specific to individual jurisdictions. The deadline for providing feedback to the relevant national competent authority is 15 April 2016. Following the consultation process, the EBA will release an updated version of FINREP.
The EBA press release can be read here.
EBA report on SME lending and the SME supporting factor
The EBA has published a report on SMEs this month. The report analyses the evolution of lending trends and conditions for SMEs, the effective risk levels of EU SMEs over a full economic cycle and the consistency of own funds requirements laid down in the Capital Requirements Regulations for credit risk on exposures to SMEs.
Against the background of the introduction of the SME supporting factor aimed at increasing lending to SMEs, the report shows that there is no evidence that the supporting factor has provided additional stimulus for SME lending as compared to lending to large corporates.
However, the report acknowledges the limitations in respect of available data for the assessment and also notes the relatively recent introduction of the supporting factor. As a result, and in order to draw firmer conclusions, the EBA believes it would be necessary to assess the impact of the supporting factor over a longer period. Consequently, the report recommends the continued monitoring of the application of the supporting factor.
The report can be found at this link.
EBA decision on benchmark rate under the Mortgage Credit Directive
The European Banking Authority has published a Decision on the formula to be used by creditors when calculating the benchmark rate under the Mortgage Credit Directive. By specifying a formula to be used to calculate a rate rather than setting a single rate, the EBA has sought to ensure that the rate is representative of national circumstances and specific to each Member State. The EBA rate will only apply where no national rate has been set.
The Directive specifies the information that creditors should provide to consumers in order to enable the consumer to compare and reflect on the characteristics of credit products. The required information includes illustrations of the annual percentage rate of charge, and of a maximum instalment amount based on the highest value of any external reference rate or a benchmark rate specified by a competent authority or the EBA.
The EBA's proposal was subject to a six-week consultation period between October and November 2015. The EBA received four responses which are summarised in the Report together with the EBA’s feedback on those responses.
The EBA’s decision can be read here.
EBA Guidelines on cooperation agreements between deposit guarantee schemes
The European Banking Authority published its final Guidelines on cooperation agreements between deposit guarantee schemes last month. The EU Deposit Guarantee Schemes Directive requires EU schemes to have written cooperation agreements in place to allow more effective cooperation between one another.
The EBA Guidelines set out the minimum content which must be included in the agreements in respect of three key areas:
- Repayment to depositors by local schemes at branches of banks established in other Member States;
- Transfer of contributions from one scheme to another where a credit institution ceases to be a member of a scheme and joins another; and
- Mutual lending between schemes.
In order to ensure that depositors are treated equally across the EU, the Guidelines also provide guidance on the sequence and timing of events where a local scheme pays out to depositors on behalf of a scheme based in another Member State.
The final Guidelines can be read here.
Central Bank enters settlement agreement with reinsurer
The Central Bank fined Arch Reinsurance Europe Underwriting dac (“Arch”) €275,000 this month for breaches of the Corporate Governance Code for Credit Institutions and Insurance Undertakings 2010 (the “Code”). The Code, which came into force in January 2011, prescribes minimum corporate governance requirements which insurance undertakings must observe.
Following a full risk assessment carried out by the Central Bank from January to June 2014, 9 prescribed contraventions of the Code were identified. The breaches related to key parts of Arch’s governance structure including its board, its risk committee and its oversight of its subsidiary. In addition, the Central Bank identified issues regarding the consistency and completeness of Arch’s governance, risk and policy documentation. The Central Bank took the view that these failures demonstrated a compliance culture within the firm which fell short of the standard expected in respect of corporate governance.
The full press release can be found here.
Final edition of Central Bank’s ‘Solvency II Matters Newsletter’ published
The Central Bank has recently published the final edition of its ‘Solvency II Matters’ newsletter.
The newsletter states that the Central Bank intends to issue a public consultation paper in May to discuss the scope of the auditing requirements for regulatory returns for periods ending on or after 31 December 2016. The Central Bank also highlights the 31 May 2016 deadline for submission of notifications in respect of in-situ individuals that will perform the role of Head of Actuarial Function for insurance undertakings. The in-situ process only applies where a person was in the role on or before 31 December 2015 with subsequent appointments required to follow the standard Fitness and Probity Approval process.
Some of the other items contained in the newsletter include a summary of recent Central Bank publications and engagements and a summary and explanation of the key issues on which undertakings require clarification in respect of their reporting requirements under Solvency II as identified in the Central Bank’s recently held reporting workshops.
Going forward, a new quarterly insurance newsletter will replace the Solvency II newsletter, with publication commencing in June 2016.
The full newsletter can be read here.
EIOPA publishes monthly technical information
Earlier this month, the European Insurance and Occupational Pensions Authority (“EIOPA”) published updated technical information on the relevant risk free interest rate term structures with reference to the end of February 2016. The update mainly relates to market developments in respect of negative euro swap rates.
The EIOPA press release can be read in full here.
2016 Insurance Sector Stress Test
EIOPA has announced that an EU wide stress test of the insurance sector will be conducted this year. The exercise will aim to assess the sector’s vulnerabilities to a combination of market risk and adverse scenarios.
This month EIOPA invited the main EU stakeholder associations to engage in a workshop with industry and actuary representatives to discuss the shape and technical specifications for the exercise.
The deadline for industry participants to submit data to relevant national supervisory authorities will be July 2016 and results of the test will be published in December 2016.
Details of the exercise can be found here.
Effective date of the Investor Money Regulations for Fund Service Providers delayed
The effective date of the Investor Money Regulations has been put back by one month from 1 April 2016 to 1 July 2016. This postponement will allow investment funds more time to change their processes in order to ensure that their subscription/redemption/dividend accounts operate at an umbrella level as fund assets thereby avoiding the Regulations.
Once the Regulations come into force at the beginning of July, fund service providers will be required to comply with the following principles in respect of money held on behalf of investors:
- Segregation – investor money should be held completely separate from non-investor money and accounting segregation should also be maintained;
- Designation – investor money should be clearly identifiable in both internal records and those of third parties;
- Reconciliation – accurate books and records should be kept to ensure an accurate record of money held each for each investor. Reconciliation of records against those of any third parties with whom investor money is held should also be conducted on a daily basis;
- Daily calculation – the aggregate balance of all collection accounts should be checked daily against the balance as at close of business on the previous working day to ensure that it equals the amount that should be held on behalf of investors;
- Risk management – systems and controls should be applied which are appropriate to identify risks in relation to investor money and mitigants should be put in place to counteract any risks identified; and
- Investor money examination – an external auditor should be engaged to report at least annually on the safeguarding of investor money.
Central Bank themed inspection of investment firms identifies conflicts risks
The Central Bank has completed a themed inspection of the processes employed by investment firms to identify and manage conflicts of interest. The MiFID, UCITS and AIFMD regulations all impose requirements on firms to manage conflicts of interest.
The Central Bank has followed up on the main issues identified during the inspection by engaging with the relevant institutions to ensure that specific remedial actions are taken. A letter providing feedback on the inspection and highlighting good and poor practices has also been issued to all investment firms. The letter emphasises that a strong culture of compliance is an essential component of the effective management of potential conflicts.
A copy of the Central Bank’s letter can be read here.
Doohan, Eoin and Anne Doohan v Irish Life Assurance plc and Irish Life Investment Management Ltd
The plaintiffs brought a test case as representatives of 214 investors in Irish Life’s “Austin Friars” Geared Property Funds. The first plaintiff is an investment advisor and former account manager with Irish Life and had previous experience of investing in geared property funds.
The plaintiffs invested in a geared fund to purchase a commercial property in London. 68% of the equity was raised by virtue of a five year loan with PTSB which was Irish Life’s sister company at the time. The remaining equity was raised from high net investors and pension funds.
In July 2013 the property was sold with investors losing 78% of their capital.
The plaintiffs claimed that Irish Life was in breach of its contractual duty by failing to structure the borrowings so as to give Irish Life a discretion to extend the loan at the end of its term if necessary and in negligently disposing the London office property in July 2013 in breach of its contractual and/or fiduciary duty.
The terms and conditions of the contractual documentation stated that the intended life of the fund was 5 years with discretion to amend this to an earlier or later date “depending on market conditions”. Despite a number of requests from Irish Life, PTSB decided not to extend the loan in 2012 but offered a six month extension on the basis that the property would be sold and the loan repaid in January 2013.
In the High Court, Justice Fulham held that Irish Life had done all it could to get the best outcome for investors and had not breached its fiduciary or contractual duty. The Court also found, on the evidence, that the plaintiffs would still have invested in the fund if they had known that there was no right to extend the term of the loan past five years. This judgment is another line of authority that an action for mis-selling against a firm is an uphill struggle for investors where appropriate contractual documentation and disclaimers have been provided at the outset.
The full judgment can be read here.
ESMA publishes Q&A on UCITS V
The European Securities and Markets Authority (“ESMA”) has published a consolidated Q&A document on the application of the UCITS V Directive which came into force on 18 March 2016.
The consolidated document includes new questions regarding the additional documents that funds are required to provide for UCITS V and also amalgamates the various other ESMA Q&A documents on UCITS.
The updated Q&A document can be found here.
ESMA consultation on Securities Financing Transaction Regulation
The European Securities and Markets Authority has this month issued a Discussion Paper on rules under the Securities Financing Transaction Regulation.
The Paper sets out proposals regarding the implementation of the reporting framework under the Regulation and includes details of the procedure and criteria for registration as a trade repository and for the use of internationally agreed reporting standards. The proposals have been developed in line with ESMA’s experience with EMIR and other EU-wide reporting regimes in order to harmonise reporting standards as far as possible.
ESMA is seeking responses from interested stakeholders before 22 April 2016 and intends to use feedback received to develop draft rules which will then be subjected to a follow-on consultation process in the second half of 2016. The final draft rules will then be sent to the European Commission for approval in January 2017.
The Discussion Paper can be accessed here.
European Commissioner speaks on Capital Markets Union
Earlier this month the European Commission published a speech by Jonathan Hill, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, in which he summarised the Commission’s work on establishing a single capital market in Europe. In particular, he noted the following:
- This year, the Commission will seek to strengthen venture capital markets by amending existing legislation governing venture capital funds. The Commission is also keen to encourage the development of crowd-funding as a source of finance for start-ups and the development of industry-led business growth funds in order to support equity in SMEs.
- The Commission has made a proposal to restart Europe's securitisation markets which sets out criteria for simple, transparent and standardised securitisation, with reduced capital requirements for qualifying securitisations.
- The Commission is working to remove barriers to cross-border investment in order to deepen the financial markets available to companies of all sizes. It is also intended to improve the passport system for investment funds to allow them to offer their services and compete in different markets more easily. As part of this process, the Commission will this year launch a consultation to identify the main barriers to funds operating on a cross-border basis.
The full speech can be read here.
Central Bank inspection targets non-compliant intermediaries
The Central Bank announced this month that its targeted inspection of retail intermediaries that were not complying with minimum reporting requirements has led to the majority of firms either becoming compliant or seeking to revoke their authorisation.
Of the 325 firms that were targeted due to failure to submit annual reports, 171 are now meeting their reporting obligations and 134 have sought voluntary revocation of their authorisation. The Central Bank has announced that it will use further supervisory powers in respect of the remaining 20 firms that are still non-compliant.
The full press release can be read here.
Central Bank publishes report on Anti-Money Laundering / Countering the Financing of Terrorism and Financial Sanctions Compliance
The Central Bank has this month published a report on Anti-Money Laundering and Countering the Financing of Terrorism (“AML/CFT”) and Financial Sanctions (“FS”) Compliance in the Life Insurance Sector. Although the report’s specific focus is the insurance sector, the Central Bank states that it expects all financial and credit institutions to carefully consider the issues identified, and to use the report to inform the development of AML/CFT and FS frameworks.
The report is based on a combination of on-site inspections and off-site desktop reviews which involved assessment of firms’ relevant policies, procedures, risk assessments, outsourcing and third party arrangements together with interviews of key staff, walk-throughs of key processes and a review and testing of relevant IT systems.
The issues identified by the report as representative across the sector include the following:
- Insufficient evidence of firms implementing the requirements of the CJA 2010 and performing an adequate risk assessment in a timely manner;
- Deficiencies in the policies and processes in place relating to third party reliance and outsourcing arrangements including a lack of oversight;
- Insufficient evidence of effective monitoring of investor transactions on an on-going basis;
- Insufficient documentation being retained to support the application of the simplified client due diligence procedure;
- Weaknesses in the suspicious transaction reporting processes, in particular, due to a lack of records of the assessment carried out by the MLRO on the rationale for reporting or not reporting a particular matter;
- Deficiencies in the policies and procedures in place in relation to the definition and identification of PEPs and application of Enhanced Client Due Diligence for new PEPs;
- Insufficient evidence of appropriate instruction to staff and board members on the law relating to AML/CFT issues; and
- Non-adherence to stated AML, CFT and FS policies.
While the report acknowledged that many firms had satisfactory procedures, systems and controls in place, it states that the issues identified emphasise the need for further enhancements to strengthen existing frameworks.
A copy of the report can be found by following this link.
Criminal Justice (Offences Relating to Information Systems) Bill 2016 published
On 15 January, the Government published the Criminal Justice (Offences Relating to Information Systems) Bill 2016. The main purpose of the Bill is to give effect to provisions of the EU Cybercrime Directive (Directive 2013/40/EU) which aims to harmonise EU Member States’ criminal laws on attacks against information systems and to enhance cooperation between relevant authorities.
The Bill removes cybercrime from the scope of the Criminal Damage Act 1991 and creates new offences carrying maximum sentences of between 5 and 10 years. The new offences relate to:
- Unauthorised access of information systems;
- Interference with information systems or with data on such systems which will address denial of service attacks for the first time under Irish law;
- Interception of transmission of data to or from information systems; and
- The production or use of tools to facilitate the commission of these offences.
The Bill has not yet reached the second stage in the legislative process and it may be some time before the Bill is enacted. While it is unclear what changes, if any, it will undergo prior to enactment, it will be of huge importance in terms of combatting cybercrime and seeking to safeguard modern information and communication systems.
The Bill as initiated can be viewed here.
Central Bank highlights consumer protection risks and key priorities for 2016
The Central Bank has set out the consumer protection priorities on which it will focus over the next year in its ‘Consumer Protection Outlook Report’ published last month. The report also highlights a number of key risks facing financial services consumers which all regulated firms are encouraged to fully consider.
The risks identified in the report include the absence of a consumer-focussed culture within firms, the design and sale of products which are complex and difficult to understand and poor service standards. A number of risks are also identified in respect of the current trend of firms moving away from traditional delivery channels and services to online and mobile technologies.
The report also warns against the re-emergence of irresponsible lending.
The key priorities for the Central Bank this year, as set out in the report, include:
- achieving significant progress on the tracker mortgage examination;
- driving a more consumer-focussed culture in firms through challenging boards and senior management to demonstrate that they are identifying and addressing consumer risks;
- an examination of the risks and benefits to consumers of intermediary commission payment structures;
- rolling out an enhanced authorisation model for assessing applications from firms, including credit servicing firms, retail intermediaries and payment institutions;
- undertaking themed inspections of the sale of private health insurance, structured investment products and the handling of insurance claims;
- a supervisory focus on smaller retail firms and increased frequency of firm-specific on-site inspections; and
- continuing to strengthen the consumer protection framework, and concluding our consultation on transparency requirements for mortgage lenders.
The Central Bank report can be read here.
Court of Appeal considers litigation privilege over correspondence with Central Bank in context of the Administrative Sanctions Procedure
The Court of Appeal delivered its judgment in the case of Purcell v Central Bank of Ireland, The AG and Ireland  IECA 50 on 26 February 2016, in which it considered the plaintiff’s application for discovery of ‘without prejudice’ correspondence between the Central Bank and one of the subjects of an inquiry established pursuant to the Central Bank’s Administrative Sanctions Procedure, the Irish Nationwide Building Society (“INBS”). The ‘without prejudice’ rule generally prevents statements made in a genuine attempt to settle a dispute from being relied upon in court as evidence against the person who made the statement.
In July 2015 the Central Bank served a Notice of Inquiry on INBS and a number of people associated with its management, including the plaintiff who is a former executive director and secretary of INBS. The Notice alleged that the plaintiff was a ‘person concerned’ with the management of INBS who participated in certain regulatory ‘prescribed contraventions’.
The Central Bank subsequently issued a statement announcing that it had reached a settlement with INBS, in circumstances where INBS had admitted multiple failings of its commercial lending process, “all the way to its Board of Directors”. The statement went on to explain that it had imposed a €5 million fine on INBS but that it was not proposed to collect the fine given that INBS had no assets.
The plaintiff challenged the validity of the settlement, on the basis that the Administrative Sanctions Procedure was unconstitutional and further asserting that the publication of the settlement had damaged his name, by implying that he had participated in the admitted contraventions of INBS.
The plaintiff sought discovery of any 'without prejudice' correspondence leading to the settlement in question, on the basis that this correspondence was necessary for him to establish that the settlement reached was not a genuine one. The High Court refused the relief sought, holding that the damage to the interests of justice caused by non-disclosure would need to be very clear and overwhelming in order to set the litigation privilege aside. The High Court also rejected the plaintiff's argument that the Central Bank had waived its litigation privilege by making a public statement regarding the settlement with INBS.
The Court of Appeal upheld the Central Bank's claim to litigation privilege, and rejected the argument by the plaintiff that the privilege had been waived by publication of the settlement. The Court reviewed the rationale behind the ‘without prejudice’ rule, noting that its purpose is to encourage parties to a dispute to speak frankly and openly to one another for the purpose of reaching settlement, and that the rule should only be departed from in truly exceptional circumstances. The Court found that it would be necessary for the plaintiff to demonstrate that the Central Bank had actually abused the privilege before the Court could or should sanction the lifting of litigation privilege. The Court held that the Central Bank had not done so.
While the Court acknowledged that a litigant may indeed waive litigation privilege, either expressly or by implication, it found that this had not occurred in this case. The Court considered the case of Property Alliance Group Ltd v Royal Bank of Scotland  EWHC 1557 as an example of where the conduct of the defendant in the course of litigation amounted to a waiver of privilege. In that case, the English High Court held that the defendant bank, by making a formal assertion in its pleadings in relation to a settlement it had previously negotiated with the regulator, had waived litigation privilege over documents provided to the regulator for the purpose of reaching a settlement in that regulatory procedure. The Court of Appeal ultimately found that the present case did not come within the scope of that decision.
In reaching its decision, the Court of Appeal held the critical point to be the fact that the Central Bank had never formally put the terms of the INBS settlement at issue or sought to rely on its terms adversely as against the plaintiff. The Court did, however, note that if the Central Bank was to invoke the terms of the settlement by way of affirmative defence in the proceedings, or in some other affirmative fashion in the course of the Administrative Sanctions Procedure, then, in principle, the plaintiff might legitimately contend that the litigation privilege had been waived in light of cases such as Property Alliance.
The Court of Appeal’s judgment can be found here.
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