Taking effect today, 1 August 2013, the Central Bank (Supervision and Enforcement) Act 2013 (the “Act”) is likely to be the last significant piece of regulatory legislation to follow on from the financial crisis.
Having undergone a series of changes since it was first presented to the Oireachtas in July 2011, the Act introduces a number significant new powers for the Central Bank of Ireland (the “Central Bank”). However, it is some of the changes which the Act makes to existing legislation which will in our view be of most interest to clients - some of which are expected, some timely, as well as one or two which are a little surprising.
In this client briefing we identify some of the changes and consider the impact they will have on clients operating in the Irish market.
21st Century Consumer Credit
For those providing consumer credit, the changes to the Consumer Credit Act 1995 and the Electronic Commerce Act 2000 are very welcome. The Act removes the cross-reference to the Consumer Credit Act 1995 from the Electronic Commerce Act 2000 – putting beyond doubt the ability to contract using e-signatures. The amendment made to section 45 of the Consumer Credit Act also make it clear that the strict requirements relating to communications by post relate only to paper communications (rather than all written communications), also a timely and welcome change.
Third country branches
One of the more unexpected and surprising changes effected by the Act is the inclusion of the new provisions permitting credit institutions operating in third countries (ie outside the EU/EEA) to operate branches in Ireland. Subject to certain criteria, such credit institutions will now be able to apply to the Central Bank for a section 9A ‘bank licence’ in accordance with the relevant provisions now contained in the Central Bank Act 1971. It had been the policy of the Central Bank not to accept such applications and it may be hoped that this change will facilitate further development of internationally traded financial services.
Debt management firms
The Act also introduces a new authorisation regime for firms that provide debt management services to one or more consumers.
Debt management firms are defined quite broadly in the Act and include those who give debt or budgeting advice, negotiate with creditors on behalf of clients or perform any similar activity. Unless such person is an ‘excepted person’ (which includes trustees and personal representatives, charitable organisations, MABS, banks and credit unions and certain regulated professionals (lawyers and accountants) providing debt management services in an incidental manner) then an application for authorisation must be made to the Central Bank.
Where an application for authorisation is made within three months of 1 August 2013, then a firm which currently provides these services may continue to do so until the Central Bank has determined its application. The Central Bank has separately also published a consultation paper on the authorisation requirements and standards which it is proposed will apply to such firms. Customer rights – civil action
Of significance also is the introduction of a statutory basis for an action for damages by customers who have suffered loss as a result of any failure by a financial services provider to comply with its obligations under financial services legislation. ‘Customer’ in this context extends to any person who has requested services or to whom services are offered or provided by that financial service provider, and also includes a potential customer and a former customer. For example if a customer suffers loss as a result of a firm not complying with the MiFID Regulations or the Insurance Mediation Regulations the customer may have a right to damages for that breach.
Customer rights – redress by the Central Bank
In addition to the individual right of a customer to seek damages, the Central Bank will now be able to direct the redress of customers in cases of widespread or regular ‘relevant defaults’ (where customers have suffered, are suffering or will suffer loss or damage).
‘Relevant defaults’ include overcharging; providing extra services not agreed to by the customer, providing unsuitable services or when customer choice is based in incorrect information, failures with system or controls and prescribed contraventions. Redress is limited to actual loss (with interest if appropriate).
Increased penalties and other new powers related to the Central Bank Administrative Sanctions regime
Also effective from today are the increases in the maximum fines which can be imposed by the Central Bank in its administrative sanctions regime. For corporates, maximum fines rise from €5 million to €10 million / 10% of turnover; for individuals, the maximum fine is increased from €500,000 to €1 million. In addition, the Bank’s powers to publish its findings have also been amended and clarified.
New sanctions available to the Central Bank include the power to revoke the authorisation of that financial service provider or to suspend its authorisation in respect of some or all authorised activities for up to 12 months where there has been a prescribed contravention.
Another option for the Central Bank is in the form of its new power to apply to the High Court for a ‘Restitution Order’ in cases where there has been unjust enrichment / loss suffered. Restitution Orders are also an option for the Bank in the context of a prescribed contravention in the Market Abuse, Prospectus and Transparency Regulations as well as where a conviction is imposed in respect of a breach of financial services legislation.
Protected Disclosures - increased responsibilities for those in pre-approval controlled functions
Employees in the financial services sector will now have statutory protection where they disclose, in good faith, certain facts to ‘an appropriate person’ (which in the Act is defined as the Central Bank, an officer or employee of the Central Bank or an authorised officer). Protected disclosures cover information relating to breaches of financial services legislation or the destruction or concealment of relevant evidence related to such breaches.
However, for those employees who are currently employed in pre-approval controlled functions (“PCFs”), the Act in fact introduces a positive obligation to make a protected disclosure where he or she believes that information “will be of material assistance to the Bank”.
Whilst the Act provides specific grounds permitting non-disclosure (where there is a reasonable excuse, where to do so will self-incriminate or where the information has already been disclosed), failure to comply with this provision by a PCF has been included as a basis for the Central Bank to commence a fitness and probity investigation into that PCF, and also as one of the grounds upon which a prohibition order under the Fitness and Probity regime may be made. The Act provides for the issuance of guidance by the Central Bank for PCFs on this, including guidelines as to the assessment of whether a disclosure is required.
Financial Service Ombudsman’s ability to ‘name and shame’
The only section not being commenced today is section 72 of the Act, which provides the FSO with the option to publish in its annual report the name of a regulated financial service provider against which it has made an adverse finding. Applying a ‘3 strikes rule’, the option will be available in relation to those regulated financial service providers against whom three or more findings have been made in the preceding financial year. The complainant must neither be named nor be identifiable from the information published.
Central Bank – new supervisory / regulatory powers
Perhaps of most significance is the introduction of ‘law making powers’ for the Central Bank. The Central Bank will now have the ability to issue statutory instruments (which once issued will fall within the definition of “financial services legislation” under the Act) under a number of headings. Whereas before, the Central Bank imposed obligations using a variety of methods - codes of conduct (eg Consumer Protection Code), requirements (eg Client Asset Requirements) or conditions on authorisations - it will now be able to impose sectoral-wide or sectoral specific regulations in a number of areas. Whilst we see this as a further extension of the recent trend for financial services regulation to be more formal and legalistic in its nature it is, nonetheless, a significant power for the Central Bank.
Skilled Persons reports
Already available to regulators in other jurisdictions, the Act gives the Central Bank the power to require a financial service provider appoint a so-called “skilled person”, such as a lawyer or accountant or other expert, to produce a report for the Central Bank. The proposed expert is nominated and once approved, the Central Bank will then specify the matters which must be covered in the report. The cost must be borne by the firm itself.
As can be seen, the effect of the Act is the further evolution of the powers of the Central Bank following the financial crisis, making regulation more formal and legalistic in nature. As well as providing the Central Bank with new supervisory powers and increasing potential penalties, the whistle-blower protection imposes mandatory reporting obligations for specific employees. Critically the Act amends some existing legislation in some important respects and in many ways it is these other changes which may have the most practical significance for firms.