Gross Negligence and the Payment Service Regulations

Please click here for an article on the meaning of Gross Negligence under the Payment Services Regulation.

EBA Announces Key Components of 2014 EU Stress Testing

European Banking Authority (“EBA”)

  • In 2014 the EBA will begin to carry out stress tests on various European banking institutions to provide consistent data. This will allow for an accurate comparison of EU bank’s resilience under adverse market conditions.
  • These stress tests will be conducted by the national competent authorities, which will be provided with a consistent and comparable methodology by the EBA.
  • The exercise has been designed in conjunction with the European Central Bank and forms part of their preparations for the introduction of the Single Supervisory Mechanism.
  • Banks resilience will be assessed over a three year period, from 2014 to 2017. The tests will assess the banks’ exposure to credit risk, sovereign risk, securitisation and to cost of funding fluctuations. Both trading and banking book assets will be subject to the stress tests, including off-balance sheet exposures.
  • In relation to capital thresholds; the threshold rate for the baseline scenario will be 8% common equity tier 1 (“CET1”) and for the adverse scenario a threshold of 5.5% CET1 will apply.
  • The methodology and scenario to be employed are expected to be released by April 2014. However, the EBA has recently published a preliminary draft.
  • For a copy of this preliminary draft please click here or for more information on the key components announced by the EBA please click here.

Structural Reform of the EU Banking Sector

EU Commission Proposes EU Volcker Rule

  • On 29 January 2014 the European Commission proposed a regulation designed to prevent Europe’s largest and most complex banks from engaging in proprietary trading. Michael Barnier, the Commissioner for the Internal Market has claimed that the regulation will be the “final cog in the wheel to complete the regulatory overhaul of the European Banking System”.
  • The proposal is aimed at enhancing the financial stability of the European Banking System through structural reforms targeted at the larger banks. As such, the proposed regulation contains certain thresholds and exceptions to ensure that only large and complex banks are caught by it.
  • Under these new proposals non-exempt financial institutions will be prevented from: 
  1. engaging in proprietary trading in financial instruments and commodities, i.e. trading on the bank’s own account for the sole purpose of making a profit for the bank;
  2. acquiring or retaining, directly or indirectly, units or shares of alternative investment funds with the banks own capital or borrowed capital; and
  3. investing, directly or indirectly, in derivatives, certificates, indices or any other financial instrument the performance of which is linked to shares or units of alternative investment funds.
  • In addition, the proposals will grant competent authorities the power to require, and in certain circumstances impose obligations on competent authorities to require, banks to transfer high risk activities (such as marketmaking, complex derivatives and securitisation operations) to separate legal entities within the same group.
  • The proposals go further by laying down economic, legal and governance rules in relation to the operational links between these separated legal entities and the rest of the banking group.
  • The proposals go further by laying down economic, legal and governance rules in relation to the operational links between these separated legal entities and the rest of the banking group.
  • To ensure that banks do not circumvent the new proposals by shifting these activities to the less regulated shadow banking sector, it is proposed that these reforms will be accompanied by structural separation measures, which will improve the transparency of the shadow banking sector.
  • When launching this new initiative Michael Barnier was keen to stress that these measures are aimed at bank’s which are “too big to fail, too costly to save and too complex to resolve”. While this may be the Commission’s intention, it is clear that all banks will have to keep a close eye on the development of these proposals.
  • The Commission has indicated that it envisages that the regulation will be adopted by June 2015. With the prohibition on proprietary trading becoming effective from 1 January 2017 and the separation of trading activities to become mandatory by 1 January 2018.
  • For more information on the Commission’s proposed structural reforms please click here.

Protection of Residential Mortgage Account Holders Bill 2014 Passes Second Stage

Government Doesn’t Oppose Private Member Bill

  • On 5 March 2014 the Protection of Residential Mortgage Account Holders Bill passed the second stage in the Dail and was referred to the select subcommittee on finance.
  • The Bill was introduced by Mathew McGrath TD and on the advice of the Minister for Finance the government did not oppose the Bill. Michael Noonan remarked that there were a number of deficiencies in the Bill and that, as currently drafted, the Bill does not provide additional protection for mortgage holders. Mr Noonan however, indicated that these deficiencies would be dealt with as the Bill progressed through the Oireachtas.
  • The intention behind the Bill is to provide protection for mortgage holders whose mortgages will be sold as part of the IBRC liquidation. It is expected that the IBRC will sell 13,000 mortgages to investors in the near future.
  • The Bill will provide mortgage holders with a continued right of recourse to the Financial Services Ombudsman, even after the transfer of their mortgage to an entity not governed by the Central Bank.
  • For a copy of the Bill please click here.

Central Bank Publishes Plan for Themed Reviews and Inspections

2014 Review and Inspection Priorities

  • The main areas which the Central Bank proposes to focus on are as follows:
  1. Consumer Protection
  • SME Lending;
  • Advertising Requirements;
  • Compliance with the Code of Conduct on Mortgage Arrears;
  • Provision of Information on Fees and Charges;
  • Debt Management Firms;
  • Retail Intermediaries;
  • Newly Authorized Firms Compliance;
  • Professional Indemnity Insurance;
  • Solvency/Financial Position; and
  • Firms that fail to engage appropriately with the Central Bank.
  1. Markets
  • Outsourcing of Activities by Fund Administrators;
  • Data integrity of regulatory returns;
  • Corporate Governance of Investment Funds and Fund Managers;
  • Conduct of Business for Investment and Stockbroking Firms (with particular focus on compliance with MiFID); and
  • Client assets
  1. Anti-Money Laundering Compliance
  • Anti-Money Laundering, Countering the Financing of Terrorism and Financial Sanctions.
  • For more information on the Central bank’s announcement please click here.

Central Bank Publishes Enforcement Priorities

2014 Risk Based Regulatory Enforcement

  • In During 2013, the Central Bank entered into 16 enforcement settlements with regulated entities, with fines totalling €6,348,215 being imposed. All of these related to one or more priority areas highlighted by the Central Bank as enforcement priorities at the start of 2013.
  • Enforcement priority areas for 2014:
  1. Banking & Insurance
  •  Prudential requirements; and
  • Systems & controls.
  1. Markets
  • Prudential requirements (with a focus on large exposures);
  • MiFID conduct of business rules;
  • Client Asset Requirements;
  • Timeliness and accuracy of information submitted to the Central Bank; and
  • Systems & controls.
  1. Credit Unions
  • Prudential requirements (with a focus on reserves, liquidity, lending & investments);
  • Timeliness and accuracy of information submitted to the Central Bank;
  • Systems & controls; and
  • Governance.
  1. Consumer Protection
  • Code of Conduct for Mortgage Arrears;
  • Prudential requirements for retail intermediaries and debt managemen firms;
  • Professional indemnity insurance; and
  • Firms which fail to engage appropriately with the Central Bank.
  1. All Sectors
  • Fitness and probity obligations of the Central Bank  Reform Act 2010; and
  • Anti-Money Laundering (AML)/Counter Terrorism Financing (CTF) compliance.
  • Enforcement actions are not limited to the above areas and the Central Bank will continue its enforcement activities outside these areas. The Central bank has stated that it had made provision in the allocation of its resources to ensure it reacts to serious issues identified through day-to-day supervisory work and from other information sources e.g. whistleblowing.
  • For more information on the Central Bank’s enforcement priorities please click here.

European Banking Authority (EBA) Proposes the use of Unique Identification Codes

For Supervisory Purposes of Credit and Financial Institutions

  • This announcement is viewed as a major step towards the adoption of the Global Legal Entity Identification System (GLEIS), which was initially proposed by the Financial Stability Board and has been endorsed by the G20.
  • Competent Authorities will have to notify the EBA by 29 March 2014 whether they intend to comply with the proposal.
  • For more information on the EBA’s proposal please click here.

Central Bank Issues Guidelines for Re-Insurance Companies

Compliance Statements

  • The Central Bank has issued a notice to all re-insurance undertakings under Section 25 of the Central Bank Act 1997.
  • The notice requires all such undertakings to confirm to the Central Bank that they are compliant with their undertakings and obligations under:  
  1. the European Communities (Reinsurance) Regulations 2006;
  2. the Corporate Governance Code for Credit Institutions and Insurance Undertakings 2010;
  3. the Corporate Governance Code for Captive Insurance Undertakings and Reinsurance Undertakings 2011; and
  4. the insurance Acts, as defined by the Insurance Act 1989.

On 21 January 2014 the Central Bank published guidelines for insurance undertakings as to how to comply with this notice.

  • A statement of compliance must be submitted to the Central Bank. This statement must be signed by the directors of the firm, certifying the accuracy of its content.
  • For a copy of the guidelines published by the Central Bank please click here.

Central Bank Requests Amendments to Actuarial Reports

PRISM Engagement Model

  • On 7 February 2014 the Central Bank wrote to all insurance undertakings designated as High Impact under the PRISM model, asking them to provide additional details in there actuarial reports, which accompany their Statement of Actuarial Opinion. The Central Bank has asked for additional information in relation to:   
  1. the methodologies used to calculate the unearned premium reserve;
  2. the calculation of the additional unexpired risk reserve;
  3. the calculation of a provision for unallocated loss adjustment expenses;
  4. actual versus expected analysis;
  5. periodic payment orders;
  6. claims inflation;
  7. court awards; and
  8. post balance sheet events.
  • The Central Bank indicated that there is currently a variety of practices employed across different firms, and for the sake of clarity has set out specifically what information is required.
  • For the letter issue by the Central Bank on 7 February 2014 please click here.

Central Bank Themed Review of Sales Incentives

Sales Incentives for Employees of Life Insurance Companies

  • The Central Bank has recently completed its review of direct to employee sales incentives in life insurance undertakings.
  • Following its review the Central Bank has sent a letter to regulated undertakings providing feedback and recommendations in relation to the dangers posed by certain sales incentive payment practices.
  • The review focused on the following three areas:   
  1. incentive schemes;    
  2. sales quality monitoring; and    
  3. conflicts of interest and governance.
  • In its review the Central Bank stated that sales based incentive schemes encourage poor sales behaviour. The Central Bank went on to state that firms are required to incorporate qualitive metrics into any such incentive schemes.
  • The Central Bank recommended that these qualitive metrics should include customer satisfaction and compliance. The Central Bank also recommended that penalties or claw backs should also be incorporated into these schemes to ensure adequate deterrents are put in place.
  • While the Central Bank acknowledged that the majority of undertakings reviewed appreciated the importance of sales quality monitoring, it noted that most firms only conduct a review on an annual basis. The Central Bank recommended that this should be amended so that reviews are conducted on an on-going basis.
  • The Central Bank has further indicated that these risks and recommendations apply equally to all financial service providers.
  • As the Central Bank is extending its supervisory work to banks and other financial services providers it is important that all such entities conduct a review of their remuneration structures in light of these recommendations.
  • The importance of compliance was further highlighted by the settlement agreement reached between the Central Bank and Combined Insurance Company of Europe Limited in December 2011, under which the Combined Insurance Company of Europe Limited was required to pay a fine of €3.35 million.
  • For more information in relation to the Combined Insurance Company of Europe Limited settlement agreement please click here. For more information in relation to the Central Bank’s findings please click here.