Credit institutions, investment firms, fund service providers and EEA insurers will be interested in the Central Bank of Ireland's ("CBI's") latest consultation on a new methodology for calculating industry funding levies ("CP 108"). While currently funding levies are based on an entity's risk impact categorisation, this can lead to "threshold effects" whereby a movement between impact categories can give rise to a substantial increase or decrease in levies. The proposed new methodology will introduce continuous levying thereby eliminating these threshold effects. The CBI is also proposing to move away from the single levy currently imposed on EEA insurers towards a risk-based funding model.
The CBI raises 50% of the costs it incurs for financial regulation directly from regulated financial service providers ("Firms"). The individual levy imposed on each Firm is determined with reference to:
- its industry funding category; and
- its impact categorisation under the CBI's Probability Risk and Impact SysteM ("PRISM"), which is the framework that the CBI uses to apply risk based supervision.
A Firms's industry funding category is a function of the authorisation that it holds. PRISM enables Firms to be categorised based on impact so that supervisors can guard against the potential failure of those Firms which pose the highest potential impact. A Firm's impact category (Ultra
High, High, Medium High, Medium Low or Low) is a reflection of the potential scale of harm (prudential, reputational or consumer related) that could arise from its failure.
According to the CBI the use of impact categories to calculate funding levies results in threshold or cliff effects whereby a movement between impact categories gives rise to a substantial increase or decrease in the levy.
The CBI is proposing to introduce new levy methodologies for Irish and EEA credit institutions, investment firms and fund service providers and for EEA insurance undertakings.
Following the establishment of the Single Supervisory Mechanism ("SSM"), supervisory engagement for credit institutions is largely determined by the SSM's Information Management System (IMAS), rather than by PRISM. Consequently the CBI is proposing to use an adapted version of the European Central Bank's ("ECB's") method for calculating industry levies for its own calculations.
To determine a credit institution's annual supervisory fee, the ECB methodology provides for a minimum and a variable fee component apportioned between significant institutions and less significant institutions. The CBI is proposing to use the same two fee components but to apportion them between:
- Category A entities including significant institutions, retail subsidiaries of significant institutions, and high-priority less significant institutions; and
- Category B entities including non-retail subsidiaries of significant institutions, less significant institutions not within Category A, EEA branches and third country branches.
Category A entities will be levied in aggregate 80% of the annual funding charge while Category B entities will be levied in aggregate 20% of that charge. Non retail-EEA branches will be subject to the minimum fee component of the methodology only.
Irish Investment Firms and Fund Service Providers
Irish investment firms and fund service providers will be charged a single levy comprising both a flat element and a variable element set as a multiple of an entity's PRISM impact score that exceeds a specified threshold, each of which will be determined annually. According to the examples in CP 108 this new methodology will mean that some firms will see an increase in their existing levy while others will see their levy reduced.
Currently EEA insurers writing Irish risks are subject to a single low levy irrespective of their size and complexity. The CBI is proposing to categorise EEA insurers into three categories for levying purposes, as follows:
- Category 1 large non-life and life insurers, to be levied at half the rate of medium high insurers;
- Category 2 non-life insurers not belonging to category 1 having written motor insurance in Ireland in 2016, to be levied at half the rate of medium low insurers; and
- Category 3 insurers not belonging to Category 1 or Category 2, to be levied as before.
Should this proposal be adopted, Category 1 and 2 insurers will see a substantial increase in their current industry funding levies. According to the CBI, if this methodology had been in place for the levies invoiced in 2016, Category 1 insurers, comprising non-life insurers and life insurers having written premiums in Ireland of more than, respectively, 50m and 100m, would have been subject to a levy of 91,731, instead of 6,002. The levy for Category 2 non-life insurers would have been set at 18,236. However, the levy for Category 3 insurers would not have changed.
Moreover, while currently all EEA insurers operating in Ireland are subject to the industry funding levy, irrespective of whether they operate on a freedom of services or a freedom of establishment basis, only those operating on a freedom of establishment basis are invoiced. The CBI is intending to start invoicing and collecting levies from EEA insurers operating by way of freedom of services if they belong to category 1 or category 2, or use the services of a Managing General Agent in the State.
EEA Investment Firms and Fund Service Providers
EEA investment firms and fund service providers will be subject to a fixed levy equal to the flat levy component of the levy imposed on Irish investment firms and fund service providers. Had this fixed levy applied in 2016, it would have amounted to 6,606.
The public consultation process will run until 28 April 2017 and the CBI is proposing to apply the new funding methodology for 2017 levies. As mentioned above, in some instances this will mean that a credit institution, investment firm or fund service provider sees a decrease in its levy contribution for 2017, in other instances the application of the new methodology will result in an increased levy contribution. EEA insurers falling within Category 1 are likely to see a significant increase in their levy contribution should the CBI adopt its proposed new categorisations.
While Irish insurance undertakings are not addressed in CP 108, the CBI intends to consult on continuous levying for such undertakings in the second half of 2017, once Solvency II data is compiled and analysis carried out in respect of alternative funding methodologies. The changes in the funding levies will then take effect in 2018.