Regbrief: Arthur Cox Financial Regulatory Update, July 2014
Central Bank’s Annual Report and Performance Statement Published
On 30 April 2014, the Central Bank published its Annual Report 2013 and its Annual Performance Statement – Financial Regulation 2013-2014. Certain key action points for the rest of 2014 were highlighted in addition to those set out in the Central Bank’s Programme of Themed Reviews and Inspections and Enforcement Priorities (see our previous briefing here) as follows:
- AML and CTF: the Central Bank intends to undertake 3 detailed inspections, 24 standard inspections and a number of risk evaluations – it will follow these with a number of thematic reports, reflecting both good and bad practices discovered as part of those inspections
- Business Lending: the Code of Conduct for Business Lending to Small and Medium Enterprises will be reviewed
- EMIR: the regulatory regime in respect of the European Markets Infrastructure Regulation (Regulation (EU) 648/2012) (EMIR) is expected to be fully in place by Q4 2014, subject to the Central Bank being formally designated as the Irish competent authority (CA)
- Client Assets: new client asset regulations and guidance are expected to be introduced before the end of the year
- Mortgage Arrears: a review of compliance with the revised Code of Conduct on Mortgage Arrears will be carried out
- Debt Management: additional consumer protection requirements for debt management firms will be finalised
- Intermediaries: a revised Handbook of Prudential Requirements for Authorised Advisors and Restricted Intermediaries will be published
- Governance: the Fitness and Probity regime will be amended and clarified as necessary
- Payments: depending on the transposition of the proposed Payment Accounts Directive (see further below), the Code of Conduct on the Switching of Current Accounts with Credit Institutions will be reviewed
- Updated Implementation Notice: following the transposition of the Capital Requirements Directive (Directive 2013/36/EU) (CRD IV) into Irish law on 31 March 2014 by way of SI 158/2014, and the Capital Requirements Regulation (Regulation (EU) No 575/2013) (the CRR) becoming directly effective in Ireland, the Central Bank has updated its notice regarding the Implementation of Competent Authority Discretions and Options in CRD IV and CRR (the Implementation Notice). The Implementation Notice, available here) explains how the Central Bank will exercise the discretions and options afforded to it, as CA, under SI 158/2014 and the CRR. Key aspects of the Implementation Notice include:
- the Central Bank’s policy regarding certain transitional provisions in relation to own funds, capital buffers, liquidity requirements and large exposures
- the Central Bank’s approach towards discretions arising in respect of the standardised approach to credit risk
- the Central Bank’s requirements regarding specific liquidity discretions
- a summary of how the recovery and resolution provisions of CRD IV have been transposed by SI 158/2014
- the Central Bank’s policy regarding the discharge of corporate governance related discretions (in particular in relation to combined risk-audit committees for institutions that are not considered to be significant, the segregation of the roles of chairman and chief executive officer, and limits on the number and nature of directorships that members of the management bodies of significant institutions are allowed to hold)
- guidance as to what constitutes a “significant subsidiary” for reporting purposes (the Central Bank considers a subsidiary that represents ≥5% of group assets and/or has market share in any sector or group of connected sectors ≥20% to be a “significant subsidiary” for the purposes of Article 13 of the CRR)
- guidance on the impact of CRD IV and the CRR on firms authorised under the Markets in Financial Instruments Directive (Directive 2004/39/EC) (MiFID), in particular as regards liquidity requirements, capital buffers, the leverage ratio, the fixed overhead requirement, requirements for initial capital, corporate governance and reporting requirements
The Implementation Notice contains useful appendices which set out new CA discretions and options that arose under SI 158/2014, existing discretions and options where related conditions have changed, unchanged CA discretions and options arising under SI 158/2014, new CA discretions and options identified within CRR (together with existing discretions and options where conditions associated with them have changed) and unchanged CA discretions and options identified within CRR.
- Liquidity Coverage Ratio: following its March 2014 Consultation Paper (CP 80) on its proposed approach to the calculation of the liquidity coverage ratio (LCR) required by Article 460 of the CRR, the Central Bank published a feedback statement (available here) and amended its Guidelines on LCR Calculation for the Interim Observation Period (available here) to reflect changes arising from the CP 80 consultation process. Section 9 of the Implementation Notice also sets out details in relation to the LCR calculation for the interim observation period (the interim observation period is scheduled to end in mid-2015).
- Whether SME investment firms are to be exempted from certain capital buffer requirements: the Central Bank has also published a Consultation Paper (CP 81) setting out its proposed approach to the possible exemption of SME investment firms authorised under MiFID from the requirements, under CRD IV, for institutions to hold a capital conservation buffer and a countercyclical capital buffer. The requirements for institutions to hold these buffers apply to investment firms that are authorised to provide the MiFID investment services and activities of “dealing on own account” and/or “underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis”. The Central Bank has discretion to exempt SME investment firms from these requirements if such an exemption would not threaten the stability of Ireland’s financial system. The consultation period ends on 12 September 2014.
- Recent Level 2 Measures: a number of Commission Delegated Regulations (CDRs) and Commission Implementing Regulations (CIRs) have been published in the Official Journal in relation to CRD IV and the CRR in the last quarter, key aspects of which are highlighted in the Annex to this Briefing. The European Commission (the Commission) has also published useful ‘State of Play’ documents in respect of both regulatory technical standards (RTS) and implementing technical standards (ITS) required under CRD IV and the CRR, available here (in respect of RTS) and here (in respect of ITS) which are expected to be updated periodically and serve as a useful reference point.
- Remuneration FAQs: the Commission published FAQs on 26 June 2014 on Commission Delegated Regulation (EU) No 604/2014 (referred to in the Annex) regarding staff regarding as being “material risk takers”. The FAQs consider which staff members will be identified as material risk takers, whether staff who meet one or more of the criteria for being a material risk taker can claim that they are not a material risk taker (for these purposes, the Commission distinguishes between the number of quantitative, and the number of qualitative, criteria met by that staff member) and the role of the CAs (ensuring that institutions retain records of assessments made and intervening in a prompt and effective manner where it believes that an institution has used its ability to rebut the presumption that a staff member is a material risk taker in an excessive, unjustified or doubtful manner).
- Technical advice sought from EBA: the updated 2014 Work Programme of the European Banking Authority (EBA), published on 16 April 2014, highlights CRD IV and CRR-related topics on which it has been asked to provide technical advice by the Commission including the following:
- own funds requirements for covered bonds
- capital requirements on exposures to transferred credit risk
- the implementation of the internal capital adequacy assessment process and Pillar 2 requirements
- the scope of application and exemption of Pillar 1 requirements
- longer-term refinancing operations
- the consistency of macro-prudential rules
- prudential filter for fair value gains and losses arising from an institution’s own credit risk related to derivative liabilities
- implementing acts on third country equivalence decisions
- appropriateness of the definition of eligible capital applied for the purposes of the large exposures regime
- long-term financing
- CET1 Capital Instruments: the EBA also published, on 28 May 2014, a list of Common Equity Tier 1 capital instruments that have been classified as such by CAs for the purposes of Article 26(3) of the CRR. The list, which can be accessed here, is based on information received by the EBA up to 28 June 2014.
- PII for Mortgage Intermediaries: the EBA has published final draft RTS on the minimum professional indemnity insurance (or comparable guarantee against liability arising from professional negligence) that mortgage intermediaries must have under the Mortgage Credit Directive (Directive 2014/17/EU). A minimum of €460,000 has been set for each individual claim, and an aggregate amount of €750,000 has been set per calendar year for all claims. The EBA has forwarded these final draft RTS to the Commission for adoption by way of delegated regulation.
- Debt Management Firms: on 20 June 2014, the Central Bank published a further Consultation Paper (CP 82) (available here) proposing additional consumer protection requirements for debt management firms, which are regulated by the Central Bank since the enactment of the Central Bank (Supervision and Enforcement) Act 2013. Key proposals on which the Central Bank is consulting include client leads, the use of credit to pay for debt management services and a cooling-off period.
- Financial Services Ombudsman (FSO): the Central Bank Act 1942 (Financial Services Ombudsman Council) (Amendment) Regulations 2014 were made on 4 April 2014. These regulations amend the Central Bank Act 1942 (Financial Services Ombudsman Council) Regulations 2005 as regards the definition of “consumer” for the purposes of legislation concerning the FSO. That definition of “consumer” now includes:
- natural persons acting for personal purposes
- natural persons acting for business purposes (subject to the turnover limit below)
- sole traders (subject to the turnover limit below)
- groups of persons (subject to the turnover limit below)
The turnover limit has been clarified as an annual turnover of <€3 million in the financial year prior to the year in which the complaint is made to the FSO, provided that such person(s) may not be member(s) of a group of persons having a combined turnover >€3 million. “Turnover” will be determined by deducting sales rebates from the income received from the person’s (or group of persons’) sales and services falling within the person’s or group of persons’ ordinary activities.
- CCD Review: on 14 May 2014, the Commission published a report on the implementation of the Consumer Credit Directive (Directive 2008/48/EC), concluding that creditors should increase their efforts to ensure that the rights given to EU citizens by the directive are respected, and that enforcement should continue to be monitored with the Commission expected to launch an assessment of the supervisory practices of Member States shortly. Notably however, the Commission did not perceive a need to revise the directive for the time being.