Read the latest edition of RegBrief, the quarterly bulletin from our Financial Regulatory Group. This edition focuses on the Capital Requirements Directive, corporate governance, steps towards European banking union, mortgages, enforcement, consumer protection, derivatives, investment services and markets, funds and asset management, payments, money laundering, insurance, debt management firms and credit unions.
Capital Requirements Directive
Implementing Legislation: The Minister for Finance, on 31 March 2014, announced that he had signed into law two statutory instruments, one giving effect to the Capital Requirements Directive (Directive 2013/36/EU) (the Capital Requirements Directive) and the other giving effect to technical requirements connected to the Capital Requirements Regulation (Regulation (EU) No 575/2013) (the CRR and, together with the Capital Requirements Directive, known as CRD IV). We will be issuing a further client briefing over the coming days examining these measures in greater detail.
New Central Bank Consultation: The Central Bank has published CP 80 on its proposed approach to calculating the Liquidity Coverage Ratio under the CRR during the interim observation period which will run until the expected Commission Delegated Regulation, specifying the Liquidity Coverage Requirement as a prudential ratio, comes into force (expected in 2015). This consultation closes on 16 April 2014.
Credit risk adjustments: On 27 February 2014, Commission Delegated Regulation 183/2013 was published in the Official Journal, supplementing the CRR with regulatory technical standards (RTS) for specifying the calculation of specific and general credit risk adjustments.
Own funds requirements: On 14 March 2014, Commission Delegated Regulation 241/2014 was published in the Official Journal, dealing with common equity Tier 1 (CET1) capital, additional Tier 1 capital, deductions from CET1 capital and own funds, the conditions under which national competent authorities (NCAs) may decide that an undertaking qualifies as a mutual, a cooperative society, a savings institution or a similar institution for the purposes of the own funds requirements of the CRR, and the concept of gain on sale.
FAQs on the Corporate Governance Code for Credit Institutions and Insurance Undertakings 2013: On 31 March 2014, the Central Bank published a set of FAQs on the Corporate Governance Code for Credit Institutions and Insurance Undertakings 2013 (the 2013 Code). These FAQs, along with the 2013 Code, will apply from 1 January 2015. A copy of our Financial Regulatory Group’s Briefing on the 2013 Code can be found here.
New Central Bank consultation: The Central Bank has published CP 79 on its proposed handling of protected disclosures by whistleblowers following the enactment of the Central Bank (Supervision and Enforcement) Act 2013, including the establishment of a new Whistleblower Desk and procedures regarding how protected disclosures are to be received and handled. This consultation closes on 19 June 2014.
Steps towards European Banking Union
Update on Single Resolution Mechanism (SRM): On 27 March 2014, the EU Council announced that political agreement had been reached with the European Parliament (the Parliament) on the proposed SRM Regulation. It is now expected that the SRM Regulation will be approved by the Parliament at first reading in its 14-17 April 2014 plenary session, and the EU Council then proposes to adopt the regulation without further discussion. The SRM Regulation is expected to enter into force on 1 January 2015. Our Financial Regulatory Group will be issuing a further Briefing on the SRM Regulation once it has been formally adopted.
Update on Single Supervisory Mechanism (SSM): Pending the SSM becoming fully operational in November 2014, the European Central Bank is carrying out a comprehensive assessment of the banks that will fall under its direct supervision, and reviewing their balance sheets. The Irish banks that are subject to that comprehensive assessment are Allied Irish Banks plc, Merrill Lynch International Bank Limited, Permanent tsb plc, The Governor and Company of the Bank of Ireland and Ulster Bank Ireland Limited.
Update on Revised Deposit Guarantee Schemes Directive: On 18 February 2014, it was announced that political agreement had been reached between the Parliament and the EU Council on the text of this proposed directive. The proposed directive is expected to be adopted at the final plenary session of the current Parliament, between 14 and 17 April 2014. Member States will have 1 year after the directive enters into force to transpose it into national law.
Regulating loan book purchasers: As highlighted in the previous edition of RegBrief (available here) the Government signalled, in its updated Legislation Programme published on 15 January 2014, its intention to introduce a draft bill in 2015 dealing with the sale of loan portfolios by regulated financial institutions to unregulated financial institutions. While the Government’s intention remains to introduce that legislation from 2015 to protect mortgage holders, on 4 March 2014 it also decided not to oppose the passage of the Protection of Residential Mortgage Account Holders Bill 2014 (a private members’ bill proposed by Michael McGrath TD) to Dáil Committee stage. In the Second Stage debates in the Dáil, the Government signalled that significant amendments would, however, be needed to that Bill to ensure that obligations imposed on loan book purchasers are enforceable against them. It remains to be seen how those amendments will be addressed at Dáil Committee stage and whether this could result in the earlier production of the draft Government legislation.
New Central Bank statistics: On 4 March 2014, the Central Bank released its Residential Mortgage Arrears and Repossessions Statistics: Q4 2013. Key points to note from this set of statistics were as follows:
- the number of principal dwelling houses (PDH) mortgages in arrears fell by 3.3% relative to the end of Q3 2013, although the Central Bank noted that this figure was affected by asset sales
- PDH mortgages in < 90 days arrears declined by 5.7% during Q4 2013 (compared to 5.5% in Q3 2013)
- PDH mortgages in > 90 days arrears decreased by 2.3% over Q4 2013, the first such decrease since this series of statistics was first issued in September 2009
- PDH mortgages in > 720 days arrears increased by 1,755
- the use of split mortgages and arrears capitalisation as restructuring options increased, while the use of interest-only arrangements declined
- the number of buy-to-let (BTL) mortgages in arrears fell from 27.4% to 27% over Q4 2013, but the number of BTL mortgages in arrears > 720 days continued to rise
New Department of Finance statistics: On 13 March 2014, the Department of Finance published its Mortgage restructures data for January 2014, covering the 6 main lenders that are subject to the Central Bank’s Mortgage Arrears Resolution Targets. Key points of note in relation to PDH mortgages were an increase in customer engagement and permanent mortgage restructures, a drop in the number of PDH mortgages in > 90 days arrears and a significant rise in the number of split mortgages. Key points of note in relation to BTL mortgages were a slight decrease in the overall number of BTL mortgages in arrears, but a slight increase in the number of BTL mortgages in > 90 days arrears, an increase in the number of permanent restructures and an increase in the number of rent receivers appointed.
Mortgage Credit Directive: The Mortgage Credit Directive (Directive 2014/17/EU) has been published in the Official Journal with a transposition deadline of 21 March 2016. A separate Briefing will shortly be published by our Financial Regulatory Group on the impact of this new directive.
Central Bank’s 2014 Enforcement Priorities and Programme of Themed Inspections: On 25 January 2014, the Central Bank published its Programme of Themed Reviews and Inspections for 2014 and its Enforcement Priorities in 2014. A copy of our Financial Regulatory Group’s Briefing on these publications can be found here.
Financial Services Ombudsman: On 26 February 2014, the Financial Services Ombudsman (FSO) published his Bi-Annual Review for July-December 2013, the first since the FSO’s ability to ‘name and shame’ was introduced in September 2013. Key trends highlighted by the FSO for that period included a 35% decrease in the number of complaints made during that period (compared to the first 6 months of 2013). In the banking sector, 50% of complaints related to mortgages, with 28% relating to accounts. In the insurance sector, 45% of the complaints related to payment protection insurance (PPI) with 11% relating to life insurance. The majority of complaints (57%) in the investment sector related to mis-selling and misrepresentation. For the full 12 months of 2013, there were 2,993 findings by the FSO (10 of which were mediated, 202 of which were upheld complaints, 472 were partly upheld complaints and 2309 were complaints that were not upheld).
Sanctions: To date in 2014, the Central Bank has entered into three settlement agreements with regulated financial services providers in relation to breaches of the European Communities (Capital Adequacy of Investment Firms) Regulations 2006, the European Communities (Markets in Financial Instruments) Regulations 2007 and the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992, further details of which can be found here.
Consumer and Competition Bill 2014: This draft Bill was published on 31 March 2014, following Government agreement on the text. The Bill, once enacted, will dissolve both the National Consumer Agency and the Competition Authority and the functions of those two agencies will then be carried out by a new Competition and Consumer Protection Commission.
EMIR Consultation: On 28 February 2014, the Department of Finance issued a consultation paper on Member State discretions under the European Market Infrastructure Regulation (Regulation (EU) No 648/2012) (EMIR) seeking views on, among other matters:
- the proposed designation of the Central Bank as NCA for Ireland
- the proposal to give the Central Bank power to direct the directors of a counterparty to compile a statement of compliance specifying whether the counterparty has complied with EMIR
- the proposal to give the Central Bank powers to:
- appoint authorised officers (and the scope of the powers of those authorised officers)
- give directions to an entity to take particular action, or to refrain from taking particular action, including the entry into of derivative contracts
- order the rectification of data returns that contain errors or are incomplete
- the proposed Central Bank power to require a “skilled persons report” (as contemplated by the Central Bank (Supervision and Enforcement) Act 2013) for the purposes of EMIR from financial counterparties and non-financial counterparties that breach any of the clearing thresholds or would do so in the absence of the calculation exemption at Article 10(3) of EMIR
- giving the Central Bank power to take enforcement action in respect of EMIR infringements
The consultation period closed on 14 March 2014. At the date of this Briefing, the Central Bank has not yet been formally designated as the NCA for Ireland.
Definition of “derivative”: On 14 February 2014, the European Securities and Markets Authority (ESMA) wrote to the European Commission (the Commission) asking it to clarify the definition of “derivative” under EMIR, noting that the fact that the definition of “derivative” is not harmonised across the EU could have a detrimental effect on the consistent application of EMIR. In particular, ESMA highlighted the impact this could have on foreign exchange forwards and physically settled commodity forwards. The Commission response, dated 26 February 2014, was published on 20 March 2014 in which the Director General for Internal Markets and Services:
- agreed that there was a lack of clarity
- noted that the Commission would need to consider what constitutes appropriate delivery periods in the foreign exchange forward markets
- requested input from ESMA as to how the definitions of derivative and foreign exchange forward have been transposed by NCAs
- requested details from ESMA as to commonly accepted delivery periods for currencies in Member States and developments in foreign exchange markets since the implementation of the Markets in Financial Instruments Directive (Directive (Directive 2004/39/EC) (MiFID)
He also noted that the definition of commodity forwards that can be physically settled was discussed during MiFID II negotiations and that further work is to be carried out – ESMA was also asked to assess the status of physically settled forwards as part of its work on MiFID II.
New lists and updated Q&A published by ESMA: 24 February 2014 saw the publication by ESMA of an updated list of applicant central counterparties (CCPs) established in non-EEA jurisdictions. On 20 March 2014, following the authorisation of Nasdaq OMX as the first EU-based CCP under EMIR, ESMA published a list of CCPs authorised to offer services and activities in the EU in accordance with EMIR together with a public register for the clearing obligation under EMIR, which lists the classes of over-the-counter (OTC) derivative contacts that CCPs have been authorised by their NCA to clear. On the same day, ESMA also updated its EMIR Q&A, addressing intragroup transactions, notional amounts, risk mitigation techniques for OTC contracts not cleared by a CCP, reporting of outstanding positions once EMIR came into force, and issues relating to trade repository reporting requirements.
New Commission Delegated Regulation: On 21 March 2014, Commission Delegated Regulation 285/2014 setting out RTS which specify contracts that are considered to have a direct, substantial and foreseeable effect within the EU, and to prevent the evasion of rules and obligations, was published in the Official Journal. With the exception of Article 2 (Contracts with a direct, substantial and foreseeable effect within the Union) which will apply from 10 October 2014, the remaining parts of this delegated regulation enter into force 20 days following publication in the Official Journal.
Investment Services and Markets
Acquiring Transactions – investment firms: The Central Bank has published an Acquiring Transaction Notification Form for firms authorised under the Investment Intermediaries Act 1995 (as amended).
MiFID: On 21 February 2014, ESMA published compliance tables in relation to both suitability guidelines and compliance guidelines, indicating that all Member States (with the exception of Croatia) had confirmed that the comply, or intend to comply, with those guidelines.
On 22 February 2014 a corrigendum to the Omnibus I Directive (Directive 2010/78/EU) was published in the Official Journal, correcting Article 6 of Omnibus I to clarify that the RTS to establish an exhaustive list of information relate to information requirements under Article 10b(4) of MiFID rather than under Article 10a(4) of MiFID.
MiFID II: In advance of the expected approval of MiFID II in this Parliament’s final plenary session between 14 and 17 April 2014, ESMA published a speech by its Executive Director on 25 February 2014 in which he noted that ESMA expects to publish a discussion paper on MiFID II technical standards shortly after the Parliament approves MiFID II, followed by a consultation on draft technical standards later in 2014 or early in 2015, and that ESMA will also issue Q&As on MiFID II once the Level 2 measures come into force. He also indicated that stakeholders have been asked to share evidence with ESMA to assist ESMA in developing parameters and transparency requirements for each instrument or category of instrument. For more information on the MiFID II proposals, see our Financial Regulatory Group’s recent briefing, available here.
Market Abuse: Once the MiFID II legislative package is finalised, work will begin on aligning, where necessary, the provisions of MiFID II and the directive and regulation that will revise the current Market Abuse regime (the new proposed directive and regulation are together referred to as MAD II). That alignment will enable MAD II to be published in the Official Journal (expected in June 2014) and the transposition deadline for Member States to implement the directive is expected to be 24 months later (certain provisions of the regulation may also come into effect at the end of that 24 month period, and some may come into effect sooner). Our Securities Law Group will be issuing a Briefing on MAD II once the final texts of the directive and regulation are published in the Official Journal.
Short Selling Regulation: On 12 February 2014, ESMA updated its list of market makers and authorised primary dealers who use the exemption under the Short Selling Regulation (Regulation (EU) No 236/2012). It has also published an updated version of the list of administrative measures and sanctions applicable in Member States for infringements of that regulation.
Benchmark Regulation: The vote by the Parliament on the proposed Benchmark Regulation (designed to improve the regulation of the benchmark-setting process in relation to financial instruments and financial contracts) has been postponed until after the May 2014 Parliament elections.
Funds and Asset Management
Central Bank AIFMD Q&A: On 7 March 2014, the Central Bank published the 8th edition of its AIFMD Q&A in relation to the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (AIFMD), amending questions regarding alternative investment funds (AIFs) in liquidation, professional investor funds, and non-EU alternative investment fund managers (AIFMs) marketing both EU and non-EU AIFs to professional investors in Ireland, and adding questions regarding MiFID authorisations and delegation.
AIFMD Reporting: The Central Bank has also published details of the first reporting dates for the submission of returns in accordance with Regulations 4(3)(d) and 25 of the European Union (Alternative Investment Fund Managers) Regulations 2013 together with a reporting dates matrix.
Central Bank consultation: The Central Bank has published CP 78 on the carrying out of depositary duties in accordance with Article 36 of the AIFMD which provides that Member States may allow an authorised EU AIFM to market units of non-EU AIFs it manages to professional investors in their territory, subject to a number of restrictions. This consultation closes on 30 May 2014.
ESMA AIFMD Q&A: 17 February 2014 saw the publication by ESMA of its AIFMD Q&A which it intends to update periodically as and when queries arise. Key issues covered in the first edition were remuneration rules, notification and reporting under Article 42 of AIFMD. These were further updated on 25 March 2014, principally covering reporting to NCAs.
RTS delay: On 10 March 2014, the Parliament indicated that, as regards the proposed RTS on determining types of AIFMs, it has extended the timeframe it has to examine the proposed Commission Delegated Regulation by 3 months.
UCITS V Directive – political agreement: On 25 February 2014, the Parliament announced that it had reached political agreement with the EU Council on the proposed UCITS V Directive, highlighting that agreement had been reached in the areas of:
- remuneration (at least 50% of fund managers’ variable remuneration will need to be paid in the assets of their UCITS unless the management of UCITS accounts for less than 50% of the total portfolio)
- depositaries (a single depositary must be appointed to oversee investor payments to the fund and act as custodian to its assets, depositaries must keep investors’ money separate from their own assets, will be precluded from investing these funds on their own account and may be deemed liable for loss of assets even if they delegate custody to a third party)
- sanctions (Member States will be required to legislative for harmonised administrative sanctions for funds that do not comply with national UCITS authorisation and reporting rules).
The EU Council’s Permanent Representatives Committee announced on 19 March 2014 that it had approved the position agreed with the Parliament and it is now hoped that UCITS V will be adopted by the Parliament in its final plenary session in April before the May 2014 elections.
UCITS and ETFs: 24 March 2014 saw the publication by ESMA of its final report on the provisions on the diversification of collateral contained in ESMA’s guidelines on exchange traded funds (ETFs) and other UCITS issues, together with its revised Q&A on those guidelines.
SEPA: On 18 February 2014, the EU Council announced that it had adopted the regulation amending the SEPA Migration Regulation (Regulation (EU) No 260/2012) which allows an additional transitional period (to 1 August 2014) during which non-SEPA payments can continue to be accepted in the eurozone. The amending regulation (Regulation (EU) No 248/2012) was then published in the Official Journal on 20 March 2014, applying with retrospective effect from 31 January 2014.
Revised Payment Services Directive: The report of the Parliament’s Economic and Monetary Affairs Committee (ECON) on the proposed revised payment services directive and regulation on multilateral interchange fees was published on 11 March 2014, setting out proposed amendments to the Commission’s original proposals. Our understanding is that Parliament’s vote on both proposals will be postponed until after the May 2014 Parliament elections.
Payment Accounts Directive: On 20 March 2014, ECON announced that political agreement had been reached on this proposed directive which addresses open access to basic payment accounts, the provision of clear information and the required characteristics of a basic payment account. The aims underlying this directive are to facilitate fee comparisons between providers of payment accounts across the EU, to facilitate switching between accounts and to allow all consumers, irrespective of their financial status or residence, to open basic payment accounts via which they can perform day-to-day operations. The Parliament is expected to adopt the directive at its 14-17 April 2014 plenary session, following which it must then be formally adopted by the EU Council and published in the Official Journal. Member States are expected to be given 24 months to transpose the directive into national law.
Trust or company service providers: The Central Bank has published details of a new authorisation process for trust or company service providers which are subsidiaries of credit or financial institutions for the purposes of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended).
Timing update: On 14 February 2014, ECON indicated that trialogue negotiations on the proposed fourth money laundering directive (MLD4) are likely to start under the Italian Presidency of the EU Council (which will run from July to December 2014) meaning that it is unlikely that the Parliament will adopt MLD4 in plenary session until late 2014.
ECON Reports: On 3 March 2014, ECON together with the Parliament’s Committee on Civil Liberties, Justice and Home Affairs published two reports, one in relation to MLD4 and one in relation to the proposed revisions to the Wire Transfer Regulation (Regulation (EC) No 1781/2006), setting out recommended improvements to the texts of both proposals. As regards MLD4, these recommendations related to the clarification of risk evaluation at an EU level, improvements to the operations of business registers in Member Stages and a targeted and proportional preventative approach. As regards the proposed revised Wire Transfer Regulation, recommendations related to proposed transfers outside the EU, transfers without accounts, intermediary payment service providers and moving towards a more risk-based approach.
PPI: On 7 March 2014, the Central Bank published a report on its review of the sale of PPI by 11 credit institutions. The review had resulted from inspections carried out by the Central Bank in 2011 which gave rise to concerns that certain credit institutions had not complied with the Consumer Protection Code during their PPI sales processes.
Issues were found with 22% of PPI policies that were reviewed, meaning that approximately 77,000 PPI policyholders will receive refunds, with the total amount to be refunded being €67,372,525 (including interest of approximately €4.9 million). The three key areas in which the PPI policies that ‘failed’ the review were found to be deficient were eligibility, suitability and an inability on the part of the credit institution to demonstrate compliance with the Consumer Protection Code (the issue of poor record keeping was highlighted).
Revised Insurance Mediation Directive: On 26 February 2014, the Parliament announced that it had voted to adopt amendments to the proposed text of the revised Insurance Mediation Directive (IMD2). The Parliament did not vote on the proposed IMD2 as a whole, so as to leave open the possibility of negotiating a first-reading agreement with the Council of Ministers.
Debt Management Firms
Amendments to Minimum Competency Code: On 31 March 2014, the Central Bank published an Addendum to the Minimum Competency Code 2011 which makes the following amendments to the Minimum Competency Code 2011 (the MCC) so as to incorporate standards for providers of debt management services who have been subject to regulation by the Central Bank since the enactment of the Central Bank (Supervision and Enforcement) Act 2013:
- debt management services will now be a “specified function” under the MCC
- competencies for the provision of debt management services have been included
- recognised qualifications have been included for the provision of debt management services
- transitional arrangements have been put in place for those who were already providing debt management services on 1 August 2013
These amendments to the MCC will come into effect on 1 June 2014.
Further commencement order: On 26 February 2014, the Minister for Finance signed the Credit Union and Co-operation with Overseas Regulators Act 2012 (Commencement of Certain Provisions) Order 2014 which commenced, with effect from 3 March 2014, further provisions of the Credit Union and Co-operation with Overseas Regulators Act 2012. These relate to a credit union’s board of directors, the submission of annual compliance statements to the Central Bank and the report by a credit union’s board oversight committee to the members in annual general meeting. Changes were also made by the Central Bank to its Credit Union Handbook at the same time to reflect the commencement of these provisions.
Consultation on stabilisation levy: On 26 February 2014, the Department of Finance issued a Stabilisation Levy: Consultation Paper in relation to the size and structure of the levy it proposes to introduce to fund the stabilisation of credit unions following on from the March 2012 Report of the Commission on Credit Unions. In the consultation paper, the Department of Finance proposed a fund of €30,000,000 to be built up over 6 years, and sought views on whether that amount represented a reasonable estimate of the size of the fund required, whether the proposal to build up the fund over 6 years was consistent with maintaining the financial viability of credit unions, and whether a fixed rate levy should apply to all credit unions or whether the levy ought to be adjusted in various circumstances. The closing date for the consultation has recently been extended to 28 May 2014.
Other Useful Publications
ESMA Consolidated Registers: On 25 February 2014, ESMA published a series of new consolidated registers on its website relating to the following:
- investment firms authorised under MiFID
- management companies authorised under the UCITS IV Directive (Directive 2009/65/EC)
- AIFMs authorised under AIFMD
- administrative measures and sanctions imposed on investment firms under Article 51 of MiFID and sanctions imposed on investment firms under Article 14 of the Market Abuse Directive (Directive 2003/6/EC)
- prospectuses, supplements and certificates of approval which have been approved under the Prospectus Directive (Directive 2003/71/EC)