Regulated firms need to focus on emerging technologies and climate change, and be aware of the potential risks posed by both. This is one of the key messages from the Central Bank’s Annual Performance Statement 2020-2021, published earlier this week. In light of COVID-19, 2020 was a year in which financial and operational resilience was crucial, and the Central Bank has reiterated the need for firms to continue to focus on their resilience, to identify threats to their long-term sustainability, and to focus on board responsibility, strong governance and oversight, and effective and improved culture.

The Central Bank will publish its next Strategic Plan, covering 2022-2024, later this year and recently sought industry feedback on key themes that should be addressed in that plan. In the meantime, this week’s Annual Performance Statement set out the Central Bank’s priorities for the final seven months of its current Strategic Plan 2019-2021.  These include:

• Prioritising legacy COVID-19 issues, with distressed debt remaining a top priority. For more information on its focus on this area, read our previous briefing: COVID-19 Payment Breaks: Active engagement and tailored sustainable solutions remain the Central Bank’s priorities. The outcome of its recent consultation on the form of Standard Financial Statement (required as part of the Mortgage Arrears Resolution Process which must be followed by regulated lenders) is also relevant here – for more detail, read our recent NPL Update.
• Senior Executive Accountability Regime (SEAR): It continues to engage with the Department of Finance on draft legislation in relation to the proposed SEAR, and will continue working towards its own external consultation on aspects of the proposed individual accountability framework.
• Consumer Protection Code (CPC): Following its review of the CPC, it plans to consult on a revised CPC later this year. The revised CPC is expected to take the form of a new regulation, rather than a code.
• AML/CFT: Effective AML and CFT supervision continues to be a priority following the transposition of the Fifth Money Laundering Directive into Irish law in April 2021. For recent developments in that area, read our latest briefings: Arthur Cox Q&A: MLD5 Transposition and AML Horizon-Scanning and AML Update: Crypto-Assets – VASPs must register with Central Bank.
• Investment Firms: It is very focused on the new framework for investment firms that comes into force on 26 June 2021. For more information, read our recent briefings: Investment Firms: New prudential rules will apply from 26 June 2021 and Investment Firms Update: Variable Remuneration under IFD/IFR for ‘Class 2’ firms.
• Credit Servicing Firms: It will continue to “rigorously challenge” the remaining transitional firms and their senior management to ensure they meet key authorisation standards and requirements and ensure fair treatment of borrowers in arrears.
• Recovery Planning: It is considering developing regulations to require pre-emptive recovery planning by banks.
• Client Assets: It remains committed to strengthening its client assets regime, following its recent consultation where it outlined its plans to, among other matters, extend the scope and application of those requirements to banks undertaking MiFID investment business, introduce new disclosure and consent requirements, and launch new guidance on its expectations as to how client funds should be segregated.
• Business Interruption Insurance: This continues to be a major focus in light of business closures due to COVID-19. In August 2020, the Central Bank published a Business Interruption Supervisory Framework advising insurance firms to adopt a customer-focused approach to dealing with business interruption claims and setting out the Central Bank’s expectations. To ensure consistency with its expectations, the Central Bank is closely monitoring firms’ approaches to the issue and is also monitoring the judgments of the Irish High Court on business interruption policies and ongoing litigation in the courts.
• Differential Pricing Practices: It is engaged in an ongoing review of price differentiation practices in the Irish motor and home insurance market. This is the practice of insurers charging customers different prices on a basis other than risk. Given that the practice of differential pricing can give rise to both costs and benefits to consumers, the Central Bank has undertaken a detailed analysis to ensure that any intervention it makes in the area will produce the best solutions for consumers. The Central Bank’s final report, which may be accompanied by a consultation on proposals for reform, is expected later this year.

Separately, the Central Bank does not plan to amend its mortgage measures in 2021, but plans to launch a review of those measures later this month which could lead to changes in 2022.  The countercyclical capital buffer, which was reduced from 1% to 0% by the Central Bank in 2020 in response to the impact of the COVID-19 pandemic, is expected to remain at 0% for the remainder of 2021.

From a European perspective, the Central Bank will continue to participate in the Eurosystem’s exploration of a potential digital euro, and explore the possible development of a macro-prudential framework for non-bank lenders.   The Central Bank had previously signalled that it was considering a macroprudential framework for the market-based finance sector following its deep dive review into property funds and the Irish commercial real estate market.

While not explicitly referenced in this week’s Annual Performance Statement, the following points from the Central Bank’s Consumer Protection Outlook Report, and Securities Markets Risk Outlook Report, published earlier this year continue to be relevant:

• Retail investors: The Central Bank is continuing to monitor offerings of complex products to retail clients. At EU-level, while ESMA favours broader involvement by retail investors in the capital markets, it also remains focused on retail investor protection throughout the financial markets and issued strong statements earlier this year (ESMA highlights risks to retail investors of social media driven share trading and ESMA sees high risk for investors in non-regulated crypto assets).
• Market Abuse: Following the launch, in 2020, of a supervisory review of compliance by issuers with the requirements of the Market Abuse Regulation (with a particular focus on how inside information is dealt with), the Central Bank signalled that it planned to complete those reviews in 2021 and take appropriate action based on the outcomes. While not explicitly referred to in this week’s Annual Performance Statement, the Central Bank emphasised that it is focused on wholesale conduct risk, of which MAR compliance forms part.
• Crowdfunding: The Central Bank is expected to publish further details on the authorisation application process for regulated crowdfunding service providers in advance of the new regulatory framework coming into effect on 10 November 2021. For further information on that framework, read our recent briefings here: Arthur Cox Q&A: EU Crowdfunding Regulation and Crowdfunding Update: Marketing Requirements.

As always, we will continue to update the market when there are further developments in each of the above areas.  In the meantime, if you would like to discuss any of the above regulatory themes in more detail, please get in touch with any member of our Financial Regulation Group, or our Insurance and Reinsurance Group.