Financial Services Regulation and Compliance - General Cross Sectoral Nov 2020

DOMESTIC

CBI inspection finds weakness in firms' compliance with fitness & probity regime

The CBI has issued a letter to the management of all regulated financial service providers setting out its expectations for firms to take appropriate action to address significant issues identified by thematic inspections into compliance with firms' legal obligations under the fitness and probity (F&P) regime. 

In the letter, the CBI notes that the inspections revealed the following common issues and shortcomings:

  • poor levels of awareness by board members of their F&P obligations, which was particularly evident in relation to the process for appointing members to the board
  • consistently weak due diligence measures, including a lack of evidence of qualifications, reference checks and suitability searches
  • where pre-approval controlled functions (PCF) or controlled functions (CF) are outsourced to unregulated outsource service providers (OSPs), a lack of evidence that firms had obtained the required documentation or made inquiries as to the OSP's process for assessing F&P
  • an absence of processes in firms to identify, escalate and notify the CBI in a timely manner of potential concerns regarding the F&P of a CF or PCF holder
  • the failure by firms to undertake robust compliance testing of their F&P procedures

Speech – Gerry Cross: Sustainable Finance: the changing regulatory landscape

Speaking at Sustainable Finance Ireland's annual ESG Day, Gerry Cross the CBI's Director of Financial Regulation: Policy & Risk, indicated that the CBI continued to address a range of priorities in the area of climate change. 

These included:

  • addressing risks to regulated firms' functioning and financial stability arising from climate events  or the transition to a sustainable economy
  • addressing conduct issues, including ensuring that financial products are only described as "green" or "sustainable" where this is meaningful and accurate
  • ensuring that the financial sector plays its role in the wider goal of achieving a sustainable economy

Cross noted that the first tranche of items arising out of the EU Action Plan on Sustainable Finance were due to be implemented in the coming year and that in light of the increasing focus on environmental issues, the CBI was in the process of establishing a centralised climate change unit. 

Cross also highlighted a range of potential regulatory reforms specific to the banking sector, including:

  • the ECB's draft Guide on Climate-Related and Environmental Risks which proposes detailed supervisory expectations in the context of climate-related and environmental risks
  • the potential integration by the EBA of environmental, social, or governance (ESG) risks into the Supervisory Review and Evaluation Process (SREP) for banks and investment firms
  • the requirement for large institutions with publicly listed issuances to disclose ESG risks under the revised Capital Requirements Regulation
  • the EBA's consideration of whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified

Department of Finance publishes Ireland for Finance Action Plan 2020

The Minister of State with responsibility for Financial Services, Credit Unions and Insurance Sean Fleming TD has published the 'Ireland for Finance Action Plan', which aims to develop Ireland as a top tier international location for specialist financial services. The plan is a strategic framework to support the development of the international financial services sector in Ireland in by encouraging firms to establish operations in regional locations, raising awareness of the need for diversity in the financial sector and increasing the commitment to providing international financial services to meet the imperative of combating climate change.

EUROPEAN

EBA sets out how prudential supervisors should take money laundering and terrorist financing risks into account in the SREP

The EBA has published an opinion setting out how prudential supervisors should consider money laundering and terrorist financing (ML/TF) risks in the context of the supervisory review and evaluation process (SREP).  The opinion highlights how the EBA expects prudential supervisors to cooperate effectively and in a timely manner with ML/TF supervisors to exchange information on ML/TF risks and to assess the implications of those risks for the safety and soundness of the institutions they supervise. 

The EBA will include more detailed guidance on how ML/TF risks should be considered by prudential supervisors in the revised version of the SREP Guidelines that is planned to be published by end December 2021. 

EBA launches consultation to incorporate ESG risks into the governance, risk management and supervision of credit institutions and investment firms

The EBA has published a discussion paper on environment, social and governance (ESG) risk management and supervision. The discussion paper aims to provide a comprehensive proposal on how ESG factors and risks could be included in the regulatory framework for credit institutions and investment firms. 

The EBA is seeking comments on the discussion paper and the deadline for submission is 3 February 2021. 

Speech - Kerstin af Jochnick: COVID-19: recovery and regulatory response

At the 7th Annual European Banking Union Colloquium, Kerstin af Jochnick, a member of the ECB's supervisory board, spoke about a number of issues, including the ECB's regulatory response to the COVID-19 pandemic. Af Jochnick indicated that the ECB was concerned at the level of non-performing loans present in euro area banks and the potential cliff effects this might have for bank capitalisation when loan guarantees and payment moratoria expire.  

Af Jockhnick also highlighted the importance of credit risk management and ensuring that this is underpinned by a robust governance framework. Finally, af Jocknick also noted that that climate change would be a point of growing supervisory attention for the ECB in the future, pointing out that the ECB had recently published a guide on climate related and environmental risks to assist banks in this area. 

For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 4 December 2020