FIG Top 5 At 5 – 13/07/2023 – Reinsurance

1. Central Bank (Individual Accountability Framework) Act 2023
– Updates

Commencement of the Central Bank (Individual Accountability
Framework) Act 2023

On 7 July 2023, the Central Bank (Individual Accountability
Framework) Act 2023 (Commencement of Certain Provisions) (No.2)
Order 2023Opens in new window (the
“Commencement Order“) commencing the
remaining sections of Central Bank (Individual Accountability
Framework) Act 2023 (the “IAF Act“) was
published in Iris Oifigiúil .

The Commencement Order notes that sections 3 – 6 and 10 of
the IAF Act, which deal with the Senior Executive Accountability
Regime (“SEAR“), the conduct standards
and the certification process will be commenced from 29 December
2023.

As outlined in the FIG Top 5 at 5 update from 16 March
2023these sections were to be commenced following
completion of the Central Bank of Ireland’s public consultation
on the draft regulations and supporting draft guidance on the
operation of the Individual Accountability Framework
(“IAF“) as contained in the IAF Act. The
consultation closed for feedback on 13 June 2023.

Following the receipt and review of feedback to CP153, the
Central Bank will publish the final regulations and guidance
together with a feedback statement on the responses received to the
consultation. No date has been set yet by the Central Bank for
this, however, we expect it to be after the summer

As noted in the FIG Top 5 at 5 of 20 April
2023, the Central Bank intends to allow for a
transitional period for firms and holding companies to implement
the changes introduced by the IAF, as follows:

• Conduct Standards to apply from 31 December 2023;




• Fitness & Probity Regime – Certification and
  inclusion of Holding Companies to apply from 31 December 2023;
  and




• Regulations prescribing responsibilities of different roles and
  requirements on firms to clearly set out allocation of those
  responsibilities and decision making to apply to in-scope firms
  from 1 July 2024.

Central Bank of Ireland Speech on Enhancements to the
Administrative Sanctions Procedure

On 5 July 2023, Seána Cunningham, Director of Enforcement
& Anti-Money Laundering (“AML”) at the Central Bank
of Ireland (“Central Bank”) gave a speechOpens in new window at
a Law Society event on the enhancements to the Central Bank’s
Administrative Sanctions Procedure (“ASP”) as a result of
the enactment of the Central Bank (Individual Accountability
Framework) Act, 2023 (“IAF Act”).

At the outset, Ms Cunningham noted that the Central Bank takes a
“targeted and proportionate approach” to
enforcement and only takes enforcement action “where such
significant action is merited, following a consideration of all of
the facts of the case“.

Enhancements to the ASP

Ms Cunningham advised that the aim of the Central Bank’s
recently published consultation on the implementation of the
enhancements to the ASP (“CP154”) (see FIG Top 5 at 5 of 29 June
2023 for detail) is to ensure that the proposed
guidelines (“ASP Guidelines“) are
“practical and clear and that they will support a smooth
transition to the operation of the enhanced ASP procedures and
processes“.

She noted that while there are a number of enhancements to the
ASP process, “much will remain the
same“. Part of the changes in the draft ASP
Guidelines include a consolidation of the Central Bank’s
existing published guidance documents on the ASP in an effort to
ease understanding of the ASP process and its practical
operation.

ASP Investigations

Ms Cunningham noted that the Central Bank’s aim in drafting
the guidance on ASP investigations was to “provide
sufficient clarity to investigation subjects and
practitioners” on the investigative procedures and to set
out its expectations on their engagement with an investigation. She
advised that:

• The IAF Act places the investigation phase of the ASP on an
  express statutory footing for the first time. However, as the
  legislation was modelled on the Central Bank’s existing
  investigative procedures, much of the process will look familiar,
  with some changes in terminology;




• Notices of Investigation (formerly Investigation
  Letters) will set out the breaches of financial services
  legislation under investigation;




• Investigations will be run by Responsible Authorised
  Officers (“RAOs”) who will gather and analyse
  relevant information and documents for the purposes of the
  preparation of an investigation report;




• RAOs will share investigation reports with
  investigation subjects at the completion of an
  investigation and prior to any decision on whether or not to hold
  an inquiry; and




• Investigation subjects will be able to make submissions
  in response to the report and there will be engagement on
  disclosure.

ASP Inquiries

There have been a number of procedural changes to the inquiry
process including:

• Designating the Regulatory Decisions Panel as a panel
  established by the Minister for Finance to enhance
  independence.




• Procedural enhancements and greater detail and clarity
  on the inquiry process (based on the Central Bank’s
  experience of the operation of Inquiries). This includes setting
  out the roles of participants at an inquiry hearing and providing
  that the Central Bank’s Enforcement Division (or its legal
  representatives) will now present the case at inquiry.

Sanctions

In addition, addressing the new statutory sanctioning factors
for individuals introduced by the IAF Act, Ms Cunningham advised
that the ASP Guidance provides further guidance in relation to the
Central Bank’s general approach to the determination of
sanctions and, for the first time, the determination of monetary
penalties to “assist investigation and inquiry subjects,
legal practitioners and decision makers in their understanding of
the ASP sanctioning process“.

ASP Settlements

The IAF Act provides for three distinct settlement processes, an
Undisputed Facts Settlement, an Investigation Report Settlement and
a No Admissions Settlement. Ms Cunningham advised that there will
be different statutory procedures for settlement which will be
dependent on the stage of the process and whether there has been an
admission.

The Central Bank will continue to operate a settlement scheme
for admissions settlements, where the settlement occurs prior to an
inquiry:

• Discounts of up to 30% may be available for an Undisputed Facts
  Settlement that occurs prior to completing an investigation;
  and




• Discounts of up to 10% may be available for an Investigation
  Report Settlement that occurs prior to an inquiry.

Ms Cunningham highlighted that discounts apply to
“monetary penalties only and not to any other
sanction“.

The Central Bank will continue to require admissions from firms
and individuals for settlement in almost all cases and, while no
admissions settlements may be considered, this is “only on
an exceptional basis and by reference to the non-exhaustive
suitability factors set out in the ASP Guidelines“.

Ms Cunningham advised that, for the first time, all sanctions in
Undisputed Facts Settlements and Investigation Report settlements
will be subject to High Court confirmation. The Central Bank will
continue to publish public statements immediately following the
conclusion of a settlement, however, it will be noted that the
sanction is subject to confirmation by the High Court.

Conclusion

Ms Cunningham concluded by reiterating her comments at the
beginning on the Central Bank’s approach to enforcement and
highlighting that the Central Bank is keen to receive feedback to
CP154 from all stakeholders. She advised that the Central Bank
intends to publish the final ASP Guidelines and related feedback
statement following receipt and review of the feedback received to
CP154.

2. Central Bank Act 1942 (Section 32D) (National Claims
Information Database Levy) Regulations 2023

On 7 July 2023, Central Bank Act 1942 (Section 32D) (National
Claims Information Database Levy) Regulations 2023 (S.I. No. 348 of
2023)Opens in new window (the “NCID Regulations”)
were published in Iris Oifigiúil.

Section 11 of the Central Bank (National Claims Information
Database) Act 2018 (the “Act“) requires
the Central Bank of Ireland (the “Central
Bank“) to make regulations to recoup the cost of the
National Claims Information Database
(“NCID“) by prescribing levies to be
paid by insurance undertakings. In essence, Section 11 responds to
the European Central Bank (“ECB“)
opinion issued in 2018 which noted that the NCID is not deemed as a
“central bank task” under European law. As such, the
Central Bank is not permitted to pay for the cost of establishing
and running the NCID from its own resources.

Basis of calculation for dedicated levy contribution

The amount of the levy for each relevant insurance undertaking
for a specified category of relevant non-life insurance business
comprises of a minimum amount of €500 and a variable
amount.

The variable amount is calculated as follows: (A / B) *
(C – D)

Where:

A = Gross earned premium of that insurance undertaking in the
data reference period in respect of the specified category of
relevant non-life insurance business, as confirmed to the Bank by
the insurance undertaking as part of the data collection
process.

B = Total gross earned premium for all relevant insurance
undertakings in the data reference period in respect of the
specified category of relevant nonlife insurance business, as
confirmed to the Bank by relevant insurance undertakings as part of
the data collection process.

C = Total levy expenses accrued by the Bank and attributed to
the relevant levy period and specified category of relevant
non-life insurance business.

D = Aggregated minimum amount for all relevant insurance
undertakings for the relevant levy period in respect of the
specified category of relevant non-life insurance business.

The NCID Regulations came into operation on 10 July 2023.

3. ESMA Statement on its CSA and mystery shopping exercise on
costs and charges under MIFID II

On 6 July 2023, the European Securities and Markets Authority
(“ESMA“), published a statementOpens
in new window on its February 2022 Common Supervisory Action
(“CSA“) and mystery shopping exercise
regarding compliance with disclosure requirements for costs and
charges under MIFID II.

CSA

27 National Competent Authorities
(“NCAs“) participated in the CSA which
assessed credit institutions and investment firms compliance with
requirements on ex-post costs and charges information provided to
retail clients.

ESMA’s statement notes that the CSA shows:

• an adequate level of compliance with most elements of the
  ex-post costs and charges requirements under MiFID II (although
  this varied across Member States);




• in general, firms provide the ex-post costs and charges
  information to clients and have relevant controls in place;
  and




• in most instances, firms also provide itemised breakdowns of
  the costs and charges to clients if requested.

The CSA also identified the following shortcomings/areas where
there is a lack of convergence:

• Costs not always shown as a percentage: Some
  firms only provide disclosure documents showing the nominal amounts
  and not the corresponding percentages. Where the percentage
  information was provided, firms did not always explain to clients
  how this percentage was calculated. Methodologies to calculate
  percentages also differed among firms.




• Cost allocation between service and product costs
  varies:On occasion, the allocation by firms of certain
  costs and charges items to one or the other category varied,
  leading to differences in the disclosures provided to clients and
  hampering their comparability.




• Inducements: differing practices and sometimes lack of
  disclosure:Inducements are not always shown in a
  consistent manner by firms (e.g. aggregated figures, itemised
  lists) and some firms did not disclose inducements at all to
  clients.




• Implicit costs not always shown:Implicit costs
  are sometimes not disclosed to clients. Firms that do disclose such
  costs often apply different methodologies to calculate them. Firms
  tend to rely heavily on third-party data without being able to
  check the validity of such data.




• Illustration showing cumulative effect of costs on
  return: differing and not always compliant practices:Firms
  that make use of narratives only (as opposed to additional graphs,
  tables etc.) for the purpose of providing clients with an
  illustration of the cumulative impact of the costs and charges on
  the return of the investment, sometimes just included a generic
  statement that the costs had a negative effect on the client’s
  return, without specifying the actual cumulative effect on the
  client’s return.




• Format and content of ex-post disclosures differ
  widely:The disclosure of ex-post costs and charges (both
  in terms of the aggregated information and the itemised breakdown)
  differs widely between Member States and sometimes even from firm
  to firm within the same Member State. In this context, NCAs
  stressed the need for having a standardised format for the
  disclosure of costs and charges information.

Mystery shopping exercise

The mystery shopping exercise, focused on the ex-ante costs and
charges information given to retail clients with the goal of
getting a better picture of how the ex-ante MiFID II requirements
are perceived by the investor and to a lesser extent to assess
whether firms comply with the applicable requirements.

Ten NCAs participated the mystery shopping exercise which
involved both onsite visits to physical branches where a retail
investor was looking for investment advice and remote visits where
a retail investor was looking to trade on investment products
without advice and on his/her own initiative.

The exercise found that in most cases, mystery shoppers were
provided with some information about costs and charges prior the
provision of the investment service, however, the following was
also noted:

• only in approximately half of the cases, proper MiFID II
  ex-ante information about costs and charges was provided, in a
  durable medium;




• ex-ante costs and charges were at times only disclosed late in
  the client’s decision process;.




• when providing investment advice, firms did not always disclose
  in an adequate manner whether their investment advice was
  independent or not; and




• Firms were not always forthcoming with respect to the
  disclosure of inducements.

ESMA noted as a caveat on the findings that that there are some
reservations on the results obtained, given some factors that may
have conditioned the interpretation of responses submitted by
mystery shoppers (e.g. limited use of real accounts/transactions,
technicality of some aspects related to costs and charges
disclosure, difficulty to compare results from different outsourced
providers).

Next steps

Based on the above findings, ESMA will focus its convergence
efforts on:

• Developing a limited number of new Q&As, or reviewing
  existing ones, to address some issues identified;




• Preparatory work on a possible standardised EU format for the
  provision of information about costs and charges to clients.

NCAs will undertake follow-up actions on individual cases where
necessary.

ESMA reminds market participants that they should ensure
compliance with all relevant MiFID II regulatory requirements at
all times.

4. EBA speech FinTech and the future of financial
intermediation

On 4 July 2023, the European Banking Authority
(“EBA“) published a speechOpens in new window by
Jose Manuel Campa, Chair of the EBA, at the Central Bank of Cyprus
on FinTech and the future of financial intermediation.

At the outset, Mr Campa noted that there are three different
dimensions of technology-enabled transformation, the emergence of
new products and services, new ways of performing front and
back-office processes and new distribution models.

He advised that to-date, the emergence of novel types of
products and services has been limited (although an uptick in
crypto-assets is expected as a result of the Markets in
Crypto-assets Regulation (“MICA“)).
However, new front and back-office processes and distribution
channels are having a “rapid and significant
transformative impact” which has increased as a result of
the pandemic for example contactless payments, remote
customer-onboarding, credit scoring and the use of cloud
technology.

Opportunities

Regarding opportunities, Mr Campa noted that Fintech:

• has a competitive impact, as many incumbent financial
  institutions view technology investments as necessary to maintain
  market share;




• can play a positive role in shaping financial intermediation
  e.g. facilitating access to financial services ‘anytime
  anywhere’;




• can facilitate access to more tailored products and services,
  and speed up the processing of account opening and credit
  provision;




• can improve efficiencies in internal processes for financial
  institutions, including for the purposes of compliance and
  regulatory reporting (“RegTech“);
  and




• can be of benefit to supervisors through supervisory
  technologies (“SupTech“) as a complement
  to RegTech.

However, stressed that for these “opportunities to be
leveraged responsibly industry, supervisors and regulators need to
be proactive in identifying, monitoring and mitigating
risks“.

Risks

He highlighted the following risks to consumers:

• ineffective disclosures of product features when using digital
  channels to market and provide access to financial products and
  services;




• unclear or opaque channels of communication between service
  providers and users which may be exploited by criminals
  masquerading as the service provider;




• the sale of unsuitable or unduly costly products and services
  to consumers when product or service bundling;




• financial exclusion or bias when utilising digital channels
  over more traditional distribution channels;




• exploitation of consumer data in the event of poor standards of
  digital data security, cyber-attacks or lack of opportunities for
  informed consumer consent;




• unintended discrimination and opacity in the decision-making
  driven by the use of ‘black boxes’ of models;

Regarding financial institutions, Mr Campa noted that the use of
FinTech may give rise to governance and risk management challenges,
including:

• Operational risk: through increased
  dependencies on technologies, including those provided by third
  parties.




• Reputational risk: some examples include
  ineffective disclosure of product features a partner comparison
  website or data breaches of a third party data storage
  provider.




• Prudential risks: crypto-assets are example of
  prudential risk, Mr Campa notes that while EU banks’ exposures
  to crypto-assets are de minimis to-date, crypto-assets should be
  subject to conservative prudential treatment pending the
  implementation of the December 2022 Basel Committee on Banking
  Supervision standard on banks’ exposures on crypto-assets.

The EBA notes its expectation that financial institutions who
are increasing their reliance on innovative technologies,
“implement a commensurate ‘skilling up’ on
technology, risks, and risk mitigation techniques at the level of
the management body and throughout institutions” and have
“updated and robust” risk management
frameworks.

With regard to system-wide risks, Mr Campa highlighted
concentration risk and money laundering and terrorist financing
risks as areas of concerned. He noted the importance of the new
Digital Operational Resilience Act
(“DORA“) framework and collective
dialogue and information sharing in tackling these risks and as
“we grapple with the impact of new frontiers of
innovation“.

EBA’s work in 2023/2024

Mr Campa outlined the EBA’s work for the remainder of 2023
and into 2024 including:

• DORA: Together with the other European
  Supervisory Authorities (“ESAs“) work
  has commenced on the policy mandates and on the broad parameters of
  the oversight framework for critical ICT third party service
  providers.




• MiCA: The consultation phase on the vast
  majority of the MiCA technical standards and guidelines is
  anticipated to begin in October 2023, however, several
  consultations papers in the areas of authorisations and governance
  can also be expected between now and the end of September. The EBA
  is also expanding its market monitoring and supervisory capacities
  to prepare for its supervision tasks in relation to significant
  issuers and a publication is expected shortly on the EBA’s work
  to promote convergence in supervisory expectations toward
  asset-referenced token and e-money token issuance activities in the
  transition phase to the application of MiCA.




• Anti-Money Laundering and Countering the Financing of
  Terrorism (“AML/CFT”): The EBA will revise the
  existing AML/CFT guidelines to set common regulatory expectations
  on the management of financial crime risk in the context of
  crypto-asset services.




• Prudential standard on banks’ exposures on
  crypto-assets: The EBA is continuing to engage in the work
  of the Basel Committee on Banking Supervision to ensure a prompt
  and consistent implementation of the prudential standard on
  banks’ exposures on crypto-assets.




• Map innovation trends: The EBA’s focusing
  this year will be on mapping artificial intelligence
  (“AI“) use cases in the financial
  sector, tokenisation in relation to new financial products and
  services, digital identity management, decentralised finance and
  crypto-asset staking and lending as these activities fall outside
  the scope of MiCA.




• The use of AI for creditworthiness
  assessments: The EBA is focusing enhance its understanding
  on the opportunities, risks and challenges brought by AI in the
  context of creditworthiness assessments as this is expected to be
  classified as a ‘high-risk’ AI system in the upcoming AI
  Act.




• Upcoming legislation: including in the
  legislative proposals for a digital euro, the third Payment
  Services Directive, the Payment Services Regulation and the
  framework for Open Financial Data.

5. European Insurance Updates

EIOPA consultation on measures to address demand for NatCat
insurance

On 5 July 2023, EIOPA published a Staff PaperOpens
in new window on measures to address demand side aspects of the
natural catastrophe (“NatCat“) insurance
protection gap. The Paper explores the ‘demand-side’
barriers that can prevent consumers from buying NatCat insurance
and proposes possible solutions.

The paper draws on EIOPA’s consumer research and behavioural
studies and identifies the following demand-side barriers:

• income levels and the perceived unaffordability of
  coverage;




• a lack of clarity in terms and conditions;




• previous negative experiences with insurance claims;




• the misperception of the risks of a NatCat event;




• high expectations about state intervention in case of a
  catastrophe; and




• the perception that the process of buying insurance is
  demanding.

Potential solutions identified:

• increasing risk awareness;




• better comparison and greater standardisation of products
  regarding coverage, exclusions and pricing structures,




• simpler and more consumer-friendly purchasing processes;
  and




• premium reductions for implementing risk mitigation
  measures.

Next steps

The consultation is open for feedback until 5 October 2023.
EIOPA notes that based on the feedback received, it may issue
feedback and will consider which of the measures could be most
effective in improving consumer resilience to NatCat events.

EIOPA consults on supervisory expectations regarding the
supervision of reinsurance concluded with third-country
reinsurers

On 10 July 2023, EIOPA launched a public consultationOpens in new
window on its draft supervisory statement on the supervision of
reinsurance concluded with third-country reinsurers.

The draft statement outlines the supervisory expectations for
national competent authorities (“NCAs“)
and insurance undertakings in the event of using reinsurance from
third countries including:

• Undertakings are expected to properly consider and NCAs to
  assess the trade-off between reinsurance premiums, additional risks
  and impact on Solvency Capital Requirement
  (“SCR“) and other regulatory
  considerations from third-country reinsurance.




• NCAs are encouraged to engage in on-going supervisory dialogue
  with the undertaking starting sufficiently before the conclusion of
  the reinsurance agreement and maintained over time to account for
  changes. Particularly where a significant level of risk is being
  transferred.

• Insurance undertakings are expected to demonstrate in the Own
  Risk and Solvency Assessment (“ORSA“)
  that risks associated with third-country reinsurance arrangements
  are appropriately captured by the risk management framework and
  quantified while also including a list of the most material
  arrangements.




• NCAs following a risk-based supervision must perform an
  assessment of the risk management and internal control systems of
  the insurance undertakings using material reinsurance arrangements
  with third-country reinsurers. The statement outlines the factors
  to be taken into consideration for the assessment.

Tools to mitigate any additional risks: If,
following assessment, the insurance undertaking has concerns or has
identified increased material risks, different tools could be
considered (or be requested by the NCA) including:

• Pre-emptively limiting exposures on certain third-country
  reinsurers;




• Mitigating counterparty default risk of the third country
  reinsurer with collateral agreements/pledge assets/premium and
  reserve deposits in cash or securities;




• Ensuring that undertakings have set out in the reinsurance
  agreement, a direct claim on that counterparty in the event of a
  default, insolvency or bankruptcy of a counterparty or other credit
  event; and




• Including in the agreements with third-country reinsurers
  clauses for regular commutations or exposure threshold-initiated
  execution of a commutation agreement.

The consultation is open for feedback until 10 October 2023

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.