Central Bank of Ireland sets out its financial regulation priorities for 2022

Introduction

The Central Bank of Ireland’s Director General (Financial Conduct), Derville Rowland, recently outlined the Central Bank of Ireland’s (the “CBI”) financial regulation priorities for 2022 in a speech delivered at an engagement with Financial Services Ireland.
 
These priorities align with the CBI’s new Strategy published in September 2021 and effective from January 2022. The CBI’s strategic direction is set around four connected themes (future-focused, open & engaged, transforming and safeguarding) to ensure that its direction and ambitions over the next five years are responsive and forward.

When commenting on financial regulation specifically, Ms Rowland noted that the CBI’s vision is for a “resilient and trustworthy financial system”, which sustainably serves the needs of the economy and citizens, in which firms and individuals adhere to “a culture of fairness and high standards”.

The following is a summary of the main financial regulation priorities for the CBI for the year ahead:
 

1. Forward-looking approach to the authorisation of firms

The CBI is the competent authority in Ireland for the authorisation of financial services firms. Authorisation is an important part of the overall supervisory framework where the role of the CBI is to assess applicants against the applicable regulatory standards and to ensure that any firm authorised demonstrates clearly that it has met those standards and will continue to meet them into the future. The specific authorisation requirements are risk based and a robust authorisation process mitigates risks which can emerge in supervision.

The CBI is committed to providing a clear, open and transparent authorisation process while ensuring a rigorous assessment of the applicable regulatory standards. As an open, engaged and future-focused regulator, Ms Rowland commented that the CBI seeks to anticipate and support innovation in financial services and understand, anticipate and adapt to the ever-evolving financial services landscape. Ms Rowland further stated that “Our objective is to create the regulatory context in which the potential benefits of innovation for consumers, businesses and society can be realised, while the risks are effectively managed”.

In this regard the CBI’s Innovation Hub (launched in 2018) allows firms operating in the fintech sector to engage with the CBI outside of existing formal regulator/firm engagement processes. The CBI is of the view that by engaging with innovators, an early sight of new technologies can be gained which enhances its understanding of potential risks and, importantly, potential mitigants.
 

2. Driving fair outcomes for consumers and investors

In February 2022, the CBI published its second Securities Markets Risk Outlook Report which details key conduct risks to securities markets and sets out actions that firms should take to identify, mitigate and manage those risks. The report highlighted key risks across sustainable finance, governance, conflicts of interest, market dynamics, cyber security, data & financial innovation and misconduct.

In particular, Ms Rowland explained that the CBI is undertaking a “root-and-branch review” of the Consumer Protection Code. The objective of the CBI is to ensure that the Consumer Protection Code “is suitably robust to address emerging trends and risks across the rapidly changing financial services landscape, reflects the significant developments in EU consumer protection, and continues to deliver strong protections for consumers into the future”.

In this regard, the CBI published its Consumer Protection Outlook Report for 2022 on 14 March last. The report identified the following five key cross sectoral risks facing consumers of financial services:
 

1. Poor business practices and weak business processes
2. Ineffective disclosures to consumers
3. The changing operational landscape
4. Technology-driven risks to consumer protection
5. The impact of shifting business models

The CBI expects that all regulated financial firms will review the risks identified and take action to identify, mitigate and manage these risks in their businesses so that the best interests of consumers are protected.

In line with its Strategy published in September 2021, the CBI has advised that it will undertake a programme of active engagement with key stakeholders in relation to the report. 
 

3. Individual Accountability Framework ​

In more recent years, there has been an increased focus nationally and internationally on strengthening corporate culture, driving positive behaviour and increasing individual accountability to mitigate conduct risk and prevent issues arising within firms.   Ms Rowland commented that effective governance is “essential if the financial sector is to be resilient, trustworthy, adapt to shocks and rise to the challenges ahead.”

The CBI has been actively engaged with the Department of Finance in relation to proposals for the introduction of the new Individual Accountability Framework (“IAF”). The General Scheme of the Central Bank (Individual Accountability Framework) Bill was published in July 2021. It reflects proposals set out in the CBI’s report titled “Behaviour and Culture of the Irish Retail Banks” published in 2018 and also captures the experience of regulators who have implemented accountability regimes, most notably the Senior Managers and Certification Regime in the United Kingdom.

The IAF is ultimately focused on incentivising positive behaviours and promoting an improved culture within firms while strengthening the CBI’s enforcement arsenal, particularly with respect to individuals, to allow the CBI to more effectively hold to account those that fall below the expected standards.  The IAF will introduce the Senior Executive Accountability Regime which focuses on prioritising individual accountability for those who perform senior executive functions within a regulated financial services firm. The CBI’s Administrative Sanctions Procedure will also be strengthened to ensure that individuals can be pursued directly for their misconduct rather than only where they have participated in a firm’s wrongdoing. 

It is expected that the Central Bank (Individual Accountability Framework) Bill will be enacted in the coming months.
 

4. Anti-money laundering and countering the financing of terrorism​

Anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) will be another key area of core focus for the CBI for 2022, and indeed for the foreseeable future.
Money laundering and the financing of terrorism continue to be a major concern for the EU’s financial system and the security of its citizens. A series of recent scandals of alleged money laundering in Europe involving some of Europe’s most high-profile banks, and more recently the downfall of Wirecard, the German Fintech payment provider, highlighted significant deficiencies in the current AML/CFT regime of the EU.

The European Commission presented an ambitious package of legislative proposals designed to strengthen the EU’s AML/CFT framework to include the creation of a new EU authority to fight money laundering and the establishment of an EU single rulebook on AML/CFT.

The CBI has committed to “work closely with our European counterparts to help shape and implement the Package and the new single AML authority, which will mark a structural sea-change in the European approach to combatting this problem”.
 

5. Crypto-assets and the risks involved​

The CBI has identified that crypto-assets is another area where the European regulatory framework must be strengthened to prevent fraud and real risk to investors, both institutional and particularly retail.

The CBI’s Consumer Protection Outlook Report for 2022 (which can be accessed here) highlights that the growth in the trade of unregulated virtual assets remains an area of special concern given the extreme volatility of these assets and the absence of investor protections.

Ms Rowland commented that this is “a gap which at European level we are working to close”. Ms Rowland also warned that retail investors risk “losing all their money if they buy these crypto-assets and they should be alert to the risks of misleading or aggressive advertisements, including via social media and influencers, particularly those that claim fast or high returns”.

Conclusion

The core of the CBI’s work is protecting and serving the public interest, which is clearly evidenced in its Consumer Protection Outlook Report for 2022. The CBI’s regulatory priorities recognise the rapid changes in our economies and the speed and scale of technological change in the financial system which bring significant opportunities but equally bring significant risks. A clear and defined strategic direction that focuses on evaluating risks facing the financial system, strengthening the resilience of the financial system to those risks, conducting intrusive supervision, and improving culture while serving the interests of consumers and investors will help maintain public trust and confidence in the financial system.

Written by: Rosie Callan, Maria Curran, Clodagh Morrissey