FIG Top 5 At 5 - 18/07/2024 - Financial Services - Finance and Banking (2025)

1. The Central Bank of Ireland publishes the Review of theFitness and Probity Regime

On 11 July 2024, the Central Bank of Ireland("Central Bank") publishedOpens in newwindowthe independent review("Review") of its Fitness and Probity("F&P") regime. The Review wascarried out by the former Chair of ECB Supervisory Board, Mr AndreaEnria at the request of Governor George Makhlouf.

The Review was considered necessary as the implementation of theF&P framework is over a decade old and it was considered timelyto review it to ensure, as the regulatory landscape evolves, thatthe existing gatekeeping process remains relevant, effective and inline with international supervisory and industry best practices.The F&P framework plays an important role in promoting soundgovernance, effective risk management and public trust in thefinancial sector.

The recent decision of the Irish Financial Appeals Tribunal("IFSAT") in the AB case was also referencedas having been an element of the impetus for the Review.

The Review recognises the importance of the F&P regime as afundamental element of the supervisory toolbox, ensuring thatindividuals operating in key roles within regulated entities in thefinancial sector are carrying out their responsibilitieseffectively and in accordance with high ethical standards. From theyear 2020 until 2023, the Central Bank approved over 11,000individual roles, illustrating the centrality of the F&Pprocess in the supervision of the financial sector in Ireland.

As part of the preparatory work for the Review, Mr Enria engagedin a thorough consultation process with key stakeholders to includeall relevant industry associations, individual firms, legislativeand policymaking bodies, staff in the Central Bank and other Irishauthorities. Mr Enria also examined good practice prevailing inother supervisory authorities in the EU, the UK and Australia,which was an essential component of the Review.

The Review found that the F&P regime at the Central Bank isbroadly in line with supervisory authorities in other jurisdictionsacross a number of areas, namely:

• required standards are comparable;
• statistics on approvals, withdrawals of applications andrefusals correlate with those published by peer regulators.Further, these outcomes did not show a particular stringency orleniency of the process in Ireland as against those employed in theother comparable jurisdictions; and
• timelines are well aligned with the target service standards ofthe Central Bank and are generally faster than in othercountries.

Overall, it was found that over the 13 years that the F&Pregime has been operative, it has been successful in raising thebar for entry into key positions in the financial industry. Thishas positively served the interest of consumers and the stabilityof the financial system.

The review of the F&P process also highlighted the potentialfor targeted improvements in the areas of consistency of theprocess across firms of different size and operating in differentfinancial sectors.

The Review acknowledges that the practices adopted by theCentral Bank are already to a large extent aligned with therecommendations set out in the Review and so not allrecommendations are seeking change. Rather, taking into accountthat there may have been some divergences from those good practicesat times, it is seen as important that those matters are reiteratedand clarified in official documents and embedded in Central Bankculture. Specifically, the recommendations in the Reviewconcentrate on three areas:

• clarity as to the expectations of supervisory authorities;
• internal governance of the process; and
• the effectiveness, transparency and fairness of theprocess.

Appendix 1 of the Review sets out the recommendations of Mr.Enria. The following is a high level overview of eachrecommendation:

1. Fostering industry role in gatekeeping

The Central Bank should, as part of an overall enhancement onprocess guidance, provide greater clarity and guidance to industryon the important role of regulated entities in the gatekeeperphase;

2. Clear fitness and probity standards

It is recommended that the Central Bank consolidate standards ina single location which would enable regulated entities,individuals and the staff of the Central Bank to access andunderstand the expectations more easily, promoting consistency intheir application;

3. Governance

The establishment of a single F&P gatekeeping unit withresponsibility for the entire gatekeeping process together withenhanced implementation of a risk-based approach for F&Pgatekeeping, with a reconsideration of the overall number of PCFroles. It is recommended that this unit be organisationallysegregated from the enforcement function to ensure a cleardistinction between the two processes.

4. Decision making

Some of the recommendations under this heading include:

• the establishment of a significant decisions committee withinthe Central Bank; and
• where legal advice is required at the decision making stage, itshould be provided by the General Counsel to the Central Bank;

5. Communication and IT platform

It is recommended that the Central Bank should organise anannual information session open to both firms and potentialcandidates to assist with their understanding of the practicalitiesof the F&P process;

6. Interview stage

• as regards interview notifications, it is recommended that theCentral Bank should provide a minimum of 5 working days' noticeof an interview to the relevant individual; and
• the Central Bank should commit to keep interviews within acertain time limit (e.g., 90 minutes, as it is good practice atother authorities); and
• the Central Bank should adopt as a principle that it willprovide feedback in all cases where an interview has been conducted(whether an assessment interview or a specific interview) and thatsuch feedback should be provided to both the individual and theregulated entity.

7. Efficiency of interview process

The Central Bank should aim to conduct a single comprehensiveinterview. This approach reduces the potential for unnecessaryduplication, such as conducting an initial assessment interviewfollowed by a specific interview.

8. Withdrawals/feedback

As well as providing feedback after an interview, it should alsobe provided in cases where a withdrawal occurs.

9. Management information

There are quite a number of recommendations under this headingsome of which address the following:

• clear and comprehensive service standards;
• time limits; and
• various different reporting categories.

10. Quality assurance

It is recommended that a robust quality assurance mechanismsshould be set in place. The output from this process should beconveyed on at least an annual basis to a senior committee.

11. Complaints procedure

A complaints process should be established specifically for theF&P gatekeeping process. This procedure should be led by anexternally appointed risk advisor.

12. Training

The development of a comprehensive training programme for theF&P gatekeeping process, including the nature of thegatekeeping role and its significance, the process to be adoptedincluding any risk framework overlay, conduct of interviews andprovision of feedback, is recommended in the Review.

Governor Makhlouf, speaking at the publication of the Review,said the following:

"I accept all of the recommendations in the review.They will help us to ensure that the F&P regime continues toperform its key role into the future. In particular, I very muchwelcome the emphasis on the critical role of supervisory judgementin promoting good governance within the financial sector and thenecessity to uphold procedural fairness as its foundation. In thisrespect there are clearly improvements we can make in the way wemanage applications and come to a judgement on them. As weintroduce these improvements, it is paramount that our supervisoryjudgement is consistently grounded in a fair and impartialevaluation process, ensuring equity and transparency for allparties involved. We are immediately looking to our implementationapproach, including the creation of a new unit to bring togetherF&P activities that are currently dispersed across the CentralBank."

Next Steps

As set out above, the Review introduced a number ofrecommendations that would improve the operation of the F&Pregime including the introduction of a new unit with responsibilityfor the entire gatekeeping process. The recommendations of theReview will be implemented over the coming months and are expectedto be in place by the end of the year.

2. ESAs consult on Guidelines under the Markets inCrypto-Assets Regulation

On 12 July 2024, the three European Supervisory Authorities("ESAs") publishedOpens in newwindowaconsultation paper on Guidelines("Guidelines") under the Markets inCrypto–Assets Regulation ("MiCA").These draft Guidelines are the only joint ESA policy mandate underMiCA.

The Guidelines set out a standardised test to encourage a commonapproach to classification. The Guidelines also set out templatesfor legal explanations and opinions, which provide descriptions ofthe regulatory classification of crypto assets in the followingsituations:

• Asset – referenced tokens("ARTs"):

The white paper for the issuance of ARTs, which includesextensive information about the crypto asset, is required to beaccompanied by a legal opinion describing the classification of thecrypto asset, specifically, the fact it is not an electronic moneytoken ("EMT") or a crypto-asset thatcould be considered excluded from the scope of MiCA; and

• Crypto assets that are not ARTs or EMTs under MiCAR:

The white paper for the crypto asset must be accompanied by anexplanation of the classification of the crypto asset, specificallythat it is not an EMT, ART or crypto asset excluded from the scopeof MiCA.

The guidelines set out:

• templates establishing the content and form of the explanationaccompanying the crypto asset white paper;
• templates establishing the content and form of the legalopinion on the qualification of ARTs; and
• a standardised test that recognises that MiCA applies to cryptoassets that are not:
  • unique and non-fungible with other crypto-assets;
  • in scope of relevant sectoral measures by virtue of theirqualification as financial instruments, deposits, insurance andpensions products and other relevant financial
  • products;
  • issued by excluded persons..

The ESAs have provided a useful flow chart of the standardisedtest which is available on page 34 of the Consultation paperOpens in new window. Thisstandardised test recognises that the regulatory classification ofcrypto assets requires examination on a case–by–casebasis, considering applicable EU and national law, decisions of theCourt of Justice of the European Union, decisions of the nationalcourt, and any guidance applicable at national level.

Next Steps

On 23 September 2024 from 10:00 to 12:00 CEST, the ESAs willhold a virtual public hearing on the consultation paper. Interestedstakeholders may attend by registering through this linkOpens in new window by 19 September 2024at 16:00 CEST.

Comments on the consultation paper can be submitted through theconsultation page. There will be no submissions accepted after 12October 2024. Any comments will be released following the end ofthe consultation period, unless specified otherwise.

3. MiFIR review: ESMA launches new consultations

On 10 July 2024, the European Securities and Markets Authority("ESMA") publishedOpens in new windowanew package of public consultations. The aim of this package is toenhance transparency and system resilience within financialmarkets, decreasing reporting burden and encouraging collaborationin the supervisory approach.

Reasons for publication

A review of the Markets in Financial Instruments Regulation("MiFIR") and of the second Markets inFinancial Instruments Directive ("MiFIDII") was carried out which resulted in an amendingregulation and amending directive being published in the OfficialJournal of the European Union on 8 March 2024. Following this, ESMAhas been authorised to establish various technical standardsidentifying certain provisions.

Included in the consultation paper("CP"), are various mandates with a 12month deadline and one with a 9 month deadline. The objective ofthese mandates is to gain an insight into the views, comments andopinions of stakeholders and market participants on the proposalsfor:

• the modification of the L2 provisions, identifying theobligations on equity transparency, covering technical advice tothe Commission as well as amendments to the Commission DelegatedRegulation ("RTS") on equitytransparency;
• a contemporary implementing technical standard("ITS") for notification of investmentfirms acting as Systematic Internalisers("SIs") to competent authorities;
• the amendment of RTS specifying the volume cap;
• the amendments of the RTS identifying organisationalobligations for trading venues to allow for the integration of thenew empowerment on circuit breakers as well as highlighting thechanges resulting from the Digital Operational Resilience Act("DORA"); and
• a new RTS on the input / output data for the equityConsolidated Tape Provider ("CTP").

This CP also proposed flags for post-trade transparency for thetransparency requirements for non-equity instruments, notablybonds.

Contents

The CP introduced the following:

• the changes to the L2 provisions on equity transparencycover;
• the changes to the MiFiR review which amend the definition of a'liquid market';
• the specification of information to be disclosed in the area ofpre-trade transparency for trading venues, which is also ofrelevance for the equity consolidated tape;
• the review of pre-trade transparency requirements for Sis;
• A new Commission Implementing Regulation on the content andformat of the Systematic Internaliser Notification. The aim of themandate is to establish a standard template to be used by firms forthe notification to their NCA when they meet the definition of anSI.;
• some largely technical amendments to the RTS, aiming tosimplify the use of cap volume in particular:
  • a shift from double volume cap("DVC") to single volume cap("SVC");
  • removal from the scope of the volume cap of transactionscompleted under the negotiated trade waiver;
  • application of suspensions by trading venues based on thepublication by ESMA of trading data; and
  • a shift from monthly to quarterly publication by ESMA oftrading data.
• the proposed recast of the RTS, highlighting the organisationalrequirements for trading venues, concentrating on the new mandateon circuit breakers and highlighting the changes resulting fromDORA;
• the scope of data to be contributed to the equity CTP alongwith the data to be published by the equity CTP. This wasestablished in correspondence with the proposed amendments to theRTS on equity transparency to ensure full alignment; and
• the range of flags to be used for post-trade transparency fornon-equity instruments.

The Annexes to the CP provide the legal drafting of the L2amendments and the ITS / RTS mandates in significant detail.

Upon approval, these standards will facilitate theimplementation of the CTP in the European Union. The objective ofthese standards is to encourage efficiency and competitiveness inthe European financial markets.

Next Steps

For the technical advice, RTS 1, the RTS on input / output datafor shares and ETFs CTP and the flags under RTS 2, ESMA willconsider all comments received by 15 September 2024 and aim tosubmit a final report to the European Commission by December2024.

For the SI ITS, RTS 3 and RTS 7, ESMA will consider allapplications by 15 October 2024 and aim to submit a final report tothe European Commission by March 2025.

4. ECB publishes report on bank digitalisation assessmentcriteria and sound practices

On 11 July 2024 the European Central Bank("ECB") publishedOpens in new windowareport ("Report") on the digitalisationactivities of banks in the single supervisory mechanism("SSM").

The Report sets out the main assessment criteria used by the ECBto assess the digitalisation activities of banks and the relatedrisks. In addition, the Report give examples of sound practicesemployed by banks that the ECB considers to, in the main, meet theassessment criteria.

The ECB's assessment framework was mainly based on the CRDIV Directive and relevant EBA guidelines, particularly those onsupervisory review and evaluation process("SREP"), outsourcing and internalgovernance. The ECB also considered the publications ofinternational and European standard-setting bodies ondigitalisation and technology-related risks.

The Report groups the assessment criteria and sound practicesare grouped together according to three themes as follows:

• business model impact;
• governance; and
• risk management.

It is stated in the Report that these criteria and practices maychange in the future based on upcoming supervisory activities,including future targeted reviews, on-site inspections and deepdives.

Business model impact

Under the heading there are a number of assessment criteria setout including:

• whether the institution understands the impact of digitaltrends on the business environment in which it operates, in theshort, medium and long term, enabling it to make informedcommercial and strategic decisions;
• whether the institution identifies, assesses and documents, ina comprehensive and systematic manner, the digital-related externalfactors impacting its business environment;
• whether the institution performs a digital readiness assessmentto understand its digital positioning;
• whether the institution understands how digitalisation affectsits business environment in the short, medium and long term anddoes this awareness inform its business strategy process; and
• does the institution have in place adequate financial andnon-financial execution capabilities for the proper implementationof any relevant digital strategy

Allied with each assessment criterion are examples ofcorresponding sound practices, for example:

• clients' behaviours, expectations (monitored for instancethrough specialised regular market benchmarks or continuous clientfeedback) and the demographic implications of the institution'sclient base, which help tailor its offer to specificaudiences;
• regulatory requirements and their implications, to ensure duecompliance, to force reprioritisation dynamics into the originalroadmap and scan for opportunities for innovation;
• data and artificial intelligence (AI) capabilities, to spotopportunities for automating internal processes and improvingcustomer services; and
• the top-level strategy is translated into business lines andteams collaborate to i) define a plan with the required budget,resources and expected deliverables, and ii) deliver on the plan,flagging adjustments or reprioritisations when needed.

Governance

Matters taken into account under this heading include thefollowing:

• whether a bank has a clear allocation of responsibilitiesrelated to digital topics in the management body;
• whether its management body provides effective oversight of thedigitalisation strategy and related risks;
• whether digitalisation is embedded in the bank's riskculture; and
• whether the bank monitors critical dependencies,interdependencies and third-party relationships.

Sound practices identified under the heading include:

• workforce planning, recognising different needs at differentphases of the roll-out to feed the information into hiring(including external developers), training and reskillingplans;
• strategic alignment, with a focus on aligning business and ITstrategies and / or the digital strategy specifically, in order tomake sure that digitalisation aspects are consistently addressed;and
• the allocation of adequate human, financial and technicalresources is discussed in relation to the strategic objectives,based on the progress monitoring reports.

Risk management

Matters highlighted as assessment criteria in terms of riskmanagement include the following:

• whether the institution runs a detailed impact review oftraditional and non-traditional risk dimensions during the digitalstrategy-setting process and the new product approval process("NPAP") as well as during the executionof its digital strategy;
• whether the institution has in place a data governance processto support data-driven digitalisation initiatives; and
• whether the institution assesses and updates the risk map andrelevant risk metrics in all risk dimensions, and reviews and adaptthe suitability of existing risk models in view ofdigitalisation.
• Sound practices identified under the heading include:
• a data governance framework that includes all the entity'srelevant data, regardless of their origin, including digital-drivendata or data relevant for digital initiatives;
• a dedicated data quality key risk indicators("KRI") dashboard reported to andactively discussed in the management body with appropriatefollow-up; and
• automated data quality checks for the detection, correction andremoval of data inaccuracies/inconsistencies.

Next Steps

The Report states that the "sound practices"are being published at an early stage so as to inform thesupervisory dialogue on those aspects with the banks making astrategic decision to develop their digital footprint. The Reportalso sets out that "as part of this supervisory dialogue,the ECB will discuss with institutions the ECB's assessmentcriteria in terms of any possible divergences in institutions'practices."

5. EBA publishes final report on ITS on supervisory reportingunder CRR

On 9 July 2024 the European Banking Authority("EBA") publishedOpens in new windowits final report ("Report") on finaldraft Implementing Technical Standards("ITS") amending Commission ImplementingRegulation (EU) 2021/451 on supervisory reporting referred to inArticle 430(7) of Regulation (EU) No 575/2013 concerning outputfloor, credit risk, market risk, operational risk, crypto assetsand leverage ratio on the changes to the current reportingframework that stem from the implementation of Basel III reforms inthe Capital Requirements Regulations III ("CRR3").

The new ITS will repeal Commission Implementing Regulation (EU)2021/451. These ITS reflect the single rulebook at the reportinglevel and form part of the single rulebook for banking in Europeand become directly applicable in all Member States once adopted bythe European Commission ("Commission")and published in the Official Journal of the EU. The ITS will allowsupervisors to have sufficient comparable information to monitorcompliance by institutions with CRR 3 requirements, thus furtherpromoting enhanced and consistent supervision.

In view of the fact that the Basel III reforms have anapplication date of 1 January 2025, the EBA publishedOpens in new windowthe "EBA Roadmap on Strengthening the PrudentialFramework" ("Roadmap"). The Roadmapsets out the process that applies when developing reporting anddisclosure requirements as follows:

• prioritising mandates and changes necessary to implement andmonitor Basel III requirements in the EU; and
• implementation by the EBA of other reporting and disclosurerequirements that are not directly linked to Basel IIIimplementation.

Consequently, the new ITS are a result of step one of thisprocess. The final draft ITS include the minimum reportingrequirements on operational risk that will be applicable toinstitutions from the date of application of the CRR 3.

In addition to the final Report, the EBA has publishedOpens in new windowan updated mapping tool between the revised disclosure templatesand the reporting templates, together with a summary of all thePillar 3 disclosure requirements and their respectivefrequency.

Next Steps

The application date for the ITS will be 1 January 2025 with thefirst reference date to be 31 March 2025. However, due to concernsraised by stakeholders about the tight timeframes, the referencedate will be extended from 12 May to the end of June 2025 (6weeks).

By the end of the year, together with the related policyproducts, the EBA will finalise the rest of the reportingrequirements on operational risks, taking into account the relevantpolicy choices including more granular data.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.