European Union: FIG Top 5 At 5 - 21/12/2023

1. Department of Finance publishes its Feedback Statement on the National Discretions contained within MiCA

On 14 December 2023, the Department of Finance published its Feedback Statement on the National Discretions within MiCA ("Statement"). The Consultation received 7 responses, including one from Matheson, and for further information on Matheson's view, please see Matheson's submission to the Department of Finance's MiCA Public Consultation.

Since the receipt of the responses to the consultation, the European Securities and Markets Authority ("ESMA") published a letter highlighting the need for coordinated action across Member States to ensure effective application of MiCA. In particular, it raised specific concerns about forum shopping, and requested that Member States reduce the discretionary transition period to 12 months to avoid a number of risks. In the Statement, it is noted that Department officials considered the contents of the letter in their analysis of applying the national discretions. It goes on to state that the positons taken "uphold the objectives of MiCA to permit regulatory harmony throughout the European Union, protect investors and consumers from associated risks, while simultaneously continuing to facilitate responsible innovation in the financial services sector."

Decisions on National Discretions

Discretion 1: Public disclosure of inside information Article 88(3)

MiCA contains a discretion to Article 88(3) which permits Member States to require that a record of an explanation as to why an entity has delayed its disclosure to the public of inside information, be provided only upon the request of the National Competent Authorities. There are 2 options to choose from:

• require the explanation to be provided in all notification cases (baseline); or
• require the explanation only when specifically requested by the NCA (alternative).

Feedback: Most respondents were against exercising the discretion and advocated to maintain consistency with similar discretions in Irish law.

Decision: The Minister and his Officials have decided that this discretion will not be exercised so as to ensure consistency across similar regulations.

Discretion 2: Administrative penalties and other administrative measures Article 111

Article 111(1) provides a discretion in relation to administrative penalties and other administrative measures for certain infringements of MiCA, and allows Member States to decide whether or not to set rules for administrative penalties that are already subject to criminal penalties at national law. Article 111(6) permits Member States to supplement the powers given in 111(2) to (5) and allow Member States to impose higher levels of penalties than those provided for in the Article.

Feedback: Most of the respondents were against exercising these discretions.

Decision: The Minister and his Officials has made 3 decisions in relation to the discretions set out in Article 111:

• the discretion under Article 111(1) will not be exercised;
• financial penalties which have 'minimum maximum' amounts which are lower than MiCA should be brought up to the Central Bank of Ireland's ("Central Bank") Administrative Sanctions Procedures ("ASP") minimums; and
• sanctions under the ASP should be available to the Central Bank in respect of sanctioning breaches under MiCA obligations, not just the minimum list of penalties set out in Article 111.

These decisions will be transposed into Irish law to give them proper effect.

Discretion 3: MiCA transitional period for existing CASPs Article 143(3)9

Article 143 provides for a transitional period for Crypto Asset Service Providers ("CASPs") that existed before the applicability of MiCA, which permits CASPs to continue to provide services for up to 18 months after the date of application of MiCA, or until they are granted or refused authorisation under Article 63 of MiCA. The default position is that CASPs can avail of the transition period, but Member States have a discretion to not apply the transition period or to reduce the duration. Recital 114 also envisages a reduction of the transition period where Member States who do not have sufficiently strong prudential requirements will not be permitted to apply or to reduce the 18 month transition period. The Department views Article 143, which states that the discretion should not be exercised "where they consider the national regulatory framework applicable before 30 December 2024 is less strict than the Regulation", as a pre-condition to exercising the discretion.

Feedback: All responses supported use of the full 18 month transition period to provide operational certainty for businesses up to the point that MiCA is fully applicable.

Decision: The Minister and his Officials, determined that Ireland does not meet the pre-condition set out in MiCA for the full 18 month transition period. Therefore, Ireland will exercise its discretion and reduce the transition period to 12 months.

Discretion 4: Article 143(6): Simplified procedure for applications for CASP authorisation

Article 143(6) allows Member States to implement a "simplified procedure" for service providers who were authorised under national law to provide crypto-assets on 30 December 2024. Ireland does not have a national regime which authorises entities to provide crypto-asset services, and instead entities performing specific activities are required to register as Virtual Asset Service Providers ("VASPs") with the Central Bank.

Feedback: Most respondents favoured a simplified procedure for applications for CASP authorisation, but it was noted in Matheson's submission that there is no comparable national regime in Ireland that aligns with the requirements that a CASP would be expected to meet under MiCA. If Ireland was to exercise this discretion it risks treating groups on different levels, without a single, standardised process for all relevant applicants. Transparency of requirements and open communication channels between the NCA will be vital features for entities applying for a CASP authorisation.

Decision: The Minister and his Officials have decided not to exercise this discretion which reflects ESMA's advice, recognising Ireland's existing VASP registration process is not comparable to the MiCA CASP requirements.

Next Steps

The Department notes in the Statement that it intends to designate the Central Bank as the relevant NCA. It will notify the European Commission, the European Banking Authority and ESMA of this fact and the position it has taken regarding the national discretions. Additionally, in advance of 30 June 2024, department officials will introduce the necessary secondary legislation to transpose MiCA into Irish law.

2. Insurance Updates

European Parliament and Council of the EU reach provisional agreement on amendments to Solvency II and IRRD

On 14 December, the European Parliament ("Parliament") and the Council of the EU ("Council") released press releases confirming that they had reached a provisional agreement on amendments to the Solvency II Directive and the new rules on insurance recovery and resolution ("IRRD"). The view of both institutions is that the proposed amendments will enhance the role of the (re)insurance sector in providing long-term private sources of investments to European businesses. In addition, it will improve the sector's resilience and preparation for future challenges to better protect insurance policyholders.

Amendments to Solvency II

• More money into the real economy

The changes will free up large sums of money, which previously insurance firms had to keep in reserve, to enable more money to be channelled into economic recovery and particularly the Green Deal. The agreement will reduce the cost-of-capital rate from 6% to 4.75%.

• Better supervision

The changes will simplify supervision but will also empower supervisors on systemic risks. In addition supervisors will be required to improve cooperation with supervisors in other Member States where insurers operate to improve consumer protection.

• Sustainability related risks

The changes will also introduce provisions requiring insurance firms to take sustainability-related risks into account more, and to report on those risks to ensure that policyholders can understand a firm's green credentials.

• Administrative burden

The changes will introduce more simplified and proportionate rules which will ensure flexibility as well as reducing the administrative burden on smaller and non-complex insurance companies.

• EIOPA

The agreement assigns EIOPA a number of tasks in terms of elaborating various elements through technical standards. The new rules will also be complemented by delegated acts at a later stage, ensuring a balanced review of the Solvency II framework in relation to capital requirements.

Insurance Recovery and Resolution Directive ("IRRD")

• Harmonised Regime

The agreement will introduce a harmonised regime at a European level for resolving insurers in an orderly manner. The IRRD will give national authorities preventative powers to intervene at an early stage. Member States will be required to establish national insurance resolution authorities, either within existing authorities or through new self-standing legal entities, which would ensure effective cooperation across borders, giving EIOPA a coordinating role.

• Recovery Planning

The agreement introduces a requirement on companies representing 60% (down from 80% in the initial proposal) of the respective (re)insurance markets which requires (re)insurance companies and groups to draw up and submit pre-emptive recovery plans to national supervisory authorities. Resolution authorities who represent 40% (down from 70% in the initial proposal) of their respective market will have to draw up a resolution plan for (re)insurance undertakings and groups. Small and non-complex undertakings will not in principle be subject to pre-emptive recovery planning requirements on an individual basis.

Resolution authorities would be given powers to implement resolution action in a timely and coordinated fashion, and will provide them with resolution tools and procedures to address failures, particularly in a cross-border context.

• Other Provisions

The agreement also adds more detailed conditions regarding the use of tools and procedures regarding write-downs and conversion and some liabilities are excluded to prevent adverse outcomes for policy holders; and specific provisions on financing arrangements and a review clause regarding Insurance Guarantee Schemes are including.

Next Steps

The provisional agreement texts will now be finalised and will be presented to Member States' representatives and the Parliament for approval. Following this, the texts must be formally adopted by the Council and the Parliament.

EIOPA launches consultation on prudential treatment of sustainability risks

On 13 December 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") launched a consultation paper on the prudential treatment of sustainability risks ("Consultation"). Under Solvency II, EIOPA is mandated to assess the potential for a dedicated prudential treatment of assets or activities associated substantially with environmental or social objectives, or harm to such objectives.

EIOPA has identified a number of areas relevant to the potential treatment of sustainability under Solvency II. These are summarised as follows:

• Potential link between prudential market risks and transition risks: EIOPA has taken the view that a risk based analysis regarding Solvency II's solvency capital requirements in terms of the standard formula would be appropriate. The Consultation noted that while challenges remain in relation to the availability of sustainability-related data, sufficient progress has been made to provide meaningful evidence, and that transition risks are sufficiently reflected in Pillar II and III of Solvency II requirements;
• Potential link between non-life underwriting risks and climate-related risk prevention measures: EIOPA has focused on the environmental objective of climate change adaption on which a direct and risk-based link to insured loss is given. It has focused on analysing the solvency capital requirements, as risk management and disclosure requirements are considered to sufficiently reflect the effects of the climate-related risk prevention in the non-life underwriting business. It does not recommend changing the prudential treatment of premium risk for climate related adaption measures;
• Potential link between social risks and prudential risks: EIOPA has considered that social risks affect insurance undertakings in a similar manner as other sustainability risks. EIOPA has provided an initial analysis of the Pillar II and III requirements under Solvency II to identify what areas may need more work. It does not recommend changes in Solvency II related to a dedicated Pillar I treatment of social objectives and risks.

Next Steps

The consultation will close to feedback on 22 March 2024.

European Union (Motor Insurance) Regulations 2023 [S.I. No. 643 of 2023]

On 14 December 2023, the European Union (Motor Insurance) Regulations 2023 [S.I. No. 643 of 2023] was published in the Irish Statute Book. The Regulations give effect to the 6th Motor Directive ("Directive") (EU) 2021/2118 of the European Parliament and of the Council of 24 November 2021, amending Directive 2009/103/EC relating to insurance against civil liability in respect of the use of motor vehicles, and the enforcement of the obligation to insure against such liability. The Regulation revokes the European Union (Motor Insurance) (Limitation of Insurance in relation to Injury to Property) Regulations 2016 (S.I. No. 655 of 2016).

For more information on the Regulation, please see FIG Top 5 at 5 dated 14 September 2023.

3. EBA publishes roadmap on the implementation of the EU Banking Package along with a number of associated consultation and discussion papers

On 14 December 2023, the European Banking Authority ("EBA") published its roadmap on the implementation of the EU Banking Package ("Package") ("Roadmap"). The goal of the Roadmap is to strengthen the prudential framework, ensure a level playing field at an international level, and clarify to the industry how it intends to develop the mandates implementing the Package and how it expects to finalise the most significant components ahead of 1 January 2025.

The EBA is required under Capital Requirements Regulation ("CRR")and Credit Requirements Directive ("CRD") to develop a comprehensive set of technical standards, guidelines and other products which will underpin a robust regulatory framework, efficient supervision and enhanced risk control by credit institutions. The EBA will use a proportionate and transparent approach to the development of the regulatory framework involving a 3 month consultation for all individual mandates and with impact assessments in place for each product. It includes roughly 140 mandates – 60 implementing technical standards, 29 guidelines, and 36 reports and opinions and 14 operational products relating to the development of operational products such as the EBA Data Hub.

The Roadmap will be completed in 4 phases:

• Phase 1: this phase includes 32 mandates covering areas of credit, market and operational risk resulting from the transition to Basel III, which have a deadline of up to one year following the entry into force of the Package;
• Phase 2: this phase includes mandates with deadlines of up to 2 years after the Package enters into force. This phase will also see further progress on mandates to credit, market and operational risks and development in mandates relating to high EU standards in terms of governance and access to the single market with regard to third-country branches. It is the most intense phase with 43 mandates being developed;
• Phase 3: this phase includes mandates with deadlines of up to 3 years after the Package enters into force. This phase includes 21 mandates representing most of the remaining mandates related to regulatory products and reports where further perspectives and initial monitoring efforts regarding banking regulation implementation. During this phase, most of the technical standards and guidelines will be closed;
• Phase 4: this phase includes the remaining mandates with deadlines of 4 years after the Package enters into force. 36 products, most of which are reports will be developed, providing information on implementation progress, results and challenges; and
• 7 mandates are ongoing and are not part of the 4 phases outlined above but will be operational by the 2025 implementation date.

The EBA aims to have most of the regulatory and implementing CRR technical standards necessary for the implementation of Basel III available in the first 2 years after entry into force. CRD also introduces several enhancements to areas supporting the European single market, alongside mandates referring to the new framework for third-country branches, banks' internal governance, ongoing supervision and the management of ESG risks. As a 'general rule' the EBA will aim to consult on mandates, a year before the legal deadline, with operational risk mandates due to start 15 months in advance.

EBA launches discussion paper on Pillar 3 Data Hub - on 14 December 2023, the EBA launched a discussion paper on Pillar 3 Data Hub processes and possible practical implications that reflect reforms to the CRRmade by the Capital Requirements Regulation III ("CRR III").

EBA consultation papers - on 14 December 2023, the EBA published two consultations on amendments as part of its roadmap on the Package, which aims to align the existing regulatory technical standard with the CRR III Regulation (consultation paper 1 andconsultation paper 2). It also launched a consultation paper on two draft implementing technical standards amending Pillar 3 disclosures and supervisory reporting requirements, reflecting reforms introduced under the CRR III Regulation.

4. AML Updates

Provisional political agreement reached on proposed AMLA Regulation

On 13 December 2023, the Council of the European Union ("Council") announced that the Council and the European Parliament ("Parliament") reached a provisional political agreement on the proposed Regulation establishing the Anti-Money Laundering Authority ("AMLA").

A number of changes were made to the initial proposal which were highlighted in the press release and include:

• Supervisory powers:
  • the AMLA will directly supervise certain types of credit and financial institutions including crypto-asset service providers considered high risk or operating across borders;
  • a selected group of 40 credit and financial institutions (in the first selection process) ("obliged entities") will be supervised by joint supervisory teams led by AMLA;
  • anti-money laundering and countering financing of terrorism supervisory system ("AML/CFT") of non-selected obliged entities will remain at national level primarily;
  • for the non-financial sector, AMLA will have a supporting role in reviewing and carrying out investigations; and
  • the AMLA will be required to establish and maintain a central database of information relevant for AML/CFT
• Targeted financial sanctions: the obliged entities will be monitored by the AMLA to ensure that they have internal policies and procedures in place to ensure implementation of targeted financial sanctions, asset freezes and confiscations;
• Governance: AMLA will have a general board consisting of representatives of supervisors of Financial Intelligence Units ("FIUs") from all Member States, and an executive board which will be the governing body of the AMLA consisting of the chair of the AMLA and 5 independent full time members;
• Whistleblowing:
  • the agreement introduces a reinforced whistle-blowing mechanism and for obliged entities the AMLA will only deal with reports from the financial sector; and
  • the AMLA Regulation will establish reporting channels for receiving and handling information on breaches and protection of whistle-blowers and effective cooperation of national FIUs and AMLA;
• Disagreements: AMLA will be empowered to settle disagreements with binding effect in the context of financial sector colleges and upon the request of a financial supervisor in any other case; and
• AMLA seat: On 18 December 2023, the Council and the Parliament reached a common understanding on the process for selecting the seat for AMLA. They have worked together to ensure that the process is transparent, fair and equitable for all candidates. They will organise joint public hearings where representatives from candidate Member States will present their applications, and each will be assessed in line with the selection criteria included in the call for applications, the information provided in the application forms, the Commission's assessment of those forms and the outcome of the public hearings.

In deciding the location, the co-legislators will make this decision in an informal inter-institutional meeting at political level where the Council and Parliament's representatives will vote at the same time with the same number of votes ascribed to each co-legislator. The location of the seat will be included in the AMLA Regulation. Ireland is one of the Member States being considered as the host of the AMLA – for more detail please see FIG Top 5 at 5 dated 7 December 2023.

Next Steps

The text will be finalised and presented to the Parliament and the Member State's representative for approval. If it is approved, the Council and the Parliament will have to formally adopt the texts.

European Commission adopts Delegated Regulation amending list of high-risk third countries under MLD4: December 2023

On 12 December 2023, the European Commission ("Commission") adopted a delegated regulation ("Regulation") amending the list of high-risk third countries under the fourth Money Laundering Directive ("MLD4").

Delegated Regulation 2016/1675 identified those third countries that have strategic deficiencies in their anti-money laundering and counter-terrorist financing ("AML/CFT") regimes which pose a strategic threat to the financial system. This list is amended regularly to reflect information from international organisations and standard setters for AML/CFT such as the Financial Action Task Force ("FATF").

In October 2023, the FATF removed the Cayman Islands and Jordan from its list and this Regulation amends the Annex to Delegated Regulation 2016/1675 to delete the Cayman Islands and Jordan from the list of third countries identified as having strategic AML/CFT deficiencies.

Next Steps

The Regulation will now be submitted to the Council of the European Union and the European Parliament for scrutiny, and will enter into force 20 days after it is published in the Official Journal of the EU if neither objects.

5. Council of EU and European Parliament reach provisional agreement on financial sector scope under CSDDD

On 14 December 2023, the Council of the European Union ("Council") and the European Parliament ("Parliament") reached a provisional agreement on the Corporate Sustainability Due Diligence Directive ("CSDDD"). To date all that is available regarding the detail of the provisional agreement are press releases from both institutions and some observations published by industry groups. As a result, the below details may be clarified further once the text of the provisional agreement is made available.

Crucially it appears that the proposal made by the European Commission to extend the full extent of the CSDDD to the financial services sector has been rejected. For now, the financial services sector will only be required to conduct "upstream" due diligence - checking for forced labour or environmental harms in respect of their own operations. However, we understand that a review clause has been agreed upon which will allow for reconsideration of this position during the first review of the legislation.

Additionally, it has been confirmed by the Parliament that there will be a mandatory obligation on financial services firms to adopt and put into effect a climate transition plan, integrating due diligence into their policies and risk management, that 'ensures their business model complies with limiting global warming to 1.5°C'.

Next Steps

The provisional agreement must now be formally adopted by both institutions.