Ireland: Looking Ahead: Irish Developments - Horizon Scanner Finance March 2024

CENTRAL BANK PRIORITIES FOR 2024/2025

The Central Bank of Ireland's Regulatory Supervisory Outlook Report 2024 and accompanying Letter to the Minister for Finance were published on 29 February 2024. While optimistic that the Irish economy will grow, the Central Bank sees the interest rate environment and inflation (and their impact on asset valuations, particularly in the commercial real estate space), liquidity mismatches and increased leverage, and operational risk and resilience, as key risk areas. Geopolitical tensions, climate and environmental-related challenges (in particular growing physical, transition and litigation risks) and rapid digitalisation are seen as presenting continuing challenges.

The Central Bank's financial regulation priorities for 2024 include:

• Revising the Consumer Protection Code (consultation paper to be published on 7 March 2024).
• Ongoing implementation of the Individual Accountability Framework.
• The implementation of both DORA and MiCA.
• Addressing systemic risks in the non-bank sector (with a particular focus on macroprudential risks).

While these topics were expected to feature prominently on the priorities list for 2024, a notable addition is the development of policy work and supervisory expectations on the use of AI in financial services. The Report includes a specific 'Spotlight' section on AI.

The Central Bank's planned supervisory activities for 2024/2025 include the following:

• Banks will be subject to a thematic review on engagement with borrowers in arrears, and their work towards improving ESG disclosures and implementing ESG-related supervisory expectations will also be assessed.
• Against the backdrop of 2022/2023 interest rate increases, retail credit firms and credit servicing firms can expect the Central Bank to focus on how those firms are engaging with borrowers in arrears (a thematic review is planned), whether firms have sufficient operational capacity (with the necessary processes and controls in place) and challenging firms to resolve distressed debt.
• For MiFID investment firms, outsourcing, operational resilience, marketing and advertising, and the integration of sustainability requirements in firms' suitability assessments and product governance processes will be focus areas.
• The Letter to the Minister noted a heightened risk level associated with payment institutions and e-money firms – the Central Bank's planned supervisory activities in that sector will target previously-identified safeguarding issues; governance, risk management and control frameworks; improvements to regulatory returns; and the impact of both DORA and the planned changes to the Payment Services Directive. The Central Bank's ongoing supervisory focus on payment institutions and e-money firms was also emphasised by Mary-Elizabeth McMunn (the Central Bank's Director of Banking Payments and Credit Union Supervision) in remarks delivered on 29 February 2024 ("Perspectives and priorities - payments and e-money").
• Financial crime (AML/CFT, market abuse, financial sanctions, fraud) will be a priority supervisory area across all sectors. From an AML/CFT perspective, again payment institutions and e-money firms can expect increased supervisory focus from the Central Bank. The Central Bank also plans to improve the process for its Risk Evaluation Questionnaires (and aims to put bespoke questionnaires in place for each sector). Suspicious transactions and orders reporting will continue to be a top supervisory priority in the area of market abuse – comments by Seána Cunningham (the Central Bank's Director of Enforcement and Anti-Money Laundering) in the press release published the following day (29 February 2024) in respect of the Central Bank's latest enforcement action (for prescribed contraventions of the EU Market Abuse Regulation) emphasised this point ("This outcome stresses the importance of effective arrangements, systems and procedures, such as trade surveillance frameworks, within firms that professionally arrange or execute transactions. Effective trade surveillance facilitates the submission of high quality Suspicious Transaction Order Reports (STORs) by firms to the Central Bank, which assist in the detection and combatting of market abuse...The Central Bank expects the board and senior management of regulated entities to take full ownership of the governance of market conduct risk. This case serves to highlight the importance the Central Bank places on firms' abilities to monitor, detect and report suspected market abuse, a critical part of protecting the integrity of financial markets.")

From a domestic policy perspective, the Central Bank and Department of Finance will work closely together on various key matters, including the implementation of recommendations arising from the Retail Banking Review, the proposed Access to Cash legislation, the upcoming National Payments Strategy, and the completion of the Funds Sector 2030 review.

The Central Bank noted the following as key upcoming developments for 2024: the EU AI Act, the recently-agreed EU AML/CFT package, the final Basel III implementation package (CRR 3 and CRD VI), the CPC review, DORA implementation, ESAP, IAF/SEAR, the upcoming Instant Euro Credit Transfers Regulation, MiCA implementation, the proposals to update the Payment Services Directive with a new directive and regulation (with a focus on combatting authorised push payment fraud), the European Commission's Retail Investment Strategy and the Solvency II review.

CONSUMER PROTECTION CODE (CPC): CONSULTATION AWAITED

The Central Bank will publish its consultation paper on planned changes to the CPC on 7 March 2024. While the Central Bank's objective was to have the new retail conduct framework in place by the end of 2024, the later-than-expected publication of the consultation paper may have a knock-on effect on overall timing.

From the perspective of the Individual Accountability Framework (IAF), the consultation paper is very keenly awaited. The Business Standards under the IAF will be set out in the recast CPC (the Business Standards will apply to all regulated financial service providers (RFSPs) albeit the Central Bank may apply the standards differently as between different classes of RFSPs).

For more information on the planned CPC consultation, read our insights here: CPC Update: Revised 2024 CPC Regulations to be updated again in 2025. We will publish insights on the key themes from the CPC consultation and the likely impacts for our clients when the consultation paper is published.

GENERAL SCHEME OF ACCESS TO CASH BILL: PRE-LEGISLATIVE SCRUTINY

Pre-legislative scrutiny of the General Scheme of the Access to Cash Bill (published in January 2024) is ongoing before the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, reflecting the Bill's position on the 'priority for drafting' list in the Government's Spring 2024 Government Legislation Programme.

Proposals in the General Scheme include the following:

• The Minister for Finance would be able to set regional criteria (which could be adjusted based on census data and/or cash demand) stipulating the minimum numbers of ATMs per 100,000 people, the percentage of the population (by specific region) that must be within 10km of an ATM and the percentage of the population (again by specific region) that must be within 10km of a cash service point where cash and cheques can be lodged. The Central Bank will be empowered to assess local deficiencies (regions where it is particularly difficult to access cash), and require designated entities (expected to be, at least initially, the three main retail banks) to address those deficiencies. The Central Bank will be tasked with publishing guidance on local deficiencies before the Bill becomes law.
• A Central Bank registration framework for ATM operators and cash-in-transit firms (CITs) is planned. ATM operators and CITs would be subject to a similar registration regime to that currently applicable to virtual asset service providers.

The opening statement by Brian Hayes (Chief Executive, Banking & Payments Federation Ireland) to the Joint Committee on 27 February 2024 set out concerns regarding a potentially disproportionate level of responsibility for the three retail banks in respect of the requirements on access to ATMs, cash access points and counter services – these concerns include the potential for the retail banks to be placed at a competitive disadvantage.