Regulatory News

Opening statement by Ed Sibley, Director of Credit Institutions Supervision at the Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

European Union FlagChairman, Committee members, we welcome
the opportunity to appear before you today to discuss the potential impacts
arising from Brexit in the context of financial services. I am joined by Gerry
Cross, Director of Policy and Risk, and John Flynn, Head of Irish Economic

In our opening remarks I will: (i) start
by making a few key points, which summarise our overall perspectives and approach;
(ii) consider the overall effects of Brexit on Irish financial services firms; (iii)
outline our approach to dealing with the challenges of Brexit for existing
financial services firms in Ireland; (iv) summarise our approach to engaging
within the Europe supervisory framework; (v) provide a brief overview of our
engagement with financial services firms considering relocating business from
the UK; and (vi) detail the Central Bank’s approach to resourcing challenges.

factors and assumptions informing the Central Bank’s approach

Central Bank’s mandate and mission of protecting consumers and safeguarding
financial stability underpins our approach to dealing with Brexit. In this
regard, I would highlight:

  • the Central Bank has been working in earnest on Brexit-related risks for nearly two years, and, overall, still considers that Brexit will have negative effects for Ireland, notwithstanding that our overall economic forecasts are for relatively favourable growth in the near term;
  • from an early stage we have sought to ensure that financial services firms are adequately prepared and resilient enough to cope with plausible stress scenarios related to Brexit;
  • it is both desirable and realistic that decisions related to the relocation of activities from the UK to other parts of the European Union (EU) be driven by factors other than regulatory and supervisory differences;
  • the Central Bank’s approach across different financial services firms is consistent with there being commonality across sectors in many of the key regulatory and supervisory issues to be considered as part of any relocation of activities from the UK; 
  • the Central Bank is engaging effectively in influencing European regulatory and supervisory approaches to dealing with Brexit-related issues, as well as operating consistently with them;   
  • we expect Brexit to have significant impacts on the Irish financial services industry, with some negative but manageable impacts for both domestically focused firms and for those with a UK focus; and
  • we expect a material increase in authorisation activity due to UK firms seeking to relocate some of their activities in the EU27, which needs to be considered from a financial stability perspective.

impacts on financial services firms

has a substantial, complex and multi-faceted financial services sector.   Brexit effects on the financial services
sector will vary accordingly.  For the
domestically focused firms, clearly the Brexit-related impacts on the domestic
economy will be critically important.

Disentangling the potential macroeconomic,
financial stability, regulatory and legal effects of Brexit is no easy task
and, in any case, is subject to the considerable uncertainty of the
negotiations.  While a wide range of
factors will determine the precise impact on Ireland’s economy, our analysis is
that the overall economic effects for Ireland in the short and longer term will
be negative.  The effects will be much
worse if there is no free trade agreement. 

a ‘hard’ Brexit may also require sudden regulatory and financial adjustments
since UK financial services firms would lose passporting rights associated with
EU membership and vice versa.  This risk is
likely to be associated with a period of heightened uncertainty in the
financial services sector.  This
emphasises the importance of a transitional period to mitigate potentially
disruptive cliff effects and associated financial stability risks.

Central Bank’s approach to Brexit for
existing financial services firms

Prior to the Brexit referendum, the Central
Bank carried out extensive and coordinated analysis of the regulatory, policy,
economic and broader financial sector effects of a potential Brexit, including
the risks arising for the firms supervised by the Central Bank and the risks
arising for the Central Bank itself.  That
work prepared us for a number of potential Brexit scenarios. 

The Central Bank initiated an internal
Brexit task force approximately one year in advance of the UK referendum. The
task force comprises representatives from fifteen divisions across the Central Bank,
its work is ongoing and it provides comprehensive assessments of Brexit-related
matters to the Central Bank’s Financial Stability Committee and the Central
Bank Commission.

From a regulatory and supervisory
perspective, the focus has been to ensure that regulated firms were addressing
and planning appropriately for the impacts, such as currency movements,
liquidity provision and changes in economic outlook in the UK and Ireland. We
continue to push regulated firms across all sectors to consider, plan and adapt
to the potential implications for their business models and revenue streams.   The first appendix to this statement provides
a high-level summary of the impacts to date on existing Irish authorised
financial services firms.

engagement and drive for convergence

The lessons from the global financial
crisis remain fresh in the minds of the European regulatory community and form
the foundation for assessing the implications of the new organisational
configurations that Brexit will trigger. For these financial stability reasons,
the importance of a robust approach to prudential supervision is a widely held
view.  The post-Brexit evolution of the
European financial system cannot involve any dilution in the capacity of
supervisors to ensure effective regulation of international financial services firms,
in relation both to firm-specific and systemic risk.

At a European
level, in light of the obvious material Brexit impacts on the State, the Central
Bank has been to the fore in the discussions on the regulatory and supervisory
approach to Brexit across all three European Supervisory Authorities (ESAs) and
the work of the ECB/ Single Supervisory Mechanism (SSM). The aim of this
approach is to mitigate against the risk of regulatory and supervisory
arbitrage and to ensure that regardless of where a firm relocates to, it can
expect a consistent application of the applicable EU regulatory standards and
intrusive ongoing supervision of its activities.

Specifically, the aim is to ensure that the Central Bank is operating
in line with European regulatory and supervisory norms, and is being effective
in influencing these norms. We are satisfied that this approach is both
correct, and proving worthwhile, and it is clear both through our interaction
at the European level, but also with individual firms, that the opportunities for
regulatory arbitrage are being successfully targeted and addressed.

The role of the SSM in banking supervision ensures that a level playing
field will apply in relation to banks. Although there is more national autonomy
in relation to other types of financial services firms, national regulators
operate within the broad framework of the European System of Financial
Supervision and there is significant (if incomplete) convergence in supervisory
approaches across member states. With a broadly similar regulatory framework
across member states within the EU, the primary focus of firms in relation to
Brexit planning should be on non-regulatory criteria such as business model fit,
legal systems, the availability of a skilled workforce, the quality of relevant
infrastructure, cost factors and so on.

The SSM and the ESAs are developing guidance that will
set out the approach they expect to see adopted by national authorities when
dealing with Brexit-related applications.  The Bank has also been actively involved, via
ESA working groups and membership of the relevant Boards of Supervisors, in
contributing to ESA considerations of Brexit issues across these sectors. 

with financial services firms considering relocating business away from the UK

Since the Brexit referendum, the Central
Bank has had significant engagement with firms who are exploring the
possibility of relocating aspects of their operations to Ireland. This includes
existing, currently authorised firms that are considering changes to existing
operations and those that are considering seeking entirely new
authorisations.  This engagement
represents a major increase against normal activity and has been observed
across all sectors[1].  In addition to individual engagements, we
have held a number of roundtables with industry to detail our approach and hear
views, with accounts of these meetings published on our website. 

In terms of our approach, we have dealt
with all enquiries in an open, engaged and constructive manner. We are
approaching new authorisations and material business model changes in a similar
way, through a clear, well-structured, transparent, consistent and
predictable authorisation process. The purpose of this predictability and
consistency is twofold – firms will know what to expect from us and we can
outline what will be expected of them in terms of deliverables
and timelines.

Our approach is in line with sound practices
agreed across Europe. Our responsibility is to ensure that firms authorised to
operate from Ireland are soundly run in compliance with EU requirements. To
this end, we seek to ensure that an entity will be substantively run from
Ireland and that the set-up permits effective supervision, with local
management accountable for decision-making. The Central Bank has consistently
said it is not sustainable to entertain proposals that fall short of these
basic requirements.  Moreover, we are
actively considering the financial stability risks associated with potential
changes to the financial services sector in Ireland, factoring in recovery and
resolution planning into the authorisation process.

We have outlined in Appendix II to this statement
a high-level overview of our approach to engaging with firms seeking to
relocate aspects of their UK-based business to Ireland.

It is clear that London will remain a
majorly important location for financial services activities.  The level of activity that moves from London because
of Brexit is highly uncertain, and contingent on the outcome of the
negotiations between the EU and the UK. 
In the face of this uncertainty, there are hundreds of meetings being
held across Europe between firms and regulators as both firms and regulators
seek to navigate a path through the uncertainty created by Brexit.  Firms
that are considering moving activities from the UK are typically visiting
several jurisdictions to assess the fit of that jurisdiction for their businesses.  They
are then whittling these locations down to two or three possibilities and in
all likelihood might have further visits.   They will subsequently
make their decisions and inform the regulator.  In the case of Ireland,
and similarly across the EU, they will then embark on the formal process.
 Even at this latter stage, a submission of a formal application may be
several months away.  Different firms are at different stages of this

So, in the same way as scores of meetings
are being held in Dublin, they are also being held in Paris, Frankfurt,
Amsterdam, and so on.  The number of meetings held to date gives
absolutely no indication as to the likely outcome. Nor does the number of applications
or expressions of interest give any sense as to the size, scale or complexity
of an operation.  What I would say is
that, based on the many meetings we have had to date, Ireland can expect to
receive a meaningful share of the activities that will move from the UK.  We
are also conscious of other state bodies with other mandates and are working
well with them to ensure that the Central Bank’s approach is well

Central Bank organisation and

The Bank is committed to ensuring that we
are well positioned to predict, understand, assess and respond effectively to
developments arising from Brexit. Of critical importance, we are seeking to
ensure that we have the skills, experience and resources that will enable us to
deal both with the authorisation of new and materially changed firms and their
subsequent supervision and possible resolution. 
On the latter point, while the common European approach should ensure
regulation is not the deciding factor for firms in their relocation decisions,
it is important to bear in mind why we regulate in the first instance – to have
a well-functioning financial sector, to safeguard stability and ultimately,
protect consumers. 

Since Ireland is already home to a large-scale
international financial services centre, we have significant experience in
dealing with the authorisation and supervision of financial services firms.  We have approved the recruitment of
additional staff and set up new teams in order to manage Brexit-related
authorisation queries across banking, insurance, investment firms, investment
funds and financial markets infrastructures. 
The need for further resources is being kept under constant consideration. 


In conclusion, the Central Bank has taken
a proactive, considered, adaptive and influential approach to dealing with the
impacts of Brexit on financial services and beyond.  We remain conscious of the likely negative
impact of Brexit on the Irish economy. 
Our approach is anchored by our core mandate of protecting consumers and
safeguarding financial stability. We are working effectively to both operate
within and influence European norms so that relocation decisions will be based
on factors other than potential regulatory or supervisory differences across

* * *

I – High level summary of the impacts to date on existing Irish authorised
financial services firms

Brexit impacts on domestically focused
(retail) banks have been manageable to date. The banks have witnessed no
material deposit outflows and no significant deterioration in credit quality. The
banks do not currently foresee any material deviation from their current overall
strategies but there have been some reductions in forecast loan book growth and
subsequent profitability estimates out to 2019. However, second round impacts
of a general downturn in the UK could have a potential knock-on effect on the
Irish economy, with follow-through impacts on the credit quality, loan growth
and profitability of all the Irish retail banks. 

From an insurance perspective, the
majority of Irish regulated insurance entities have little or no direct
business with the UK.  However, and
notwithstanding this, many larger non-life firms do sell a portion of their
business into the UK, particularly in Northern Ireland.  For the companies not selling in the UK, the
impact of Brexit will be limited to the impact on financial markets in general
and any economic slowdown in the markets to which they sell. For those Irish
insurance firms that sell into the UK, there is potential for their business
model to be impacted. The extent of the impact will largely depend on the
proportion of their sales that are to the UK and whether those sales are made
via a branch i.e. freedom of establishment (FOE) or via freedom of services
(FOS) arrangements available within the EU. As outlined in the opening
statement, supervisors are engaging with firms on an ongoing basis to
understand the impact that Brexit will have on their business models. Firms
have been contacted to provide an updated assessment of firm strategy taking
into account Brexit developments.  

Supervisors continue to actively engage with supervised entities within
the asset management industry[2].  Initial
concerns post the Brexit vote centred on the market volatility. Some fund
values initially suffered from the sell-off in equities and the fall in bond
yields, but not to an extent which triggered substantial redemptions with
investors broadly taking a “wait and see” approach.

terms of investment firms, Irish authorised firms passport services to the UK,
both on a FOS and on a FOE basis. Similarly, UK firms provide services to
Ireland on a FOS and on a FOE basis under the passporting regime. A large
number of investment firms operating in Ireland on a FOE basis are UK firms
(91%). Similarly, of the Irish firms operating branches in the EEA, the
majority of these are based in the UK (67%). Supervisors are actively engaging
with these firms to understand the impact of Brexit on their business.

relation to investment funds, Ireland is home to a substantial fund industry
with extensive ties to the UK fund sector. For example, there are over 2,000
Irish-domiciled funds, both UCITS and Alternative Investment Funds (AIFs)[3]
which are marketed into the UK and over 160 UK managers managing[4]
Irish funds.

the case of EU (including Irish) UCITS, they will not be able to avail of the
UCITS passport in order to market into the UK. Therefore, the extent to which
they will be permitted to market there will be at the discretion of the UK
authorities. Post Brexit, all UK-authorised UCITS will become AIFs and will not
be able to avail of the UCITS passport to market in the Union.  Marketing funds to professional investors is
a little different and is subject to AIFMD – the impact of Brexit in relation
to the AIFMD regime will also depend on the outcome of the negotiations.

the UCITS and AIFM Directives permit fund managers to manage funds established
in a host Member State.  Post Brexit, UK
managers will likely lose this right and EU managers will lose the right to
manage UK funds. However, as the fund industry has well-developed arrangements
in place, which allow fund managers to delegate investment management services
to third country managers, the loss of the management passport may be less

II – High level approach to engaging with larger and more complex Brexit
related authorisations

Generally, authorisation for larger and more complex entities begins with
an exploratory pre-application process. The purpose of this phase is to provide
us with an insight into the nature and scope of the firm’s proposed business
model. This stage also provides firms with a good insight into the Central Bank’s
requirements and approach and allows us to identify any potential areas of
concern early in the process. At this early stage, we will focus on a number of
different areas, including, for example, the firm’s proposed strategy, the
organisational structure, the firm’s risk appetite and its approach to risk
management and issues such as capital and liquidity arrangements, including the
firm’s approach to recovery and resolution. This exploratory phase will also
comprise a number of dedicated face-to-face meetings to cover the main areas of
the application.

Following the initial exploratory phase, the Bank will then seek to
assess the draft application. Once this assessment is complete, the firm will be
in a position to submit a completed formal application. Following receipt of the
formal application, this will be assessed in line with the legislative
timelines as set out in the relevant and sector-specific legislation. As we are
responsible for the authorisation of a wide and varying universe of firms
across different sectors, this approach to authorisations as outlined is more
streamlined for smaller, less complex institutions.

Our website contains detailed guidance outlining our authorisation
process for each of the sectors that we regulate, and the different stages
involved in this process. In line with our stated aim of
transparency, the Central Bank publishes on a semi-annual basis our Regulatory
Service Standards Performance Report. These reports, which are available on our
website, provide real transparency around our authorisation process for firms,
including measurement against standards to which we are committed in terms of
application processing across each of the sectors we regulate.

III – List of references to relevant material and speeches

Some perspectives on Brexit – Sharon Donnery, Deputy
Governor (Central Banking), (22 February 2017 Irish Centre for European Law, Royal Irish

The European Banking Sector – Growing Together and Growing Apart – Sabine Lautenschläger, Member of the Executive Board of the
ECB and Vice-Chair of the Supervisory Board of the ECB, (2 March 2017 LSE
German Symposium)

Caution Should be the Life of Banking – Sabine
Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the
Supervisory Board of the ECB, (22 March 2017 AFME Board of Directors)

European Financial Integration: Implications of Brexit Governor
Philip R. Lane, (28 March 2017 Barclays European Financial Capital Summit)

Opening statement to the Seanad Committee on Brexit – Gabriel Fagan, Chief Economist
Central Bank of Ireland, (4 May 2017 Seanad Committee on Brexit)

Central Bank of Ireland Annual Performance Statement Financial Regulation 2016 –

For example, including banking, insurance, investment firms, investment funds,
fund service providers and payment service providers.

Specifically, fund service providers, stockbroking and wealth management firms,
asset management firms and market infrastructure firms.

Funds which are authorised as UCITS have a European passport and maybe marketed
throughout the Union. Funds which are not UCITS are known as AIFs. Managers of
AIFs (AIFMs) which are authorised in accordance with the Alternative Investment
Fund Managers Directive (AIFMD) may market their AIFs (whether or not the AIFs
are regulated by a supervisory authority) to professional investors throughout
the Union

A UK entity may have established an Irish fund management company / act as a
of an Irish fund management company by providing investment management
services in respect of a fund.

Original Article Here

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