| Level of EU regulation continues to increase |
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| Financial services regulation in Ireland has recently been going through a period of significant change recently, both at a national and at EU level, and further changes are anticipated in the near future write Daragh Bohan and Deirdre Kelly. |
The establishment of the Irish Financial Services Regulatory Authority (IFSRA) on 1 May 2003, following the enactment of the Central Bank and Financial Services Authority of Ireland Act, 2003, went a long way towards the introduction of a single regulatory authority for the financial services sector in Ireland. IFSRA, a distinct division of the Central Bank and Financial Services Authority of Ireland (CBFSA), is the new watchdog for some 4,000 financial institutions operating in Ireland. It will, on a day-to-day basis, operate independently, but remain subject to the board of the CBFSA as regards its functions, policies and performance.
Organisational structure
Although IFSRA will operate as a part of the CBFSA, it has its own independent functions and its own board. The board of IFSRA consists of a Chairman, Chief Executive, the Director of Consumer Affairs and seven other board members.
IFSRA will perform the functions the CBFSA previously had under the various legislative provisions governing the regulation and supervision of financial services in Ireland. In exercising these functions, IFSRA may bring and defend legal proceedings and take such other appropriate actions in the name of the CBFSA. IFSRA will also assist the CBFSA in discharging its responsibility to maintain the overall stability of Ireland’s financial services industry.
Scope of IFSRA’s responsibilities
IFSRA has responsibility for all financial institutions previously regulated by the Central Bank of Ireland, the Department of Enterprise, Trade and Employment (DETE), the Office of the Director of Consumer Affairs and the Registrar of Friendly Societies. As such, banks and building societies, insurance companies, insurance intermediaries, investment business firms, stock exchanges, stockbrokers, bureaux de change, mortgage intermediaries, money lenders and credit unions now fall within IFSRA’s regulatory ambit.
The Act amends a considerable number of legislative provisions dealing with the regulation and supervision of these aforementioned entities to achieve the requisite transfers of regulatory responsibility. It is IFSRA’s responsibility (among other things) to examine applications for licence or authorisation, submission of financial returns, conduct of on-site inspections, compliance with minimum capital requirements and to hold regular review meetings with senior management of all regulated institutions. In brief, IFSRA oversees credit institutions, investment business firms, retail intermediaries’ collective investment schemes, the Irish Stock Exchange and its members, FINEX trading members, futures and options exchanges moneybrokers and the Investor Compensation Company.
Consumer protection
In exercising its functions, IFSRA is required to maintain a focus on consumer protection. Speaking at the launch of IFSRA, the Tanaiste said that, ‘In setting up the new regulator, we have taken the view that the public interest and the consumer interest are at one. Prudential supervision and consumer protection are complementary, not conflicting. This is the guiding principle of IFSRA’.
To underscore this focus on consumer protection, the Act provides for the appointment of a consumer director as a full member of IFSRA’s Board. The consumer director has statutory responsibility for monitoring the provision of financial services to consumers having regard for the public interest and the interest of those consumers. The cconsumer director will also be responsible for exercising the functions of the CBFSA under various legislative provisions specifically designed to protect the interests of consumers of financial services.
IFSRA is also in the process of developing a charter, which will be displayed in all Irish financial institutions that have dealings with the general public.
Appeals process
The Act provides for the establishment of a Financial Services Appeals Tribunal to hear appeals against decisions of IFSRA made pursuant to certain legislative provisions. Detailed provision is made in the Act for hearing and determining appeals, calling witnesses and the awarding of costs. It also provides for references on questions of law and appeals to be made to the High Court. The Minister for Finance has yet to sign the Commencement Order to give effect to the establishment of the Appeals Tribunal and it is currently anticipated that this will happen when the Central Bank and Financial Services Authority Bill, 2003 is enacted.
Staff
The Act also provides for the assignment of employees of the Bank to work for IFSRA. In addition, employees from the DETE have been seconded to IFSRA for an initial period of two years. These provisions should ensure a smooth transition period following the transfer of all relevant functions to IFSRA.
Prudential supervision
IFSRA is also for ensuring the solvency of all firms and the safety of consumer monies across the financial services sector in Ireland. In addition, a Registrar of Credit Unions is to be appointed with responsibility for the functions previously carried out by the Registrar of Friendly Societies as they relate to crediit unions.
Further legislation
Further substantive changes to the regulation of the financial services sector are also expected. With the publication of The Central Bank and Financial Services Authority Bill, 2003 (the so-called IFSRA No. 2 Bill) later this year, the establishment of a statutory Financial Services Ombudsman and Industry and Consumer Consultative Panels to liaise with IFSRA’s Board. It is proposed that this Bill will also make certain amendments to existing financial services legislation. In addition, a Financial Services (Miscellaneous Provisions) Bill is expected to be published which will further amend financial services legislation, although the amalgamation of the provisions of the two bills is being considered at present.
The introduction of the new regulator consolidates the supervision of the major sectors of the financial services industry in Ireland. IFSRA is mandated to promote the best interests of users of financial services in a way that is consistent with the orderly and proper functioning of financial markets and with the orderly and prudent supervision of providers of those services.
Regulation at EU Level
Since the adoption in 1999 of the Financial Services Action Plan (COM (1999) 232) (the FSAP) the EU financial services regime has also undergone significant change. The FSAP consists of measures intended to fill gaps and remove remaining barriers so as to provide a legal and regulatory environment that supports the integration of EU financial services and securities markets.
The FSAP covers a broad range of measures. Wholesale measures relate to securities; insurance and trading; securities settlement; accounts; and corporate restructuring. Retail measures relate to insurance; savings through pension funds and mutual funds; retail payments; electronic money; and money laundering. There are also further measures relating to financial supervision; corporate insolvency, and cross-border savings. It is intended that the FSAP be implemented by 2005, and many measures are due to be implemented before then, following the establishment of the new Lamfalussy fast track procedures. The Irish financial sector, corporate sector and consumer groups will all be affected by FSAP measures as and when they are implemented.
The following are some of the specific directives introduced under the FSAP and which financial institutions will be required to comply with once implemented:-
1. Money laundering
On 10 June 2003, the Minister for Justice signed into force regulations to fulfil Ireland’s obligations under the 2001 Directive relating to money laundering. The new regulations extend the categories of bodies who will have regulation and reporting requirements (including solicitors, auctioneers and auditors amongst others). At the request of IFSRA, a number of additional categories have been introduced the regulations come into force on 15 September 2003. A proposal from the Commission for a Third Money Laundering Directive is expected by the end of 2004.
2. Market abuse directive
Due to be implemented by October 2004, the Market Abuse Directive of January 2003 harmonises rules on the prevention of insider dealing and market manipulation in both regulated and unregulated markets.
The directive applies to all transactions concerning financial instruments admitted to trading on at least one regulated market in the EU, including primary markets, whether the transaction is undertaken on a regulated market or elsewhere. It also covers both insider dealing and market manipulation.
The directive requires each EU member state to designate a single administrative regulatory and supervisory authority, with a common minimum set of responsibilities, to deal with insider trading and market manipulation. It also establishes transparency standards requiring people who recommend investments to the public to disclose their relevant interests. In particular, this will apply to financial analysts and to financial journalists who recommend investments to the public.
3. Prospectus directive
The Prospectus Directive which was adopted in July 2003, is designed to provide a ‘single passport’ for issuers of equity and debt securities so that, once an issue of securities meets prospectus requirements in one country, the securities can be sold across the EU. It is expected to be implemented by May 2005. The directive also provides for the centralised filing of the prospectus which is expected to facilitate to prospectuses by investors throughout the EU.
4. Investment services directive
A revision to the Investment Services Directive was proposed by the Commission in November 2002, and is intended to replace the 1993 Directive, which regulates the authorisation, behaviour and conduct of business of securities firms and markets, including exchanges.
5. Transparency directive
The Transparency Directive, which was proposed by the Commission in March 2003 is set to impose an obligation on issuers to meet continuing disclosure requirements after issue.
6. Insurance
Two Directives of March 2002, which are due to be implemented by September 2003, update solvency standards for life and non-life insurers, and a scheme is being considered for the protection of policy holders. The Insurance Mediation Directive of December 2002, which is due to be implemented by January 2003, introduces an EU framework for the authorisation, capitalisation and regulation of intermediaries and brokers who sell insurance products. A Commission proposal is also expected around the end of 2003 to harmonise the framework for reinsurance supervision in the EU.
7. Risk-based capital directive
A proposal from the Commission for a Risk-Based Capital Directive is expected in 2004 to amend the existing Capital Accord. It is intended that the new directive will apply to all credit institutions incorporated in the EU.
8. Accounting directives
The Fair Value Accounting Directive of May 2001, due to be implemented by January 2004, brings up to date existing EU accounting directives for companies, banks and other financial institutions, on the valuation of assets at methods other than purchase price and cost.
The Regulation of July 2002 endorsing International Accounting Standards proposes that a single set of international accounting standards will apply to all listed companies across the EU for each financial year starting on or after 1 January 2005. The Accounting Modernisation Directive, which was adopted by Council in May 2003, amends the Fourth and Seventh Company Directives, and is due to be implemented by January 2005.
9. Distance marketing and pensions directives
The Distance Marketing Directive of September 2002, due to be implemented by October 2004, governs conditions on the sale of retail financial services product, if they are not sold face-to-face.
The Pension Funds Directive of May 2003, due to be implemented by August 2005, regulates the operation of employment related pension schemes across borders in the EU. This is based on mutual recognition of home state regulation and establishes a ‘prudent person’ approach in Community law so that a prudent investment policy can be followed for scheme members in each Member State.
Clearly, substantial progress has been made towards achieving a single market in financial services, particularly in wholesale financial markets.
At both an EU and a domestic level, it is clear that regulation in respect of the financial services is tangibly changing at a great pace, which it is hoped will ensure that Ireland will have a first class regulatory regime, without lessening our competitiveness in attracting financial services companies going forward. |
Daragh Bohan is a partner and Deirdre Kelly is a solicitor in William Fry.
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| Article appeared in the September 2003 issue.
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