The Regulatory Framework and Drive for Supervisory Convergence - Sylvia Cronin, Director of Insurance Supervision

Remarks delivered to IDA Jurisdictional Insights Event

Good morning ladies and gentlemen. Thank you to IDA Ireland for the invitation to speak at today’s event.

In my remarks this morning, I will mainly discuss the strength of the Irish regulatory framework in the context of insurance authorisation and consider the question of supervisory convergence.

Impact of Brexit

While there is still considerable uncertainty, it is clear that Brexit will have broad, fundamental impacts, and will substantively alter the functioning of the UK, Irish, and European financial systems. It will impact on the continued ability of financial services firms to sell their products from the UK directly into other European Union (EU) Member States and vice versa, in the absence of a negotiated alternative.

Since the Brexit referendum in June 2016, UK financial firms who sell services to the EU market have been considering the implications for their business models of a loss of passporting rights arising from the UK’s exit from the EU.

In considering those implications there are a number of options open to firms in order to maintain the ability to continue to write and/or service cross border business. These options include:

• Establishing a new subsidiary in an EEA jurisdiction.
• Establishing a third country branch to service the local market.
• Extending the authorisation of an existing EEA entity to take on business currently written from the UK.

In this context, in Ireland we have seen a material increase in the number of applications across each of these options. We have concluded a number of authorisations in 2017 and 2018, and have several further applications under review. The Central Bank is focused on ensuring that firms’ plans are robust enough to provide certainty and continuity for policyholders in mitigating a hard Brexit scenario.

We have increased headcount, recruited heavily and re-allocated senior and experienced resources from other important tasks to ensure that we deliver supervisory outcomes in an effective, efficient and timely fashion.

The business models we have received and considered to date typically include: 

• Domestic Irish risk that has been written from the UK on a Freedom of Service (FOS)/Freedom of Establishment (FOE) basis and is now being re-domesticated;
• Pan-European specialty risks that have previously been written from the UK on an FOS/FOE basis. This includes marine, aviation, trade credit & political risk, financial lines, cyber.

Authorisations

As part of our overall mission of ‘Safeguarding Stability and Protecting Consumers’, the Central Bank is strongly committed to assessing authorisations in an effective and efficient manner. This includes deciding on applications for authorisation as well as the ongoing task of conducting assertive, risk-based, supervision of authorised firms. We have had engagements with a large number and range of firms that require a solution in order to continue to access the EU market after Brexit.

I would like to reflect on the characteristics of those applications that have successfully come through the authorisation regime established by the Central Bank.

We understand that in the current climate, firms are facing a large number of issues and many are having to restructure their business models. Brexit has imposed additional costs and complexities, including: establishing a presence in Ireland; relocating and/or hiring staff; re-organising business models and governance arrangements. We understand that firms wish to keep cost and disruption to existing business models to a minimum.

Risk Assessment

We expect firms to undertake a robust assessment of the risks associated with their business model and to ensure that identified risks are appropriately governed and mitigated. We expect firms to consider how they are established and organise themselves to ensure that the business is genuinely and demonstrably run and overseen from Ireland.

Substance

A fundamental principle of authorisation and supervision is that a regulated entity must have governance and control arrangements in place that are commensurate with the nature, scale and complexity of its business from the point of authorisation. We have significant experience in dealing with the authorisation of firms. Firms must expect challenge and be prepared to demonstrate presence in such a way to meet our robust, analytical, intensive and outcomes focused supervisory expectations. This means that as well as having appropriate substance, the firm should also have appropriate expertise.

Expertise

Firms need to be able to demonstrate that they have the requisite skill-set in the Irish entity to discharge the responsibilities of a regulated insurer carrying on the business for which they are licensed. This includes but is not limited to devising and executing the strategy of the firm; effectively overseeing any functions that are outsourced; and having meaningful discussions with the regulator.

In summary, we expect firms regulated in Ireland to be well governed, self-sustainable in their own right and be established in such a way that they are capable of being supervised by the Central Bank.

Where firms have met these criteria the authorisation process has been relatively smooth, however where they have not, the process has been more problematic and lengthy.

Supervisory Convergence

I would now like to take the opportunity to discuss the drive towards supervisory convergence. Supervisory convergence is a key strategic goal for EIOPA. As stated by EIOPA a ‘true single market demands a level playing field and quality regulation and supervision’. Several initiatives are used to drive consistency between Member States. These include working groups, college of supervisors meetings, common supervisory handbook, EIOPA guidelines and peer reviews.

Our approach to insurance supervision is to ensure we are aligned with European best practice. As a member of the EIOPA Board of Supervisors, EIOPA working groups and committees, we play an active and important part in shaping and influencing European standards.

A good example of the work the Central Bank does in this space is in relation to a recent Fitness and Probity (F&P) peer review. In 2017, EIOPA, through its Board of Supervisors, initiated a peer review on the assessment of “Propriety of AMSB Members and Qualifying Shareholders”. AMSB members are members of the Administrative, Management and Supervisory Body of an insurance or re-insurance entity. Typically the members include directors of the board, key function holders and qualifying shareholders.

The objective of the peer review was to focus on the convergence of supervisory practices in F&P assessments across the EEA.

Arising from these peer review findings, the Panel made recommendations which should facilitate improvements in supervisory practices across the EEA. I would like to touch on three key recommended improvements.

• Firstly, in a number of Member States, national competent authorities (NCAs) are recommended to seek legislative change to strengthen the national regulatory frameworks for their F&P regimes.
• Next, EIOPA recommends an ongoing focus on F&P after the initial approval of individual Pre-Approval Controlled Functions (PCF) applications. NCAs should focus, as an integral part of their supervisory activities, on how F&P requirements are complied with on an ongoing basis.
• Finally, EIOPA recommend measures to strengthen cross border cooperation between NCAs.

As a result of the work by EIOPA and by the Central Bank, you should expect to see a continuing supervisory focus on F&P following the initial PCF approvals by the Central Bank. It is equally important that firms are fully aware of their F&P responsibilities to ensure that all individuals who are performing Controlled Function (CF) and PCF roles within firms comply with the F&P Standards. The ultimate objective is to embed a culture of individual responsibility and compliance with the core standards of F&P within all financial services firms; to influence the behaviors of individuals and to protect consumers.

Ongoing supervision

The gatekeeping role that the Central Bank has is hugely important in mitigating financial stability risks and protecting market integrity and customers in Ireland and across Europe. It also promotes trust and the reputation of the Irish financial services system. As I alluded to earlier it is essential that firms authorised by the Central Bank meet the high standards that are expected of any such firm authorised in the EU – consistent with them effectively being, in many cases, an EU head office responsible for business undertaken in multiple jurisdictions.

Maintaining these high standards in both the initial authorisation phase and through our ongoing supervision is aligned to the Central Banks’ strong regulatory reputation. We believe that this is one of the factors firms consider when applying for authorisation. This benefits firms we regulate in that clear and robust regulation enhances their profile in the markets in which they operate and transfer a level of confidence to consumers.

We are continuously focused on strengthening and enhancing our framework to ensure that it remains relevant to the new business models that we are authorising. For example, in response to Brexit we consulted, in November 2017, with industry regarding the authorisation and supervision of third country branches in Ireland. Additionally, in respect of the volumes of with-profits business that we were seeing in our authorisations pipeline, we consulted, in June 2018, with industry on proposed changes to the Domestic Actuarial regime and associated governance requirements.

One of my key priorities for 2019 is to ensure a smooth transition of authorised firms to business as usual. In respect of lines of business that are new to the Central Bank, we are reflecting on the regulatory framework to ensure supervisors are equipped to deal with supervising these firms. I would also add that to date the PRA has been supportive in sharing its insight on firms proposing to move to Ireland and particularly in relation to specialty lines new to the Central Bank.

Culture

Before I conclude, I want to talk about Culture. I have spoken about a number of topics here today and I have reiterated the need for firms to implement and to put in place robust structures to manage their risks. However, simply having these structures in place is not enough – it is the behaviours within and around these structures that will ultimately determine their success.

In his recent speech to the Banking Payments and Federation Ireland (BPFI), Deputy Governor Ed Sibley talked about culture within firms and outlined what he saw as ‘the overly legalistic’ approach adopted by some banks, and how some firms needed to be pushed and prodded by the Central Bank before taking the appropriate, and in some cases, long overdue, action to address failings or remediate risk.

Culture is now and will be one of the key priorities for the Central Bank going forward. I am conscious of the audience today – I am sure you will be aware of the critical role that top executives and the board of directors play in setting the required tone and ensuring that it is permeated and lived by all staff throughout the organisation.

Closing Remarks

Let me conclude there.

My key messages in summary are that firms presenting for authorisation need to demonstrate a robust assessment of the risks facing their business model and put in place appropriate substance and expertise to support it.

The F&P standards we apply are consistent with expected European norms and guidance and will develop further with a focus on ongoing assessment.

While we already supervise a wide variety of firms, some with relatively complex business models, the Central Bank’s regulatory framework will evolve where we believe it necessary to maintain robust, effective supervision.

Thank you for your attention.

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Acknowledgements: I thank Stephen Marrey for his assistance in preparing this speech