It is a pleasure to be here for this joint Institute of Banking/Compliance Institute seminar to mark the 20th anniversary of the Compliance Institute.
An anniversary tends to be a natural reflection point: we look back, sometimes with nostalgia, sometimes with regret, sometimes a combination of both - but we also look forward.
With hope and expectation, if we’re optimists…
Or, if you’re a regulator or compliance expert, with a firm eye on risk and the need for effective governance and culture.
Which I like to think makes us realists rather than pessimists!
Today I’d like to focus my remarks on those topics in the context of the changing financial services landscape and three issues specifically:
Firstly, ensuring effective governance through accountability;
Secondly, the structural changes in the Irish retail banking sector;
And thirdly, sustainable finance, disclosure and transparency.
I will emphasise the importance of effective governance, culture and agility in responding to risks and protecting consumers and investors.
White swans and black swans:
But first, a step back in time.
The Compliance Institute was founded in November 2002 when around 80 people gathered in the offices of Irish Life in Abbey Street to establish a network for compliance professionals.1 It’s worth taking a moment to consider one of the most significant events that year – although for harmony’s sake I might gloss over Saipan.
In November 2002, the SARS pandemic broke out in China.
If we took a step back in time to the end of that year and asked ourselves what lay ahead, we would safely have anticipated that the SARS pandemic would likely be followed by others.
But most of us would not have expected the human devastation of the Covid pandemic.
Yet this was more “white swan” than “black swan”, to quote Nassim Nicholas Taleb.
In other words, while none of us has a crystal ball, we need to be cognisant of future events that have a near certainty of occurrence over time, but with some doubt about precise timing or impact.
The next decade will continue to be characterised by rapid change in our economies and in the financial system, driven by technology, by an ageing society, by the need to respond to climate change, and, perhaps most immediately, by the move to different ways of working.
Within all of those categories, we – regulators and regulated firms alike - need to prepare for predictable surprises – and do so more effectively.
The changing landscape:
Since 2018 the growth of the financial sector in this jurisdiction has continued apace, coinciding with the UK’s departure from the EU. In the same vein, the Irish market-based finance sector is increasingly outward looking, with greater exposures to the rest of the EU, the UK, the US and elsewhere.
Technological change is disrupting the landscape of financial services, with new entrants, new business models, a race by incumbents to invest in developing the necessary capabilities, and more. We are seeing increased new lending from non-bank lenders and retail credit firms, which offers customers increased choice.
The Central Bank seeks to anticipate - and support - innovation in financial services and understand and adapt to the far-reaching changes taking place within the industry.
Our objective is to ensure the regulatory context enables the potential benefits of innovation for consumers, businesses and society to be realised, while the risks are identified and managed.
Our new strategy is designed with those objectives in mind.
The Central Bank’s strategic approach:
The strategy is built around four core themes:
The Safeguarding theme reflects fulfilment of our mandate to maintain price stability and financial stability and ensure that the interests of consumers and investors are secured.
Under the Future Focused theme, we are working to ensure the financial system adapts well to the backdrop of rapid change and disruption, so that the interests of citizens and the economy are served by change, innovation and competition.
Through the Open and Engaged theme, we are focused on enhancing our engagement with our full range of stakeholders at home and abroad, including yourselves, to better explain our approach and better understand your challenges, concerns and perspectives.
Finally, by Transforming, we are focused on being more agile, enhancing our skills and capabilities, and making even better use of technology.
Our continued focus on risk and resilience is central to the strategy – seeking to ensure the financial system has the capacity both to respond to predictable surprises and genuine shocks, and to innovate appropriately over time.
I’d refer you to a series of speeches by our Governor on the work we are undertaking in conjunction with our international counterparts to deepen resilience and anticipate and respond to risk.4
But today I want to focus on a small number of predictable surprises in particular, and the common theme that links them.
Mistakes, misconduct and the importance of effective culture:
Most firms aspire to high standards. We welcome well-run firms with sustainable business models and effective cultures who do the right thing by their customers and do well in return.
But mistakes occur and, regrettably, so does misconduct – posing a risk to consumers, investors and wider society.
Regulators and compliance professionals share a desire to see firms minimise mistakes and root out misconduct.
And we recognise that strong and effective tools are vital to that objective.
This is why the Central Bank proposed the introduction of an enhanced Individual Accountability Framework (IAF) – as a tool to deliver better outcomes not solely for consumers and investors, but for businesses themselves.
The IAF will consist of:
A Senior Executive Accountability Regime (SEAR);
Enhancements to the current Fitness & Probity (F&P) Regime; and
A strengthened enforcement process.
The various separate aspects of the IAF will complement each other to achieve the ultimate goals of better outcomes for consumers and a more sustainable financial system by driving higher standards of behaviour for individuals in financial services firms.
Firstly, the proposed conduct standards will apply to all sectors, across the thousands of firms and entities we currently regulate. The standards comprise common conduct standards for individuals carrying out controlled functions (CFs), additional conduct standards for the most senior executives, and the important standards for businesses.
The conduct standards set out the behaviour expected of firms and their staff, including obligations to conduct themselves with honesty and integrity, to act with due skill, care and diligence, and in the interest of consumers.
We believe these are standards to which most firms and individuals already hold themselves – and indeed the standards which compliance professionals would expect.
The additional conduct standards will be applied to the most senior executives and require them to meet a standard of reasonable care in how they perform their function and manage their respective areas of the business.
Secondly, the initial scope of SEAR will include credit institutions, certain insurance undertakings and investment firms amounting to approximately 150 firms. It will require in-scope firms to set out clearly and comprehensively where responsibility and decision-making lie in order to ensure transparency.
Firms will be required to provide a Statement of Responsibilities for each Senior Executive Function (who will be broadly equivalent to existing PCFs at firms in-scope for SEAR) which clearly sets out their role and responsibilities, in addition to a Management Responsibilities Map for the firm documenting key responsibilities, management and governance arrangements.
We expect that implementation of SEAR will support senior management in implementing an effective governance framework by identifying how risks are being managed and any gaps which may arise. This has been the experience in the UK whereby the Senior Manager and Certification Regime has been credited by firms as providing a sound framework for enhancing governance.
Thirdly, the Fitness and Probity framework will be enhanced by including a requirement for firms to certify on an annual basis that individuals exercising a controlled function remain fit and proper.
Finally, the Central Bank’s primary enforcement process, the Administrative Sanctions Procedure6, will be enhanced to enable us to take direct enforcement action against individuals without first needing to establish wrongdoing by the firm.
Within the above, there will be a critical onus on firms to recognise that they must drive effective cultures.
It is globally recognised that culture is a matter for each individual firm in the first instance and that regulators cannot prescribe culture for individual firms. That is the role of the boards and senior leadership teams.
Subject to the legislative process, it can be expected that the Bill will be enacted into law during the course of the months ahead. The General Scheme provides the Central Bank with regulation-making powers in respect of the SEAR, the Conduct Standards and Certification on which we have been working in parallel to complete the new framework.
Once the Bill has been enacted, we will move quickly to consult and engage with key stakeholders on the operationalisation of the IAF.
This consultation will include draft regulations and accompanying guidance on key components to ensure the proposed policy measures and guidance are clear, consistent, and pragmatic and to support firms in achieving an effective and consistent implementation of what is a significant step forward.
In the interim, our message to firms is that they should be taking preparatory steps now – as well as being fully mindful of existing obligations, both at firm and individual level.
On preparation, I am encouraged by the findings of the survey undertaken by the Compliance Institute in conjunction with Mazars in Ireland.
There is a high level of awareness of the IAF (70%) within Boards of Directors and Executive Committees of firms, and many firms have already taken some action to prepare for its implementation.
I am heartened that the Compliance Institute has already engaged in developing guidance for its members in that respect, which no doubt will evolve as matters progress.
Firms should also review their current Fitness and Probity processes to assess any enhancements required to meet the annual certification requirements and consider what training and monitoring will be required to embed the conduct standards as expected standards of behavior.
Firms should also more broadly examine their internal culture and values as against the IAF principles and how these could be more meaningfully reflected in practice in the firm’s business.
Consideration should be given to effective ways of engaging with staff, customers and other stakeholders to spread awareness of and embed standards and positive behaviours.
Education and training together with consistent internal and external messaging will play an important part in this – and I welcome in that context the Institute of Banking’s clear focus as an educational provider on improving culture in financial services. Your culture programmes in the areas of culture, conduct risk, consumer protection, ethics and expected behaviours will play an important role in raising standards both at all levels.
If the IAF speaks to the importance of effective governance and culture in the round, I want to turn to two specific areas where their importance is immediately evident.
Structural changes in the Irish retail banking sector:
In Ireland, as across Europe, some of the biggest changes in financial services have been seen in the area of retail banking.
There has been a profound shift to digitally enabled services, with challenger firms providing payment and other services, putting increasing pressure on banks to improve their digital offerings.
For example, in the area of payments and e-money firms, we have seen the number of authorised firms grow by an order of magnitude – from low single digits to more than 40 - in four years, with a significant further number currently in the approvals process.
In addition to new entrants, there is welcome evolution by existing sectors such as credit unions to enhance their offerings and target new business.
And of course, there are exits, significantly with the withdrawal of Ulster Bank and KBC.
The Department of Finance-led review of the retail banking sector is therefore timely and welcome, examining as it will the current landscape and likely market trends over the next decade. The review will focus on the importance of maintaining competition, consumer protection and consumer choice, and the roles of the various component parts of the system – Government, industry and regulators - in same.
Turning to the banking exits specifically, these represent a seismic shift within the overall landscape with an array of implications – especially for affected customers - and accordingly have been a priority for us since first announced.
For the consumer and the taxpayer, safeguarding financial stability is one of the most important ways in which the Central Bank works to protect their interests, including seeking to ensure that the banking system operates in a safe, sound and sustainable way.
Banks need to be in a position to absorb shocks and have the ability to build buffers to withstand future shocks in order that they can serve the economy and consumers over the long-term.
The exit programmes of Ulster Bank and KBC includes both a number of complex asset and liability sale transactions, together with the closure of customer current and deposit accounts.
Since the announcements by the boards of the departing banks in February and April last year, we have been intensely engaged with both the exiting and acquiring banks with a view to assessing and managing the full implications of the transactions.
For the exiting banks, it is imperative that their wind-downs are effectively managed and overseen by their executive management and boards. They are to be informed by appropriately granular board-approved exit plans that also provide for contingency scenarios that may arise as the wind-downs are executed.
Our focus has been, and will continue to be, that exiting banks must continue to have adequate financial and operational resources, be well governed and effectively managed, recoverable should they get into difficulty and ultimately adopt a customer-centric approach at all stages throughout their wind-downs.
For the acquiring banks, it is a similar focus, albeit on the opposite side of the transactions. We expect their executive management and boards to ensure they have the appropriate financial and operational resources in place to acquire these new businesses, and to execute and integrate these transactions in a safe manner.
It is imperative that executive management and boards have demonstrated that such acquisitions do not jeopardise the safety and stability of their business and that their strategic ambitions do not outpace their financial and operational capacity.
Again, our expectations have been clearly set out: we expect acquiring banks to govern and manage these transactions effectively and in a consumer-centric manner, while proactively considering business model sustainability and risks to their liquidity, capital and recoverability.
As the process of closing bank accounts now commences, the imperative for departing and remaining banks is to have sufficient plans, preparations and resources in place.
We are assertively supervising the banks to ensure they prioritise the interests of customers and prospective customers throughout this unprecedented volume of account migration.
Customers of Ulster Bank and KBC will – in line with the guidance they receive from their bank – have to take action to move their accounts.
But customers did not choose to be in this position, and this is where a consumer-focused approach is essential – not just from the banks leaving the market, but the various financial services firms seeking to acquire their customers.
The departing banks will issue letters in phases with a view to managing the flow of migrations over the period 2022 into 2023.
It is important to stress that customer notifications in no way diminish the duties of the existing provider under the requirements of Irish financial services legislation, including the Central Bank’s statutory codes of conduct. Such duties remain until the customer has been properly on-boarded to another provider.
Existing providers have a duty under Provision 3.11(c) of the Consumer Protection Code to “ensure all outstanding business is properly completed prior to the … cessation of operations”.
Such protections will be especially important for consumers who face challenges in migrating their account.
Nor do the notifications diminish the duties under the relevant legislation of any prospective new provider to whom that customer wishes to switch their account.
All of the above is especially important in the context of potentially vulnerable customers. We expect firms to assess specifically the impact of their decisions on vulnerable customers and provide the assistance necessary to reasonably mitigate those impacts and retain access to basic financial services.
This includes having specific and effective processes and communication plans to support vulnerable customers throughout this period.
And should errors occur that impact customers, we require firms to remediate and rectify them without delay, to ensure that customers are treated fairly and are put back in the position they would have been in had the errors not occurred.
From our intensive engagement with the firms on this, it is clear that much work is being done within the banks.
I acknowledge the unprecedented scale involved, and also acknowledge that staff within the banks are working extremely hard in challenging circumstances to provide customers with the services they require. We are keenly aware of the impact on both staff and customers in that regard.
But while recognising the challenge an exercise of this scale represents, it is also clear that, in terms of the banks’ overall plans, more needs to be done.
Engagement with CEOs
We issued our first industry letter in June 2021, setting out our expectations of how consumers must be treated throughout this period of change and consolidation.
We have written again this week to the CEOs of the five main retail banks to set out our further expectations on some of these key items and convene a roundtable meeting, which will also include the BPFI given its role.
In February 2022 we published the findings of our review of call wait times on customer support phone lines in the main retail banks.
The review found areas for improvements and we have engaged directly with the retail banks to implement robust action plans to ensure the level of customer service provided on support phone lines is sufficient to manage both normal call volumes and to deal with surge events.
We will repeat this review in Q2 2022.
Separately, the banks need to engage with other service providers, including direct debit originators (DDOs), to ensure a smooth and timely switch of a customer’s account.
As a number of the top twenty DDOs are regulated financial service providers (e.g. insurance companies and payment institutions), the Central Bank has written to the CEO of each such provider to reinforce their duty to take action to ensure this exercise is completed efficiently.
In a process of such scale and complexity, we acknowledge firms may not always be able to move at the speed customers expect.
But a strong consumer-focused culture – with appropriate leadership and oversight by boards and senior management – will go a major way towards doing this well.
We will continue to closely supervise firms in that context, including their planning, operational capacity and customer approach.
We are very clear on our powers, and are ready to intervene further as necessary should this transition not proceed in line with our expectations.
Sustainable finance and the risks of greenwashing:
Sustainable finance is the other area I wish to touch upon today as a litmus test for all of us.
The Central Bank is continuing to step up our work on climate change to both ensure the financial system can support the transition to a carbon neutral economy and is suitably resilient to the risks. We know we have much more work to do.
This means continuing to adapt our supervision to ensure that financial firms are fully reflecting climate and transition risks in their business and that in developing and marketing green products and services they are meeting high standards of quality and disclosure.
I know from our engagements that industry is seeking to adapt at pace to respond to this challenge, and respond to it in the right way.
This is welcome, as the sector will play a vital role in the necessary shift towards a more sustainable economy.
Effective governance, culture and agility within firms is essential to help achieve this transformation.
Our supervisory expectations include that firms demonstrate clear ownership of climate risks affecting their firms and promote a culture that places emphasis on climate and other ESG risks. They require that firms have appropriate risk management frameworks in place, undertake scenario analysis and stress testing as appropriate, and assess their business models for climate risks.
There has been a substantial increase in the development of financial products described in some form or other as sustainable. So, the challenge for both the Central Bank and industry is to ensure that sustainable financial products are defined in an accurate and transparent manner and that investors can trust what they are receiving.
Public disclosure by firms relating to climate and other sustainability/ESG risks contribute to wider market integrity. Firms are responsible for providing disclosures to their clients and customers on the sustainability risks and, where relevant, impact of investment products. They must ensure that such disclosures are clear, fair and not misleading.
This is the case in all sectors but we are particularly mindful of this in the asset management sector where, as you know, Ireland is a significant domicile for European investment funds. It is evident that investors are demanding investment products which are more sustainable. This is why the Central Bank is currently focusing on this matter and carrying out a review of fund documentation with a view to identifying good and poor practices across the sector.
Helpfully, the European Commission has now published the final Regulatory Technical Standards (RTS) which will underpin the Sustainable Finance Disclosure Regulation (SFDR), applying from January 2023. The SFDR adds to existing requirements to provide clear information to consumers and investors and to sell them suitable and appropriate products, and the RTS will help drive clarity on what products will qualify, and what won’t.
The Central Bank is establishing a Climate Risk and Sustainable Finance Forum to bring stakeholders together and share knowledge and best practice.
Our objective is to build a shared approach to the understanding and management of the financial risks and opportunities posed by climate change.
The first meeting of the forum will take place on June 29 and we look forward to deepened and constructive engagement on this critical area.
In conclusion, the financial services landscape will continue to evolve in the period ahead. The financial services sector is materially different now to 2002. In twenty years’ time, it will look materially different again.
We want to enable the benefits of change, innovation and competition for consumers, investors and the economy as a whole while ensuring the risks are managed.
But this is not the work of regulators alone – firms must play their part in managing risk and ensuring good governance.
Effective culture is the common theme across all these issues.
Compliance professionals are central to building that culture, to ensuring that firms think about risks in the right way, seeking to mitigate them where possible and continually build resilience.
Some of you work in compliance in smaller firms, including in firms which are new to the financial services marketplace, and maybe even in applicant firms. In these firms, the maturity and scale of the regulatory compliance framework may be different to larger and more established entities. Your role then is especially important in embedding frameworks and a culture which minimise risks for the long-term benefit of consumers, investors and the wider financial system.
In finishing, I wish to congratulate the Compliance Institute on your first two decades.
And I wish you every success in your work in the decades ahead, because it will be critical to ensuring that the financial system operates in a manner that supports the effective and sustainable functioning of the economy, so that households, firms and individuals can avail of the services they require.