The Central Bank is the competent authority under EU legislation and other non-EU domestic legislation in respect of the authorisation and licensing of financial service providers. It seeks to provide a clear open and transparent authorisation process involving a rigourous assessment of the applicable standards.
In the context of Brexit, the Central Bank has been engaging with UK firms which are considering the possibility of relocating aspects of their operation to Ireland. The Central Bank has approved the recruitment of additional staff and set up teams in order to manage Brexit related authorisation queries.
The Central Bank seeks to deal with enquiries in an open engaged and constructive manner. It approaches new authorisation and material business model changes through a clear well-structured transparent consistent and predictable authorisation process.
Liaison with EU Bodies
The Central Bank engages with EU authorities including in particular the European Central Bank the European Securities and Markets Authority, the European Banking Authority and European Insurance and Occupational Pensions Authority. Since the establishment of the Single Supervisory Mechanism, the Central Bank remains responsible for direct supervision of less significant credit institutions.
The Central Bank is the decision-making authority in relation to most authorisations in the financial services industries. The European Central Bank is responsible for common procedures under the Single Supervisory Mechanism. In respect of other institutions, the European Central Bank and Central Bank cooperate closely.
In the case of significant institutions, European Central Bank staff are likely to be involved directly in the application process. Once the Central Bank in conjunction with the relevant directorate general Within the European Union recommends approval, it is submitted to the SSM supervisory board for consideration. It comprises representatives from competent authorities in the euro area. It prepares a draft decision for consideration by the governing Council for adoption under a non-objection procedure.
European supervisory authorities have a role in improving the functioning of the internal market by appropriate efficient and harmonised regulation and supervision. In this context, they are developing guidance for supervisors and issues arising in brakes of context.
The Central Bank has engaged with efforts at an EU level to promote a consistent approach across different countries to Brexit related decision-making. The Single Supervisory Mechanism has issued a “Frequently Asked Questions” guidance for banks considering relocation within the EU. It sets out expectations in a number of areas including in relation to risk management, internal governance, and outsourcing.
The European Securities and Markets Authority has published an opinion setting out general principles aimed at fostering consistency on authorisation, supervision, and enforcement relating to the relocation of institutions from the UK. The European Insurance and Occupational Pensions Authority has published a similar opinion on the principles aimed at fostering supervisory convergence and consistency.
Applying for Authorisations
In assessing applications for authorisation to do business in Ireland and Europe, the Central Bank adopts an outcomes focused risk-based approach. This seeks to ensure firms are well run financially sound and comply with EU and Irish authorisation requirements.
The Central Bank has encouraged firms which are seeking authorisation to engage with it as early as possible. The Central Bank indicates that it is committed to a transparent robust and timely approach to the authorisation process and has deployed additional resources to deal with enquiries. It has also published bi-annual regulatory service standards reports that outlines its performance against service standards in relation to authorisations.
The authorisation process requires applicant firms and the Central Bank to dedicate sufficient resources to ensure the applicant has demonstrated that it is well run financially sound and complies with EU and Irish authorisation requirements. The processing of fitness and probity preapproved control function individual questionnaire applications is an important element of the process.
In the case of larger and more complex entities, an exploratory pre-application phase is desirable. This provides the Central Bank with an insight into the nature and scope of the form, purpose and business model and provides firms with an insight into the Central Bank’s requirements approach allowing it to identify potential areas of concern early in the process.
At this early stage, the Central Bank to focus on a number of areas including
- the firm’s proposed strategy
- the organisation structure
- the risk appetite
- the approach to governance, risk management and issues such as capital and liquidity requirements including its approach to recovery and resolution.
In the case of a larger application, it will establish a designated team with a single point of contact. In less complex cases, a team may be responsible for a number of applications.
The Central Bank publishes a regulatory service standards performance report on a semi-annual basis It sets out the standards when dealing with authorisation applications in different sectors and performance against those criteria.
The relevant legislation in a particular sector will set out timeframes in most cases. The timeframe commences once the application is completed and received. Its duration depends on the complexity of the business, the quality of the application and timelines in responding to enquiries made by the Central Bank.
The Irish Central Bank requires Irish authorised firms to ensure that their business models plan appropriately for the potential impacts of Brexit where their business has direct or indirect exposure to the UK economy.
The relevant legislation sets out the degree of substance and presence required for establishment in Ireland. The firm must have a substantial presence in the jurisdiction of authorisation. The Central Bank considers the entire circumstances on the basis of the firm’s model and structure. It needs to ensure that firms which are authorised are well governed, compliant with obligations and can be effectively supervised.
The Central Bank requires that entities seeking to locate in Ireland are controlled by the board of management and not run from elsewhere. Seniority expertise and the level of staffing required by firms will depend on the nature, scale, and complexity of the business. The Central Bank requires that firms be adequately resourced, and that decision-making takes place in the Irish entity.
The Central Bank seeks to ensure that firms are capable of managing material risks locally. This requires that the risks associated with the business of the entity are governed, managed and mitigated by the Irish entity and its staff. As part of its risk management, it, therefore, expects a well-designed internal control framework commensurate with the nature scale and complexity of the business model.
The Central Bank recognises that outsourcing is part of many business models and is common practice across all sectors. The Central Bank cautions that it can be a source of material risk and that while it may be appropriate for a firm to outsource a particular activity the responsibility for the performance of the activity remains with the regulated entity. Where outsourcing is a feature of the firm’s proposed business model the Central Bank expects the arrangements are appropriately monitored and controlled and are fully compliant with the requisite requirements. In line with the determination of appropriate structure, the Central Bank will not allow outsourcing to the extent that the firm becomes an empty shell.
Outsourcing should not limit the ability of the Central Bank to effectively supervise regulated entities. Supervisors must all times have access to full information and the ability to inspect the entity providing the services. The amount, quality and robustness of outsourcing oversight is also a key factor in determining whether the entity can demonstrate sufficient substance in the jurisdiction. Generally, outsourcing arrangements including those to third countries is assessed on a case-by-case basis.
Fitness and Probity
A key part of financial services supervision is the fitness and probity regime. It requires that individuals within the financial services provider meet minimum standards in terms of probity experience and competence.
Financial service providers are categorised as significant or less significant in accordance with ECB single supervisory mechanism (SSM) regulation and framework regulation
The purpose of the fitness and probity regime is to secure that persons in senior positions within regulated service providers are competent, capable, honest, ethical, of integrity and are financially sound. The Central Bank has published a code setting out the requirements.
The Central Bank expects that all preapproval control function holders dedicate sufficient time to discharge their responsibility for the Irish regulated entity. It considers “dual hatting” based on the time dedicated to the Irish entity, management of any conflicts, availability of sufficient resources and plans to remove the dual hatting as the business grows in the context of entities which are not yet fully live.
Commencement and Transition
The Central Bank recognises that centralised risk management or back-to-back booking in the UK or another jurisdiction is a common feature of the banking landscape and can have a valuable purpose in enhancing risk management leveraging scarce resources and promoting efficiency. However, done incorrectly it may give rise to undue risks or transform risks.
The Central Bank seeks to ensure that the arrangements strike the correct balance between these aspects. It will seek to understand the rationale for the approach put in place by the entity. It will undertake an assessment of the proposed models as part of the authorisation application in particular in relation to the resolution of concerns. Where risk transformation is conducted through other group entities consideration will be given to the supervisory equivalence of the entities.
After any transitional arrangements supervisors would expect part of the relevant risk to be managed locally as part of the overall coherent risk management strategy. There must be demonstrated capabilities to manage potential crystallisation of risks in a crisis situation. The proposals must be consistent with substantive presence principles. These specific requirements will depend amongst other things on the structure of the banking model as well as on the underlying contractual relations and internal arrangements.
Assessment of Business Model
The Central Bank has issued guidance on its assessment of internal models approved by the Prudential Regulatory Authority for firms subject to capital requirements regulations. In line with the capital requirements regulation, the use of internal models require a new application for approval in the case of newly established banks or investment firms in the euro area.
The Central Bank acknowledges that it may not be feasible to undertake a full internal model approval in advance of the Brexit deadline. Accordingly, it has been working as part of the single supervisory mechanism to develop a pragmatic approach that will facilitate new euro area banks expanding or migrating from the United Kingdom to continue to use the models for a limited period and subject to certain conditions.
The conditions dictate that
- the internal models must have been approved by the UK supervisory authority in line with the Capital Requirements Directive
- the scope and content of the approval of the consolidated level must match the portfolios that will exist in the new/expanded entity
- the banks or investment firms must apply to the Central Bank for internal model approval
- in line with the principle of proportionate supervision consideration will be given to frontloading certain checks
- if significant deficiencies are found as part of this check appropriate measures including the institution to return to the standardised approach of necessary will be taken
Under the Solvency Directive, internal models must be approved prior to use for regulatory purposes. The Central Bank indicates that it is pragmatic in assessing applications and recognises that in certain cases where a business is transferring from the United Kingdom, it may be able to play some reliance on previous assessments and approvals by the UK Prudential regulatory authority. This will depend on factors including
- the appropriateness of the models to the business profile of the new undertaking
- the extent to which there are changes in the underlying portfolio/lines of business by the model
- issues arising during the validation of the model
- the period elapsed since the model was originally approved
- any regulatory issues arising in the interim,
The Central Bank’s approach is in keeping with the EIOPA’s opinion of supervisory convergence in light of the United Kingdom withdrawing from the European Union
The Central Bank recognises that reinsurance as a risk mitigation strategy can be beneficial and appropriate. It will review the approach to levels of reinsurance proposed on and a case-by-case basis in the context of the substance and overall business model of the applicant. It will require an appropriate level of local risk management by insurance undertakings authorised in Ireland.
Application Channel and Guidance
Certain applications for authorisations must be made through the online regulatory information (ORION) system. The criteria for assessing applications for authorisation are
- acceptability and transparency of the ownership of the financial services provider
- fitness and probity of individual directors and senior management
- adequacy of proposed capital to be invested
- adequacy of internal controls and risk management systems
- level of resources and expertise of staff
The Central Bank has published guidance in relation to applications in respect of
- qualified investors authorised investment funds
- retail investors authorised investment funds
- undertakings for collective investment in transferable securities
- managers of the entities.
EU Cross Border
The regulations pursuant to the European Directives provide for the procedures for submitting notifications to the Central Bank for
- marketing EU AIFs in Ireland managed by Irish AIFMs
- marketing EU AIF by Irish AIF in other states
- management of EU AIF by Irish AIFMs
Provision is made for the application process for
- EU AIFs in Ireland managed by Irish AIFMs
- marketing of non-EU AIFs in Ireland managed by Irish AIFMs
- marketing of non-EU AIF by Irish AIFM in another EU state
- marketing an AIF in Ireland managed by non-EU AIFMs.
AIF management companies pursuant to the investment funds legislation are subject to similar requirements as AIF managers. Prior discussion with the Central Bank is desirable. They must submit an application including
- completed business plan checklist
- completed individual questionnaire in respect of directors and senior managers
- where the applicant proposes to carry on certain management functions in-house
- it must include a detailed plan setting out the structure’s procedures and financial resources.
Directors and senior manager are subject to the general fitness and probity requirements.
Applications for clearance to act as an investment manager may take two forms.
A full review for non-EU based applicants is required. The applicant must complete the online application process and submit the required documentation through the online system. The Central Bank must be satisfied that the entity is appropriately regulated in accordance with its home jurisdiction. It must be authorised and subject to prudential regulation by the competent authority in that state.
Information concerning the applicant’s expertise integrity and adequacy of financial resources are required. It should set out the background, details, experience, organisation, structure, details of shareholdings, assets under management and latest audited financial statements
There is a fast-tracked application for EU based applicants. Investment managers authorised under EU regulations will not usually be subject to additional regulatory review
- UCITS management companies authorised under EU directive
- investment firms authorised to provide portfolio management
- credit institutions authorised to provide portfolio management under MIFID
- externally appointed AIFM is authorised under the AIFM directive
The Central Bank distinguishes between investment advisers with discretionary powers and those without discretionary power. Where an investment adviser to an investment fund will act in a discretionary capacity the Central Bank considers the application. The entity must comply with the above regime.
Where the entity will not have a discretionary role in relation to an investment fund no clearance is required. The investment adviser must submit the investment advisory agreement along with confirmation that the advisers in question will act in an advisory capacity only and will have no discretionary powers over any of the assets of the fund.