## _cr14137 — Executive Summary and Assessment Excerpts ## Source details **Canonical URL:** [_cr14137 — Executive Summary and Assessment Excerpts](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14137.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14137.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14137.pdf.json) --- ### Executive summary — key findings - Since the crisis began, the Central Bank of Ireland (the Central Bank) has taken substantive steps to rebuild its reputation and functions in financial regulation and supervision, including changes in the institutional setting; changes of senior staff; increases in the quantity and caliber of supervisory staff; design and implementation of a proactive and intensive approach to supervision; expansion of prudential requirements; and improvement of enforcement powers. - Overall assessment: - An overall satisfactory level of compliance with the Basel Core Principles for Effective Banking Supervision (BCP). - A high level of implementation of the International Organization of Securities Commissions (IOSCO) Principles. - Reforms are relatively young and effective implementation remains a work in progress, requiring additional skills and resources and time for the new framework to season and for staff to gain experience. - Key supervisory framework elements and issues: - PRISM (Probability Risk and Impact System) is the backbone of the new risk-based supervisory approach; significant progress was evident and recognized by market participants. - PRISM calibration needs further attention: calibrated on the impact of the failure of an individual firm as regards financial stability, which can make supervision of lower impact firms reactive and risk overlooking aggregate risks across many lower impact firms. - Strengthen supervisory processes for first-hand independent verification of data provided by institutions, particularly credit institutions (areas emphasized: earnings and banking book asset quality). - Enforcement powers (including new powers under the Central Bank (Supervision and Enforcement) Act 2013) must be used effectively as a deterrent. ### Background, mandate, mission - IMF team visit: September 23-October 10, 2013. - Mandate and scope: - Full assessments of Ireland’s compliance with the Basel Committee Core Principles for Effective Banking Supervision (BCP) and implementation of the IOSCO Objectives and Principles of Securities Regulation. - BCP assessment was a commitment under Ireland’s EU-IMF supported program; Central Bank extended the request to IOSCO assessment. - The request did not extend to IAIS Insurance Core Principles or other ROSC modules. - Authorities’ cooperation: comprehensive self-assessments, detailed questionnaire responses, access to supervisory documents, staff, and systems. ### Market structure — selected findings and figures - The financial sector is large, internationalized, and still recovering from a deep crisis. - Crisis costs and macroeconomic impacts (as reported): - Direct public cost of the crisis: €64 billion (some 40 percent of GDP). - Almost 10 percent fall in output. - 12 percent drop in employment. - Need for some 14 percent of GDP in fiscal measures in 2009-13. - International Financial Services Centre (est. 1987) houses over 500 firms specializing in internationally traded financial services. - Banking sector dynamics: - Shrinking since crisis onset due to deleveraging and credit contraction. - Post-crisis: rising stock of impaired mortgages and SME loans, weak bank profitability, slow progress on mortgage arrears resolution, narrow net interest and operating margins, elevated reliance on ECB funding. - Securities industry trends: - Expanding in volume (assets under management in CIS increased over past three years) but number of intermediaries and instruments is decreasing. - Selected quantitative snapshots (as presented in source): - 2011 2012 2013 - Assets Number Assets Number Assets Number - Banking sector 1,025.9 78 872.7 73 740.6 68 - of which Domestic Banks 1/ 638.9 20 549.6 17 474.0 24 - of which Non-Domestic Banks 2/ 387.0 58 323.1 56 266.6 44 - Insurance Corporations and Pensions Funds (ICPF) 3/ 284.5 29 4.5 29 6.0 - of which Life Assurance 4/ 148.9 16 1.8 - - of which Non-Life Insurance 4/ 34.5 32.6 - - Total Investments Funds 1,056.3 1,229.6 1,346.6 - of which Money Market Funds 287.6 297.3 276.3 - Stock Exchange 5/ 85.7 85.5 129.0 - Total 2,452.3 2,482.3 2,512.2 - Nominal GDP 6/ 163.9 166.6 169.5 - (Notes in source apply, including Q3 2013 data for ICPF and IMF staff estimate for Nominal GDP 2013.) ### Institutional setting, mandates, legal framework - Central Bank of Ireland is primary regulator for banking, insurance, securities, oversight of payments systems, resolution of financial institutions, and consumer protection. - Powers drawn from multiple laws that would benefit from consolidation, including: - Central Bank Act 1942; Central Bank Reform Act 2010; Central Bank (Supervision and Enforcement) Act 2013; and secondary legislation transposing EU Directives. - Mandate and objectives: - Dual objective for supervision of credit institutions: to foster a stable financial system and to provide consumer protection (Central Bank Act 1942, as amended). - Separate Directorate for Consumer Protection; dual objective requires monitoring to avoid unbalanced approaches that could weaken prudential supervision. - Accounting and auditing: - Listed consolidated entities must prepare group financial statements in accordance with IFRS as endorsed by the EU; auditors apply International Standards of Auditing (UK and Ireland). - IAASA is designated competent authority for accounting enforcement under the Transparency Directive and oversees audit profession supervision. - Judiciary and corporate enforcement: independent with specialized commercial courts available, but court processes are slow due to high volumes. ### PRISM, supervisory methods and calibration issues - PRISM introduced in 2011 as structured framework for risk-based supervision; extended to investment firms and credit unions in 2012. - PRISM assigns bank risk ratings and allocates supervisory resources; financial ratio triggers underpin ongoing monitoring. - High Impact firms: ongoing monitoring, frequent onsite reviews, ongoing engagement with senior management. - Concerns and operational findings: - PRISM calibration emphasizes failure impact on financial stability, creating potential under-supervision of Medium Low and Low Impact firms. - Offsite supervision largely automated and reliant on financial ratio triggers rather than deep analysis of regulatory returns. - For Low Impact banks, PRISM prescribes no minimum frequency of onsite reviews. - KRIs cover five risk areas (capital, liquidity, credit, business model/strategy and market risk) but omit interest rate risk in the banking book and have only a single indicator for market risk. - Recommendation: expand KRIs to include operational risk and IRRBB. ### Onsite verification, provisioning, and asset quality - Central Bank updated guidance on provisioning and valuation and performed more frequent and in-depth onsite assessments, with significant focus on “covered” banks. - Evidence shows increased conservatism in loan loss provisioning. - Need for greater reliance on onsite verification sector-wide: - Increase frequency and depth of onsite loan file reviews, loan sampling, testing provisioning model assumptions, prudent collateral valuation, and testing recognition of default. - For PRISM Impact ratings below High, variance analysis may not reveal weaknesses until triggers are breached. ### Enforcement, powers and supervisory tools - Central Bank has sufficient discretionary enforcement powers; Central Bank (Supervision and Enforcement) Act 2013: - Doubled level of fines for firms and individuals. - Alternative calculation of maximum fine for firms based upon 10 percent of annual turnover. - Enforcement process: - Risk Mitigation Program sets issue basis, prescribed action, required outcome and timelines. - Administrative Sanctions Procedure permits warnings, settlements, and sanctions up to fines and disqualification of individuals. ### Independence, governance and legislative concerns - No observed political interference in day-to-day operations, but current legal framework gives the Minister for Finance points of influence: - Minister may remove a Commission member “if in the Minister’s opinion it is necessary or desirable to do so to enable the Commission to function effectively” — legislation lacks objective removal conditions. - Ministerial approval required to increase industry levies. - Central Bank must seek Ministerial approval to deny a banking license application or to revoke a license. - Specific recommended legislative changes to enhance independence: - Stipulate exact conditions under which Commission members can be dismissed or removed by the Minister for Finance. - Provide Central Bank authority to revoke a bank license or deny a bank licensing application without Ministerial approval. - Do not include the Secretary General of the Department of Finance on the Central Bank Commission. - Eliminate the need for the Minister to approve the levy schedule. ### Staffing, resourcing and IAASA constraints - Supervisory staff have broadly doubled over the last five years but from a very low starting point. - Central Bank Banking Supervision Divisions are operating below approved staffing levels. - High-quality and experienced staff retention is a growing problem; turnover in some supervisory areas is high. - Central Bank operates under Civil Service pay scales and hiring rules which make salaries un-competitive with industry. - IAASA faces limited resources constraining current tasks; recommended to be given additional resources and greater freedom to contract with staff on appropriate terms. - Anticipate resource impacts from ECB Single Supervisory Mechanism (SSM) and financial sector recovery. ### EU Single Supervisory Mechanism (SSM) and preparedness - Establishment of a single rule book with centralized direct supervision at the ECB will be paramount in the new supervisory regime. - Too early to assess full impact on Irish banking supervision; impact depends on scale and timing of SSM establishment. - Central Bank staff are confident they will be well prepared to integrate into the new European structure. ### Exceptional Liquidity Assistance (ELA) and Deposit Guarantee Scheme (DGS) - ELA: - Central Bank can grant Exceptional Liquidity Assistance to a credit institution when deemed necessary for financial stability purposes. - ELA is distinct from regular ECB monetary policy operations. - Central Bank Act 1942 provides statutory basis for ELA. - In February 2013, the Central Bank’s ELA operations ceased. - DGS: - DGS protects deposits held with banks, building societies and credit unions authorized in Ireland up to €100,000 per person per institution. - DGS protection includes deposits at branches of authorized Irish institutions operating in other EU member states. - DGS excludes deposits belonging to large and medium sized companies, public authorities, insurers, pension funds, collective investment schemes, banks and certain other financial institutions. - DGS is administered by the Central Bank and funded by the credit institutions covered by the scheme. ### Securities regulation, IOSCO assessment and issuer-disclosure weaknesses - Ireland exhibits a high level of implementation of IOSCO principles; legal framework provides Central Bank broad supervisory, investigative and enforcement powers. - Areas requiring strengthening: - Increase use of on-site inspections for all types of market intermediaries. - Pursue use of all available enforcement authority, including criminal prosecutions where appropriate. - Key weaknesses in issuer-disclosure and market regime: - General disclosure and market abuse rules apply to issuers with securities admitted to trading on a regulated market (RM); few equivalent provisions for issuers who offered securities to the public but elect not to be admitted to an RM. - Very little continuing disclosure required of public issuers not admitted to trading on an RM or traded/quoted on an MTF; CBI advised few such companies and no one is responsible for reviewing their continuing disclosure. - For issuers admitted to trading on an RM and ESM companies: half yearly reports are required. For wholesale debt securities on GEM and other public issuers: only annual financial statements are mandated. - Change of auditor must be notified within a month of the change, unless securities are admitted to trading on an RM and information is price sensitive. - Central Bank operational gaps for investment firms in difficulty: - CBI lacks the power to appoint administrators or monitors to run an investment firm in crisis or to take possession/control of assets held by a firm in financial difficulty; current alternative is liquidation. - Absence of these powers can crystallize losses and delay investors' access to assets. ### Collective investment schemes, market intermediaries and secondary markets (selected points) - CIS oversight: - Two CIS regimes supervised: UCITS and AIF/AIFMD frameworks; reporting is extensive but described as “too slow to be effective.” - Valuation uncertainty: whether CIS asset valuation must follow IFRS or UK and Irish GAAP is unclear; CBI guidance exists but no prescriptive rule. - Market intermediaries: - Capital, prudential and internal control requirements exist; gaps include limited routine on-site reviews during authorization and no compulsory independent review of internal controls for some intermediaries. - CBI lacks authority to appoint an administrator to run a firm in crisis or to take possession of intermediary-held assets; investor compensation amount is €20,000 (EU minimum). - Secondary markets: - Pre-trade and post-trade transparency exists on the ISE in accordance with MiFID; T+1 reporting requirement for transactions. - Rules on market manipulation and insider trading apply only to securities admitted to trading on RMs; trading quoted/traded only on MTFs or off-exchange trading currently subject only to insider trading prohibitions in companies legislation. ### Prioritized recommended actions (selected, verbatim priorities from source) - High priority: - Implement a more proactive approach to supervision of firms designated by PRISM as Low Impact. - More prosecutions should be pursued against individuals. - Government should give the Central Bank additional resources and flexibility to depart from civil service compensation rules. - IAASA should be given additional resources and greater freedom to contract with staff on appropriate terms. - Central Bank should require all firms to conduct an annual review of risk management and controls to objective standards by a function/entity independent of the business. - Companies Law should be amended or other legislation introduced to prohibit abusive trading activities regardless of trading venue or admission to an RM. - Central Bank should carry out reasonable due diligence on regimes where principal clearing and settlement of trades by Irish intermediaries or in Irish securities occur, including obtaining legal opinions on insolvency treatment (particularly in Belgium, the UK and Germany). - Update MOU with UK authorities regarding CREST oversight and establish an MOU with BaFin regarding oversight of Eurex Clearing. - Medium-high priority: - Central Bank should be given authority to appoint an administrator or monitor to run a firm in crisis. - Consider adjustments to confidentiality requirements to facilitate greater information sharing among authorities. - Consider raising maximum fines that the District Court can impose in summary criminal matters. - Change in auditor should be a material change requiring immediate notification to IAASA and the Central Bank; larger companies should issue audited financial statements within ninety days (smaller issuers may have longer); shorten reporting period for interim statements of ESM companies from three to two months. - Central Bank should issue clear guidance that CIS asset valuation is to follow IFRS or UK and Irish GAAP, or another high quality accepted accounting standard applied consistently. - Medium priority: - Amend law to state that a Commission member may only be removed for specified, objective causes; remove inclusion of a Ministry official on the Central Bank Board via amendment to the Central Bank Act of 1942. - All public issuers should be subject to continuing disclosure requirements regardless of listing status or trading system; continuing disclosure documents should be periodically reviewed by a competent authority. - Central Bank should issue detailed guidance on information required in materials sent to shareholders for shareholder meetings, applying to all public issuers. - Reduce periods within which CIS are required by EU directives to publish annual and semi-annual financial statements to enhance transparency and prompt action. - Conduct an on-site inspection immediately before or shortly after authorization of a new trading venue. - Medium-low and Low priority recommendations include publishing the Employee Code of Ethics on the website, accelerating consolidation of laws for public use, and considering indemnification arrangements for staff in legal suits. ### Authorities’ responses — highlights - Irish authorities welcome the IMF assessment and acknowledge strengthening of supervisory process through regulatory and legislative changes. - On CP2 Independence: authorities disagree with IMF rating, characterize concerns as hypothetical, but will consider recommendations in any future statutory review. - On CP9 Supervisory Techniques and Tools: authorities emphasise proportional risk-based approach and note Medium Low cohort comprises 10 non-retail institutions with specified shares of system assets and deposits; Central Bank will review resource distribution as SSM enters into force and adhere to SSM Supervisory Manual. - On AML/CFT and related party transactions: Central Bank will evaluate recommendations, perform branch inspections, issue communications following AML inspections, and consider amending the RPL Code and its reporting framework. - Authorities preparing to implement SSM requirements from 4 November 2014. *International Monetary Fund — assessment text provided in the examined content unit* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### _cr14137 - EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### Executive summary — key findings - Since the crisis began, the Central Bank of Ireland (the Central Bank) has taken substantive steps to rebuild its reputation and functions in financial regulation and supervision, including: changes in the institutional setting; changes of senior staff; increases in the quantity and caliber of supervisory staff; design and implementation of a proactive and intensive approach to supervision; expansion of prudential requirements; and improvement of enforcement powers. - Overall assessment: - An overall satisfactory level of compliance with the Basel Core Principles for Effective Banking Supervision (BCP). - A high level of implementation of the International Organization of Securities Commissions (IOSCO) Principles. - Reforms are relatively young and effective implementation remains a work in progress, requiring additional skills and resources and time for the new framework to season and for staff to gain experience. - Key supervisory framework elements and issues: - PRISM (Probability Risk and Impact System) is the backbone of the new risk-based supervisory approach and is intellectually appealing; significant progress was evident and recognized by market participants. - PRISM calibration needs further attention: it is specifically calibrated on the impact of the failure of an individual firm as regards financial stability, which can make supervision of lower impact firms reactive and risk overlooking aggregate risks across many lower impact firms. - The Central Bank is encouraged to strengthen supervisory processes for first-hand independent verification of data provided by institutions, particularly credit institutions (areas emphasized: earnings and banking book asset quality). - Enforcement powers (including new powers under the Central Bank (Supervision and Enforcement) Act 2013) must be used effectively as a deterrent. - Resource and institutional risks: - Supervisory staff have broadly doubled over the last five years but from a very low starting point. - High-quality and experienced staff retention is a growing problem; turnover in some supervisory areas is high. - The new ECB Single Supervisory Mechanism will have additional impact on resources that cannot be assessed at this stage. - IAASA (Irish Auditing and Accounting Supervisory Authority) faces limited resources constraining current tasks. - Independence and governance: - No observed political interference in day-to-day operations, but current legal framework gives the Minister for Finance several points of influence into the policy making process; the potential for political influence limits full implementation of the BCP and IOSCO Principles on independence. - Specific supervisory recommendations (high level): - Continue review of banks’ provisioning practices to ensure provisioning fully reflects loss experience. - Strengthen monitoring of banks’ compliance with the related party lending code (RPL Code). - Continue implementation of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 and strengthen supervision of banks’ AML/CFT compliance. - For securities regulation, increase use of on-site inspections and available enforcement authority, including criminal prosecutions where appropriate. - Strengthen disclosure requirements for issuers who offer securities to the public but elect not to have securities admitted to trading on the Main Securities Market of the Irish Stock Exchange (ISE), to align with regulated market disclosure. - Address lack of power to appoint administrators to investment firms in financial difficulty (current limitation: Central Bank restricted to liquidation). ### Background — mission and scope - IMF team visit: September 23-October 10, 2013. - Mandate and scope: - Full assessments of Ireland’s compliance with the Basel Committee Core Principles for Effective Banking Supervision (BCP) and implementation of the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. - The BCP assessment was a commitment under Ireland’s EU-IMF supported program; the Central Bank extended the request to IOSCO assessment. - The request did not extend to the International Association of Insurance Supervisors (IAIS) Insurance Core Principles or other ROSC modules. - Authorities’ cooperation: - Authorities provided comprehensive self-assessments, detailed questionnaire responses, access to supervisory documents, staff, and systems. ### Market structure — overview (selected findings and figures) - The financial sector is large, internationalized, and still recovering from a deep crisis. - Crisis costs and macroeconomic impacts (as reported): - Direct public cost of the crisis: €64 billion (some 40 percent of GDP). - Almost 10 percent fall in output. - 12 percent drop in employment. - Need for some 14 percent of GDP in fiscal measures in 2009-13. - International Financial Services Centre (est. 1987) houses over 500 firms specializing in internationally traded financial services (banking, asset financing, CIS, corporate treasury, investment management, and insurance). The securities sector hosts one of the largest numbers of CIS globally (domiciled, authorized or administered in Ireland but largely sold elsewhere). - Banking sector dynamics: - Shrinking since crisis onset due to deleveraging and credit contraction. - Post-crisis: rising stock of impaired mortgages and SME loans, weak bank profitability, slow progress on mortgage arrears resolution, narrow net interest and operating margins, elevated reliance on ECB funding. - Challenge: rebuild core lending to the real economy. - Securities industry trends: - Expanding in volume (assets under management in CIS increased over past three years) but number of intermediaries and instruments is decreasing (consolidation; firms ceasing business; rising compliance costs). - Market capitalization on the ISE has increased while number of listed companies and instruments declined over past five years. - Selected quantitative snapshots from Table 1 (presented as in source): - 2011 2012 2013 - Assets Number Assets Number Assets Number - Banking sector 1,025.9 78 872.7 73 740.6 68 - of which Domestic Banks 1/ 638.9 20 549.6 17 474.0 24 - of which Non-Domestic Banks 2/ 387.0 58 323.1 56 266.6 44 - Insurance Corporations and Pensions Funds (ICPF) 3/ 284.5 29 4.5 29 6.0 - of which Life Assurance 4/ 148.9 16 1.8 - - of which Non-Life Insurance 4/ 34.5 32.6 - - Total Investments Funds 1,056.3 1,229.6 1,346.6 - of which Money Market Funds 287.6 297.3 276.3 - Stock Exchange 5/ 85.7 85.5 129.0 - Total 2,452.3 2,482.3 2,512.2 - Nominal GDP 6/ 163.9 166.6 169.5 - (Notes as in source: 1/ Institutions whose ultimate parent entity is resident in Ireland or which have a significant (>20 per cent) level of business in Ireland. Credit unions recorded as a single domestic bank; number of credit unions: 404 in 2011, 399 in 2012, and 390 in 2013. 2/ Institutions whose ultimate parent entity is non-resident in Ireland, including branches. 3/ Data for Q3 2013. Includes financial assets only. 4/ Includes both fixed and financial assets. 5/ Market capitalization ISEQ. 6/ IMF staff estimate for 2013.) ### Institutional setting — governance, legal framework, standards - Central Bank of Ireland is the primary regulator for banking, insurance, securities, oversight of retail and wholesale payments systems, resolution of financial institutions, and consumer protection. - Central Bank draws powers from many laws that would benefit from consolidation to enhance legal transparency, including: - Central Bank Act 1942; Central Bank Reform Act 2010; Central Bank (Supervision and Enforcement) Act 2013; and secondary legislation transposing EU Directives. - The Central Bank cannot itself initiate primary legislation (Constitution vests lawmaking in the Oireachtas). - Mandate and objectives: - Dual objective for supervision of credit institutions: to foster a stable financial system and to provide consumer protection (Central Bank Act 1942, as amended). - Organizationally there is a separate Directorate for Consumer Protection; the dual objective requires close monitoring to avoid unbalanced approaches that could weaken prudential supervision and strain resources. - Accounting and auditing: - Company law requires listed consolidated entities to prepare group financial statements in accordance with IFRS as endorsed by the EU; other entities may adopt local GAAP (converged to IFRS) or IFRS. - Auditors required to apply International Standards of Auditing (UK and Ireland) and ethical standards. - IAASA is designated competent authority for accounting enforcement under the Transparency Directive and oversees audit profession supervision. - Judiciary and corporate enforcement: - Judiciary considered independent with specialized commercial courts available, but court processes are slow due to high volumes. ### Areas emphasized for further work (summary) - PRISM calibration to better capture aggregate risks from many lower impact firms and to ensure supervisory attention proportionate to consumer and market exposure. - Strengthen first-hand independent verification of institution-provided data, especially earnings and banking book asset quality. - Use enforcement powers fully and visibly to promote deterrence and industry discipline. - Address staff retention and resource constraints across Central Bank supervision and IAASA; anticipate resource impacts from ECB Single Supervisory Mechanism and financial sector recovery. - Legislative changes to codify and foster Central Bank independence to reduce potential ministerial influence. - Continue implementation and supervisory follow-up on provisioning, related party lending, and AML/CFT compliance. - For securities regulation: increase on-site inspections, enforcement actions (including criminal where appropriate), strengthen disclosure for certain public offers, and obtain powers to appoint administrators to investment firms where liquidation may not be appropriate. *IMF mission visit: September 23–October 10, 2013.* ### 11. The supervision of the banking sector by the Central Bank will be affected by the new ### 11. The supervision of the banking sector by the Central Bank will be affected by the new ### EU Single Supervisory Mechanism (SSM) and preparedness - The establishment of a single rule book underpinned by centralized direct supervision at the ECB will be of paramount importance in the new supervisory regime in Ireland and the EU in general. - It is too early to assess the impact on the Irish banking supervisory regime; impact will depend on the scale and timing of the establishment of the SSM. - Central Bank staff are confident they will be well prepared to integrate into the new European structure. ### Exceptional Liquidity Assistance (ELA) - The Central Bank can grant Exceptional Liquidity Assistance (ELA) to a credit institution when this is deemed necessary for financial stability purposes. - ELA is distinct and separate from regular funding operations carried out for monetary policy implementation purposes through the ECB. - The Central Bank Act 1942 provides the statutory basis for the Central Bank to provide ELA. - In February 2013, the Central Bank’s ELA operations ceased. ### Deposit Guarantee Scheme (DGS) - The DGS protects deposits held with banks, building societies and credit unions authorized in Ireland. - All eligible deposits up to a limit of €100,000 per person per institution are guaranteed to be repaid by the DGS. - DGS protection includes deposits held at branches of authorized Irish institutions operating in other EU member states. - DGS excludes deposits belonging to large and medium sized companies, public authorities, insurers, pension funds, collective investment schemes, banks and certain other financial institutions. - The DGS is administered by the Central Bank and is funded by the credit institutions covered by the scheme. ### Securities markets infrastructure and relevant authorities - There is one regulated market and no derivatives exchange in Ireland. - The ISE has been operating an exchange in Ireland since 1793 and is an Irish private company limited by guarantee, with six member/owner firms. - The ISE operates three trading venues: - Main Securities Market (MSM) — a regulated market; - Enterprise Securities Market (ESM) — an equity market designed for small to medium sized growth companies (an MTF as defined by MiFID); - Global Exchange Market (GEM) — a specialist debt market for professional investors (an MTF as defined by MiFID). - There is an additional MTF in Ireland: an electronic crossing-system operated by Investment Technology Group Limited, called POSIT. - Other authorities with responsibilities set out in law include: - Office of the Director of Corporate Enforcement; - Takeover Panel; - Financial Services Ombudsman; - Garda Síochána (Garda Bureau of Fraud Investigation); - National Consumer Agency; - Director of Public Prosecution. - The Central Bank has established formal and informal cooperation arrangements with these agencies; despite the number of bodies, there is a consistent regulatory approach among them. ### Structural weaknesses affecting supervisory outcomes - Indications of dysfunctions exist in processes for repossessing assets, debt restructuring, and the pricing of fees for banking services. - These weaknesses may distort banking business and complicate the ability to determine the sufficiency of provisions. ### Prevailing supervisory situation before the financial crisis - The prudential supervisory framework in Ireland was seriously flawed in the run-up to the financial crisis and reflected weaknesses in banking supervision. - Irish authorities conducted two postmortem reports: the Honohan Report and the Nyberg Report, which identified the most serious shortcomings. - Key failings identified: - Supervisory approach focused on process over outcomes and failed to generate the most relevant information. - Lack of independent quantitative assessment of risks; supervisors relied excessively on banks' internal valuation processes, contributing to a build-up of credit risk. - Supervisory tasks were under-resourced, contributing to over-reliance on banks’ own governance and risk-management assessments. - Supervisors exhibited insufficient intrusiveness and assertiveness in challenging bankers; corrective regulatory intervention was delayed and timid. - Consumer issues were actively dealt with, but prudential challenge to banks was inadequate. ### Recent reform efforts (legal and institutional changes) - Key legislative measures: - Central Bank Reform Act 2010 — combined central banking and financial regulation functions into the Central Bank, replacing prior related entities. - Central Bank Credit Institution Resolution Act 2011 — provided a special resolution regime, permits the Central Bank to request recovery plans, confers powers to resolve credit institutions under powers vested in the Governor; legislation is relatively new and has not yet been used to resolve an authorized credit institution; recovery plan aspect has yet to be fully implemented and may be deferred pending EU proposed Directive on Crisis Management and Bank Resolution. - Personal Insolvency Act 2012 — established three new non-judicial procedures for debt resolution and modernized the Bankruptcy Act of 1988. - Central Bank (Supervision and Enforcement) Act 2013 — enhanced enforcement authority of the Central Bank, harmonized requirements across financial sectors, provided regulation-making powers on conduct of business and corporate governance, and increased administrative sanction fines for an individual and a firm. - Supervisory framework and practices: - In 2011 the Central Bank introduced the Probability Risk and Impact System (PRISM) as a structured framework for risk-based supervision; initially applied to banks and insurers in 2011, extended to investment firms and credit unions in 2012. - PRISM allocates resources and plans supervisory activities based on probability of failure and impact on overall financial stability, with ongoing monitoring via financial ratios that trigger supervisory attention/intervention. - High Impact firms receive ongoing monitoring through offsite supervision, frequent onsite reviews, and ongoing engagement with senior management. - Central Bank has introduced structural changes in staffing and established new directorates and divisions to support the supervisory approach. - Central Bank aims to strengthen the banking system through rigorous, conservative and independent assessments of loan losses, recapitalization actions, and targeted reduction of non-core assets. - Central Bank has prioritized improving standards for bank boards and senior management, targeting governance and fitness and probity. ### Assessment of compliance and remaining supervisory issues - Compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) is satisfactory, reflecting strengthened supervisory processes. - The banking system remains under elevated stress and vulnerabilities persist; industry faces pressure to meet forthcoming higher regulatory standards, notably the Capital Requirements Directive and Regulations (CRD IV/CRR). - Issues requiring continued attention: - Reviewing provisioning requirements to determine whether they accurately reflect current market conditions. - Continued implementation of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) (CJA 2010). - Strengthening monitoring of compliance with the Code of Practice on Lending to Related Parties (RPL Code). - Amending legislation to codify the operational independence of the Central Bank. - Specific recommendations to enhance Central Bank independence (legislative changes encouraged): - Stipulate in the Central Bank Act the exact conditions under which members of the Commission can be dismissed or removed by the Minister for Finance. - Provide the Central Bank with authority to revoke a bank license or deny a bank licensing application without seeking approval by the Minister. - Do not include the Secretary General of the Department of Finance on the Central Bank Commission. - Eliminate the need for the Minister to approve the levy schedule. - Related party transactions and monitoring: - The RPL Code is comprehensive but covers only lending transactions and not transactions such as asset purchases or deposits. - Central Bank monitoring of compliance relies heavily on offsite review of reports filed by banks; these reports do not provide information on terms of loans or dates of Board approval. - Anti–Money Laundering/Combating the Financing of Terrorism (AML/CFT): - The CJA 2010 is comprehensive and was further strengthened by the Criminal Justice Act 2013. - Central Bank has enhanced its supervisory approach to AML/CFT with in-depth onsite inspections and offsite analysis via risk assessment questionnaires. - The Central Bank’s position would be strengthened if statutory guidelines, approved as envisaged by Section 107 of the CJA 2010, were issued. - The extent of onsite reviews and subsequent supervisory action should be reviewed to ensure sufficient onsite testing and strong corrective action requirements. - Branches of member state banks should be subject to AML monitoring. - Staffing and human resources: - Central Bank Banking Supervision Divisions are operating below approved staffing levels. - The Central Bank operates under Civil Service pay scales and hiring rules which make salaries un-competitive with industry. - Civil Service employment provides job security and other benefits that may offset pay differential, but increasing supervisory complexity requires highly skilled staff. - Central Bank is encouraged to review turnover rates in skilled staff, determine reasons for turnover, consult other central banks on attracting skilled staff and achieving exemptions from Civil Service pay limitations, and review advancement opportunities tailored to technical experts. ### Assessment methodology and scope - Assessment prepared according to the Revised Core Principles (BCP) Methodology issued by the Basel Committee of Banking Supervision. - The revised BCP have a heightened focus on risk management and supervisory assessment of risk management practice; this assessment is not directly comparable with the previous 2006 assessment. - The assessment reflects the regulatory and supervisory framework in place as of the date of the assessment and is not intended to represent an analysis of the state of the banking sector or crisis management framework. - The assessment is qualitative and based on effective application of relevant laws and regulations, review of prudential returns, licensing documentation, supervisory analysis records, on-site supervision reports, and off-site analysis documentation. - The assessment team held extensive meetings with officials of the Central Bank, the Department of Finance, Financial Intelligence Unit, auditing firms, and sector participants from domestic and international banks. - The authorities provided a self-assessment and detailed responses to questionnaires and facilitated access to supervisory documents and files, staff and systems. - The standards were evaluated with a proportionate approach considering the Irish financial system’s structure and complexity; proportionality underpins all assessment criteria. - The assessment does not include the Irish Credit Union Sector due to recent legislative and regulatory developments. *International Monetary Fund — assessment text provided in the examined content unit* ### 35. The BCPs are an independent benchmark and compliance determinations are not ### _cr14137 - 35. The BCPs are an independent benchmark and compliance determinations are not ### B. Main Findings — Responsibility, Objectives, Powers, Independence, Accountability and Cooperation (Principles 1-3) - The Central Bank is the sole authority responsible for the supervision of the banking system. - Central Bank objective described as “the proper and effective regulation of financial services and markets.” - Central Bank responsibilities include safety and soundness of prudential supervision, monitoring bank compliance with consumer protection regulation and AML/CFT legislation. - Legislative enhancements strengthening Central Bank powers: - Central Bank Reform Act 2010. - Central Bank (Supervision and Enforcement) Act 2013 — strengthens fit and proper monitoring, information gathering, and broadens enforcement matters (corporate governance, systems and control and minimum competency requirements). - Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (CJA 2010) — establishes requirements for banks and makes the Central Bank the competent authority for monitoring compliance. - Staffing: Central Bank is currently operating below its approved staffing levels; prompt staffing of vacancies would enhance the Central Bank ability to conduct its activities. - Policy and enforcement tools: - Central Bank can issue enforceable policies and codes and impose license conditions. - Examples: code on related party lending, requirements to address operational risk, approval/notification for significant acquisitions, increased country risk monitoring requirements. - In AML/CFT area, CJA 2010 is comprehensive; Central Bank position would be strengthened if statutory guidelines approved as envisaged by Section 107 of the CJA 2010 were issued. - Independence concerns: - Minister for Finance may remove a member of the Central Bank Commission “if in the Minister’s opinion it is necessary or desirable to do so to enable the Commission to function effectively.” Legislation lacks objective conditions for such removal. - Ministerial approval required to increase industry levies to fund banking supervision. - Although licensing authority, Central Bank must seek Ministerial approval to deny a banking license application or to revoke a license. ### Ownership, Licensing, and Structure (Principles 4-7) - The Central Bank grants banking licenses to entities which may have unregulated corporate parents, domestically and cross-border. - Result: a newly licensed bank operates under a ring-fence regime from opening due to lack of supervisory authority over the parent. - Central Bank lacks authority to: - perform fit-and-proper reviews on management of the unregulated parent; - take enforcement action on the parent. - Prior to enactment of Central Bank (Supervision and Enforcement) Act 2013, Central Bank lacked authority to require submission by the parent of information needed for supervision. - Options to address lack of express authority over parents include imposing licensing conditions (restrictions on the license; requiring parent company and management to provide information and comply with fit-and-proper requirements). ### Methods of Ongoing Supervision (Principles 8-10) - PRISM model is the centerpiece of supervisory framework: - Assigns bank risk ratings and allocates supervisory resources; determines supervisory intensity and frequency. - Resources for onsite reviews and intrusive techniques mainly allocated to High Impact banks. - Medium-Low and Low impact categories rely heavily on reactive processes. - Concerns about PRISM calibration and practice: - Offsite supervision largely automated; reliance on triggers of financial ratios rather than analysis of regulatory returns. - Quality, frequency and depth of qualitative data limited; onsite activity limited. - For Low Impact banks, PRISM prescribes no minimum frequency of onsite reviews or engagement. - Reactive supervision and exception reporting for lower impact banks may not allow timely identification, assessment and mitigation of risks; aggregate build-up across lower impact banks could create vulnerabilities and reputational risk. - Supervisory focus distortion: - Focusing primarily on the impact of a failure on the overall market distorts resource allocation because supervisory approach should be preventive/corrective to maintain safety and soundness, not focused on resolution impact. - More attention needed to independent verification of banks' self-assessments and risk profile assessments. - Supervisory scope should focus on bank-specific risks with differences in activities between high risk banks and greater flexibility in supervisory activities. - Monitoring tools: - PRISM includes KRIs categorized into five risk areas: capital, liquidity, credit, business model/strategy and market risk. - No KRIs for interest rate risk in the banking book and only a single indicator for market risk. - KRIs form key feature of exception reporting for lower impact banks; KRIs should be expanded to cover all material risks. ### Corrective and Sanctioning Powers of Supervisors (Principle 11) - Central Bank has sufficient discretionary enforcement powers to address weaknesses or non-compliance. - Central Bank (Supervision and Enforcement) Act 2013 enhancements: - Level of fines doubled for both firms and individuals. - Alternative calculation of maximum fine for firms based upon 10 percent of annual turnover. - These deterrents are expected to increase compliance. - Enforcement process: - A well designed enforcement process linked to PRISM ensures prompt supervisory action. - Risk Mitigation Program used to set out issue basis, prescribed action, required outcome and timelines. - Administrative Sanctions Procedure allows supervisory warnings, settlements, and after an Inquiry can impose sanctions from caution/reprimand to fines and disqualification of individuals from management. ### Consolidated and Cross-Border Banking Supervision (Principles 12-13) - Central Bank applies prudential standards on a group-wide basis where responsible for consolidated supervision. - Supervisory activities undertaken to understand overall banking group structure and supervise material activities, including non-banking activities domestic and cross-border. - Central Bank collects and analyses financial and other information considered adequate for effective consolidated supervision. - Central Bank takes action when risks from the banking group or wider group could jeopardize safety and soundness of the bank and banking group. - Home-Host relationships functioning well, particularly supervisory colleges. ### Corporate Governance (Principle 14) - Central Bank issued a Corporate Governance Code that goes beyond minimum CRD requirements. - Code sets corporate governance obligations for all financial institutions: role of the Board, role of senior management, requirement for an annual compliance statement. - Central Bank has extensive powers regarding fitness and probity of directors and certain senior management positions. ### Prudential Requirements, Regulatory Framework, Accounting and Disclosure (Principles 15-29) - Supervisory evaluation processes: - Supervisors evaluate adequacy of risk management strategies, policies, processes and limits through periodic risk assessments and engagement with bank senior personnel. - Dedicated onsite risk review teams: Credit, Treasury, Risk Analytics (Quantitative Models Unit and Portfolio Analytics, Stress testing Unit) and Business Model Analytics. - Specialist teams also assess offsite reporting. - Under risk-based approach, monitoring level and frequency by specialist teams varies according to PRISM impact rating. - Where onsite activities are not performed, considerable reliance on self-assessments. - Range of qualitative and quantitative information (e.g., business continuity) insufficient to reliably monitor robustness on an ongoing basis. - Asset soundness and credit risk: - Resources heavily weighted toward High Impact banks (greatest systemic importance and largest exposure to credit risk). - Routine supervisory activities for High Impact banks provide varied inputs to assess credit risk management against market and macroeconomic changes. - Supervisors for High Impact banks go beyond routine PRISM tasks. - Onsite loan file reviews: - Allow assessment of whether senior management implemented Board-approved credit risk strategy and whether underwriting practices are prudent. - Frequency and depth of onsite credit risk reviews for lower risk institutions and allocation of credit risk specialists could be enhanced. - For banks with PRISM impact ratings below High (especially Medium Low and Low), variance analysis may not reveal application of credit risk management processes until after risks crystallize and supervisory triggers are breached. - Provisioning, valuation and balance sheet exercises: - Central Bank updated and expanded guidance on provisioning and valuation practices and performed more frequent and in-depth onsite assessments. - Central Bank has allocated considerable resources to encourage prudent provisioning with significant focus on the covered banks. - Updated guidance goes beyond that of other authorities in the region where IFRS is applied. - Sector subject to externally led balance sheet exercises; evidence shows increased conservatism in loan loss provisioning. - Need for greater reliance on onsite verification: - Supervisory activities should place greater reliance on onsite verification of bank processes for early identification of problem assets, prudent collateral valuation, and testing provisioning model assumptions. - Evidence that process commenced with “covered” banks (those guaranteed by the Irish Government in September 2008) but not yet extended across the sector (with due regard to proportionality). - Greater frequency and depth of onsite reviews, loan sampling and testing of assumptions would improve ability to deem provisions adequate for prudential purposes. - Related-party transactions: - RPL Code issued in 2010 establishes requirements for transactions with affiliates to be at arms’ length and has a broad definition of related parties. - Only lending transactions covered by the Code; items such as asset purchases and deposit terms are excluded. - Country risk and operational risk policies: - Country risk policy issued in August 2013 and in process of implementation; one bank examination conducted, another ongoing. - Implementation will require improved bank reporting, incorporation into PRISM and reviews of bank compliance; banks must implement internal processes. - Detailed operational risk policy implemented and a number of onsite reviews conducted; a report to be filed by banks implemented with first reports to be filed as of September 30, 2013. - Anti-Money Laundering: - AML legislation implemented in 2010; scope comprehensive and Central Bank implementing monitoring and enforcement program. - Elements of strategy remain to be implemented: analysis of data from risk assessments and in-depth inspections to underpin publication of findings, inform sector-wide risk mitigation actions and identify targets for thematic inspections. - Compliance assessments via risk assessment questionnaires carried out on 21 banks. - Central Bank’s AML/CFT position would be strengthened if statutory guidelines, as envisaged by Section 107 of the CJA 2010, were issued. *Source: IMF staff assessment text (Ireland BCP assessment excerpt).* ### 6. Transfer of significant ownership ### 6. Transfer of significant ownership ### Supervisory powers and general framework - CBI has adequate prudential powers to supervise proposals to transfer significant ownership. - Requirement for major acquisition reviews was implemented in August 2013. Too early for a record of compliance and enforcement to be reviewed. - The CBI employs a mix of off- and on-site supervisory activities. The PRISM model is the centerpiece of the supervisory framework which is used to assign bank risk ratings and allocate supervisory resources and determines supervisory intensity and frequency of supervisory activities. - Supervisory reports are collected on a solo and consolidated basis, and independently verified. - CBI has an adequate range of supervisory tools to bring about timely corrective actions. Its enforcement powers were recently enhanced by the introduction of the Central Bank (Supervision and Enforcement) Act 2013. This gives the Central Bank greater information gathering powers and also provides for new sanctions and increased monetary penalties under the Administrative Sanctions Procedure. - CBI undertakes supervisory activities to understand the overall structure of the banking group for which it is ultimately responsible and supervises and monitors material activities (including non-banking activities conducted by entities in the wider group, both domestic and cross-border). - CBI has an adequate framework to cooperate and collaborate with foreign supervisors. ### Identified supervisory shortcomings and operational findings (items 9–29) - Supervisory techniques and tools - Primary concern: whether calibration of PRISM is appropriate for the mix of onsite and offsite supervision for Medium Low and Low Impact banks. - Analysis of regulatory returns should be strengthened and greater focus on testing and sampling of risk management processes is needed. - Corporate governance (14) - For banks rated Medium-low and Low, the range and frequency of supervisory activities to assess governance is not adequate to assess robustness of governance. - Inadequate level of attention to a board’s stewardship and understanding of risk and corporate governance. - Risk management process (15) - Range of qualitative and quantitative information to assess business continuity insufficient to reliably monitor robustness of arrangements on an ongoing basis (EC12). - Frequency of onsite testing and verification of model validation results needs to be enhanced (EC6). - Capital adequacy (16) - CBI has set prudential and appropriate capital adequacy requirements. - Credit risk (17) - Frequency and depth of onsite credit risk reviews for lower risk institutions and allocation of credit risk specialists to perform file reviews is not sufficient to maintain an accurate assessment of the credit risk environment. - For banks assigned PRISM Impact ratings of Medium Low and Low, variance analysis might not provide insight into application of credit risk management processes until after risks have begun to crystallize resulting in breaching the Central Bank’s triggers for supervisory attention. - Problem assets, provisions, and reserves (18) - Need greater frequency and depth of onsite reviews of loan loss provisioning practices (e.g. testing of assumptions against experience, recognition of default, prudent valuations). - Concentration risk and large exposure limits (19) - Limits are in place and are prudent. - Transactions with related parties (20) - Only credit transactions are covered by the regulation. - Compliance monitoring is mainly offsite (with some onsite testing) but reports filed by banks lack information to monitor terms, rates and other requirements of the RPL Code. - Country and transfer risks (21) - Requirements issued in August 2013. CBI has developed a monitoring process and is conducting initial reviews to determine compliance. - Market risk (22) - Onsite examinations of market risk: coverage by the Treasury Team limited, though proportional based on either complete absence or very low level of traded market risk in most banks supervised. - Insufficient testing of implementation of policies and procedures onsite to accurately assess effective implementation of controls, especially verifying that marked-to-market positions are prudently valued and revalued frequently. - CBI’s oversight of internal models on an ongoing basis is inadequate to ensure models are fit for purpose and calculating capital accurately (see Essential Criterion 4). - Interest rate risk in the banking book (23) - Detailed reviews by the treasury team conducted on High Impact banks; treasury team support provided to lower impact banks as part of Full Risk Assessments. - Lower impact banks: less frequent reviews supplemented by quarterly risk dashboards and twice yearly meetings; reliance on self assessment for lower Impact banks. - Liquidity risk (24) - CBI requires each credit institution to establish and maintain a liquidity strategy and liquidity policy. - CBI requires each credit institution to establish a contingency funding plan, developed by management and approved by the Board. - Operational risk (25) - First monitoring reports filed by banks as at September 30, 2013. Effectiveness of monitoring and enforcement cannot be assessed at this time. - Internal control and audit (26) - No requirement in regulations for the Board to take responsibility for establishing the internal control environment, although regulations require banks to maintain internal controls. - For banks with an Impact rating below High, supervisory activities to assess the effectiveness of the internal control function will rely upon desk based review of exception reporting without a sufficient suite of supporting documentation to make an accurate assessment required by essential criteria 4 and 5. - Financial reporting and external audit (27) - The Central Bank does not have the power to reject and rescind the external auditor as required by the Essential Criterion 6. - Existing legislation does not provide the Central Bank with the power to influence the scope of the external audit or establish the standards for such an audit. - Disclosure and transparency (28) - CBI will ensure that the financial statements have an auditor’s opinion expressing the opinion that they give a true and fair view. - Abuse of financial services (29) - Branches of foreign banks have not been incorporated in AML compliance reviews. - Most reviews of compliance have been through the review of risk assessment questionnaires sent to banks with limited onsite testing. - While the CJA 2010 is comprehensive the CBI’s position would be strengthened if statutory guidelines, approved as envisaged by Section 107 of the CJA 2010, were issued. - CBI has not issued specific requirements for internal audit and/or external experts to independently evaluate relevant AML risk management policies, processes and controls. - There is no requirement to appoint a relevant dedicated officer to whom potential abuses of the banks’ financial services are reported. - CBI is planning to issue communications following its inspections setting out principal findings and its expectations as to how compliance with the CJA 2010 can be demonstrated. ### Recommended Actions (excerpted from Table 3) - CP 2 Independence, accountability, resourcing and legal protection for supervisors: - Amend existing legislation to detail the framework for Central Bank independence. Also address reasons for removal of Commission members to be similar to Governor. - Take steps to fill vacancies in banking supervision. - CP 5 Responsibilities, objectives and powers: - Consider options for improving the CBI’s ability to conduct fit and proper reviews during licensing of banks owned by unregulated parents. - Study enforceability of special conditions to the license that must be accepted by parent company at time of approval to enhance CBI enforcement authority. - CP 9 Supervisory techniques and tools: - Consider the distribution of resources and supervisory tasks across Medium Low and Low Impact ratings. - Consider expanding KRIs in PRISM to include a broader suite of risk metrics i.e. operational risk and IRRBB. - CP 15 Risk management process: - For banks accredited to use internal models, annual assessment that banks comply with supervisory standards (e.g. validation). - Implementation of framework to assess IT across regulated banks. - CP 17 Credit risk: - Increase frequency and loan sample size for Medium Low banks. - CP 18 Problem assets, provisions, and reserves: - Greater frequency and depth of onsite reviews of loan loss provisioning practices (e.g. testing of assumptions against experience, recognition of default, prudent valuations). - CP 20 Transactions with related parties: - Amend the Related Party Lending code to include asset sales, deposits and other areas addressed in the Principle. - Expand information in Related Party Lending regulatory reports so that a more complete offsite compliance assessment may be made. - CP 27 Financial reporting and external audit: - Enact legislation giving the Central Bank the power to reject or rescind external auditors. - CP 29 Abuse of financial services: - Expand supervisory scope to include branches of foreign banks. - Statutory guidelines, approved as envisaged by Section 107 of the CJA 2010, should be issued. - Review the current balance between onsite and offsite reviews. Currently emphasis is heavily weighted on offsite. ### Authorities’ response — key points - Irish authorities express appreciation for the IMF assessment and welcome acknowledgement of strengthening of supervisory process through changes to regulation and legislation. - Central Bank implemented a risk based supervisory approach in 2011 with a new risk assessment framework and increased resources. - On CP2 Independence: - Authorities disagree with IMF rating; characterize IMF concerns as hypothetical and note no observed political interference. - Will consider recommendation for a more detailed framework for Central Bank independence in any future statutory review. - On CP9 Supervisory Techniques and Tools: - Authorities emphasize proportional, risk-based approach; note Medium Low cohort comprises 10 non-retail institutions and specific asset/deposit shares: "this cohort of 10 non-retail institutions comprises 3 percent of total Irish banking system assets, does not take retail deposits, comprises 2 percent of all Irish corporate deposits, is not involved in retail lending, and transacts with counterparties who are predominantly business to business and intra-group." - Central Bank will follow IMF recommendations relating to CP 9 and will review distribution of resources as the Single Supervisory Mechanism ("SSM") enters into force; will adhere to SSM Supervisory Manual. - On CP20 Related Party Transactions: - Authorities note RPL Code, reporting framework, onsite testing, lending limits and requirement for prior approval of transactions over €1m. - Central Bank will evaluate related party transactions and amend the Code accordingly. - On CP29 Abuse of Financial Services: - Authorities will follow IMF recommendations; request Minister for Justice to issue guidelines envisaged by Section 107 of the Criminal Justice Act 2010. - Central Bank will communicate principal AML findings to the banking sector and review balance between onsite and offsite reviews. - Acknowledge branches of foreign banks have not been inspected; branch inspections will be performed. - Concluding comment: - Authorities will evaluate IMF recommendations and are preparing to implement SSM requirements from 4 November 2014. ### Assessment of IOSCO Objectives and Principles of Securities Regulation - Ireland exhibits a high level of implementation of IOSCO principles. Legal framework is robust and provides the Central Bank with broad supervisory, investigative and enforcement powers. - Some areas require strengthening: - Make more use of on-site inspections for all types of market intermediaries. - Pursue use of all available enforcement authority, including criminal prosecutions, where appropriate. - Certain legal provisions regarding governance structure raise concerns about Central Bank independence (presence of a member of the Department of Finance on the Commission and authority of the Minister to remove a Commissioner for reasons other than misconduct or incompetence), although no indications of interference with day-to-day operations. *Source: _cr14137 - 6. Transfer of significant ownership (IMF assessment excerpts). * ### 64. The regime that applies to entities that have issued their securities to the public where ### 64. The regime that applies to entities that have issued their securities to the public where ### Key weaknesses in the issuer-disclosure and market regime - General disclosure requirements and full market abuse rules apply to issuers with securities admitted to trading on a regulated market (RM). - There are few equivalent provisions for issuers who offer securities to the public but elect not to have their securities admitted to trading on an RM. - Both the Irish companies legislation and EU prescribed deadlines for publishing annual and interim reports should be reduced for all issuers, including collective investment schemes. - Very little continuing disclosure is required of public issuers who offered securities to the public but whose securities are not admitted to trading on an RM or traded/quoted on an MTF; CBI advised that there are few of these companies and no one is responsible for review of the continuing disclosure of these other public issuers. - For issuers admitted to trading on an RM and ESM companies: half yearly reports are required. For wholesale debt securities on GEM and other public issuers: only annual financial statements are mandated. - A change of auditor must be notified within a month of the change, unless the securities of the issuer are admitted to trading on an RM and the information is deemed to be price sensitive. - IAASA examines annual and half-yearly financial reports of Irish issuers admitted to trading on an RM for compliance with the reporting framework. CBI and the ISE contribute to monitoring and review of non-financial disclosure for issuers admitted for trading on an RM and/or quoted on ESM. ISE reviews disclosure by companies on its three markets. ### Central Bank of Ireland (CBI) powers and operational gaps - CBI lacks the power to appoint administrators or monitors to step in and run an investment firm that is in crisis. - CBI does not have authority to take possession/control of assets held by a firm that is in financial difficulty. - The absence of these powers effectively means the only alternative is to liquidate a company, thereby: - crystallising potentially significant losses for investors, - delaying investors' access to their assets. - The timeliness of appointing a liquidator may put client assets at risk. ### Human resources constraints at CBI - There are impediments to CBI’s ability to attract and retain high-calibre staff. - CBI needs to be able to structure compensation programs to accommodate recruitment and retention difficulties for persons with appropriate skill sets for particular positions. - The effect of the government’s recent legislation imposing a pay-cut on Central Bank staff has a constraining effect on CBI’s ability to seek and retain experienced regulators. - Resources required for the breadth and number of institutions and the resource demands of the PRISM process may result in under-resourcing allocated to the medium and low impact institutions. Additional resources are required. ### Assessment methodology and scope - The assessment was carried out using the 2011 IOSCO Methodology for Assessing Implementation of the IOSCO Principles (the Assessment Methodology). - Principle 38 was not assessed due to the existence of separate standards for securities settlement systems and central counterparties. - Principle 22 regarding credit rating agencies (CRAs) reflects an assessment of the European Securities and Markets Authority (ESMA), as the direct supervisor of CRAs in Europe, in a review conducted by the IMF in December 2012. - The IOSCO Assessment Methodology requires assessors to judge not only legal and regulatory frameworks but also how they have been implemented in practice, including inspection programs, cycle, scope and quality of inspections, and supervisory follow-up, including enforcement actions. - The assessment relied on: - a detailed self assessment submitted by the authorities, - extensive interviews with CBI staff, - review of legislation, regulations, guidelines and related materials, - interviews with other competent authorities in the jurisdiction: Irish Stock Exchange (ISE), Irish Accounting and Auditing Supervisory Authority (IAASA), the Financial Services Ombudsman, the Office of the Director of Corporate Enforcement, - interviews with market participants and other stakeholders. - The assessment team comprised Tanis MacLaren and Mark McGinness, both external technical experts. ### Main findings summary (selected Principles) - Principle 1: CBI has a clear mandate defined by law; multiple competent authorities exist but there is a consistent regulatory approach. - Principle 2: CBI operates free of day-to-day government and industry influence, but: - the Minister for Finance may remove a Commission member for reasons other than misconduct or incompetence, - the Secretary General of the Department of Finance is an ex-officio Commission member, - no statutory provision for CBI to pay legal costs of staff if sued (CBI reimburses staff as a matter of practice but does not indemnify them). - Principle 3: CBI has sufficient powers to license, inspect, enforce and regulate capital market participants; training enhanced; active Consumer Protection Unit; resource shortfalls noted. - Principle 4: CBI publishes consultation papers; rules, codes and guidance are available on its website; laws and regulations need consolidation. - Principle 5: CBI staff observe high professional standards and a Code of Ethics applies, but the Code is not publicly available. - Principle 6: CBI has processes to monitor and mitigate systemic risk, including the Financial Stability Committee, Risk Governance Committee and PRISM. - Principle 7: CBI regularly reviews regulatory perimeter; Unauthorized Providers Unit monitors unauthorized activity. - Principle 8: Processes exist to address conflicts of interest across CBI, issuers, intermediaries, ISE, SROs and CIS. - Principle 9: Three approved professional bodies exercise direct oversight for limited investment business services; confidentiality rules may inhibit cooperation in oversight. - Principle 10–12: CBI has broad inspection, investigation, surveillance and enforcement powers; 2013 Central Bank Act increased fines, allowed restitution and investigation costs, and provided authority to obtain restraining orders; PRISM underpins supervision; Low Impact firms rely heavily on reactive processes with no minimum frequency of onsite reviews; Administrative Sanction Procedure successful but criminal referrals since 2010 have not resulted in convictions. - Principle 13–15: CBI can share public and non-public information domestically and internationally; signatory to IOSCO Multilateral MOU (December 2012), MOU with ESMA and multiple bilateral MOUs; participates in Supervisory College for an international fund manager. - Principle 16–18: Initial disclosure requirements for public offers are extensive; differing reporting requirements across markets (half-yearly for RM/ESM; only annual for GEM/other public issuers); IAASA, CBI and ISE have roles in monitoring disclosure; limited continuing disclosure and oversight for public issuers not admitted to an RM. - Principle 19–21: Auditors are subject to oversight via Recognized Accountancy Bodies and IAASA; IAASA resources are insufficient; auditors must be independent; auditing standards follow International Standards on Auditing (UK and Ireland). - Principle 22: ESMA is the direct supervisor of CRAs in Europe; ESMA conducted on-site inspections of large CRAs, is implementing a risk framework, and needs additional resources. * _cr14137 - 64. The regime that applies to entities that have issued their securities to the public where_* ### 23. Other entities that offer investors analytical or evaluative services should be subject to oversight ### 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them. ### Overview - Entities that provide analytical or evaluative services are caught either by MiFID or the Investment Intermediaries Act 1995, and have to be authorized by CBI. - The assessment organizes findings under Principles 24–28 (collective investment schemes and hedge funds), Principles 29–32 (market intermediaries), and Principles 33–38 (secondary markets). ### Principles 24–28: Collective investment schemes and hedge funds - Principle 24 — eligibility, governance, organization and operational conduct: - CBI authorizes and supervises two CIS regimes: under the UCITS Regulations and the EU UCITS Directive 2009/65/EC, and under the Alternative Investment Fund Regulations and Alternative Investment Fund Managers Directive 2011/61/EU. - Funds offered to the public and their operators and distributors are subject to authorization and reporting requirements. - Both regimes require operator and fund manager to have appropriate organizational and operational structures, including risk management systems and internal controls. - Reporting is extensive and detailed. On-site inspections and off-site reviews are informed by PRISM and supplemented by thematic reviews, sampling and reports. - Outsourcing is permitted and used but subject to detailed requirements. - Principle 25 — legal form, structure and segregation of client assets: - Fund prospectuses must contain detailed information on legal form of the CIS and investors’ rights. - Assets are segregated from those of the operator and distributor and required to be held by a depositary or custodian. - No prohibition on separation of management in a group; however custodian/depositary functions cannot be performed by the same legal entity responsible for investment functions. - Functional independence is required; no persons may sit on boards of both entities. - Principle 26 — disclosure necessary to evaluate suitability and value: - All publicly offered funds must be approved by CBI; CBI reviews detailed prospectuses with comprehensive CIS information. - Material changes must be notified; prospectus amendments require CBI consent prior to registration. - Investor protection provisions are robust. - Reporting requirements for both AIFs and UCITS are regular and EU-adopted but are described as “too slow to be effective.” - Principle 27 — asset valuation, pricing and redemption: - Securities and assets are required to be valued fairly and independently. - Fund prospectus must describe valuation, pricing and applicable purchase and redemption provisions; continuous disclosure of the price is prescribed. - Uncertainty exists whether valuation of CIS assets must follow IFRS or UK and Irish GAAP, or another high quality accepted accounting standard; industry guidance exists but CBI has not issued prescriptive rules. - CBI has not issued rules prescribing how pricing errors are to be treated by CIS. - Principle 28 — oversight of hedge funds and managers/advisers: - “Hedge fund” is not defined in Ireland but is treated by CBI as a CIS regardless of legal structure. - The AIFM framework governs registration, internal organization and operational conduct. - Operators must be authorized by CBI and are subject to inspection according to PRISM and other supervisory initiatives. ### Principles 29–32: Market intermediaries - Principle 29 — minimum entry standards: - Framework exists for authorization and ongoing requirements for market intermediaries. - Applicants undergo detailed off-site reviews prior to authorization; on-site reviews are not routinely performed during authorization except by the ISE. - Gaps exist in information posted on CBI's website regarding authorized firms. - Principle 30 — capital and prudential requirements: - Initial and ongoing capital requirements exist for all types of intermediaries to ensure adequate resources. - Capital requirements for MiFID firms trading on own account or holding client assets are based on the EU Capital Requirements Directive, addressing market and credit risk. - Liquidity and operational risk are addressed via the Basel II ‘Pillar 2’ Internal Capital Adequacy Assessment Process. - Capital formulae for other intermediaries are fairly simple, reflecting practical operations. - Principle 31 — internal functions for compliance, risk management and client protection: - Market intermediaries must have systems of risk management and internal controls. - If a MiFID firm has an internal audit function, it must review these systems annually and report results to the Board of Directors. - If an intermediary holds client assets, an auditor’s review of systems and controls for safekeeping and accounting for client assets is required at least annually. - Otherwise there is no compulsory independent review of internal controls. - Regulations require segregation of clients’ assets and business conduct rules, including ‘know your client’ and suitability; rules on conflicts of interest and client asset protection are extensive. - Principle 32 — procedures for intermediary failure: - CBI has plans to deal with a firm’s failure; plans are flexible to restrain conduct, ensure clients’ assets are properly managed and provide information to regulators. - CBI lacks authority to appoint an administrator to run a firm in crisis, nor to take possession of intermediary-held assets. - Liquidation is available to the Central Bank under both MiFID and the Investment Intermediaries Act, 1995. - Investor compensation funds are available but amounts are fairly low at €20,000, the EU minimum pursuant to the EU Investor Compensation Scheme Directive. - MOUs facilitate information sharing when failures have cross-border implications. ### Principles 33–38: Secondary markets - Principle 33 — authorization and oversight of trading systems and exchanges: - Securities exchanges, as RMs, and MTFs are subject to authorization by CBI with specified criteria (systems, infrastructure capacity, technical competence). - No routine on-site visits are performed before authorization is granted. - Conditions imposed on the ISE and CBI oversight generally meet Self-Regulatory Organizations Principle 9. - Principle 34 — ongoing supervision of exchanges and trading systems: - Comprehensive oversight system includes on-site examinations and off-site reviews of rules and other matters. - CBI may suspend operations of a stock exchange or MTF. - Market surveillance is conducted by the ISE and CBI. - Principle 35 — transparency of trading: - Pre-trade and post-trade real-time price transparency exists on the ISE in accordance with MiFID; exceptions are subject to clearly defined conditions and prompt post-trade reporting. - Certain specified trades may occur outside the automatic trading system subject to conditions and prompt post-trade reporting; specific waiver from pre-trade transparency must be granted. - All transactions in any securities undertaken by market intermediaries must be reported to CBI by T+1 at the latest. - Principle 36 — detection and deterrence of manipulation and unfair practices: - Rules on market manipulation and insider trading apply only to securities admitted to trading on RMs. - Trading quoted/traded only on MTFs or off-exchange trading is currently subject only to insider trading prohibitions in companies legislation. - Proposed EU amendments to the Market Abuse Directive are expected to address this gap. - Principle 37 — management of large exposures, default risk and market disruption: - Trades in Irish securities are settled on systems physically located outside Ireland and supervised by foreign regulators; no ISE clearing member is established in Ireland. - Functions monitoring large market exposures are performed by supervised entities outside CBI’s jurisdiction; CBI relies on supervision by the regulators in those jurisdictions without conducting independent due diligence. - Large exposure limits and reporting requirements are in place; default rules at clearing and settlement systems are public. - CBI does not have specific information-sharing MOUs with all relevant regulators, but parties are members of general ESMA and IOSCO Multilateral MOUs. - Provisions addressing short selling exist. - Principle 38 — securities settlement systems and central counterparties: - Not assessed. ### C. Recommended Actions — prioritized list (Table 5 excerpt) - High priority: - 12. Implement a more proactive approach to supervision of firms designated by PRISM as Low Impact. - More prosecutions should be pursued against individuals. - 3. Government should give the Central Bank additional resources and flexibility to depart from civil service compensation rules. - 18 and 19. IAASA should be given additional resources and greater freedom to contract with staff on appropriate terms. - 31. Central Bank should require all firms to conduct an annual review of risk management and controls to objective standards by a function/entity independent of the business. - 36. Companies Law should be amended or other legislation introduced to prohibit abusive trading activities regardless of trading venue or admission to an RM. - 37. Central Bank should carry out reasonable due diligence on regimes where principal clearing and settlement of trades by Irish intermediaries or in Irish securities occur, including obtaining legal opinions on insolvency treatment (particularly in Belgium, the UK and Germany). - Update MOU with UK authorities regarding CREST oversight and establish an MOU with BaFin regarding oversight of Eurex Clearing. - Medium-high priority: - 32. Central Bank should be given authority to appoint an administrator or monitor to run a firm in crisis. - 9. Consider adjustments to confidentiality requirements to facilitate greater information sharing among authorities. - 12. Consider raising maximum fines that the District Court can impose in summary criminal matters. - 16. Change in auditor should be a material change requiring immediate notification to IAASA and the Central Bank; larger companies should issue audited financial statements within ninety days (smaller issuers may have longer); shorten reporting period for interim statements of ESM companies from three to two months. - 27. Central Bank should issue clear guidance that CIS asset valuation is to follow IFRS or UK and Irish GAAP, or another high quality accepted accounting standard applied consistently. - Medium priority: - 2. Amend law to state that a Commission member may only be removed for specified, objective causes; remove inclusion of a Ministry official on the Central Bank Board via amendment to the Central Bank Act of 1942. - 16. All public issuers should be subject to continuing disclosure requirements regardless of listing status or trading system; continuing disclosure documents should be periodically reviewed by a competent authority. - 17. Central Bank should issue detailed guidance on information required in materials sent to shareholders for shareholder meetings, applying to all public issuers. - 26. Reduce periods within which CIS are required by EU directives to publish annual and semi-annual financial statements to enhance transparency and prompt action (see Principle 16 recommendation). - 33. Conduct an on-site inspection immediately before or shortly after authorization of a new trading venue. - Medium-low priority: - 2. Consider provisions permitting the Central Bank to indemnify staff, officers and Commissioners for legal costs and make funds available during suits. - 4. Accelerate official consolidation of laws for public use; in the interim prepare and post ‘unofficial’ consolidated versions of key financial services acts and regulations. - 17. Consider rationalizing and simplifying requirements applying to substantial shareholders, officers, directors and other parties; apply regime equally to all public issuers. - 27. Central Bank should publish rules relating to pricing errors. - 29. Central Bank should supplement public register information on its website to add: (i) permitted activities for each investment product intermediary under the Investment Intermediaries Act, 1995; and (ii) identity of senior management and names of other authorised individuals acting for MiFID or Investment Intermediaries Act firms. - Low priority: - 5. Publish the Employee Code of Ethics on the website. ### D. Authorities’ response to the assessment - Irish authorities welcome the IMF’s review and appreciate the cooperative manner of the assessment. - Authorities note the IMF’s overall assessment that Ireland exhibits a high level of compliance with the IOSCO Objectives and Principles of Securities Regulation and commit to appraising current practices in light of the recommendations. - On Principle 37, authorities observe that Ireland does not have domestic clearing and settlement infrastructures; clearing and settlement for Irish securities is provided within the EU Single Market by regulated service providers in other EU Member States. - The Central Bank disagrees with the report’s characterization that the State has “outsourced” clearing and settlement functions, asserting that mutual recognition and reliance on supervisory practices of other EU competent authorities is appropriate, subject to ESAs and ESRB monitoring. - Given the Principle’s purpose, the Irish authorities believe a “not applicable” rating is more appropriate. - Authorities will consider the report’s recommendations to inform priorities and workload. *Source: _cr14137 - 23. Other entities that offer investors analytical or evaluative services should be subject to oversight* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14137.pdf_