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| Financial Law Update | Back to article summary. |
| 'Fitness & Probity' directors' regime looks set to be finalised in 2006 | ||
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| Joe Beashal of Matheson Ormsby Prentice takes a look at some of the upcoming regualtory developments and challenges which firms will face in 2006. Some of the important events to note in the diary, he says, are the finalisation of the Financial Regulator's Fitness and Probity of Directors and Managers (CP11) regime, which is scheduled for September, and the imminent introduction of the EU Reinsurance Directive in Ireland. | ||
At the time of writing, newspapers, magazines and television are full of the usual reviews of the year gone past, 2005. If we, briefly, indulge the urge to do the same and look back at the regulatory changes that have affected the financial services industry in 2005, we can see evidence of what, in recent years, has become something of a cliché, another year of significant change.
Some of the main regulatory changes in 2005 included:
On a positive note it was announced in early December that the requirement for Directors of certain companies to prepare compliance statements, contained in the Companies (Audit and Accounting) Act 2003 would be amended and significantly scaled back in its scope. The new proposed model for directors compliance statements will require directors of plcs and large private companies to produce a statement of compliance with regard to all offences in tax law and indictable offences in company law. The provisions will place an obligation on the directors of companies, within the scope of the directors compliance statement regime, to acknowledge their responsibilities with regard to these codes. It will require them to adopt a compliance policy statement and have arrangements in place for securing compliance. The Financial Regulator’s work programme, published in its Strategic Plan for 2006, actually runs to 12 pages. Some of this list covers ongoing monitoring work but quite a lot relates to new regulation which will require the close attention of all those affected. EU Reinsurance Directive A development to watch in 2006 will be the manner in which Ireland implements the EU Reinsurance Directive (Directive 2005/68/EC). Although the Directive itself gives member states two years from the date of entry into force to adopt implementation measures, the Department of Finance recently published a draft set of Regulations, the European Communities (Reinsurance) Regulations 2005, which are intended to implement the Directive in Ireland. The Department invited comments on the draft Regulations, and submissions were received from a wide range of interested parties, including the DIMA, individual reinsurers themselves, service providers and advisors to the industry. As a result of the consultation process, it is understood that changes are to be made to the draft Regulations, but it remains likely that the Regulations will become law during the first six months of 2006 – considerably ahead of the likely implementation date in the rest of the EU. As a result of this expedited timetable for implementation, the Irish reinsurance industry will have significantly less time than its European counterparts to grapple with the implications of the establishment of a common regulatory framework and a single licensing regime for the carrying on of reinsurance business within the EU. Although ‘grandfathering’ provisions will be adopted for existing reinsurance operations in Ireland, the likely timescale for these is unclear. A further area of uncertainty is whether the Irish Financial Services Regulatory Authority will adopt the practice in relation to reinsurance undertakings of imposing additional prudential supervisory requirements on reinsurers operating in Ireland which go beyond those required by either the Directive or the Irish implementing Regulations. The Regulations will require new reinsurance operations setting up in Ireland to go through an authorisation and licensing process broadly comparable to that currently required of primary insurance operations. Once authorised, reinsurance undertakings will be required, in respect of their entire business, to establish technical reserves and a guarantee fund and to maintain a solvency margin. It is suspected that the Irish Financial Regulator may require newly authorised reinsurance undertakings, as is the case with direct insurers, to maintain a solvency margin that is higher than the minimum required under the Directive – possibly 150%-200% of the minimum level prescribed. Undoubtedly the potential application of such additional requirements raises competitive issues for Ireland, as EU member states compete for new inward investment projects in the reinsurance area. Under the Directive as implemented, the Irish Financial Regulator will have power to make specific rules for finite reinsurance activities, and there is much speculation as to how it will exercise these powers. Over recent years Ireland has become a focal point for the development of the international finite reinsurance market and it is hoped that the effect of any measures that may be adopted by the Irish Financial Regulator would serve to reinforce the perception of Ireland as having a sensible and prudent, but not over-restrictive regulatory regime. Measures that are excessive or unnecessarily restrictive would undoubtedly undermine the future viability of the finite reinsurance market in Ireland. A further area to watch will be the implementation of those aspects of the Directive that govern the operation of special purpose vehicle (SPV) reinsurers. These reinsurers are set up for securitisation or other structured risk financing transactions, and typically their obligations are fully collateralised by means of funds raised in an associated debt offering. The Irish Financial Regulator has wide power under the Directive to impose a special regime for the regulation of such entities, and given Ireland’s position as a centre for structured finance activities generally, it is to be hoped that the regime adopted will be as facilitative as possible. Consumer Protection Code The Financial Regulator recently published its response to its consultation paper on the proposed Consumer Protection Code (CP10) (the ‘Code’). Some of the general feedback highlighted a concern that the Code was overly prescriptive, could increase bureaucracy and that some of the specific rules, which derive from the investment sector, are not suitable to banking and general insurance services. While the Financial Regulator has indicated its willingness to take many of the specific comments on board, like everything, the devil will be in the detail and it will be important to see how individual provisions are drafted. The Financial Regulator aims to issue the final Code in 2006. Its introduction will have important implications for all financial services providers as they will be required to review many aspects of their business including standard form terms of business, the whole sales process where a new cooling off period applies, procedures for access to their services from customers with a disability. Procedures to satisfy the requirement to ‘know your customer’ and conduct a suitability check in the sales process will need to be developed and staff trained, in fact one could go on and on. Fitness and Probity of Directors and Managers The consultation on the Fitness and Probity of Directors and Managers (CP11) is expected to be finalised and new requirements are targeted to come into operation in September 2006. While understanding the benefits of applying consistency we hope any new requirements will not place new disproportionate burdens on industry and will not disadvantage firms which have directors from international parent firms of their boards. Competency Requirements Consultation Paper CP4 relating to mandatory competency requirements sought views on an appropriate measure of competence for those who provide advice on or sell retail financial products. New requirements are expected to be finalised by the middle of the year. These, of course, will require affected organisations to update their systems and procedures and obviously may require amendments to staff training. EU Directives Other changes include preparation for the implementation of new Basel II requirements, the Markets in Financial Instruments Directive (MiFiD) (Directive 2004/39/EC) (this was the subject of my article in last month’s Finance), the Transparency Directive(2004/109/EC) and the Third Money Laundering Directive (2005/60/EC) . New Chief Executive of the Financial Regulator Finally, Mr. Patrick Neary, current Prudential Director at the Financial Regulator, will succeed Dr. Liam O’Reilly as Chief Executive of the Financial Regulator in February. We would like to congratulate Dr O’Reilly on his achievements as the first Chief Executive of the Financial Regulator and wish Mr Neary every success in his new role. Further information on the firm is available at www.mop.ie. |
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Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the firm’s Regulatory Risk Management and Compliance Group. He can be contacted by phone: +353 1 619 9000 or by email: joe.beashel@mop.ie |
