Financial Services Regulation & Compliance Newsletter January 2012 Tracker

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1 Page 1 of 7 Financial Services Regulation & Compliance Newsletter January 2012 Tracker On the domestic front: The heads of a new Personal Insolvency Bill has been published and the Law Reform Commission has published a consultation in relation to insurance contracts. On the international front: An EU wide debate on corporate restructuring and anticipation of change has been launched by the European Commission, ESMA has issued a report in relation to the registration and certification of credit rating agencies and the EBA has published a consultation paper on implementing technical standards on supervisory reporting requirements for institutions. BANKING Personal Insolvency Bill proposals published On 25 January 2012, the Irish Government published the heads of a proposed new law, the Personal Insolvency Bill, which, it states, has the aim of providing "a new approach to dealing with insolvency" in Ireland. There are a number of new and unexpected developments in this Bill which are likely to affect and be of significant interest to both lenders and borrowers. The scheme, only, of the Bill has been released as yet and it is set to undergo further amendment and development before becoming law. Summary of Key Aspects of the Bill In summary, the key aspects of the proposed Bill are as follows: New non-judicial settlement systems: The Bill provides for 3 new non-judicial settlement mechanisms. This aspect of the Bill is somewhat radical and is likely to be of most interest. The new procedures are: (1) a Debt Relief Certificate which provides for the full write-off of qualifying unsecured debt (including for example credit card debt and overdrafts) up to 20,000 following a one-year moratorium period (during which the debtor's circumstances must not have improved); (2) a Debt Settlement Arrangement for the settlement of debt of 20,000 and over, to be agreed by a 65% majority (in value) of the affected creditors; (3) a Personal Insolvency Arrangement for the agreed settlement of both secured and unsecured debt of 20,000 and over. Changes to the existing bankruptcy regime: The period for discharge of bankrupts is to be reduced from 12 to 3 years. This is a significant step and will be of particular interest to all undischarged bankrupts and to those currently facing bankruptcy proceedings in Ireland. In addition, the amount which must be owing before bankruptcy proceedings can be brought has increased from the euro equivalent of IR 1000 to 20,001. New Insolvency Service and Personal Insolvency Register: The Bill also establishes a new State-funded independent body to be known as the Insolvency Service which will oversee, and give determinations on, the non-judicial settlement procedures referred to above. The Insolvency Service will also maintain a new Personal Insolvency Register which will hold details of debtors subject to the new procedures. Central Bank Statement on Bill Payment and Debt Management Firms The Central Bank has carried out an inspection of the bill payment and debt management industry with a view to assessing whether firms are providing services or carrying out an activity that should be regulated by the Central Bank. Debt management firms which process payments on behalf of clients are subject to regulation under payment services legislation. The Central Bank has also warned consumers to be mindful that certain bill payment and debt management firms may not be regulated and therefore consumer funds with those firms will not be subject to safeguarding and segregation rules.

2 Page 2 of 7 Central Bank publishes Impairment Provisioning and Disclosure Guidelines The Central Bank has published guidelines "Impairment Provisioning and Disclosure Guideline" which set out policies and procedures that should be followed by specified institutions in relation to impaired loan asset portfolios. EBA consults on reporting standards for CRD IV On the 10 th January 2012, the Council of the EU published a compromised proposal on the proposed CRD IV Directive, and a compromised proposal on the proposed Capital Requirements Regulation (CRR). The proposed CRD IV Directive and CRR will re-cast and replace the Directive that currently comprise the capital requirements directive and, among other things, will implement the Basel III Reforms in the EU. European Systemic Risk Board Publishes Recommendation on Funding of Banks in US Dollar On the 16 th January, the European Systemic Risk Board published a new recommendation on US dollar denominated funding of banks addressed to the National Supervisory Authorities of the EU Member States. The ESRB believes that action should be taken to avoid a recurrence of the strains on US dollar denominated funding of EU banks in the medium term. Special meeting of the European Bank Coordination "Vienna" Initiative At a special meeting of the European Bank Coordination "Vienna" initiative on 16 January, public officials met with the aim to enhance the coordination of national policies that could impact the economies of emerging Europe. The purpose of the meeting was to exchange views between supervisors, central banks and fiscal authorities among the officials from the EU Institutions and how to better coordinate national policies so as to avoid adverse cross-border effects in the context of the on-going bank deleveraging in advanced Europe and to support the transition towards a more sustainable banking model in emerging Europe. Creation of High Level Expert Group on Reforming the Structure of the EU Banking Sector The Commission is constituting a High-Level Expert Group to consider the reform of structural aspects of the EU Banking Sector. The Group should start in February and finish during the course of the summer. Its mandate will be to determine whether, in addition to on-going regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection, and if this is the case, make any relevant proposals as appropriate. European Banking Authority Work Programme 2012 The European Banking Authority has published its work programme for this year. The programme identifies four areas of EBA's activities and sets out the main objectives and priorities for The first three areas - Regulation; Oversight, and Consumer Protection, represent the core functions of the EBA that are laid down in the EBA Regulation. On the Regulatory policy area, the main objective of the EBA is to play a leading role in the creation of the single rule book for the EU banking system. In relation to oversight work, the main objective would be to deliver independent and high quality analysis of EU banks and EU banking sector in a way that adds value to the National Supervisory Authorities and EU Supervisory Authorities. European Banking Authority Publishes Guidelines on Advanced Measurement Approach Extensions and Changes The European Banking Authority has published guidelines on Advanced Measurement Approach (AMA) extensions and changes. The Guidelines provide institutions with guidance on how to communicate AMA extensions and changes to the competent authorities and on how to define internal policies for AMA changes in line with supervisory expectations. The Guidelines do not contain requirements regarding the modelling or risk management of institutions. The key aim of the Guidelines is to harmonise processes regarding the supervisory approval of such changes and to assist institutions using the AMA to further develop their AMA models. BIS Working Papers (No 369) Stress testing macro stress testing: does it live up to expectations? In this Paper, the BIS critically review state of the art in macro stress testing and assesses its strengths and weaknesses. This Paper examines what is a macro stress test, elements of good practice and sets out conclusions. FUNDS

3 Page 3 of 7 Central Bank New Fitness and Probity Regime The Irish funds industry has been busy ensuring that a list of pre- approval controlled functions (PCFs) was filed with the Central Bank of Ireland (Central Bank) by 31 December 2011 for each fund and fund service provider. Firms are required to carry out due diligence on individuals carrying out PCFs and have until 31 March, 2012 to fulfil their due diligence responsibilities and file the necessary confirmation with the Central Bank. The Central Bank issued further guidance with respect to the application of their Fitness & Probity regime to the industry, noting "...that the minimum competency requirements referred to in Section 15 of the Guidance apply, in the main, to consumer-facing roles. As such, the Central Bank would not expect that due diligence relating to the minimum competency requirements would be required for PCFs relating to nonexecutive directors of self-managed investment companies or management companies." The Central Bank further advised "a further point to note in relation to existing PCFs in situ at 1 December 2011 is that the recommendation to obtain references will not apply where the person has performed the same CF or PCF with the regulated financial service provider for at least one year." Additional industry specific guidance, in the form of a questions and answers paper is expected to issue early in Please call your usual contact on the A&L Goodbody Investment Funds team for a full suite of compliance documentation. Letter from Central Bank regarding the Appointment of Directors through conduit firms or other third parties The Central Bank has written to industry regarding the appointment of directors to investment funds and/or management companies. The Central Bank is of the view that "it is not appropriate to have the terms of a director's appointment documented in and governed by an agreement between the CIS or management company and a conduit firm or other third party". The Central Bank further notes that where such arrangements currently exist the Central Bank will allow a period up to 31 December 2012 for these arrangements, where applicable, to be terminated or amended. ESMA consultation on guidelines for UCITS ETFs and related issues The European Securities and Markets Authority are holding a consultation on future guidelines for UCITS exchange traded funds (ETFs) and other UCITS-related issues which closes on 30 March ESMA aims to issue guidelines for adoption in the second quarter of ESMA's proposals cover ETFs, the use of total return swaps by UCITS, UCITS investing in strategy indices, securities lending and the retailisation of complex products. Proposals for Venture Capital and Social Entrepreneurship Funds The European Commission has published proposals (by way of draft regulations) to create two new European fund types; European Venture Capital Funds and European Social Entrepreneurship Funds. These proposals now pass to the European Parliament and the Council (Member States) for negotiation and adoption under the co-decision procedure. IOSCO final report and principles on suspension of CIS redemptions The Technical Committee of the International Organization of Securities Commissions (IOSCO) published a final report setting out 7 principles for the suspension of redemptions for open-ended collective investment schemes (CIS). INVESTMENT FIRMS Central Bank issues Guidance Note 1/97 in relation to Multi-Advisor Collective Investment Schemes: Disclosure in respect of Investment Advisors This note issues guidance to non-ucits multi-advisor Collective Investment Schemes who wish to seek a derogation from the Central Bank of Ireland standard requirements in respect of investment advisors. European Private Equity and Venture Capital Association published Hand Book of Professional Standards On the 19 th January EVCA published its draft hand book of professional standards for member consultation. Feedback on this is invited from members by 30 March This new version has some additional sections including GP Communication and Transparency, LP Conflicts of Interest, LP Advisory Committee, keyman provisions and secondary transactions. Briefing Paper on Review of the Markets in Financial Instruments Directive Published

4 Page 4 of 7 The European Parliamentary Financial Services Forum has published a briefing paper on the review of the Markets in Financial Instruments Directive. Position Papers on the Review of the Market Abuse Directive and MiFID published The European Banking Federation has published position papers on the review of the Market Abuse Directive and MiFID. European Securities and Markets Authority Publishes Updated Q&A on the Market Abuse Directive On the 10 th January, the European Securities and Markets Authority published updated Questions and Answers in relation to the common operation of the Market Abuse Directive. Report - Requirements for OTC derivatives data reporting and aggregation The Committee on Payment and Settlement Systems and IOSCO have published their final report on OTC derivatives data that should be collected, stored and disseminated by trade repositories. The report was first published last August and this final report reflects comments following a consultative exercise and has been updated to reflect recent international developments in data reporting and aggregation. INSURANCE Law Reform Commission consults on insurance contracts On 11 January 2012, the Law Reform Commission launched a consultation paper on insurance contracts. The consultation paper assesses current insurance contract law and makes a number of detailed recommendations on potential reform of the law in this area. Delays in voting on Omnibus II On 16 January 2012, the European Parliament's procedure file for the proposed Omnibus II Directive was updated to indicate that the Parliament's Economic and Monetary Affairs Committee vote will now take place on 21 March 2012 (rather than 23/24 January 2012 as originally tabled). According to an update issued by the Financial Services Authority in the UK (the FSA), this delay is partly related to a lack of consensus on key issues concerning Solvency II. It was also recently reported in the German media that the delay in voting on Omnibus II could have a knock on effect on the timing of the introduction of Solvency II, which is reported to be unlikely to be introduced before 2015, according to the reports. EIOPA publishes 2012 work programme On 23 January 2012, the European Insurance and Occupational Pensions Authority (EIOPA) published its 2012 work programme. EIOPA's main workstream priorities identified in the programme include (1) continued work in relation to Solvency II, including a "major wave" of public consultation on EIOPA Solvency II standards and guidelines in mid 2012, with a view to finalising standards and guidelines for Solvency II in September 2012, (2) continuing to work with the European Commission in preparing equivalence decisions in respect of supervisory regimes in third countries and (3) expansion of staffing levels. EIOPA plans to expand staff numbers by 50%, particularly to bolster its consumer protection and financial innovation unit. FOS seeks funding reform in relation to PPI complaints In its January/February 2012 edition of Ombudsman News, the Financial Ombudsman Service in the UK (FOS) refers to the need to reform the funding system currently in place for its services. This need is partly driven by unpredictable demand for the FOS' services in certain areas, making it difficult for the FOS to manage financial risks and costs pressures. An example given by the FOS is that of mass complaints on issues such as mis-selling of payment protection insurance (PPI) currently accounting for over half of the total number of complaints received by the FOS, by comparison to 2% of complaints five years ago. Motor insurance costs in the UK recommendations for change On 12 January 2012, the House of Commons Transport Committee in the UK published a follow-up to its 2011 report on the cost of motor insurance in the UK. This outlines key developments since the 2011 report. It also makes recommendations on issues contributing to higher motor premiums, including personal injury claims (in particular, for whiplash) and referral fees. The Committee recommends that the bar for receipt of compensation for whiplash should be raised, and suggests that there may be a need for legislative change in this area. The Committee also calls on the Government to (a) implement legislation to prohibit insurers from receiving referral fees in the context of insurance claims and (b) investigate cold calling of motor insurance

5 Page 5 of 7 claimants by firms offering services such as legal advice and vehicle repair, with the intention of generating personal injury claims. CROSS SECTORAL Central Bank publishes letter on risk appetite statements On 9 January 2012, the Central Bank of Ireland published a letter (dated 22 December 2011) in relation to the risk appetite statement ( RAS) required by the Corporate Governance Code for Credit Institutions and Insurance Undertakings. The letter identifies areas for improvement in the quality of RASs on foot of a sample review conducted by the Central Bank's Insurance Supervision Directorate, which found that RASs fell short of acceptable standards. Key areas for improvement included the need for RASs to (a) be approved by the board of directors, (b) include all material risks in the RAS, (c) express risk appetite in both a quantitative (financial) and qualitative (non-financial) manner, and (d) address risk appetite in the short, medium and long term, separately. The letter urges undertakings to re-assess their RASs in light of the findings. FAQ document on online reporting from the Central Bank On 6 January 2012, the Central Bank published a frequently asked questions (FAQ) document on online reporting for retail intermediaries i.e. all retail intermediaries authorised by or registered with the Central Bank under (i) Investment Intermediaries Act 1995, (ii) the European Communities (Insurance Mediation) Regulations 2005 or (ii) Consumer Credit Act Amongst other matters, the FAQ points out that all intermediaries registered with the Central Bank under the European Communities (Insurance Mediation) Regulations 2005 are required to submit an online return, unless they are already reporting to the Central Bank under a separate authorisation. The Central Bank also clarified that where a firm is no longer trading it will still be required to submit to complete a return. In addition, where a firm is in the process of having its authorisation or registration revoked, but the revocation has not happened as at the submission date, the firm will still be required to complete the return. LMA Publishes amended Investment Grade Facility Agreements On the 23 December 2011, the Loan Market Association published revised versions of its Investment Grade Facility Agreements (among other things). European Commission publishes Q&A on Payment Services Directive The European Commission has published new questions and answers on the payment services directive, access to payment systems, liability and general PSD Q&A. Consultation Paper on Short-Selling and Certain aspects of Credit Default SWAPS The European Securities and Markets Authority has published a consultation paper on draft technical standards on the EU Regulation on short-selling and certain aspects of credit default swaps. (The ban on short-selling was lifted by the Central Bank of Ireland at the end of December 2011). In November 2011, the Council and Parliament voted on a regulation on short-selling in certain aspects of credit default swaps. This is about to be published and should be applicable from 1 st November According to the Regulation ESMA has to submit its technical standards to the Commission by 31 st March On the 24 th January ESMA published for a consultation the draft technical standards inviting comments by 13 February Following the close of the consultation, ESMA will consider the feedback it received to those consultations and expects to publish a final report on submission of the draft technical standards to the European Commission by 31 st March ECB Opinion on Proposal for a Directive on Prudential Supervision for Credit Institutions and Investment Firms The ECB has issued its opinion on a proposal for a Directive of the European Parliament and of the Council on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending earlier Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and a proposal for a Regulation on the prudential requirements for credit institutions and investment firms. European Parliament Favours Euro zone Financial Transaction Tax The European Parliament has published a press release "Pendulum Swings Firmly in Favour of Euro Zone Financial Transaction Tax". Broad agreement in favour of an EU financial transaction tax has emerged at the start of the Economic and Monetary Affairs Committee's work on the legislative proposal. A number of the

6 Page 6 of 7 European Parliament's political groups support such a tax. LMA Expresses concerns about CRD IV On the 4 th January 2012 the Loan Market Association issued a press release expressing concerns about the impact of the proposed CRD IV on the syndicated loan market. It believes that the CRD IV will have a negative impact on the market on liquidity for borrowers. It suggests a number of amendments to the CRD IV to address these concerns in relation to risk weighting of exposures to financial counterparties and liquidity covered ratio and loan classification. ESMA Consultation paper - Guidelines on certain aspects of the MiFID suitability requirements ESMA has issued a Consultation Paper in relation to guidelines on certain aspects of MiFID suitability requirements. The purpose of the guidelines is to enhance clarity and foster convergence in the implementation of certain aspects of the MiFID suitability requirements. The consultation sets out draft guidelines for investment firms (including credit institutions and UCITS management companies when providing investment services) and competent authorities. They will apply when providing investment advice and portfolio management services. Comments should be submitted by 24 February ESMA aims to publish a final report and guidelines in mid Top News from the European Commission Published On Friday 6 th January, the European Commission published its top ten news items. These include the EU investigation into consumer credit websites; breaking down barriers to secure and innovate card, internet and mobile payments and an action plan to double the share of the internet economy in Europe by Commission Investigation Consumer Credit Websites The European Commission has issued a press release in relation to a "Consumer Credit Sweep" which is an EU-wide investigation of consumer credit websites to check for compliance with consumer protection laws. Commission Green Paper on Internet and Mobile Payments in Europe This Green Paper assesses the current landscape of card, internet and mobile payments in Europe, identifies the gaps between the current situation and the vision of a fully integrated payments market and the barriers which have created these gaps. The objective of the Green Paper is to launch a broad consultation process with stakeholders to validate or contribute to the Commission's analysis and to help identify the right way to improve market integration. The main issues identified in the paper include: - Market access and entry for existing and new service providers; - Payment security and data protection; - Transparent and efficient pricing of payment services; - Technical standardisation; and - Inter-operability between service providers. EC Green Paper on Corporate Restructuring Restructuring and anticipation of change what lessons from the economic crisis? The EC has launched a Europe wide debate on corporate restructuring and anticipating change. The debate will run until 30 March The Green Paper includes several questions including: lessons from the crisis are existing policy measures and practices adequate?; adapatability of business is an anticipative approach best?; and the impact of restructuring operations. ESMA Annual report on credit rating agencies and Final Report on Regulatory Technical Standards ESMA has issued the first annual report on the application of Article 21(5) of the Regulation 1060/2009 on credit rating agencies (as amended) which mandate ESMA to publish annually a report on the application of the Regulation. This report summarises work carried out by national competent authorities and ESMA and outlines the supervisory actions that ESMA has undertaken during 2011 to ensure that CRA's comply with the standards established in the Regulation. ESMA has also issued a final report in relation to regulatory technical standards (RTS) on the information for registration and certification of credit rating agencies. The final report sets out a summary of the responses received by ESMA following a consultation period and describes any material changes to the proposed draft RTS and the cost-benefit analysis on which ESMA consulted. The draft RTS will now be submitted for adoption by the EC. EBA consultation paper on draft ITS on supervisory reporting requirements The EBA has published a consultation paper on draft Implementing Technical Standards (ITS) on supervisory reporting requirements for institutions. The draft ITS is aimed at implementing uniform reporting requirements

7 Page 7 of 7 which are necessary to ensure fair conditions of competition between comparable groups of credit institutions and investment firms. The consultation is open to all interested parties until 20 March ESMA consultation on MiFID compliance function requirements ESMA is holding a consultation on aspects of MiFID compliance function requirements. The consultation closes on 24 February The consultation sets out draft guidelines on the compliance function provisions in Article 13 of MiFID and Article 6 of the MiFID Implementing Directive (2006/73/EC). The guidelines focus on the responsibilities of the compliance function for monitoring, reporting and advising and on the organisational requirements of the compliance function for the standards of effectiveness, permanence and independence. ESMA aims to publish a final report and guidelines in mid A&L Goodbody Head Office, IFSC, North Wall Quay, Dublin Tel: Fax: dublin@algoodbody.com Web: DUBLIN - BELFAST - LONDON - NEW YORK - PALO ALTO The contents of this Newsletter are necessarily expressed in broad terms and limited to general information rather than detailed analyses or legal advice. Specialist professional advice should always be obtained to address legal and other issues arising in specific contexts.