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 CompliReg is a leading provider of consultancy services to MiFID, Payments and Emoney firms. Our founder, Peter Oakes is an independent non-executive director of two Central Bank regulated MiFID firms, an emoney firm and a payments firm. Peter is a member of the Audit, Risk, Nomination, Remuneration and Internal Audit Committees of a number of firms. Read more about Peter's NED services and CompliReg's services. If below post on the marketing of complex investment products is of interest, then you should also look at our post of 1 December 2021 on the Central Bank's review findings on firms providing investment services. The Central Bank's found that there is a need to improve suitability assessments. Central Bank reviews identify issues in marketing of complex investment productsCentral Bank reviews identify issues in marketing of complex investment products
The Central Bank of Ireland has written to MiFID investment firms, outlining the findings from a series of targeted reviews of Structured Retail Products (SRPs). These reviews examined SRPs manufactured and distributed by investment firms in the MiFID investment sector. A number of areas were identified where further action is needed by firms to ensure their governance and oversight of SRPs keeps pace with an increasingly complex retail investment market, so that investors are appropriately protected. The reviews found a number of poor practices and weaknesses in firms’ processes, which increase risks to investors. This includes failure by firms to consider potential difficulties investors may have in understanding the complex features involved in some SRPs; failing to present past performance information in a fair and balanced manner; and not including prominent capital at risk warnings in marketing materials. Director of Consumer Protection, Colm Kincaid, said: “The retail investment market is changing rapidly, with an increasing shift away from traditional, capital protected products to more complex, capital at risk products. As complexity increases, so too do the risks to investors and the responsibilities regulated firms have to protect those investors’ best interests. Our recently published Outlook Report highlighted a number of risks for consumers from changing business practices and ineffective disclosures on investment products, as well as what we expect regulated firms to do to deal with those risks. The work we are publishing today builds on that Report. “We carried out these reviews because we want to see that regulated firms meet high standards in how they design, manufacture and distribute complex investment products to retail investors. In particular, we want to see that complex investment products are designed with real investment needs in mind, that they are targeted only at investors with those needs and that the risks are properly explained. We are requiring firms to take action to improve their performance on each of these fronts, as well as highlighting good practices which we want to see emulated across the sector.” The letter requires regulated firms to take action to identify a sufficiently granular target market for SRPs and to drive improvements in the quality and transparency of disclosures to investors of the risks relating to these products. In particular:
The Central Bank expects firms to adhere to high standards of investor protection, acting in the best interests of investors at all times. We continue to monitor developments in the retail investment market, and the findings of these reviews and the expectations set out in today’s letter will be considered as part of future supervisory engagements. ENDS Notes to Editors
Source: Central Bank of Ireland, 22 April 2022
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 This blog by Peter Oakes, Founder of Fintech Ireland and CompliReg. Peter qualified as a lawyer in Australia, the UK and Ireland. He is a director of a number of regulated innovative fintech and adviser to fintech and crypto firms and their professional service providers. Contact him here and follow him on Linkedin and Twitter (Fintech Ireland Twitter). A summary of this material appears at Linkedin here The first Irish regulated funds to take exposure to crypto-assets have been approved by the Central Bank of Ireland (CBI). The funds, both Qualifying Investor AIFs (QIAIF), will obtain indirect exposure to Bitcoin, by acquiring cash-settled Bitcoin Futures traded on the Chicago Mercantile Exchange (CME). Before you get too excited looking to by some of the digital asset via the QIAIFs note that this channel of exposure is RESTRICTED TO PROFESSIONAL INVESTORS. [NB: As recently as March 2022 the the Central Bank has issued a warning on the risks of investing in crypto assets]. We have provided further details about the regulatory crypto investing landscape in Ireland under 'Further Reading' below. Last month the CBI informed industry bodies that it had approved in principle at least one QIAIF with a low level of exposure to cash settled Bitcoin futures traded on the CME. The two unnamed QIAIFs are the first type of such funds to provide indirect crypto exposure and approved by the CBI. If you want your existing QIAIFs or you wish to establish a new QIAIF to obtain exposure to crypto assets, get in touch (details above). I am asked on a regular basis by institutional investors and professional investors how they can get exposure to cryptocurrencies and other digitalassets via regulated products. Unless you are able to gain direct exposure via a virtual asset service provider (VASP), the Irish QIAIF model (non-UCITS) might be your avenue. Note however that the CBI has said it is highly unlikely to approve a UCITS proposing any exposure (either direct or indirect) to crypto assets. Thus retail investors wanting crypto exposure in Ireland need to turn to VASPs/Exchanges direct. Through Fintech Ireland, CompliReg and the industry experts network, we know the lawyers, ManCos and depositories / custodians who can assist institutional/professional firms and funds promoters looking to gain exposure to the crypto markets. Further, if you are seeking a registration as a virtual service asset provider or authorisation as a MiFID, emoney institution or payments institution to provide services to institutional, professional and retail clients, check out our Authorisation Page. Further reading:
Question. Can a RIAIF or a QIAIF invest either directly or indirectly in crypto-assets? Answer. Crypto-assets are generally considered to be private digital assets that depend primarily on cryptography and distributed ledger or similar technology. However, the nature and characteristics of crypto-assets vary considerably. For example, crypto-assets that are tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)) may have a different risk profile when compared to other crypto-assets that are based on an intangible or non-traditional underlying. For the purposes of this Q&A “crypto-asset” is used to refer to the latter type of crypto-asset. The Central Bank must be satisfied that direct or indirect exposure to crypto-assets is capable of being appropriately risk managed. As of the date of publication of this Q&A, the Central Bank has not seen information which would satisfy it that direct or indirect exposure to crypto-assets is capable of being appropriately risk managed. Though crypto-assets do not all have uniform characteristics, the Central Bank has noted that they can present significant risks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks. Taking into account the specific risks attached to crypto-assets and the potential that retail investors will not be able to appropriately assess the risks of making an investment in a fund which gives such exposures, the Central Bank is highly unlikely to approve a RIAIF proposing any exposure (either direct or indirect) to crypto assets. In the case of a QIAIF seeking to gain exposure to crypto-assets, the relevant QIAIF would need to make a submission to the Central Bank outlining how the risks associated with such exposures could be managed effectively by the AIFM. The Central Bank’s approach in relation to crypto-assets will be kept under review, continue to be informed by European regulatory discussions on the topic and may change should new information or developments emerge in the future.
Question. Can a UCITS invest either directly or indirectly in crypto-assets? Answer. Crypto-assets are generally considered to be private digital assets that depend primarily on cryptography and distributed ledger or similar technology. However, the nature and characteristics of crypto-assets vary considerably. For example, crypto-assets that are tokenised traditional assets (whose value is linked to an underlying traditional asset or a pool of traditional assets (such as financial instruments or commodities)) may have a different risk profile when compared to other crypto-assets that are based on an intangible or non-traditional underlying. For the purposes of this Q&A “crypto-asset” is used to refer to the latter type of crypto-asset. The Central Bank must be satisfied that assets in which a UCITS invests are capable of meeting the eligible asset criteria for UCITS and that indirect exposure to the assets is capable of being appropriately risk managed. As of the date of publication of this Q&A, the Central Bank has not seen information which would satisfy it that crypto-assets are capable of meeting the eligible asset criteria for UCITS or that indirect exposure to crypto-assets is capable of being appropriately risk managed. Though crypto-assets do not all have uniform characteristics, the Central Bank has noted that they can present significant risks, including liquidity risk; credit risk; market risk; operational risk (including fraud and cyber risks); money laundering / terrorist financing risk; and legal and reputation risks. Taking into account the specific risks attached to crypto-assets and the potential that retail investors will not be able to appropriately assess the risks of making an investment in a fund which gives such exposures, the Central Bank is highly unlikely to approve a UCITS proposing any exposure (either direct or indirect) to crypto assets. The Central Bank’s approach in relation to crypto-assets will be kept under review, continue to be informed by European regulatory discussions on the topic and may change should new information or developments emerge in the future.
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 Bank of Ireland (BOI) cops a €24.5mn fine over its information technology service for the reason that "the impact of these breaches meant that had [note: “HAD” not 'did have'] a severe disruption event occurred, BOI may not have been able to ensure continuity of critical services, such as payment services." Today’s announcement by the Central Bank of Ireland (CBI) falls in the week the CBI published its ‘Operational Resilience Finalised Guidance Paper’ arising from CP140 - Cross Industry Guidance on Operational Resilience. Speaking of timing, last week there was a well-publicised outage at Revolut which is seeking authorisation in Ireland as an emoney firm and, as previously raised by its founder, potentially a bank/credit institution authorisation in Ireland. It has a bank and emoney authorisations in Lithuania. The case is well worth a read by all regulated financial technology (#fintech) firms focused on emoney and payments and not just banks operating in Ireland. In particular, the statement should be read and digested by the large pipeline of emoney and payment services applicants. A number of points to call out include:
In the case of BoI, admitted five contraventions occurring between 2008 and 2019 – quite an extended period.
Being a INED of several regulated fintechs and financial services firms in Ireland, I thought this point in the publicity statement by the CBI was worth noting.
Read the statement issued by the Central Bank of Ireland on 2nd December 2021 below. Posted by Peter Oakes, CompliReg. Linkedin Post at https://www.linkedin.com/feed/update/urn:li:activity:6872160483626029056/ Statement issued by the Central Bank of Ireland on 2nd December 2021 On 30 November 2021, the Central Bank of Ireland (the Central Bank) reprimanded and fined The Governor and Company of the Bank of Ireland (the Firm or BOI) €24,500,000 pursuant to its Administrative Sanctions Procedure (ASP) for failures to have a robust framework in place to ensure continuity of service for the Firm and its customers in the event of a significant IT disruption. These IT service continuity deficiencies were repeatedly identified from 2008 onwards but due to internal control failings only started to be appropriately recognised and addressed in 2015. The steps taken by the Firm to address the deficiencies were completed by 2019.
The Central Bank has determined the appropriate fine to be €35,000,000, which has been reduced by 30% to €24,500,000 in accordance with the settlement discount scheme provided for in the Central Bank’s ASP. The Firm has admitted five contraventions1 occurring between 2008 and 2019 including:
Firms and their boards are responsible for having an effective IT service continuity framework and associated internal controls. These are core parts of a firm’s operational resilience and will continue to be an area of focus as part of the Central Bank’s and the European Central Bank’s supervisory strategy. The Central Bank’s Director of Enforcement and Anti-Money Laundering, Seána Cunningham, said “Today’s banks and financial services firms are wholly dependent on effective, reliable and resilient IT systems. It is vital that firms have a framework in place so that they can ensure continuity of critical IT services and minimise the impact of any significant disruption. "Without an effective IT service continuity framework, significant IT disruptions, particularly if they were to happen in a bank, could have a very serious impact on millions of customers who rely on ready access to their funds and services to keep their everyday lives and businesses moving. "From 2008 until 2019, BOI was in breach of key regulatory provisions regarding IT service continuity, arising from deficiencies that were repeatedly identified between 2008 and 2015 in third party reports. However, steps to address these deficiencies only commenced in 2015. "The extent and duration of these breaches were particularly serious given the ‘always on’ nature of the services BOI provides and how pivotal IT is to the entirety of its business operations. The impact of these breaches meant that had a severe disruption event occurred, BOI may not have been able to ensure continuity of critical services, such as payment services. Had BOI’s critical services been disrupted, this could have led to adverse effects on customers and the financial system. "This case is an example of robust enforcement action where failures expose consumers and the financial system to serious potential risk. The Central Bank expects boards and senior management of firms to implement and operate robust risk and control frameworks which recognise and address risk issues in a timely way as part of an effective risk culture. This is a core element of operational resilience designed to protect consumers and ensure financial stability.” BACKGROUND BOI is authorised to carry on banking business in Ireland as a credit institution under Section 9 of the Central Bank Act 1971. BOI is one of the largest banks in Ireland with 169 branches and over 2 million customers. Its principal activities consist of retail and commercial banking. BOI reported total operating income (net of insurance claims) for the year ended 31 December 2020 of €2,645 million. The European Central Bank (the ECB) is the prudential supervisor of BOI and works closely with the Central Bank as part of the Single Supervisory Mechanism (SSM).2 Under the SSM, the ECB has the power to ask national banking regulators to investigate issues that it has identified, and to take enforcement action where this is merited. In 2015, BOI’s Internal Audit raised concerns about deficiencies in BOI’s IT service continuity framework. In 2016, BOI commissioned an internal investigation into how the IT service continuity deficiencies had persisted from 2008 to 2015. The resulting report (completed in October 2017), which was provided to the ECB, identified a number of risk management and internal control failings in respect of BOI’s IT service continuity. In addition, the report identified failings relating to BOI’s management and oversight of its third party IT vendors and failings relating to its management body having access to information regarding the deficiencies in BOI’s IT service continuity framework. Following consideration of the report, the ECB determined that these issues merited further investigation. The Central Bank’s investigation commenced following a referral3 by the ECB in August 2018. From 2008, BOI’s internal controls in relation to IT service continuity employed a three lines of defence model, whereby:
The Central Bank’s investigation found that there were failings in each line of defence (as detailed further below). The failures in each line of defence culminated in an overall failure of this model in relation to the Firm’s IT service continuity framework. This is most clearly demonstrated in circumstances where IT service continuity deficiencies were not addressed, despite being repeatedly identified in third party reports, between 2008 and 2015. The Central Bank’s investigation found that BOI had in place second and third lines of defence which were meant to challenge and oversee the first line business unit responsible for IT service continuity. However, both the second and third lines of defence failed to ensure that the first line business unit was acting on the adverse findings of reports prepared by third parties, which had reviewed BOI’s IT service continuity framework. In addition, the second and third lines of defence failed, independently, to address and escalate the IT service continuity risks to which BOI was exposed. Ultimately, these internal control failings resulted in deficiencies in the Firm’s IT service continuity framework persisting for a prolonged period. This is particularly serious as the Firm’s reliance on IT was significantly increasing year on year, in common with the sector. In 2015 the Firm initiated steps to address the deficiencies in both its IT service continuity framework and associated internal controls. The Central Bank acknowledges that the steps taken by the Firm have resulted in an overall improvement in its IT service continuity framework and internal controls. Firms and their boards must have in place robust internal controls to ensure that their IT service continuity frameworks are maintained to a necessary standard. This enforcement outcome highlights the actions the Central Bank will take where firms cannot demonstrate that they are maintaining effective IT service continuity frameworks. PRESCRIBED CONTRAVENTIONS The Central Bank’s investigation identified five breaches relating to the European Communities (Licensing & Supervision of Credit Institutions) Regulations 1992 (S.I. No. 395 of 1992) (as amended) (the 1992 Regulations) and European Union (Capital Requirements) Regulations 2014 (S.I. No. 158 of 2014) (the Capital Requirements Regulations) as set out below. Contravention 1 – Failure to have in place contingency and business continuity plans in relation to IT service continuity. From June 2008 to April 2019, the Firm breached Regulation 16(4)(b) of the 1992 Regulations and Regulation 73(3) of the Capital Requirements Regulations by failing to have in place contingency and business continuity plans with regard to IT service continuity to ensure the Firm’s ability to operate on an ongoing basis and limit losses in the event of severe business disruption. In particular:
Contravention 2 – Failure to have in place and maintain robust governance arrangements, including effective processes to identify, manage, monitor and report the risks that the Firm was exposed to and failure to have adequate internal control mechanisms. From June 2008 to April 2019 the Firm breached Regulation 16(3) (b) and (c) of the 1992 Regulations and Regulation 61(1) (b) and (c) of the Capital Requirements Regulations by failing to have in place and maintain robust governance arrangements including:
These governance failings led to the Firm’s failure to address the IT service continuity deficiencies as set out in Contravention 1. The Firm failed to have in place and maintain effective governance arrangements through its three lines of defence model regarding IT service continuity. As a result, deficiencies in the Firm’s IT service continuity framework were identified by third party reports prepared for the Firm but were not managed, escalated and appropriately dealt with by the Firm. This demonstrates a recurring failure that is indicative of poor internal controls and demonstrates an overall failure of the Firm’s three lines of defence model with regard to its IT service continuity framework, which arose due to the following:
Contravention 3 – Failure to have in place and maintain robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility. From June 2008 to April 2019 the Firm breached Regulation 16(3)(a) of the 1992 Regulations and Regulation 61(1)(a) of the Capital Requirements Regulations by failing to have in place a clear organisational structure with well-defined, transparent and consistent lines of responsibility in relation to IT service continuity. In this case, the first line business units were siloed, which resulted in an uncoordinated approach to IT service continuity with no consistent processes or procedures in place for managing and reporting IT service continuity requirements and risks. In addition, there was no well-defined, transparent and consistent second line function with responsibility for overseeing and challenging IT service continuity requirements and risks across the Firm to ensure that they were being adequately managed. The first line unit responsible for IT service continuity was identifying risks, however, due to the siloed nature of this unit, stakeholders within the Firm had limited or no visibility of these IT service continuity risks. This had the effect of excluding key stakeholders in the Firm from involvement in the assessment of prioritisation decisions regarding IT service continuity, which is a key area of operational risk. Contravention 4 – Failure to adequately develop a clear understanding of the roles, responsibilities, accountabilities and clear interdependencies between third party IT service providers. From June 2008 to December 2019 the Firm breached Regulation 16(4)(a) of the 1992 Regulations and Regulation 61(3)(a) of the Capital Requirements Regulations by failing to adequately develop a clear understanding of the roles, responsibilities, accountabilities and interdependencies between different third party IT service providers. Contravention 5 – Failure to ensure that the Firm’s management body had adequate access to information on the Firm’s risk situation. The Firm breached Regulation 64(13) of the Capital Requirements Regulations, from 31 March 2014 (when the requirement was introduced) until Q4 2015, by its failure to ensure that the Firm’s management body had adequate access to information on the Firm’s risk situation in respect of IT service continuity, which was a key area of operational risk. Specifically, the findings of third party reports which identified deficiencies with IT service continuity were not made available to the Firm’s management body. SANCTIONING FACTORS In deciding the appropriate penalty to impose, the Central Bank had regard to the Outline of the Administrative Sanctions Procedure 2018 and the ASP Sanctions Guidance November 2019. It considered the need to impose a level of penalty proportionate to the nature, seriousness and impact of the contraventions and the size of the Firm’s operations. The Central Bank also had regard to the need for deterrence. The following particular factors are highlighted in this case: The Nature, Seriousness and Impact of the Contravention Duration and frequency of the contravention
Serious or systemic weakness of the management systems or internal controls relating to all or part of the business
The impact or potential impact of the contraventions
The loss or detriment or risk of loss or detriment caused to consumers or other market users
The extent to which the contravention departs from the required standard
The Conduct of the Regulated Entity after the Contravention Mitigating: The following two mitigating factors, indicative of exemplary co-operation and self-reporting on behalf of the Firm, applied in this case:
The investigation found that, following concerns that had been raised by its Internal Audit in 2015 about deficiencies in BOI’s IT service continuity framework, BOI commissioned an internal investigation in 2016 (completed in 2017) into how the IT service continuity deficiencies had persisted from 2008 to 2015. The resulting report:
This assisted the Central Bank’s investigation, facilitated the review of documentation, and reduced the time and resources required to complete the investigation. The Previous Record of the Regulated Entity Aggravating:
Other Considerations
1. The fine imposed by the Central Bank was imposed under Section 33AQ of the Central Bank Act 1942. The maximum penalty under Section 33AQ is €10,000,000, or an amount equal to 10% of the annual turnover of a regulated financial service provider, whichever is the greater. 2. This is the Central Bank’s 145th settlement under its Administrative Sanctions Procedure, bringing the total fines imposed by the Central Bank to over €191 million. 3. Funds collected from penalties are included in the Central Bank’s Surplus Income, which is payable directly to the Exchequer, following approval of the Statement of Accounts. The penalties are not included in general Central Bank revenue. 4. The fine reflects the application of an early settlement discount of 30%, as per the discount scheme set out in the Central Bank’s Outline of the Administrative Sanctions Procedure 2018 which is here: link. 5. A copy of the ASP Sanctions Guidance November 2019 is available here: link. This guidance provides further information on the application of the sanctioning factors set out in the Outline of the Administrative Sanctions Procedure 2018 and the Inquiry Guidelines prescribed pursuant to section 33BD of the Central Bank Act 1942 (a copy of which is here: link). These documents should be read together. 6. In accordance with the SSM, the Firm became subject to direct supervision in prudential matters by the ECB as of 4 November 2014. 7. The European Communities (Licensing & Supervision of Credit Institutions) Regulations 1992 (S.I. No. 395 of 1992) (as amended) were in force between 1 January 1993 to 31 March 2014; a copy can be found here: link. These were repealed and replaced by the European Union (Capital Requirements) Regulations 2014 (S.I. No. 158 of 2014) which are here: link. 8. On 13 September 2016, the Central Bank issued cross-industry guidance in respect of IT and cybersecurity risks that is available for download here: link. 9. The Firm has been the subject of four previous settlement agreements with the Central Bank, as follows:
Footnotes 1 Breaches of the European Communities (Licensing & Supervision of Credit Institutions) Regulations 1992 (S.I. No. 395 of 1992) (as amended)) and the European Union (Capital Requirements) Regulations 2014 (S.I. No. 158 of 2014). 2 The Firm became subject to direct supervision in prudential matters by the European Central Bank as of 4 November 2014. 3 Pursuant to Articles 4(1) and 18(5) of the SSM Regulation (Council Regulation (EU) No 1024/2013). 4 Critical services are business services that provide a substantial banking or operational activity and are of such importance that any weakness or failure in the provision of these activities could have a significant impact on BOI’s ability to meet its regulatory and legal obligations and/or control over, or continuity of, its services and activities. They could also adversely impact on BOI’s ability to manage risks related to these activities. 5 A runbook describes how the Firm would continue to provide a service should an incident arise. A runbook would also contain procedures to begin, stop, supervise, test and restart a service/system. 6 Failover is a procedure by which a system automatically transfers control to a duplicate system when it detects a fault or failure. 7 End-to-end testing refers to a software testing method that involves testing an application's workflow from beginning to end.
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 CompliReg is a leading provider of consultancy services to MiFID, Payments and Emoney firms. Our founder, Peter Oakes is an independent non-executive director of two Central Bank regulated MiFID firms, an emoney firm and a payments firm. Peter is a member of the Audit, Risk, Nomination, Remuneration and Internal Audit Committees of a number of firms. Read more about his NED services and CompliReg's services. UPDATE 22/04/2022: If below below on suitability requirements is of interest, then you should also look at our post of 22 April 2022 on the Central Bank's review findings on issues in marketing of complex investment products. Central Bank review finds firms providing investment services need to improve suitability assessments
The Central Bank of Ireland has published a Dear CEO letter outlining the findings of a review of investment firms’ compliance with the suitability requirements under MiFID II. The review was conducted as part of a Common Supervisory Action (CSA) coordinated by the European Securities and Markets Authority (ESMA). The purpose of the review was to assess firms’ compliance with the suitability requirements under MiFID II by simultaneously conducting supervisory activities throughout the EU/EEA. The findings, which are highlighted in ESMA’s recent public statement, incorporate the findings from the Central Bank’s own supervisory analysis, and engagement with other National Competent Authorities (NCAs). When providing investment advice and/or portfolio management, Firms are required to take all reasonable steps to ensure that a client’s investments align to their objectives and personal circumstances. This is a key measure to protect investors from the risk of purchasing unsuitable products. The review identified evidence of positive practices, particularly where firms took a personalised and comprehensive approach to suitability assessments for their clients. However, it also identified instances where further action is required by firms. For example:
The Central Bank will continue to engage with firms where specific supervisory actions have been imposed, which require firms to take specific action on foot of our findings. In addition, the Central Bank is requiring all Irish authorised MiFID firms and credit institutions, who provide portfolio management and advisory services to retail clients, to conduct a thorough review of their individual sales practices and suitability arrangements. This review must be documented and must include details of actions taken to address findings in the ESMA public statement and this letter. This review should be completed, and an action plan discussed and approved by the board of each firm, by end of Q1 2022. Director of Consumer Protection, Colm Kincaid, said: “Investing in an unsuitable investment product can lead to unexpected losses, which can have devastating consequences for individual investors and their families. Regulated firms play a key role in protecting consumers against this risk. “However, the findings from this review show that regulated firms need to improve their performance when it comes to assessing the suitability of investment products they recommend or advise consumers to purchase. These assessments must be of high quality, based on a good understanding of the customer’s circumstances and capacity for financial loss, and properly documented.” Source: Central Bank of Ireland, 01 December 2021
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"On the whole, I agree with you that there is a limited amount of directorships that can be held with a job being well done." This is around minutes 55-57 (around 2:25pm-2:27pm) at https://media.heanet.ie/page/0382d466362a4d90b07d8e7d7f27fdd9
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 How much does an #antimoneylaundering governance investigation cost a #fintech?
Previously noted that Australian EML doesn't expect a #moneylaundering compliance investigation (no allegation of money laundering) into one of its recently acquired Irish acquisitions (PFS Card Services Ireland Limited acquired in a deal worth up to €216.9m) to exceed AUD 2million / €1.27mn this Australian financial year which ends 30 June. However it cannot forecast the cost going into the next nor subsequent years. See https://lnkd.in/eg2cm82 (see previous blogs here). Well, it looks likely the costs may go higher if a class action by Shine Lawyers begins to bite, with the Aussie law firm looking for investors who bought shares between December 19, 2020, and May 17, 2021, to join its class action. The law firm says: * “EML did not request a trading halt for almost four days after learning of these concerns and then took another 48 hours to inform the market,” says Australian law firm * “When shareholders invest their money into a company, they do so with the belief that that company will comply with its continuous disclosure obligations. * “Our claim will allege that EML failed in its obligations, significantly impacting share prices for thousands of investors.” Read more by Sean Pollock at https://lnkd.in/efTj2dU Linkedin Post - https://www.linkedin.com/posts/peteroakes_antimoneylaundering-fintech-moneylaundering-activity-6809752916379922432-wNal
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EML Payments Money Laundering Governance Investigation to cost less than $2mn this financial year10/6/2021  In my previous post on EML Payments (EML) (see here) we noted that EML had advised that its Irish regulated subsidiary, PFS Card Services (Ireland) Limited ('PCSIL'), had received correspondence from the Central Bank of Ireland ('CBI'), including a letter received on Friday 14 May 2021 (Australian time) raising significant regulatory concerns ('Correspondence'). The CBI's concerns relate to PCSIL's Anti-Money Laundering / Counter Terrorism Financing ('AML/CTF'), risk and control frameworks and governance. The Correspondence states that the CBI is minded to issue directions to PCSIL pursuant to section 45 of the Central Bank (Supervision and Enforcement) Act 2013.
A few days ago, EML provided the Australian Stock Exchange with a trading update. The trading update also included its Quarter 3 FY2021 update in which EML confirmed: "Current Status:
Communication:
Business Impact:
Some observations:
Further reading - EML Payments Q3 FY21 Trading Update June 2021 (dated 7 June 2021)
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 Received a letter from the Central Bank of Ireland's Anti-Money Laundering Division headed "AML Risk Evaluation Questionnaire (‘REQ’) Notification to [Name of Regulated Firm] (or ‘the firm’) to submit an REQ on an Annual Basis." last month with a return date this month? If so you are not alone.
The letter reminds that credit and financial institutions are required to have anti-money laundering (AML) and countering financing of terrorism (CFT) preventive measures to ensure compliance with the Criminal Justice (Money and Terrorist Financing) Acts 2010 to 2021, a well as reminding of the obligation to comply with EU Council Regulations setting out financial sanctions (‘FS’) measures. The CBI has established the REQ to seek information regarding individual firms’ exposure to Money Laundering / Terrorist Financing risks and also the AML/CFT compliance framework. Firms are being informed to submit the REQ in the specified format via the CBI's Online Reporting System on an ANNUAL BASIS within the time period specified on ONR. The CBI has informed firms that "for 2021, this deadline for the submission of the REQ return is 18 June 2021". Not only is the form detailed, and there are a few potential ways of interpreting some of the questions, or at least their interaction with other questions, but importantly for Boards of Directors note: i) Statement of Compliance: "... the REQ includes a statement to be signed by the firm confirming compliance with the firm’s AML/CFT/FS obligations. This statement if [sic] compliance should be signed and dated by a person who is duly authorised to do so by the Board (or equivalent). Ideally this person will have responsibility for AML/CFT/FS within the firm." NB this person doesn't need to be in a PCF role, but the CBI expect them to be of sufficient seniority within the firm to provide the confirmation sought. ii) Record Retention: "A record of the person who signed the statement of compliance must be formally noted in the Board minutes (or equivalent) when it is brought forward for consideration. The original signed and dated hard copy of the statement of compliance and the accompanying REQ is required to be kept on file and made available for review by the Central Bank on request." Need assistance with your risk assessment? Get in contact with us at the details here. Further reading: Risk Evaluation Questionnaire ('REQ') Return Building upon the obligations of credit and financial institutions under the CJA 2010, the Central Bank has developed a REQ in order to seek information regarding individual firms' exposure to ML / TF risks and also their AML / CFT compliance framework. Firms selected by the Central Bank to submit an REQ are required to submit the REQ in the specified format, through the Central Bank's Online Reporting System ('ONR'), within the time period specified on ONR. The minimum frequency that a firm will be required to submit an REQ is predicated on the level of ML/TF risk presented by the firm, either by virtue of its business model and/or the sector into which it falls (for further information on the frequency of submission please see the Table: AML/CFT Minimum Supervisory Engagement Model on the Central Bank AML / CFT Supervision Tab).
Linkedin Post: https://www.linkedin.com/posts/peteroakes_antimoney-aml-cft-activity-6808437129467756546-vRba
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 The ASX Market Announcement says:
"EML PAYMENTS LIMITED (ASX: EML) ("EMU') refers to its request for a trading halt dated 17 May 2021. EML advises that its Irish regulated subsidiary, PFS Card Services (Ireland) Limited ('PCSIL'), has received correspondence from the Central Bank of Ireland ('CBI'), including a letter received on Friday 14 May 2021 (Australian time) raising significant regulatory concerns ('Correspondence'). The CBI is the relevant regulator in Ireland. The CBI's concerns relate to PCSIL's Anti-Money Laundering / Counter Terrorism Financing ('AML/CTF'), risk and control frameworks and governance. The Correspondence states that the CBI is minded to issue directions to PCSIL pursuant to section 45 of the Central Bank (Supervision and Enforcement) Act 2013. The Correspondence does not concern EML's Australian or North American operations, or the operations of PFS' UK subsidiary ('Prepaid Financial Services Limited' which is incorporated in England and regulated by the FCA), or EML's other Irish regulated subsidiary ('EML Money DAC')." ASX Announcement in PDF and at source.
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 The Central Bank of Ireland has released a Dear CEO letter setting out findings under four headings and expected Actions following a Thematic assessment of Algorithmic Trading Firms’ compliance with RTS 6 of MIFID II.
1. Governance – Deficient control and risk management frameworks: Varying levels of maturity were observed with respect to firms’ governance, control and risk management frameworks. Supervisors observed weaknesses with respect to:
The Central Bank considers the maintenance of a robust algorithmic governance and oversight framework to be of paramount importance in enabling firms to identify, monitor and mitigate the risks associated with algorithm trading strategies. Firms are reminded RTS 6 requires that as part of its overall governance framework and decision-making framework, an investment firm should have a clear and formalised governance arrangement, including clear lines of accountability, effective procedures for the communication of information and a separation of tasks and responsibilities. These arrangements should ensure reduced dependency on a single person or unit. 2. Development and Testing - Lack of formal documentation with respect to development, testing and deployment processes: Supervisors observed strong development, testing and deployment controls. However, significant disparities were identified between firms with respect to the level of detail pertaining to documentation on development, testing and deployment processes most notably:
3. Risk Measurement and Control - Lack of clearly defined Three Lines of Defence: While it was evident that certain firms had appropriately skilled and resourced second lines of defence, a number of firms demonstrated an absence of a formalised “Three Lines of Defence model”. It is important that firms have a robust model in place, with clear delineation between each line i.e. the business, the risk management functions and the internal audit function. Supervisors observed:
4. Trade Lifecycle Management – Lack of appropriate documentation with respect to pre and post-trade controls: The presence of extensive pre and post-trade controls was evident during this Thematic Review however:
Firms must have in place appropriate pre and post-trade controls that are commensurate to the nature, scale and complexity of the entity and ensure that these controls are appropriately documented. Actions As a result of the findings of this thematic review, the Central Bank has engaged with the investment firms where specific concerns have been identified, issuing risk mitigation programmes to address these specific issues. The Central Bank requires all firms engaging in algorithmic trading to consider the contents of this letter, where applicable and take all remedial action necessary to ensure that they have the appropriate control and oversight in place with respect to algorithmic trading and that the requirements within RTS 6 of MIFID II are being fully adhered to. This letter should be read in conjunction with the joint ESMA and European Banking Authority (“EBA”) Guidelines on the assessment of suitability of members of the management body and key function holders ; EBA Guidelines on internal governance; and the Central Bank’s Outsourcing: Findings & Issues for Discussion. The Central Bank will continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading and will have regard to the contents of this letter when conducting future supervisory engagement. Furthermore, in circumstances of non-compliance by any firm with the regulatory requirements associated with algorithmic trading, the Central Bank may, in the course of future supervisory engagement, or when exercising its supervisory and/or enforcement powers in respect of such non-compliance, have regard to the consideration given by a firm to the matters raised in the letter. Background: The Central Bank of Ireland (“Central Bank”) undertook a thematic review to assess how firms undertaking algorithmic trading have incorporated within their risk management and control frameworks the requirements set out in Regulatory Technical Standard C(2016) 4478 (“RTS 6“) supplementing Directive 2014/65/EU (“MIFID II”). The purpose of this letter is to provide background to our assessment, highlight the key findings of this review and outline the expectations of the Central Bank in relation to the governance, testing and controls surrounding algorithmic trading. Algorithmic trading gives rise to significant risks stemming from potential failures of algorithms, information technology (“IT”) systems and processes. In recent years, a number of significant algorithmic trading failures have resulted in substantial losses, fines and reputational damage for firms globally. This demonstrates a clear need for all entities engaging in algorithmic trading to ensure risk management and control frameworks in respect of algorithmic trading are appropriately embedded and are operating to a high standard. RTS 6 provides a framework to mitigate these, and other risks, through the requirement to maintain effective systems, procedures, arrangements and controls. This thematic review focused on the five principal areas underpinned by the requirements set out in RTS 6 of MIFID II: (i) Governance; (ii) Development & Testing; (iii) Risk Measurement and Control; (iv) Processes and Controls; and (v) Trade Lifecycle Management. The Central Bank noted many positive practices, including the presence of experienced, competent professionals across the first and second lines of defence, in addition to a comprehensive suite of controls in terms of monitoring, development, testing and deployment of trading algorithms. Notwithstanding this, supervisors also identified varying levels of maturity and a number of concerns across governance, control and risk management frameworks of in scope entities. A full list of the practices observed are noted in Appendix 1 of this letter. The key concerns arising from the review include: An over-reliance on service providers with a lack of demonstrable autonomy at regulated entity level. This was evidenced through a distinct absence of entity Board oversight in setting or challenging the key controls and in the oversight of the development of trading algorithms. ii. Insufficient formality with respect to key documentation. This was evidenced through a lack of appropriate documentation in relation to algorithmic trading controls and procedures. This speaks to this sector being at the early stages of maturity and also the extent to which firms leverage Group documentation, where relevant, which creates a possibility that entity specific risk may be overlooked. iii. A lack of clearly defined roles and responsibilities, and in particular a lack of appropriate delineation between the “Three Lines of Defence”. This is a consequence of a combination of (i) the scale of certain firms, (ii) the maturity of risk management frameworks and (iii) the non-specific nature for managing risks associated with algorithmic trading in certain firms. These do not align with a comprehensive and effective implementation of the requirements set out in RTS 6. |
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