Regulatory Upstream 2019 Presentation

for the LIA

Presented byMs. Evelyn Hanrahan

Compliance Governance & Training Ltd1

This presentation is not an exhaustive list of your regulatory requirements The content of this presentation does not constitute legal advice.

2018 a furious & fast year……………..• 1st Jan ‘18 Packaged Retail Investment and Insurance Products (PRIIPs) –

Key Information Document - KID

• 3rd Jan ‘18 NEW Minimum Competency Regulations 2017

• 3rd Jan ‘18 Financial Services & Pension Ombudsman

• 3rd Jan ‘18 Addendum to Consumer Protection Code 2012 for MiFID II products

• 28th Feb ‘18 Fitness & Probity PCF Annual Return – Due again Feb’19

• 22nd Mar ‘18 Consultation paper on Inducements/Commissions CP 116

• 25th May ‘18 General Data Protection Regulations (GDPR)

• 1st Oct ‘18 Insurance Distribution Regulations (IDR)

• 26th Nov’18 Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 2

• Insurance Distribution Regulations (IDR)

• AML/CFT/FS Inspections by Central Bank of Ireland

• Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018

• Consumer Protection Risk Assessment/Framework 2019

3

Insurance Distribution Regulations 2018 (SI.229)

• Came into effect 1st October 2018

• IDR replaces the Insurance Mediation Regulations 2005 (IMR)

• Firms currently authorised under IMR will continue to be authorised under IDR with the Central Bank of Ireland. This is reflected on the CBI Registers.

• New Requirements under these Regulations………………………………..

4

Investment Intermediaries Act 1995 (IIA)

• Insurance Policies as of the 1st October 2018 have been removed from the IIA

• Insurance Policies are no longer be defined as an ‘investment instrument’ under the IIA

• If you are a Financial Brokerage offering advice on Insurance Policies from Insurance Companies only you may wish to consider whether it is appropriate to your firms business model, now and in the future, to continue to retain your IIA authorisation?

• If you are a Financial Brokerage offering advice on Insurance Policies AND Investment Instruments* you may/will need to retain your IIA authorisation.

• NOTE: Some IIA *Investment Instruments are subject to the Addendum to CPC taking account of the Analogous Requirements of the MiFID Regulations 2017.

• CAUTION: Seek professional advice BEFORE making a decision on these matters.

•

5

IDR: Referral Only

• CBI have confirmed that a referral is not a regulated activity under IDR.

• If you are only referring IDR business only (not IIA or Mortgages) and being paid for these referrals, you are no longer require to be authorised by the Central Bank of Ireland.

• Unanswered Questions:

• How does this fit with CPC & GDPR – Consent to contact?

• How would such a payment be structured?

• How does payment for a referral fit with CPC?

• CAUTION: Seek professional advice BEFORE making a decision on these matters.6

IDR: Referrals • Based on the information currently available, the IDR Regulation reference payments

to 3rd parties by an intermediary (IDR Section 41. (5))

• There are very specific disclosure required under IDR to the customer when advising on insurance –based investment products which must be observed . i.e. payments to 3rd parties: 51 ( c ) all costs and related charges of the insurance-based investment product* recommended or marketed to the customer, including the cost of advice, where relevant, and how the customer may pay for it, also including any third party payments.

• Insurance –based investment products these are products which acquire a maturity or surrender value; where that value is wholly or partially exposed (directly/indirectly) to market fluctuations.

• Excluding

• Life Assurance contracts, death, injury sickness or disability

• Pension Products

• Occupational Pension Schemes

•

7

IDR: Referral

• Structure of Referral Payment, if relevant/appropriate:

• Commission is a payment for regulated activities, a referral in no longer a regulated activity. A fee for a referral payment may therefore be subject to VAT*

•

• What is still UNKNOWN is that the Central Bank and the Dept. of Finance have yet to finalise the remuneration section of IDR and may require full disclosure of third party payments on all policies/products.; not just investment products.

• *Get Professional Accounting/Tax advice BEFORE engaging in this activity

8

Remuneration

• CP 116 – Nov 2017 responses Closed March 2018.

• *The Payment of Commission to Intermediaries is currently the focus of ongoing work by the Central Bank. The outcome of this work may be used to further inform decisions on relevant discretions under IDR.

•

*Transposition of EU Directive 2016/97 on IDD. Dept. of Finance Feedback Statement March 2018

The outcome of CP 116 will impact on implementation of IDR in your business

9

IDR: Tied Agents

• An Insurance Intermediary can appoint Tied Insurance Intermediaries to act on its behalf under IDR.

• The Insurance Intermediary takes responsibility for the activities of the Tied Insurance Intermediary.

• The Insurance Intermediary must ensure it can meet the conditions for registration under IDR and apply to the CBI to appoint a Tied Insurance Intermediary (application forms available 1.10.18)

• Discuss with Professional Indemnity provider addition of Tied Insurance Intermediary

CAUTION: Seek professional advice BEFORE making a decision on these matters.

10

IDR: Terms of Business & Advice

• The Terms of Business is a customer facing document, the core CPC content still stands some new points of information which must be provided to a client. The Terms of Business a suitable medium to provide this information;

• How your firm provides Advice?

• On the basis of a ‘fair and personal analysis’

OR

• under contractual obligation with one or more insurance undertakings (tied) name entity/entities

OR

• not under a contractual obligation nor offers advice on a fair and personal analysis (limited advice). List insurance Undertaking with which your firm holds appointments 11

IDR: Terms of Business & Advice

• How you are remunerated: fee, commission, other economic benefit or a combination of these? Must state clearly to customers. CP 116 outcomes awaited!

• Independent Advice: only if a fee based model AND access to a sufficient range of products available on the market to ensure that the customers objectives can be suitably met and are NOT limited to the insurance products of those entities having close links with the intermediary.

12

IDR: Periodic Assessment of Suitability

• Periodic Assessment of Suitability: state whether you will provide this assessment (or not)

• This report will state how the insurance based investment product meets the customer’s preferences, objectives and other characteristics of the customer.

13

IDR: Remuneration of Employees • Duty of Care to the Customer is

the priority

• Conflicts of interest between employee remuneration and the customer must be identified and mitigated.

• Insurance Intermediaries must not incentivise or remunerate the performance of their employees in a manner that would conflict with their duty of care to the customer. 14

Fitness & Probity Standards

15

Fitness & Probity Standards

• Fitness & Probity Standards: How do you demonstrate that your team are;

Competent, Capable – Honesty, Integrity – Financially Sound

• Are you revisiting the Due Diligence carried out in the past? Do you need to refresh the information? Have you a procedure for this review?

• What about recruiting new Control Function staff? What is your Due Diligence Procedure – new employees existing.

• Central Bank at Roadshows in November 2017 gave over an hour to this topic, sharing what had been their POOR experience when auditing Fitness & Probity Due Diligence files.

This in NOT a box ticking exercise16

€200,000 fine 12th Dec 2017

• The Central Bank’s enforcement investigation identified that the regulated entity failed to introduce adequate systems or controls to ensure that individuals holding CFs and PCFs complied with the Fitness and Probity Standards (the ‘Standards’).

nor

• take reasonable steps to satisfy itself that its CFs and PCFs complied with the Standards.

• When hiring new staff and for failing to conduct the requisite level of due diligence for the ongoing assessment of CFs and PCFs.

17

Central Bank (Supervision and Enforcement)

Act 2013

18

Central Bank (Supervision and Enforcement) Act 2013

• Part 5 of Act This introduced new protections for persons making protected disclosures to the Central Bank.

• Protected Disclosures; an upward trend: 1st July – 30th June each year is reporting period

• 2015 1

• 2016 44

• 2017 79

• 2018 113

• 2019 ?

19

AML/CFT/FS A New Era

20

The Jargon……………….

• AML (ML): Anti Money Laundering

• CFT (TF): Countering of the Financing of Terrorism

• FATF: Financial Action Task Force

• CDD: Customer Due Diligence

• RBA: Risk Based Analysis

• FS: Financial Sanctions

• TFS: Targeted Financial Sanctions

• MLRO: Money Laundering Reporting Officer

• GoAML: Garda Reporting Portal

Central Bank of Ireland ML/TF/FS Inspection 2018/19

CBI Inspection Strategy 2018*

This will continue in 2019

• 250 Risk Evaluation Questionnaires

• 120 On site visits

• 50 Review Meetings

70 Full Inspections*CBI presentation 9th May 2018

24,000 Suspected Money Laundering Transactions reported to the authorities, double the number 5 years ago (Irish Times 25.08.18)

22

Central Bank of Ireland ML/TF/FS Inspection 2018/19

Risk Evaluation Questionnaire (REQ) sent to firms to be completed pre inspection (not in all cases). The information provided determines both the selection for Assessment and the Questions asked by CBI on site.

• 18 Items to be submitted 3 weeks in advance of inspection

• Copy written Policies & Procedures AML/CFT/FS only

• Copy of Risk Assessment(s)

• Copy Training Logs &Training Material

• Copy Board Minutes: where AML/CFT/FS referenced on Agenda

• MLRO Reports since 2010……………………..

• Detailed Data on Clients & Product breakdown

• Client files identified for review in advance is some cases; not all on site visits reviewed client files.

23

Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018

4AMLD

Key Amendments

24

Focus of 4th ML Directive • The Fourth EU Money Laundering Directive (“4AMLD”) was finally transposed

into Irish law with the enactment on 14 November 2018 of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 (the “Act”).

• The Act, which was commenced on 26 November 2018, amends the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 to incorporate the requirements of 4AMLD into the existing legislative framework.

• 5th Directive (5AMLD) entered into force 9 July 2018. Transposition deadline for member states 10 Jan 2020

• 6th Directive (6AMLD) Transposition deadline Dec. 2020 25

4AMLD – Risks Assessment & CDD The amendments include the introduction of requirements around;

• Business Risk Assessments; minimum risk factors to be taken into account: Investor Type, Product, Geographical, Delivery Channel and Transaction Type.

This is a ‘living document’ not just a once a year exercise.

• Customer Due Diligence; previous exemption for Specified Customers and Specified Products are NO LONGER available.

• The Business Risk Assessment will determine CDD measures to be applied in the business. All decisions to apply simplified CDD to be sufficiently documented.

•

26

4AMLD: Risk Based Approach Strengthened

• The Risk Based Approach; the risk of ML or TF differs for types of financial institutions, types of customers, transactions, products or countries.

• A Risk Based Approach requires the;

• identification of the existence of a risk;

• assessing that risk;

• determining a strategy or strategies to manage;

and

• mitigate the risk.

• Resources should be allocated so that the areas of greatest risk identified receives the highest attention. 27

Customer Due Diligence

• 4AMLD abolishes the previous automatic derogations from the Customer Due Diligence (CDD) requirements;

• Products where previously you were not required by legislation to apply CDD e.g. Protection, Pensions.

• Each firm will be expected to carry our a revised ML/TF Risk Assessment in order to determine what level of Customer Due Diligence should be applied; business wide and per product

• Firms make a decision on the level of CDD, document the decision and the rational for same. If you are a limited company this must be approved at Board level.

• Document and record all Risk Assessments and retain for inspection. 28

4AMLD – P&Ps & Ongoing Monitoring

• Internal Policies and Procedures

• The Act gives more detail on the types of policies and procedures that your firm must have in place to prevent ML/TF.

• For Example: new procedure to counter risks that may arise from the use of new products or practices arising from technological developments.

• Ongoing monitoring requirements for Existing Client: is your documentation up to date? If not bring it up to date.

29

4AMLD – PEP’s

• Politically Exposed Persons (PEPs) Extends to Irish Resident PEPs – Enhanced CDD applies. Senior Management must approve continuing with the relationship with the existing customers who are now PEPs under the new definition and give permission at the on-boarding of any new customers who are PEPs.

• Ongoing monitoring of customer base to pick up on changes in PEP status.

• 4AMLD Defines a PEP in a more precise manner;

• List of Prominent Public Functions, Clarifies Family Members, Clarifies Close Associates

30

4AMLD – PEP’s

• When a PEP ceases to be a PEP the Obliged Entity must take into account the continuing risk posed by this person for a least 12 months until the obliged entity deems it that this person poses no further risks specific to PEPs

• You will have to avail of an automated PEP checking mechanism this in your firm – too onerous a requirement to try and do this yourself.

• Your CRM provider may provide this PEP checking service; some already do HOWEVER check this with your CRM provider

31

PEP’sPolitically Exposed Persons

Specified Individuals

(a) heads of State, heads of government, government ministers and deputy or assistant ministers;*

(b) members of parliaments;*(c) members of a supreme court, constitutional court or of other high-level judicial bodies whose decisions (except in exceptional circumstances) are not subject to further appeal;*(d) member of courts of auditors or of the board of central banks;*(e) ambassadors, chargés d'affaires and high-ranking officers in the armed forces.*

Members of the administrative, management or supervisory bodies of State-owned enterprises.and include positions of prominent public function in preceding year but exclude middle ranking or more junior officials in (a)-(f)

* (defined as ‘specified official’ in law)

32

4AMLD Beneficial Ownership• Who has control of the customer and/or the natural person on

whose behalf a transaction or activity is being conducted?

• Is there indirect ownership? Who is the Beneficial Owner?

• Where a natural person controls a corporate entity which holds a shareholding of a sufficient % of shares directly or indirectly could be deemed to ultimately own or control the entity.

• This also applies where the ownership interest is held by multiple corporate entities which are under the control of the same natural person.

• NOTE The 2018 Act removes the hard threshold of 25%33

Misuse of Corporate Vehicles The appeal to criminals & terrorists lies in the fact that corporate vehicles can be misused to circumvent controls by disguising the identity of known or suspected criminals and the source of funds or assets.

What does the future hold………

35

Peer to Peer Review

Netherlands Authority for the Financial Markets (AFM) conducted a Mutual Learning Programme at the request of the CBI in 2014.

36

Netherlands Authority for the Financial Markets

3.4 Low Impact firms/Intermediaries (AFM March 2015)

• ‘Currently supervisory approach relies heavily on reactive, processed, no minimum frequency of onsite reviews and engagement with these firms is prescribed [by CBI]’

• ‘It is of material importance, as experience indicates that large impact consumer protection issues on financial retail markets regularly originate from smaller firms that are ‘low impact’ each by themselves.’

37

Netherlands Authority for the Financial Markets • ‘The Central Bank should consider developing a more elaborate supervisory strategy

for ‘low impact’ intermediaries, with focus on developing a prescribed engagement model for such firms.’

• ‘Such a strategy would ensure that such firms are supervised on a systematic proactive basis’.

• ‘The annual online return employed for the low impact firms could be used to better effect for consumer protection purposes………. currently limited to reporting of complaints.’

38

Consumer Protection Risk Framework

• Following from the Consumer Outlook Reports 2015/16/17 and the guide to Consumer Protection Risk Assessment (CPRA March 2017)

the Central Bank expects that firms now have a in place Consumer Risk Management Framework proportionate to the nature, scale and complexity of the firm.

• ‘We (CBI) are currently enhancing our own supervisory model’

• ‘our first assessment will focus on Culture, Governance (including product oversight) and controls.’

• ‘This supervisory work will be in addition to our regular program of thematic inspections, which examine how firms are selling their products and services in practice.’**Intermediary Times 30th May 2016

39

Consumer Protection Risk Framework

• ‘We (CBI) are currently enhancing our own supervisory model for Retail Intermediaries’ ‘Currently Intermediaries risk rated low’

Factors that will increase the Risk Rating:

• Turnover: CBI reluctance to give indication of exact figure, fluctuations in turnover upwards/downward

• Number of Customers/Client

• Complexity of Product or Service provided by the firm; Product Producers and Insurers provide this information via returns

• Central Bank Roadshow. November 2018

40

Consumer Protection Risk Assessment (CPRA)

August/September 2018 CPRA Questionnaire Issued

• Two weeks to compile and respond comprehensively.

• Notification that the content will form part of an on site visit – date advised

Specific Sections with multiple questions:

• Business Model and Strategy;

• Governance Arrangements;

• Compliance and Internal Audit (if relevant to the business model);

• Risk Management;

• Consumer Protection and Conduct Risks;

• Product Oversight and Governance;

• Remuneration and Incentives; and

• Culture – presentation only41

Consumer Protection Risk Assessment (CPRA) September 2018 CPRA on site Presentation with Q & A

• ‘As part of the meeting it is expected that the Firm will provide a presentation summarising the Firm’s response to the topics set out in the initial questionnaire’

Areas to be covered in Presentaion with Question & Challenge from CBI team

• Business Model and Strategy;

• Governance Arrangements;

• Compliance and Internal Audit (if relevant to the business model);

• Risk Management;

• Consumer Protection and Conduct Risks

• Product Oversight and Governance;

• Remuneration and Incentives; and

• Culture.42

Wishing you a successful 2019

Thank You for your Kind Attention

43

www.compliancegovernanceandtraining.ie

info@compliancegovernanceandtraining.ie

This presentation is not an exhaustive list of your regulatory requirements The content of this presentation does not constitute legal advice.