Opening Statement by Gerry Cross, Director, Financial Regulation - Policy & Risk at Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Good afternoon, it is a pleasure to appear before you today. I am joined by my colleagues Mary-Elizabeth McMunn, Director of Credit Institutions Supervision and Colm Kincaid, Director of Consumer Protection.

Following on from the Committee’s exchange of views with Governor Makhlouf and Deputy Governor Donnery, including in relation to the Central Bank’s recently published multi-year strategy and regulatory priorities, we are pleased to have the opportunity to discuss with you a number of issues in the area of financial regulation, particularly in the context of the rapidly changing financial services landscape in Ireland and the EU.

At the Central Bank, as you know, we seek to safeguard financial stability and protect consumers through our ambition for a resilient and trustworthy financial system, which sustainably serves the needs of the economy and citizens of Ireland and the EU.

In achieving this objective we recognise the context of deep and rapid change and innovation in which we operate and we seek to deploy our regulatory powers so that benefits of this change are realised for the consumers and users of financial services and the risks mitigated.

Our Strategy strongly reflects this context where the theme of safeguarding stability and the interests of citizens is positioned at the centre of an approach that is future focused, transforming, open and engaged.

Amongst the important areas of change that we observe are:

• A rapid evolution in the way in which banking, payment and other financialservices are provided to customers;
• Technology-driven development of whole new product areas and activities - with the dramatic growth of crypto assets being the most notable to date;
• The ever-increasing role of data and data-analytics in financial services provision; and
• The pivot to a net zero carbon economy and the imperative for the financial sector to be at the heart of that transition.

And of course Brexit, Covid-19, and now the invasion of Ukraine by Russia and its still unfolding consequences teach us that not only does the financial system and its oversight have to deal with continuing change, it also has to be able to cope with periods of quite fundamental uncertainty. The pandemic in particular, has shown us the benefits of building resilience in the financial sector in order to continue to  serve the needs of consumers and investors through periods of stress. 

Changing financial services landscape

In Ireland, as across Europe, some of the biggest changes in financial services have been seen in the area of retail banking and payments.

For example, in the area of payments and e-money firms we have seen the number of authorised firms grow by an order of magnitude – from low single digits to over 40 - in four years, with a significant further number currently in the approvals process.

Technological advances have also provided opportunities for existing banks and firms. Many have adapted their business models, focussing on digitalisation strategies as customer behaviours turn more and more to online services.  Reducing their cost base to be more in line with EU norms and remain competitive in such an environment continues to be an important aspect of banks’ strategies.

Beyond banking and payments we also see significant interest in authorisation amongst tech-driven investment firms and virtual asset service providers (VASPs). It is clear that the range and nature of financial services, and the manner in which they are provided to consumers and users, is undergoing significant change. Provided new entrants have suitably consumer-focused cultures, this is to be welcomed. Innovation and new entrants – well and proportionately regulated - are key to a well-functioning financial system. It is also consistent with Ireland’s reputation as a tech-oriented jurisdiction.

Through our Innovation Hub, as well as through our informal and formal authorisation engagements, we seek to ensure that new and innovative firms can engage easily, straightforwardly and transparently with the Central Bank. At the same time, of course, we expect prospective and existing regulated firms to be well run, with sufficient finance, good risk management, are resolvable, and have a consumer-oriented culture so that consumers are neither misled nor mistreated.

Retail banking

The retail banking sector in Ireland is seeing considerable change right now with the withdrawal of Ulster Bank and KBC. We are closely engaging with all relevant banks to ensure that the challenges this poses are being matched by plans, preparations and resources. We expect all concerned to prioritise the interests of customers and prospective customers and we are prepared to intervene further if necessary should this transition not proceed in line with our expectations.

One aspect of the retail lending sector that is not changing as quickly as we would like to see is the level of distressed debt in the system. About 47,000 principal dwelling households (PDHs) are still in mortgage arrears, of which 32,558 have missed at least three payments and are 90 days or more past due. This is a source of deep stress for the families and individuals concerned.

Successfully resolving distressed debt is important to the fair treatment of borrowers as well as to the effective support of the domestic economy.  As well as dealing with existing arrears, we have been clear with lenders on the need to be vigilant to identify and deal with new arrears cases. We expect lenders to have in place a range of restructuring options capable of delivering sustainable solutions. When a borrower is offered an alternative repayment arrangement (ARA), it must have realistic potential to resolve the borrower’s arrears position on an appropriate and sustainable basis. Lenders should also review and enhance their approach to dealing with personal insolvency practitioners.

As part of the financial services landscape, credit unions continue to fulfil a central role, and while that landscape is changing, we want to see a sustainable sector serving local communities across Ireland.  How the sector competes with others is a critical factor in their future sustainability.

Differential pricing

The rapidly evolving use of data and data analytics is another factor changing the way financial services are provided. Done well this can bring material benefits to financial services users and the economy. However, firms must be vigilant to ensure that the manner in which they use data serves customers’ best interests.

Ensuring the fair treatment of customers was the guiding principle behind the publication earlier this month of our new Insurance Regulations. Price walking in the motor and home insurance markets – the practice by which premiums charged are increased the longer the customer is with the firm - will be banned from 1 July 2022. This ban will benefit consumers by removing any loyalty penalty for consumers of long tenure. In order to support switching and competition in the market, new customer discounts will continue to be allowed.

Climate

Finally a word on climate risk and the transition to a net zero carbon economy. This forms an important aspect of our multi-year strategy. The financial sector which will be key to successful transition has three key responsibilities:

• To assess and manage their exposure to climate and transition risk;
• To achieve high quality, accurate and reliable standards of disclosure so that customers and investors can have full confidence about a product or service that is labelled “green”; and
• To evolve their business models and offerings to align with and support the move during the current and immediately coming period to a carbon neutral economy.

At the Central Bank we are engaging with firms across our supervisory mandate to ensure that these responsibilities are being fulfilled.

Conclusion

Mr. Chairman, Members of the Committee let me stop here. Hopefully I have given you a good sense of the some of the challenges coming from this period of significant change and innovation and how we see these and are approaching them. My colleagues and I look forward to your questions.