Putting principles into practice: how regulation responds to change - Remarks by Governor Makhlouf at the Financial System Conference

08 November 2023 Speech

Gabriel Makhlouf

The following remarks were delivered to open the Financial System Conference 2023, at the Aviva Stadium.


Fáilte, good morning and welcome – whether you’re in the room virtually or physically – to our second Financial System Conference.

The  conference is designed to bring together diverse perspectives from the Central  Bank of Ireland's wide range of stakeholders – including industry leaders, consumer representatives, and policymakers from Ireland, across the EU (and indeed wider afield) – to discuss and debate the forces shaping the financial system.

I am looking forward to listening and learning from our excellent panels of speakers on a range of themes throughout the day.

The economy and financial system is still adjusting to the change in interest rates by central banks. Overall, although we have seen bouts of volatility and episodes of risk crystallisation globally, that adjustment to date has been relatively orderly.

And we are in fact seeing strength in risky asset markets.

Have markets stopped pricing in uncertainties? Is there a risk of complacency?

The domestic economy has continued to expand, albeit at a slower pace, as monetary policy is taking hold, domestically and globally. Early signals of the impact of inflation and monetary tightening on borrower resilience are becoming visible among Tracker mortgages, personal loans and certain corporate lending segments. We are seeing vulnerabilities in Commercial Real Estate (CRE), but the labour market remains robust and the broad macro picture shows there is resilience in the economy and financial system.

Having said that there is huge uncertainty as to what lies ahead. A large part of monetary tightening has yet to be passed through to the financial system and to the economy; and while some risks are fading, new risks are emerging.

These issues and questions won’t be the focus of my remarks today but you can tune in to our Financial Stability Review later this month to hear our thoughts on risks and resilience of the financial system and policies to address them.

I am delighted that - Lisa Cook - from the US Federal Reserve has flown in for the conference. Lisa worked on the Eurozone sovereign debt crisis when at the White House and today will give us a wider view on challenges posed to the stability of the financial system.

Rather, my main task this morning is to open the conference and introduce some of the key themes.

Responding to change: what guides us?

Our financial system has changed significantly in recent years bringing new entrants, new products and new ways of serving consumers and the economy. This provides many opportunities; but if not adequately managed it can also pose many risks.

We have an excellent line up of speakers today to discuss some of the issues that will be top of all of your minds, including: uncertainty in the geo-economic environment, securing customers’ interests, individual accountability and EU financial regulation.

The subtext of our themes for discussion today is how.

  • How do we meet the challenge of uncertainty – be it from wars, pandemics or inflation?
  • How do we achieve positive outcomes – through regulation, through our business, or advocacy - in an ever changing world?
  • How will we make individual accountability work?
  • How must financial regulation itself transform along with the financial system?

Last year, at this conference, I discussed our own regulatory approach here at the Central Bank of Ireland.

I outlined the six principles regulation needed to follow to support positive outcomes and the “welfare of the people as a whole”. Regulation must be (i) forward looking, (ii) connected, (iii) proportionate, (iv) predictable, (v) transparent and (iv) agile.

In my remarks today I would like to outline how, over the last year, we have put these principles into practice.  

But to briefly recap on the principles:

  • Forward-looking because, although we need to learn from history, we need to prioritise regulating for the future, especially as the pace of change means it quickly becomes the present;
  • Connected because, in a European and global financial market, being more connected with market participants – whether firms, other regulators, consumers and investors – is essential to better understand risk, and to support agility and foresight in how we regulate;
  • Proportionate, because we want regulation to address the harm or failure on which it is aimed without causing unintended consequences.  If regulation goes further than required, it creates distortions that can contribute to sub-optimal outcomes. So there needs to be an effective and disciplined consideration and weighing of the costs, benefits and trade-offs involved in any regulatory intervention;
  • Predictable, because consumers and firms need to understand what the Central Bank is trying to do, and what it is we expect others to be doing. Our expectations of firms should be clear so that they can implement regulatory requirements in an orderly manner and of course it is important that investors and consumers have the basics of financial literacy;
  • Transparent because building trust in the financial system requires that market participants are able to see that regulators are doing their job and regulations are working as intended. The phrase ‘market participants’ includes firms, consumers and investors; and, last and very much not least,
  • Agile, because the financial system has shown us that it can change quickly, that it is changing quickly and that it will continue to change quickly. Regulation needs to adapt to a changing risk environment at a similar pace.

Putting principles into practice – innovation and digitalisation

Every year we work on a range of pieces of financial regulation, with our European and domestic stakeholders.

Throughout 2023 key domestic priorities for the Bank have been consulting and engaging on regulatory developments under our Consumer Protection Framework and Individual Accountability Framework (IAF), and working on our approach to innovation.

I am delighted to today launch our consultation on innovation engagement.1

As the financial landscape evolves, we acknowledge the need to evolve with it, including deepening our engagement with innovators and the wider innovation ecosystem.

This allows us to better understand the opportunities and risks for consumers and the economy. So we can remain agile and forward looking.

We are doing this to better inform our regulatory approach and better explain to new firms what being regulated entails. So firms can build regulatory requirements and safeguards into their early stage development and embed a regulatory culture, enabling them to grow safely. In essence so we can remain predictable, proportionate and connected.

Many of you have called for us to establish a sandbox. We have listened and we will do this. Our sandbox will foster innovation in financial services so as to support better outcomes consistent with our public policy objectives.  In line with our principle of transparency we want your views on our plans, the themes we should focus on and how we enhance our approach to innovation more generally.

Just like we are aiming to ensure we remain forward looking with our approach to innovation, we must also make sure our regulation remains forward looking. The revised Consumer Code will be a modern, single set of go-to regulations for consumers and firms alike, reflecting the changes that are taking place in the financial system.

A key aim of the Code review is to bring coherence to these developments, delineate the resulting shape of the regulatory landscape and, looking forward, bring clear predictability and enhanced certainty to expectations on firms.

A core theme that emerged is that digitalisation will bring greater choice and access for consumers, but it also brings potential risks and challenges which need to be addressed. As the financial system goes through a period of transition, we want to ensure that in their interactions with firms, consumers’ best interests are secured. This theme, and others, have informed our thinking on the proposed changes to the Consumer Protection Code.

Putting principles into practice – IAF and the Code

Over the coming months we will also be implementing the new Individual Accountability Framework (IAF).

I am sure the panels will discuss the specifics of these in more detail, but if you indulge me for a moment, I want to again talk about the how.

  • How are we approaching these pieces of regulation?
  • How do we plan to implement them?

We take an integrated perspective of these two significant areas of work. They complement each other, operate in tandem to advance the delivery of our mandate, and are founded in a single philosophy of high quality regulation.

A significant component of our intensive engagement with stakeholders on both bodies of work has been exchanges on the issue of impact, proportionality, and the delivery of positive overall outcomes.

We have been clear that the benefits it brings must outweigh the costs.

The regulation must be not only be proportionate but it will be applied proportionately.

And it must be consistent with a financial services market functioning well on the basis of good competition and ongoing innovation.

Sustainable profitability as a commercial objective is a key driver of a successfully functioning market and our regulation must reflect the importance of this central component of our system. But commerciality cannot be a singular focus.  We want firms to better integrate consumer protection considerations into their commercial decision making.

It is in this context, that we have developed our implementation plan for the IAF and our review of the Code.

Thank you to those who provided feedback to our consultation on the IAF and your participation in our stakeholder engagement. We have heard you.

We will be publishing our feedback statement and guidance next week, so you will have all the detail then. But let me take the opportunity of us all gathering together to outline some key aspects.

On many core issues, our proposed approach received strong support from stakeholders. Respondents were broadly supportive of the IAF and the core objectives. The broad consensus was that the IAF will provide clarity of responsibilities, which will underpin sound governance across the financial sector, enhancing the culture of accountability in firms, and bring clarity to individuals in respect of the standards of conduct they are expected to meet.

Some respondents highlighted a risk of a materially-increased compliance burden resulting from the requirements of the new framework.

In both areas of work (the IAF and the Code) our aim is to mature, improve, cohere and clarify our regulatory framework. We have avoided the idea that these simply require firms to become more sound, to strengthen their governance, and to put more consumer protections in place. We are aiming to avoid materially increasing compliance reporting, but we do want to better engender a good culture of compliance in firms.

For example, the Additional Conduct Standards are simply implementing into legislation long standing good business practices for senior individuals (PCFs). Many of the expectations already form an integral part of our existing supervisory approach today.

Both areas of work – in the Code and the IAF - have at their heart the imperative to deliver better outcomes: in terms of resilience, governance, and consumer and investor outcomes, while at the same time improving the overall regulatory context for firms.

The IAF is not and will not be a tick box exercise. Rather the IAF will support our supervision of firms. It will be implemented in a way that will support high quality leadership and governance of firms by bringing enhanced clarity to the governance of such firms, to the allocation of responsibilities, and to the expectations that apply to those running the firms.

Importantly, it seeks to do this in a flexible way, leveraging the governance and management structure adopted by the individual firm, and in a manner that has proportionality, predictability and reasonable expectations embedded at every point.

Many of you were concerned about the timing for implementation. The conduct standards are set out in legislation. SEAR Regulations, prescribing responsibilities of certain roles, will apply to in-scope firms from 1 July 2024. We think this reflects a good balance between maintaining momentum on this long awaited framework and providing sufficient time for implementation.

A frequently raised comment in the consultation was that the number and scope of Prescribed Responsibilities is significant. To address these comments, we have reviewed and reduced the number of responsibilities while maintaining overall coherence.

We have decided to defer the application to INEDs/NEDs by one year to enable both the Central Bank and regulated firms to learn from the introduction of the new framework to executives in the first instance as well as how we will use the framework to inform our supervision.

In particular, a twelve month learning period should enable firms to better manage the issues some have identified in reconciling the collective responsibility of boards with the new individual accountability regime.

The Central Bank will remain forward looking, connected, proportionate, predictable, transparent and agile in our approach to regulation, in its implementation, and supervision.

Applying our principles in Europe and beyond

International influence and co-operation is critical for delivering the Bank’s mandate in an increasingly complex, challenging and uncertain environment.

Heightened geo-political tensions, the war in Ukraine, and tighter monetary policy following a long period of low interest rates are contributing to the complexity and uncertainty for policymakers.

As a small open economy we need to be particularly alive to geo-political tensions, fragmentation and in the case of the EU, the implications of Open Strategic Autonomy. These shifting forces have implications for existing relationships and building strategic alliances looking ahead.

The evolving relationship with the UK post its withdrawal from the EU may raise issues between the UK and the EU.

The Central Bank of Ireland has always had an excellent relationship with the Bank of England and our other counterpart authorities. Throughout all the political tensions of the last few years, our close and cooperative relationship only grew.

We are honoured Governor Andrew Bailey is here to give a keynote address.

With a large international financial sector it is imperative Ireland has a credible and influential voice at European and global policy tables.

We may be a small open economy but we are home to a large and globally connected financial centre. Achieving our mission and fulfilling our statutory responsibilities requires us to work with and engage at a European and International level across all areas of the Bank’s mandate.

We are constantly prioritising and articulating our policy positions in international fora.

This year our priorities – at the EU level – included  the new regulations on digital operational resilience (DORA) and crypto markets (MiCA); contributing to progressing the review of the Payment Services Directive (PSD2) and the functioning of open banking.

The next EU Commission’s priorities will shape the EU policy pipeline for the medium term, and indeed influence the Irish Presidency in 2026.

We will all need to be flexible to achieve our strategic objectives.

In this context, I am delighted that the person at the very core of EU financial services regulation - Seán Berrigan – from the European Commission, is with us here today.


To conclude, let me reiterate a few thoughts.

We live in uncertain times, but we cannot wait for certainty to act.

How we react, to events, to risks or to change, matters.

Building trust in the financial system requires that firms, consumers and investors see that we are all doing our job and the system is working as intended.

The pace of change means it quickly becomes the present; so we all need to adapt at a similar pace.

And being more connected is essential for us all to better understand risk, and to support agility and foresight in all our work.

So I think the principles of being forward looking, agile and connected, transparent, proportionate and predictable have applicability beyond regulation-making.

And I am looking forward to us exploring these further today.

Thank you.

1Consultation Paper 156 ‘Open and Engaged: Consultation on how the Central Bank engages with Innovation’