Treasurer's checklist when preparing for increased interest rates
The global economy has witnessed continuing interest rate hikes over recent months as central banks aim to curb inflation, which has largely been caused by the consequences of the pandemic, associated supply chain disruptions, and the ongoing conflict in Ukraine. In KPMG UK’s recent blog we looked at the challenges for Treasurers in 2023 against this backdrop. Stewart Hagell (Director) and Phoenix Green (Senior Manager) continue on that theme but with a focus on key considerations for investment decisions.
With base rates having risen above 4% in the past year in the UK and US and tightening monetary policy marking the end of the near-zero interest rate era, has the yield on your investments reacted in kind or is there now a too big to ignore opportunity cost for having not acted? Have you reviewed your credit risk policy in light of the challenging economic outlook and recent mini banking crisis?
Read the full blog here.
Financial Crime: A Paradigm Shift: The 6 major trends that will disrupt financial crime compliance
With evolving financial crime threats and heightened regulatory scrutiny, firms are reassessing their approach to financial crime risk management and compliance, and are paying a heavy financial cost, collectively spending billions trying to prevent financial crime. And so, maturing and embedding a robust FinCrime operating model to meet regulators expectation, without adding cost, is becoming critical to driving strong regulatory outcomes. KPMG Ireland, led by Ian Nelson (Partner, Head of Financial Services and Regulatory), discuss this further.
ESG reporting – are you ready? (Episode 3)
Episode 3 of KPMG’s audit podcast series, where we explore the relevant issues, opportunities and new ways of working shaping the audit profession's future, focuses on the European Union Corporate Sustainability Reporting Directive (CSRD). CSRD will lead to a fundamental change in corporate reporting and represents the most significant transformation in corporate reporting in the last 25 years. Conor Holland, Principal, ESG Reporting & Assurance at KPMG Ireland, talks to Elaine Stafford about the CSRD and how this will impact Irish businesses.
Despite the hype, there’s a long way to go to convince consumers of the benefits of AI
ew research released from KPMG UK has found that while some consumers would use artificial intelligence (“AI”) to support everyday tasks, 82% have concerns or challenges that prevent them from using it. A third of consumers report data privacy concerns with AI, only 13% of consumers believe that AI will support jobs, and saving time was the most popular primary motivation for consumers using AI
Ian West, Head of Technology and Alliances at KPMG UK, said “AI is incredible technology with huge potential but there is much for businesses to think about when it comes to consumers’ views of AI. There are several barriers to adoption that need to be addressed by tech companies and by businesses who are rolling out the technology. Businesses need to be clear about the benefits of the technology and how it is transforming the proposition available to consumers for it to become accepted.
AI & Finance in Guernsey: The Power and the Implications
Guernsey Financial Services Commission (“GFSC”) and Guernsey Finance are hosting a one day conference on Wednesday 28 June 2023 for attendees to learn more about the power and potential of articial intelligence.
The event will feature keynote speakers and educational sessions where you can hear more about the potential impact of AI on the finance industry.
More information can be found here.
Isle of Man Updates
Authority sets out updated approach to supervision
The Isle of Man Financial Services Authority (“IOMFSA”) has published a document setting out its updated approach to supervising the Island’s finance sector.
The Supervisory Methodology Framework will help to focus the IOMFSA’s resources on the greatest threats to its objectives of protecting consumers, reducing financial crime, and maintaining confidence in the financial services sector through effective regulation.
For regulated firms, supervisory activity will be more proportionate to the firm’s impact, as determined by its size, the type of activities it conducts, and its potential to cause disruption to the Island’s financial system. The intention is to focus the IOMFSA’s resources on the greatest threats to its objectives of protecting consumers, reducing financial crime, and maintaining confidence in the financial services sector through effective regulation.
Ros Lynch, Head of Supervisory Practices, said: ‘Moving from a predominantly sector-based approach to an impact and risk-led model will ensure the IOMFSA’s supervisory resources are deployed in the most proportionate and efficient way. The transition will be embedded in the months ahead and we will continue to inform firms of developments.’
To provide further insight into its updated Supervisory Methodology Framework, the IOMFSA is hosting a free event in the Lecture Theatre at the Manx Museum on Friday 19 May, from 9:30am to 10:30am.
Further information on the event can be found here.
Restructure to support updated supervisory approach
The IOMFSA has announced that internal restructuring has taken place to support the transition to an updated approach to supervision.
As part of the overall restructure, governance panels will be convened on a regular basis to review impact and risk ratings, referrals to Enhanced Supervision and/or Enforcement, and process consistency.
The changes will all contribute to a more structured and consistent approach, ensuring that key elements of the supervisory process are assessed using a common framework.
Bettina Roth, Chief Executive Officer, said: ‘We believe we can deliver maximum value by focusing our resources on the firms that have the capacity to cause the greatest disruption to the economy should they fail or operate in an unsafe manner.’
PRA: BOE Staff Working Paper No. 1,017
The Bank of England (“BOE”) published a Working Paper which talks about understanding climate-related disclosures of UK financial institutions. It says that climate-related disclosures reduce information asymmetries between firms and investors and help transition to a net zero economy. However, disclosure practices might differ across firms. The Prudential Regulation Authority (“PRA”) explores the determinants of firm disclosures by creating a unique, firm-level panel data set on climate-related disclosures of UK financial institutions.
PRA: Bank of England report on climate-related risks and the regulatory capital frameworksX
The BOE published a report of Bank’s latest thinking on climate-related risks and the regulatory capital frameworks. The report includes updates on: capability and regime gaps; capitalisation timelines; and areas for future research and analysis.
FCA: CFRF Scenario Analysis: Learning from the 2021/22 Climate Biennial Exploratory Scenario
The FCA published a survey report which talks about how the UK Centre for Greening Finance and Investment (“UKCGFI”) and the Climate Financial Risk Forum (“CFRF”) worked together over 2022 to gather and synthesise the lessons from the process of the Bank of England’s Climate Biennial Exploratory Scenario (“CBES”). The central goal of this research was to capture and synthesise the learning from the CBES for UK Financial Institutions (“FI’s”) and to share this internationally.
FCA: CFRF Guide 2023: Climate Disclosures Dashboard 2.0
The FCA published an article which informs about the updated Dashboard that incorporates both recent regulatory developments and progress made by industry in preparing climate related disclosures whilst retaining the user-friendly structure of the original dashboard. The Dashboard is split into five categories of climate disclosures – Transition risks, Physical risks, Financed emissions and portfolio alignment, Financing the transition (previously Mobilising transition finance) and Engagement.
PRA: It’s not the plane, it’s the pilot - speech by Shoib Khan
The PRA published a speech by Shoib Khan in which he talks about the unique combination of risks currently facing the UK’s insurance sector.
FCA: Regulators welcome the Government’s updated Green Finance Strategy
FCA: Business interruption insurance test case – Insurer claims data
The FCA published latest data which was collected from all affected insurers on the progress of their non-damage business interruption (“BI”) insurance claims. A ’Dear CEO letter’ was sent to insurers affected by the business interruption insurance Test Case with the intention to gather information on all non-damage BI policies that are capable of responding to the coronavirus (Covid-19) pandemic. The letter also sets out the FCA’s intention to gather information from all affected insurers regularly on the progress of their non-damage BI claims, and to publish some of this data.
Central Bank of Ireland Updates
DORA Implementation Speech
The Central Bank of Ireland (“Central Bank”) published a speech by Gerry Cross, Director of Financial Regulation, Policy & Risk delivered on 28 March 2023 entitled “Implementing DORA – Achieving enhanced digital operational resilience in European Financial Services”. The speech covered the following topics with regard to the implementation of a Digital Operational Resilience Framework (“DORA”):
- Working Principles;
- Risk Management;
- ICT Incident Management & Reporting; and
- Oversign of Critical Third Party Providers
General Good Rules on Insurance Distribution
On 18 April the Central Bank published the “General Good Rules Arising from the Directive (EU) 2016/97 on Insurance Distribution 2023”. The Rules are relevant to insurance undertakings and insurance intermediaries operating in Ireland on a cross-border basis and link consumer protection requirements under the European Insurance Distribution Directive to Irish regulatory requirements set out in the Consumer Protection Code, the Consumer Insurance Contracts Act and the Health Insurance Acts, among others others.
Address by Director of Insurance Supervision, Domhnall Cullinan, to the Insurance Ireland-Milliman CRO Forum
The Central Bank’s Director of Insurance Supervision, Domhnall Cullinan, during his address to the Insurance Ireland-Milliman CRO Forum held on 18 April, noted that in a period of heightened market volatility as we are currently experiencing, the Central Bank expects firms to closely monitor market and credit risks in their investment portfolios, ensuring that these risks are not unduly concentrated within a particular counterparty, sector or region. He also reiterated the Central Bank’s priorities for 2023 from an Insurance Supervision perspective: the implementation of the Individual Accountability Framework (IAF); financial resilience; consumer Interests, specifically Payment Protection Insurance (PPI) and Value for Money (VfM) in unit linked products; climate change; digitalisation & technology; operational resilience including Digital Operational Resilience Act (DORA); and Financial Sanctions.
International Association of Insurance Supervisors Updates
International Association of Insurance Supervisors Updates
The International Association of Insurance Supervisors (“IAIS”) have published their Newsletter Issue 120 for February/March 2023.
Climate risk online training
IAIS published a press release announcing the joint launch with the Financial Stability Institute (“FSI”) of new online training materials on climate risk for insurance supervisors. The training materials focus on climate scenario analysis. The course, which is hosted on the Climate Training Alliance (“CTA”) platform, provides an end-to-end framework for supervisors to follow as they undertake a climate scenario analysis exercise. Separately, the IAIS is consulting on climate risk supervisory guidance. Later this year, IAIS plans to consult on an application paper on climate scenario analysis to support greater convergence on these practices. Climate risk and broader sustainability issues are a key theme of the IAIS' Strategic Plan 2020-2024.
Implementation of the Holistic Framework insurance standards in ten major markets
IAIS published its report on the Targeted Jurisdictional Assessment (“TJA”) of the implementation of the Holistic Framework supervisory material. The report summarises the outcomes of the assessment of the implementation of standards that form part of the IAIS Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector across ten major insurance markets.
European Insurance and Occupational Pensions Authority Updates
The European Insurance and Occupational Pensions Authority (“EIOPA”) has published on 29 March 2023 a staff paper where it explains that the failure to account for, mitigate and adapt to the consequences of biodiversity loss can have economic implications that potentially jeopardise financial stability. In the paper, EIOPA describes the transmission channels of nature-related risk into society and the economy, and the relationship between climate and nature-related risks. EIOPA identifies how nature-related risks can translate into risks to insurers' assets and liabilities, how insurers can impact on these and the type of approaches for assessing risks and impacts. As part of its sustainable finance strategy, EIOPA aims to establish supervisory expectations for managing nature-related risks and impacts in a step-by-step approach.
Fostering risk-based supervision
On 22 March 2023 EIOPA hosted its ‘Eastern Cooperation Conference’ bringing together insurance supervisors from European Economic Area (EEA) and non-EEA jurisdictions. In hosting this conference, EIOPA underlined its continued support for jurisdictions in the process of adapting or implementing EU insurance legislation. The conference focused on exchanging views on supervisory experiences and practices, in particular related to the implementation of risk-based supervisory frameworks, such as Solvency II.
Modelling of market and credit risk
EIOPA has published the 3 April 2023 results of its comparative study on the modelling of market and credit risk in internal models based on year-end 2021 data. The study focuses on EUR denominated instruments while also analysing selected GBP and USD denominated instruments as well as the corresponding foreign exchange rate indices. The 20 participants from 7 different Member States cover close to 100% of the EUR investments held by all undertakings with approved internal models covering market and credit risk in the EEA. The overall results show moderate to significant dispersion in some asset model outputs. Although this dispersion may in part be attributable to certain model and business specificities that supervisors are conscious of, EIOPA notes that it also indicates the need for continued supervisory attention, including at the European level.
Please see below for EIOPA’s response to a selection of recent questions, as summarised by our colleagues in KPMG UK. EIOPA has responded to queries where uncertainties exist in the Solvency II requirements. The Solvency II requirements may change or become more prescriptive over time. Click here to search the full list of Q&A questions and responses. These may have relevance to Guernsey and Isle of Man markets now or in the future.
15 March: Pre-financing arrangements and contract boundary X
EIOPA clarified in Q&A (#2518) that the obligations related to the insurance contract referred to in Article 18 of the Commission Delegated Regulation (EU) 2015/35 are determined by the insurance policy and not influenced by the pre-financing arrangement. Therefore, the contract boundaries according to Article 18 Delegated Regulation should be determined without consideration of the pre-financing arrangement. The same applies to the dates of recognition and derecognition of the insurance obligations as determined in Article 17 of the Delegated Regulation.
16 February: Treatment of credit derivatives in SCR
EIOPA clarified in Q&A (#2317) that the answer to this question is provided by the European Commission.
According to Article 179(3) of Commission Delegated Regulation (EU) 2015/35, credit derivatives which are part of the undertaking's risk mitigation policy shall not be subject to a capital requirement for spread risk, as long as the undertaking holds either the instruments underlying the credit derivative or another exposure with respect to which the basis risk between that exposure and the instruments underlying the credit derivative is not material in any circumstances. Therefore, if any of the examples of derivatives mentioned in the question are part of the undertaking's risk mitigation policy pursuant to that paragraph, the derivative should be treated in the counterparty default risk module and not in the spread risk module. The term credit derivative is not further specified in Commission Delegated Regulation (EU) 2015/35. However, as the explanatory memorandum to the act adopted by the Commission explains, the “Delegated Regulation [was] based on […] technical advice provided by EIOPA in 2009 and 2010“. EIOPA’s advice on the market risk module proposed that credit derivatives, “such as credit default swaps, total return swaps and credit linked notes”, should be dealt with in the spread risk module (see paragraph 4.116). Accordingly, credit default swaps and total return swaps that are not part of the undertaking's risk mitigation policy pursuant to Article 179(3) should be treated in the spread risk module.