Welcome to Banking News, the KPMG Ireland quarterly banking newsletter, which brings together useful insights and developments relevant to the banking and capital markets industry.
The domestic economy is set to outpace expectations after a turbulent period characterised by high inflation. GDP is expected to continue growing steadily (5.5%) in 2023, with growth increasing to 6% in 2024. Inflation is expected to slow to 4.5% in 2023 before falling to 3.5% in 2024, as predicted by the ESRI’s Quarterly Economic Commentary (PDF, 2.1MB).
This slowdown is largely attributable to falling energy costs, however second round effects are still holding inflation above the 2% target. This economic growth is estimated to be driven by net exports, facilitated by strong economic performance across most western countries for Q1 2023, alongside enduring private consumption. In the labour market, overall wage growth increased by 3.3% in 2022 and further growth is expected in 2023.
Unemployment remained at around 4% during early 2023, with most sectors recovering to or surpassing their pre-covid employment levels, Accommodation and Food Services being a notable exception. Low levels of unemployment are expected to remain throughout 2024.
Europe and UK
The UK economy, by contrast, is narrowly avoiding recession. GDP growth fell from 4.1% in 2022 to just 0.3% in 2023 as per the June KPMG UK economic update (PDF, 246KB). However, growth is expected to increase to 1.1% in 2024. The energy price shock, coupled with a terms of trade shock and a resilient labour market pushed inflation to record levels. The Bank of England has continued in their attempts to combat inflation, announcing a further 50 basis point rise in interest rates in June.
The ECB Economic Bulletin (PDF, 1.9MB) has announced a decline in predicted Eurozone inflation from 5.4% to 5.1% in 2023, with the Governing Council remaining committed to ensuring inflation returns to its 2% medium-term target by regulating key ECB interest rates. Tighter financing conditions and increased borrowing costs form the basis for this decline in projected inflation. A drop in public and private consumption resulted in economic stagnation and a 0.1% reduction in the euro area economy in Q1 2023. However economic growth is expected to strengthen over the course of the year as inflation reduces and supply chain disruptions ease, with projected GDP growth for 2023 at 0.9%.
The OECD Economic Outlook expects global growth to be 2.7% for 2023, rising to 2.9% in 2024. A combination of economic growth and an easing inflationary environment means that the decline in real wages is expected to cease in 2023. The effect of the global hike in interest rates towards the end of 2022 is now being felt in some markets as credit conditions tighten and investors reassess risk.
According to the OECD Employment Outlook 2023, with few exceptions, inactivity rates are below pre-pandemic levels, including among older adults. Labour markets remain tight in most countries, yet there are some signs of this easing as the ratio of open vacancies to job seeker has decreased slightly from historic peaks. Nominal statutory minimum wages have, on average, kept pace with inflation thanks to discretionary increases or indexation mechanisms across OECD countries.
In contrast, wages negotiated in collective agreements have declined in real terms, as they are reacting with some delay due to the relatively infrequent nature of wage bargaining. AI is likely to have a significant impact on the labour market, but there is little evidence of significant negative employment effects due to AI thus far. Workers and employers report that AI can reduce tedious and dangerous tasks, leading to greater worker engagement and physical safety.
Spotlight: Client Asset Regulations update
The Central Bank of Ireland are updating their Client Asset Regulations (CAR) from 2017. These new regulations came into effect for Investment firms on the 1st July 2023 and will come into effect for Credit institutions on the 1st January 2024. The updated regulations will affect all firms which hold client assets. They are intended to maintain public confidence in the client assets regime, minimise the risk of loss or misuse of client assets, and to enable the effect and cost-effective return of assets to clients in the event of insolvency. The key changes are:
- Enhanced governance requirements: Firms will be required to establish a client asset oversight function (CAOF) to oversee the firm's compliance with the client asset regulations.
- Strengthened client asset reconciliation requirements: Firms will be required to perform daily reconciliations of client asset accounts.
- Additional disclosures: Firms will be required to provide clients with more information about the risks associated with the holding of client assets.
- Expanded scope: The regulations will apply to a wider range of firms, including credit institutions, fund service providers, investment managers, and alternative investment fund managers.
- Increased focus on technology and cybersecurity: Firms will be required to have adequate technology and cybersecurity measures in place to protect client assets.
- New reporting requirements: Firms will be required to repor material breaches of the client asset regulations to the Central Bank of Ireland within 24 hours.
How to comply?
There are seven key principles for safeguarding client assets. The first principle requires the clear segregation of client assets and the firm’s own assets, meaning they are physically held separately as well as accounted for separately. This is followed by Designation and registration; Client assets should be clearly identifiable and registered as such in both firm and third-party records.
Firms also need to keep accurate books to enable them to provide an accurate record of client assets and be able to reconcile these at any time. The firm should calculate the aggregate balance of its client asset accounts at the close of business the previous day and ensure that this matches the amount it should be holding on behalf of clients.
All information should be disclosed to the client in a way which ensures that they know how and where their assets are being kept and can consent to any risks. These risks should be managed using appropriate systems and controls, alongside implementing mitigants where appropriate. Finally, firms need to engage an external auditor to examine the safeguarding of client assets at least once a year.
How to prove compliance?
To prove compliance with CAR, firms need to establish and maintain a Client Asset Management Plan (CAMP). The CAMP brings together the firm’s overall strategy regarding how to deal with risk in relation to client assets. It includes things such as details of a firm’s business model, the range and type of client assets held by the firm, and the processes and controls to mitigate risks.
The CAMP is an integral part of a firm’s risk management, and it is important that adequate time and resources are allocated to creating and maintaining it as a living document. Ultimately, it is the responsibility of the board of directors to maintain compliance with the CAR.
How can KPMG help?
The CAR includes a requirement for an external auditor to perform an annual examination of the firm’s compliance with the relevant regulations, within 4 months of the yearend. KPMG can assist in-scope firms meet this regulatory requirement. If you have any questions, or would like to learn more, please reach out to our Audit practice.
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- Updating the EU Sustainable Finance Framework
- Counting on it: Sustainability Reporting in Financial Services
- Climate-related and environmental risks in loan pricing
- ECB consults on revised guide to internal models
- IRRBB and CSRBB: Interest rate risk management climbs the agenda
- Fast-track to growth - Private Equity Investment
- DORA – The picture is becoming clearer
Central Bank of Ireland news
Mortgage holders likely to face two more rate hikes, Central Bank governor says: Gabriel Makhlouf said the ECB could lift rates by a further 50 basis points – to 4.25 per cent – before pausing and keeping them there for longer than markets are expecting. His comments reflect ECB concerns that while headline inflation is falling, underlying price growth, driven by increased wage demands, remains strong. (The Irish Times, 7th June 2023).
Irish banks’ planned Synch money-transfer app delayed further by Central Bank move: Designed to challenge the likes of Revolut and N26, the launch of Irish retail banks' money-transfer app Synch has been pushed back until 2024 following regulatory requirements announced by the Central Bank. Synch, whose current shareholders include AIB, Bank of Ireland and TSB, will require approval in accordance with the European Union Payments Services Regulation 2018 prior to entering the market (The Irish Times, 6th July 2023).
Central Bank warns Govt not to exceed 5% spending rule in Budget or risk stoking inflation: The Central Bank has warned that if Government expenditure in next year's Budget goes beyond its 5% spending rule, it runs the risk of stoking inflation further. The economy is described by the Central Bank as operating "at capacity" and "effectively at full employment" with "risks of overheating". With the economy running at capacity, pumping more money through higher spending or tax cuts on a similar scale as last year will add to inflation.
Robert Kelly, Director of Economics and Statistics at the Central Bank, added: "We could start to save excess corporate tax receipts into a fund this year and in coming years and it would reduce - maybe not eradicate - the need for further tax increases by 2030, but it will certainly help the transition where we will have a larger older population requiring more spending" (RTÉ, 21st June 2023).
How KPMG can help
KPMG has a large team of professionals with extensive knowledge and expertise in Financial Services, Banking, Aviation Finance, Insurance and Asset Management. KPMG Ireland can leverage a network of multidisciplinary professionals, stretching across Europe and beyond. Supported by this global network, KPMG Ireland can provide a broad range of support, advice, and guidance on how to address the challenges you face.
Head of Management Consulting and Head of Banking and Capital Markets
KPMG in Ireland