Global Regulator & Central Bank News Roundup
Volume 01/2024 (January 1 – January 7)
Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 700+ financial services regulators, central banks as well as global and regional standard setters. For more current updates, visit Regxplora, Regxelerator’s end-to-end automated and generative AI-powered financial regulatory intelligence platform. Sign up here to receive the roundup via email.
Themes covered in this edition
- Prudential & financial stability
- Cyber & operational resilience
- Conduct & consumer protection
- Payments & money
- Other transversal themes
- Leadership changes & appointments
- Cross-border cooperation
Prudential & financial stability
EIOPA Study Reveals Variability in Non-Life Underwriting Risk Across European Insurers
The European Insurance and Occupational Pensions Authority (EIOPA) has released the results of a comprehensive study comparing non-life underwriting risk in internal models used by 75 European insurers across 31 insurance groups. The aim of the study was to assess the consistency in risk capture by internal models and to understand the variations in risk capital since the implementation of Solvency II. Among other things, the study found significant variations in capital intensities among undertakings with similar profit and loss distributions, indicating differences in their risk management approaches. Specifically, some undertakings with lower capital intensity relied on uncertain future profit estimates in their premium risk calculations. Results also showed that insurers using internal models generally exhibited lower capital intensities for premium and reserve risk compared to the standard formula calculations, with significant variation observed among them. Moreover, the use of internal models consistently yielded stronger diversification for premium and reserve risks compared to the standard formula. Finally, the study also revealed that most insurers modeled inflation based on historical trends, which might be less reliable in times of significant inflation changes. On the basis of the results, EIOPA and national supervisors held feedback sessions with participants, and outliers were identified and notified. Some supervisory actions have already led to changes in internal models, and further follow-up and monitoring are planned, EIOPA noted in its statement.
Cyber & operational resilience
ECB Schedules 2024 Cyber Resilience Evaluation for 109 Supervised Banks
The European Central Bank (ECB) has announced that it will carry out a cyber resilience stress test on 109 banks under its direct supervision in 2024 to evaluate banks’ capabilities to respond to and recover from a cyberattack. The stress test will simulate a scenario where a cyberattack successfully interrupts the banks’ daily business activities, requiring them to activate emergency procedures and restore normal operations. 28 of the 109 banks will undergo an enhanced assessment, which will require them to provide more detailed information on the protocols followed in response to the attack. The stress test forms part of the ECB’s annual supervisory stress tests as mandated by Article 100 of the Capital Requirements Directive and alternates with the EU-wide stress test coordinated by the European Banking Authority, focusing on specific topics of interest in non-EU-wide stress test years. Although the results of the exercise will not affect the banks’ capital through Pillar 2 guidance, they will inform the broader supervisory assessment and be discussed with each bank during the 2024 Supervisory Review and Evaluation Process (SREP). Main findings are planned to be communicated by the ECB in the summer of 2024.
Conduct & consumer protection
ASIC Prolongs Product Intervention Orders on Short Term and Continuing Credit to Curb High-Cost Lending Risks
The Australian Securities & Investments Commission (ASIC) has announced the extension of its product intervention orders concerning short term credit and continuing credit contracts, stating that they will remain effective until they are revoked or reach their sunset date on 1 October 2032. The orders were initially put in place to protect vulnerable retail clients who were in financial distress and sought loans for basic living expenses, often after being declined regulated credit, from excessive fees that surpassed the National Credit Code’s cost caps. Since their inception on 15 July 2022, the orders have successfully mitigated the risk of significant harm by curbing the provision of these high-cost lending products. ASIC Deputy Chair Sarah Court emphasized the importance of these measures in safeguarding the market from predatory lending practices. The extension follows a series of consultations and actions by ASIC, including the publication of Consultation Paper 355 in December 2021 and Consultation Paper 371 in August 2023 as well as received approval from the Honourable Stephen Jones MP, Assistant Treasurer and Minister for Financial Services.
Finansinspektionen and SFM Advocate for Independent Review of Swedish Savings Market
The Swedish Financial Services Authority, Finansinspektionen (FI) and the Swedish Insurance Brokers’ Association (SFM) have jointly called for a comprehensive and independent investigation into the Swedish savings market to bolster consumer protection in a joint letter to the government. This move comes in response to concerns about consumers being offered savings products that are unsuitable and overpriced, potentially failing to meet their financial needs. Daniel Barr, Director General of FI, emphasizes the importance of consumer confidence in the financial market and notes that while some improvements have been observed, significant challenges persist. Purpose of the proposed inquiry is examine the distribution of the savings market, identify options to promote competition, and evaluate the prevalence of conflicts of interest, particularly those stemming from commission-based sales, with a view to developing strategies to mitigate such conflicts and, if necessary, recommend further legislative measures to ensure consumer protection. As part of the assessment, the investigation is expected to map out the existing fee and compensation models and sources of conflicts of interest and consumer protections risks as well as evaluate to what degree competitive neutrality exists between insurance companies with their own distribution and insurance companies that rely on insurance intermediaries.
Austrian FMA Reports Significant Uptick in Unauthorized Financial Entities and Celebrity-Linked Investment Scams
The Austrian Financial Market Authority (FMA) has observed a 26.2% increase in the issuance of investor warnings, from 84 in 2022 to 106, signaling a rise in the number of dubious financial service providers operating without authorization in the Austrian market. These entities, often based abroad and thus evading supervisory actions, predominantly use web-based trading platforms to offer financial instruments. They frequently employ manipulated software to deceive users into believing that trades and investments have occurred, only to embezzle the payments with no actual profits being disbursed. The FMA has also highlighted a surge in celebrity endorsement fraud, where these providers falsely advertise using celebrities’ images and fabricated success stories to lure investors into making initial “test investments” with promises of low risk and high returns. Subsequent forged account statements encourage further investment until contact is cut off when investors seek to withdraw the fictitious profits.
Money & payments
ECB Shares Update on Digital Euro Rulebook Development and Initiates Procurement for Digital Euro Infrastructure Components
The European Central Bank (ECB) has released further progress updates on the Digital Euro Project. In the latest update, the ECB detailed the advancements made by the Rulebook Development Group (RDG). Over the past ten months, the RDG, comprising representatives from various sectors including consumer, retailer, and intermediary associations, has been drafting a digital euro rulebook. This rulebook is intended to provide a single set of rules, standards, and procedures for digital euro payments across the euro area. It complements the proposed regulation that will establish the digital euro’s essential features. The first draft of the rulebook, shared with RDG members for interim review, includes functional, operational, and adherence models, along with technical requirements and proposed standards. The RDG is now focusing on preparing an expanded draft with additional chapters. The initial chapters align with the ECB Governing Council’s approved legislative proposal and digital euro design decisions, covering various aspects like the processes for all digital euro use cases and services, high-level architecture, potential standards, user experience, branding, certification, testing, internal rules, risk management, and interoperability. Stakeholder feedback is being incorporated to ensure adaptability to future changes and alignment with the ongoing legislative process.
In parallel, the ECB has initiated a procurement process to establish framework agreements with potential providers for various components and services related to a digital euro. The components outlined in the calls for applications include an alias lookup component for simplified transaction identifiers, a fraud and risk management component for detecting fraudulent activities, an app and software development kit (SDK) for digital euro services integration, an offline services component for engineering an offline payment instrument, and a secure exchange of payment information component for safeguarding transactional data.
Piero Cipollone, a member of the Executive Board of the ECB, has communicated these updates to the Chair of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. The ECB has also invited the ECON Secretariat to join the RDG as an observer and offered to provide a presentation on the RDG’s work, emphasizing the ECB’s readiness to support the democratic debate and provide technical expertise on the digital euro legislative proposal.
Other transversal themes
BIS Bulletin Examines Limitations of Large Language Models in Logical Problem-Solving
The Bank for International Settlements (BIS) has released a new BIS Bulletin discussing the cognitive limits of large language models (LLMs). The study, carried out and authored by Fernando Perez-Cruz and Hyun Song Shin, focused on assessing LLMs’ ability to process and understand logic puzzles, such as the “Cheryl’s Birthday” puzzle. The study conducted three tests using the original puzzle format and three with modified details. Key findings showed that while LLMs like GPT-4 can solve the original puzzle, they struggle with versions that have minor alterations, revealing a lack of genuine logical understanding. This is significant for central banks, which increasingly use machine learning in data management, macroeconomic analysis, and regulatory supervision. The authors emphasize caution in relying on LLMs for tasks requiring complex economic reasoning, noting that current LLMs lack the necessary analytical depth for high-stakes central banking tasks and the role of AI in economics and central banking. Beyond that the study raises broader questions about the capabilities and limitations of LLMs, including whether LLM limitations are due to training scale or fundamental knowledge acquisition limits.
Thailand SEC Updates Issuance Criteria for Foreign Debt Securities
The Thailand Securities & Exchange Commission (SEC) has updated the criteria for foreign entities issuing and offering debt securities in Thailand, effective from January 1, 2024. The revisions include inter alia the requirement for foreign enterprises to obtain permission for issuing and offering THB-denominated debt securities through an application directly to the SEC. Additionally, the issuance and offering of Baht Bonds now necessitate an issue rating from an internationally established credit rating agency (CRA), with a rating not lower than investment grade, the appointment of a bondholders’ representative, and registration of the offered debt securities with the Thai Bond Market Association (ThaiBMA). For existing issuers with roll-over debt securities that do not meet the new credit rating criteria, the SEC has provided temporary waivers to mitigate potential market impacts. The same revised criteria apply to the issuance and offering of foreign currency debt securities (FX Bonds) by foreign enterprises. Thes changes are aimed at aligning with the risk profiles of foreign entities and the evolving market environment.
G20 Initiates 2023 Working Group and Task Force Meetings Under Brazilian Presidency
The G20 has announced the commencement of its working group (WG) and task force (TF) meetings starting January 12, under the Brazilian presidency, following the Sherpa and Finance track meetings that took place in Brasília in December. These initial meetings aim to synchronize the presidency’s objectives with the agendas of the various groups and introduce the member country and union representatives. A total of 19 video conference meetings are scheduled to occur between January and February in Brasília, with January meetings including WGs on Global Economy, Women’s Empowerment, Development, Global Financial Architecture, Trade and Investments, Climate and Environmental Sustainability, and Digital Economy. February meetings will cover Infrastructure, Sustainable Finance, Education, Research & Innovation, Agriculture, Energy Transitions, Employment, Health, Risk and Disaster Reduction, and Tourism, along with task forces on Finance and Health and Combating Hunger and Poverty. Additionally, in-person meetings at the ministerial or vice-ministerial level will resume starting February 21, with three meetings planned in Rio de Janeiro and São Paulo. These discussions are part of the Sherpa and Finance Tracks and will lead up to the final summit in Rio de Janeiro on November 18 and 19, where the year’s topics will be presented for approval at the international economic cooperation forum. The full calendar is available via the G20 website.
Leadership changes & appointments
CBBH Appoints Dr. Jasmina Selimovic as First Female Governor
The Central Bank of Bosnia and Herzegovina (CBBH) has announced the election of Dr. Jasmina Selimovic as the new Governor, marking her as the first female governor in the modern history of Bosnia and Herzegovina. Dr. Selimovic was elected by the newly appointed Governing Council of the CBBH. She succeeds Dr. Senad Softic and will serve a six-year term.
Federal Reserve Bank of New York Appoints Vincent Alvarez as Board Chair and Pat Wang as Deputy Chair for 2024
The Federal Reserve Bank of New York has announced the appointment of Vincent Alvarez, president of the New York City Central Labor Council, AFL-CIO, as the chair of its Board of Directors for the year 2024. Alvarez, who has been a Class C director since January 2019 and has held the position of chair or deputy chair since January 2022. Concurrently, Pat Wang, president and CEO of Healthfirst, has been designated as the deputy chair of the Board, following her recent appointment as a Class C director in January 2023. These designations by the Board of Governors of the Federal Reserve System are in line with the Federal Reserve Act of 1913, which mandates a tripartite division of the nine directors of each Reserve Bank to ensure a broad representation of both public interests and member banks.
FSC Mauritius Gains Membership in NGFS to Bolster Environmental Risk Management in Finance
The Financial Services Commission (FSC) of Mauritius has officially become a plenary member of the Network for Greening the Financial System (NGFS) as of 27 December 2023. The FSC anticipates an active role in the NGFS, including participation in Plenary meetings and various workstreams and taskforces. The Chief Executive of the FSC, Mr. Dhanesswurnath Thakoor, remarked that this membership aligns with the FSC’s Environmental, Social, and Governance strategies and will enhance the understanding of the NGFS’s impact on financial jurisdictions, including Mauritius.
Bank of Italy and ASIC Establish MoU to Strengthen Cross-Border Supervisory Cooperation
The Bank of Italy has established a Memorandum of Understanding (MoU) with the Australian Securities and Investments Commission (ASIC) aimed at enhancing the performance of their supervisory functions over regulated entities. The agreement is designed to facilitate the oversight activities of both the Bank of Italy and ASIC by allowing for a more streamlined and coordinated approach to supervision and includes procedures for executing on-site inspections at the facilities of supervised entities located within the jurisdiction of the other authority.