Mr. Gerry Cross:

It is a pleasure to appear before the committee today. I am joined by Ms Mary Elizabeth McMunn, director of credit institutions supervision, and Mr. Colm Kincaid, director of consumer protection. Following on from the committee’s exchange of views with the Central Bank Governor, Mr. Makhlouf, and the deputy governor, Mr. Donnery, including in regard to the Central Bank’s recently published multi-year strategy and regulatory priorities, we are pleased to have the opportunity to discuss with the committee 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 members 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 the 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.

Among the important areas of change that we currently observe are, first, a rapid evolution in the way in which banking, payment and other financial services are provided to customers; second, technology-driven development of whole new product areas and activities, with the dramatic growth of crypto assets being the most notable to date; third, the ever-increasing role of data and data analytics in financial services provision; and, fourth, the pivot to a net zero carbon economy and the imperative for the financial sector to be at the heart of that transition. There is also, of course, Brexit, Covid-19 and now the invasion of Ukraine by Russia and its still unfolding consequences, which 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 fundamental uncertainty. The pandemic, in particular, has shown us the benefits of building resilience in the financial sector to continue to serve the needs of consumers and investors through periods of stress.

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 in four years, from low single digits to more than 40, 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, focusing 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 among tech-driven investment firms and virtual asset service providers, so-called VASPs. It is clear 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 that are 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 and good risk management, to be resolvable and to have a consumer-oriented culture so that consumers are neither misled nor mistreated.

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 banking 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 approximately 32,500 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, 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. 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.

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, that is, 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.

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 these responsibilities are being fulfilled.

I will stop here. Hopefully, I have given members 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 members' questions.