Central Bank Ramps Up Rule-Making Activity
One of the notable features of recent financial services legislation has been to give the Central Bank of Ireland (the "CBI") power to make regulations concerning a broad range of financial services activities ("Regulations"). This new power is important because a breach by a regulated financial service provider of the Regulations will give its customer a right to sue for damages suffered as a result of the breach. Although the CBI is not obliged to consult widely before making Regulations, it has, in fact, done so to date. This is to be welcomed. However, the following are currently the key issues:
- The CBI is broadening its customer protection mandate beyond consumers (i.e. private individuals acting outside the course of a trade, business or profession) to small and medium-sized enterprises ("SMEs"); and
- The Regulations present an additional source of liability for regulated entities by way of the customer's private right of action for damages.
The new power to make Regulations
The new CBI power is provided by section 48 of the Central Bank (Supervision and Enforcement) Act 2013 (the "Act"). The purpose of the Regulations is the proper and effective regulation of financial institutions. The CBI is obliged to consult with the Minister for Finance (and for certain types of Regulation the Minister for Enterprise, Jobs, and Innovation) before making Regulations and may consult with industry (but is not obliged to do so). Regulations have the status of secondary legislation. Once they are made, Regulations must be laid before the Houses of the Oireachtas.
Regulations can cover a very broad range of areas. These include the following:
(a) risk management;
(b) administrative, accounting and reporting matters;
(c) compliance resources and procedures;
(d) provision of customer information;
(e) conduct of business with customers including suitability of investments, management of conflicts of interest and quality of service etc.
The Irish Constitution provides that the Oireachtas is the sole law making authority for the State. Case law recognises the need for detailed and flexible procedures for passing subordinate legislation. However for subordinate legislation to be valid, the primary legislation must make clear the purpose to be achieved by the delegated legislation, and the principles and policies to follow in achieving that purpose.
Key points to note
Any customer can sue for breach of Regulations
In addition to giving the CBI the power to make Regulations, the Act also provides (section 44) that where a regulated financial service provider breaches financial services legislation any customer who suffers loss or damage as a result of the breach can sue for damages. Therefore a customer can sue for damages where it suffers loss as a result of breach of a Regulation.
For the purposes of the new civil right of action, a customer includes not only consumers but also non-retail customers of a financial service provider – e.g. a large corporate customer. The new private right of action presents a very significant extension of potential liability for regulated entities. This includes potential liability for breaches of a Regulation. Accordingly the CBI's consumer protection mandate has been expanded very significantly to cover commercial customers of financial service providers.
The rulemaking process has started
The CBI has already begun consultation processes on draft Regulations. In November 2014 the CBI published a consultation paper (CP 87) entitled "Macro-prudential policy for residential mortgage lending" (the "Mortgage Lending Consultation"). Its focus is the imposition of limits on loan-to-value/loan-to-income ratios for new residential mortgage lending for banks. In brief, the intention is to impose stricter requirements for lenders so that they – and their customers - are not as exposed to property market downturns/negative equity in the future. On 28 January 2015 the CBI announced its intention to make regulations to impose restrictions on residential mortgage lending.
In January 2015 the CBI issued a consultation paper and draft Regulations designed to give small and medium-sized enterprises very significant rights in the context of their relationship with lenders authorised by the CBI (the "New SME Code Consultation"). The New SME Code Consultation builds on an existing Code of Practice for SMEs issued under a different statutory provision. In particular, it is proposed that SME borrowers will have significant statutory based rights (among other things) to receive very extensive pre-contractual information, information gathered on the suitability criteria used to assess the loan, to security packages that are "reasonable and proportionate" and for detailed procedures to be followed where a borrower is in financial difficulty.
The new regulations will be detailed
The Mortgage Lending Consultation and New SME Code Consultation contain detailed draft Regulations. This suggests that the CBI is mindful of the fact that breach of a Regulation could give rise to a claim by an aggrieved customer for damages.
The Regulations will significantly increase the regulatory burden on financial service providers. Customers – retail and commercial – will likely have significant rights under Regulations. A positive development is that the CBI has consulted with industry on proposed Regulations, and there appears to be recognition that the Regulations need to be detailed – given the civil law consequences of a breach. However, vigilance will be required to ensure that future Regulations do not infringe the Constitutional principles which limit a statutory body's scope for passing delegated legislation.
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