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Primary and subsidiary legislation affecting financial services


Central Bank Act 14 to 18 Outlines powers and responsibilities of the Central Bank of Ireland.


Insurance Act 18 Gives power to the Department of Employment, Trade and Enterprise for its supervisory role.


Pensions Act, 10 Defines powers and responsibilities of the Pensions Board.





Main supervisory authorities in the financial services sector, their roles and objectives


Ireland has a number of supervisory authorities in the financial services area. The Central Bank of Ireland (CBI) looks after the banking sector, the insurance supervisor is the Department of Enterprise, Trade and Employment (DETE), and superannuation (known as pension) funds are regulated by the Pensions Board.


The CBI is a member of the European System of Central Banks (ESCB). All the central banks in this group have the same supervisory objectives. The bank’s primary duty is maintenance of price stability. In terms of financial sector companies, the CBI is charged with the supervision of ‘credit institutions’ in Ireland. Credit institutions are defined as ‘an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account. ’ This definition includes licensed banks and building societies but excludes credit unions and friendly societies.


Insurance is looked after by the Department of Enterprise, Trade and Employment. The DETE is a government department whose mission is ‘To promote the sustainable development of a modern competitive enterprise economy based on quality employment, social inclusion and enhanced working and living standards. ’ The DETE is involved in improving and monitoring labour force development; enterprise competitiveness; employment rights and industrial relations; enterprise, science and technology policy; corporate services and economic policy; trade, competition and market rights; and Insurance and company law. With relation to insurance, the department has powers to request information from companies at any time and to act according to the nature of this information. The department also has an obligation to ensure continuing compliance with regulatory requirements.


The Pensions Board regulates occupational pension schemes and Personal Retirement Savings Accounts, as well as supervising the operation of the Pensions Act. The Pensions Board also advises the Minster for Social and Family affairs on pension matters. The Pensions Board aims to promote security and protection in occupational pension schemes, development of an efficient national pension structure, and to increase participation in pensions to such a level that all members of the community can benefit. The Pensions Board is also an important source of information for anyone interested in pension schemes in Ireland.


Prudential requirements in financial services


Banking Sector


The CBI has set out minimum capital requirements to ensure the banking sector has adequate capital resources. It requires the capital to risk weighted assets ratio for credit institutions to be 8 percent. These standards comply with those put forward by the ESCB. Because of the relatively small size of the Irish banking sector, the CBI determines the appropriate capital ratios for credit institutions on an individual basis. Those set out in the standard are simply absolute minimums. The amount of funds (assets) required for each credit institution is determined as the sum of


a) the bank book risk weighted assets multiplied by the solvency ratio applicable to that institution; and


b) the trading book notional risk weighted assets multiplied by the trading book capital ratio for that institution.


Where the trading and banking book risk weighted assets are calculated based on position risk, settlement and counterparty risk, foreign exchange risk and large exposures risk. The ratios differ from institution to institution, and are determined by the CBI.


Life and General Insurance sectors


In Ireland, General insurance is referred to as ‘non life’ insurance, and has basically the same legislated requirements in terms of solvency and calculation of liabilities as life insurance. The primary prudential requirement in the insurance industry is the existence of the ‘Appointed Actuary’. All licensed insurers in Ireland must have an ‘Appointed Actuary’, who reports to the regulator and company on the financial position of the company on a yearly basis. This annual actuarial review is carried out to ensure that the company has sufficient reserves and premium levels to meet all future liabilities. The actuary also has legislated whistle blowing duties. If, in the opinion of the actuary, the financial position of the company is at risk, he or she must inform the regulator as soon as practicable. Comprehensive rules regarding investment limits, matching by currency and valuation of investments covering technical provisions exist. Technical reserves are calculated with implicit safety margins (through the assumptions).


Superannuation / Pensions


Defined benefit pension schemes require an actuary to determine the level of liabilities, since these liabilities are contingent on uncertain future events (death, retirement, ill health etc). These liabilities, together with recommendations for future contribution rates are determined by an actuarial valuation. These valuations must be carried out at least every three and a half years. In addition to this, every three and a half years each defined benefit scheme must submit an actuarial funding certificate. This certificate sets out the actuary’s beliefs regarding the schemes ability cover all of its liabilities and expenses if it were to be wound up on that date. Again, as with Insurance, the actuary has important whistle-blowing duties in the superannuation sector. These are discussed later.


Procedures available to supervisory authorities for dealing with financial institutions in distress


Banks


There are a number of things the CBI can do if it is unhappy with the operation of a credit institution, or believes it to be in distress. The CBI can impose conditions on the bank’s license; revoke the bank’s license; issue directions on what the bank must do; tell the bank to stop taking deposits from the public; petition to the High Court to have the bank wound up; petition to appoint an examiner; seek (through courts) to prohibit the bank from practicing in a way which contravenes the CBI legislation; and prosecute for certain offences.


Insurance


The DETE has a number of avenues of ‘attack’ if it believes an insurance company is unlikely to be able to meet its future liabilities, insufficient solvency, has failed to comply with the Insurance Acts, has inadequate reinsurance arrangements, defaults on the initial approval conditions (including forecasts), does not in some way meet one or more legislated standards. Actions available include directing the company to refrain from taking on new business for some or all types of contracts; limit premium income; refrain from certain types of investment; realize certain assets within a defined period; and / or retain sufficient assets in Ireland to cover technical reserves.





Pension Funds


A pension fund is in trouble if it has insufficient assets to cover all liabilities and expenses of an immediate wind up. Whether or not a pension scheme has adequate funding is determined at least every three and a half years, when an actuary prepares a funding certificate for the scheme. If the funding certificate certifies that the fund does not satisfy the funding requirements, the Trustees must have a ‘Funding Proposal’ prepared to be submitted to the Pensions Board with the funding certificate. The funding proposal sets out a plan for future contributions to the plan such that, in the actuary’s opinion, the scheme could be ‘reasonably expected’ to satisfy the funding standard as at the effective date of the next actuarial funding certificate.


The role of actuaries





Actuaries in Ireland have statutory roles in life insurance, general insurance and pensions.


In Ireland, every insurance company (both life and non-life) must have an ‘Appointed Actuary’, who is required to conduct annual investigations into the financial condition of the company and report this information to the company’s directors and the regulator.


The Appointed Actuary must sign off on the company’s technical reserves and advise on the solvency of the company. The Appointed actuary must also look at current premiums being charged, and comment as to whether or not these premiums and the company’s assets will be likely to be sufficient to cover future liabilities that will arise from writing new business and establish sufficient reserves to ensure the continuity of the company.


The relevant legislation sets out a framework outlining the conduct of annual actuarial valuations, which is based on the European Union life assurance directives. However, there are no specific provisions given on how the actuary should determine premium rates, policy conditions and reserving standards. The reason for this is the belief that the Appointed Actuary is a professional who will apply good judgment, and follow professional standards in order to maintain a strong financial position for the company. This allows companies considerable freedom in policy design. For this reason, it would be fair to say that the actuarial profession has contributed to the continued growth of new products in the Irish industry.


Defined benefit Superannuation or pension schemes in Ireland are heavily dependant on actuarial involvement in the calculation of solvency levels, contribution rates, restructuring, and many other forms of advice. Statutory actuarial work involves regular actuarial valuations; actuarial funding certificates; funding proposals; reporting to the pensions board; calculations and disclosure under Family Law Acts; and calculation of individual transfer values.


Central Bank of Ireland www.cbi.ie


- Implementation of EU directive on the capital adequacy of investment firms and credit institutions


- Saving and Investing � Your rights (brochure)


Society of Actuaries, Ireland www.actuaries-soc.ie


- Guidance notes


- ‘The Role of the Appointed Actuary in Ireland’


- ‘The Role of the Pension scheme Actuary’


Department of Enterprise, Trade and Employment www.entemp.ie


Government of Ireland www.gov.ie


Irish Pension Board www.pensionboard.ie


International Monetary Fund www.imf.org


- Report on observance of standards and codes


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