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The Central Bank’s Dear CEO Letter Highlights Inadequate Risk Frameworks

October 2, 2020

The Central Bank of Ireland recently issued a “Dear CEO” letter on 21st January 2020. The letter outlines concern that firms are not adequately identifying and mitigating market conduct risks, it stated:

“The central theme underpinning those findings is that entities may not have been adequately identifying the market conduct risk to which they are exposed, and so cannot appropriately mitigate and manage the risk.

The letter outlines three main concerns:

Inadequate Market Conduct Risk Frameworks – The Central Bank outlined some firms have a lack of structured frameworks to ensure controls are in place, and that current frameworks are not fit for purpose.

 The CBI observed that there was a lack of a structured market conduct risk identification processes and some entities had processes in place that didn’t meet the expectations of the Central Bank.

Inadequate Governance Of Market Conduct Risk – This concern was in relation to senior management and the Board not taking full responsibility for the governance of market conduct risk. In global structures, it was highlighted that there was a poor flow of conduct related information between branches and jurisdictions in the group.

The CBI also recommends that all regulated entities must be fully compliant with the CBI’s Fitness and Probity Regime. 

Failure To Identify The Risk Of Market Abuse – The Central Bank laid out expectations that it wants regulated entities to “have systems and controls in place to ensure compliance with their obligations under the MAR.” Presently, many organisations were found to have ineffective MAR3 trade surveillance systems in place.

Conclusion

The Central Bank said their :

“Supervisory work in 2020 will include focussing on regulated entities’ ability to identify market conduct risk; the extent to which they are sufficiently well controlled to govern wholesale market conduct risk; and the flow and escalation of conduct-specific information within and across regulated entities and groups.”

Conduct risk will be a key regulatory focus in the coming years. It is now time for firms to reassess their current approach and frameworks for conduct risk.

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