Central Bank says there is ‘no excuse’ for not being Brexit-ready

Regulator criticises firms for being unprepared, and warns on technology and climate

Central Bank deputy governor for prudential regulation Ed Sibley made the remarks on Friday. Photograph: Nick Bradshaw

Central Bank deputy governor for prudential regulation Ed Sibley made the remarks on Friday. Photograph: Nick Bradshaw

 

The Central Bank has criticised the financial services sector for not being Brexit-ready, and said there is “no excuse” for companies that are not prepared for the consequences of the United Kingdom’s departure from the European Union.

Central Bank deputy governor for prudential regulation Ed Sibley made the remarks on Friday during a wide-ranging address at a briefing co-hosted by PwC and Insurance Ireland on for the launch of a CEO survey report.

“Not all regulated financial services firms are adequately prepared,” he said. “There is no excuse for this, even accepting that there remains considerable uncertainty as to what will happen at the end of October and thereafter.

“So, I continue to urge you to make sure your firms are prepared – to make sure that Brexit fatigue and uncertainty does not lead to risks not being sufficiently mitigated.

“It is critical that regulated firms have considered all the impacts that Brexit could have on their businesses and that they have developed and fully tested their contingency plans in respect of these.”

Keep pace

Mr Sibley also addressed the issue of new technology and said too many insurance firms were “not getting the fundamentals right”, thereby running the risk of failing.

“Investment in talent and technology is critical to ensure your firms are able to anticipate and keep pace with these changes,” he said. “History is littered with failed firms – and in some cases industries – that did not.

“But you also need to ensure that your foundations are solid. Too many of your firms are not getting the fundamentals right, with ineffective IT risk management practices, weaknesses in IT security, a lack of effective oversight of IT, and weaknesses in the management of outsourcing.

“You run the risk that the investment in the new is being built on the sand of a lack of resilience in the old.

“Moreover, the increasing use of technology and data analytics to understand and influence customer behaviour raises important ethical and cultural questions regarding the use of this data and the significant asymmetry of information between firms and their customers.”

He said the CEO survey highlighted that just 22 per cent of respondents believe the industry has sufficiently reacted to changing consumer habits.

‘Extremely costly’

“I am concerned that even fewer of you and your boards have adequately considered the ethics of how data and technology are increasingly being used in your key interactions with your customers,” he said.

Mr Sibley also said the insurance industry was “materially exposed” to climate change, which could be “extremely costly” for the sector.

“Catastrophes are getting harder to predict in terms of frequency and impact but it is clear that both frequency and impact are increasing materially,” he said.

“The dynamics of climate change present a major challenge to modelling future impacts, but it is clear that the worst possible year is getting worse every year.”

He said there was “a very real risk” of a collective withdrawal of insurers from covering risks that they consider uninsurable.

“In some jurisdictions, such as the UK, this has prompted the state and insurance firms to work together to supply affordable insurance for homes that are at high risk of flooding.”

Mr Sibley also indicated that the Central Bank intends to introduce a public consultation next year on proposals to introduce formal recovery planning requirements for insurers that get into difficulty.

“The Central Bank aims for firms to be able to recover if they get into difficulty and for them to be resolvable in a manageable way if they cannot recover, minimising losses to policyholders and claimants and without recourse to state support,” he said.

“However, internationally and domestically, the insurance sector is not sufficiently advanced in being able to mitigate the risks of these failures, both in relation to the regulatory framework and to firms’ preparedness for crises.”

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