Asset Management & Investment Funds: Irish Practice Developments – April 2023

QIAIF exposure to digital assets

The Central Bank of Ireland (CBI) is increasing limits for indirect exposure to digital assets (also known as crypto assets), depending on the liquidity provided by the qualifying investor alternative investment fund (QIAIF).

The CBI is also removing the requirement for a pre-submission where a QIAIF is proposing to invest in digital assets.

 Key limits: 

  • up to 20% of NAV in digital assets for open-ended QIAIFs 
  • up to 50% of NAV in digital assets for closed-ended QIAIFs or QIAIFs with limited liquidity 

To avail of these limits the AIFM must:

  • have an effective risk management policy addressing (at least) liquidity, credit, market, custody, operational, exchange risk, money laundering, legal, reputational and cyber risk
  • carry out appropriate stress testing
  • have an effective liquidity management policy which includes sufficient tools to manage liquidity events
  • have clear prospectus disclosure
  • ensure the portfolio is constructed to provide appropriate liquidity (both in normal and stressed conditions)

Central Bank AIFMD Q&A 1145 (which clarifies the above) also confirms that the CBI:

  • will not permit direct investment in digital assets until it is satisfied that depositary safe-keeping rules can be met
  • is highly unlikely to approve a retail alternative investment fund (RIAIF) proposing any exposure (either direct or indirect) to digital assets

A pre submission is required for QIAIFs proposing to invest indirectly in digital assets in excess of what is outlined in the Central Bank’s AIFMD Q&A ID1145 or any direct investment in digital assets.

Central Bank UCITS Q&A 1100 confirms that the CBI is highly unlikely to approve a UCITS proposing any exposure (either direct or indirect) to digital assets.

The Individual Accountability Framework and the Senior Executive Accountability Regime

CBI Deputy Governor Derville Rowland spoke about the CBI consultation on key aspects of the Individual Accountability Framework (IAF). The speech gives a clear high-level overview on the impact and purpose of IAF.

As referenced in our March AMIF bulletin, following enactment of the of the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act), the CBI launched a three-month consultation (closing 13 June 2023) on key aspects of the implementation of the Individual Accountability Framework (IAF Framework), including the publication of draft regulations (regulations) and draft guidance (guidance).

The Act provides for the introduction of the IAF, which is designed to improve governance, performance, and accountability in firms by establishing a framework of enhanced clarity as to who is responsible for what within firms. It also clarifies the standards to be met by individuals holding these responsibilities, with a particular focus on senior executives. The four key areas covered by the legislation are:

  • A Senior Executive Accountability Regime (SEAR) which ensures clearer accountability by imposing obligations on in-scope firms and senior individuals within them to set out clearly where responsibility and decision-making lies for their business.
  • Conduct standards, including additional conduct standards and business standards which set out the standards of behaviour the CBI expects of firms and the individuals working within them.
  • Enhancements to the current Fitness & Probity (F&P) Regime.
  • Enhancements to the CBI's administrative sanctions procedure (ASP), including a key change regarding the CBI's ability to take enforcement directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.

SEAR will initially apply to a defined range of regulated firms (credit institutions, certain insurance undertakings and investment firms). However, deputy governor Rowland noted in her speech (as also reflected in the consultation) that:

"In the meantime, our view is that there is much in the spirit of the SEAR that firms not initially falling within scope should recognise as aligned with good quality governance."

The conduct standards (including additional conduct standards and business standards) and enhancements to the F&P Regime and ASP procedures will apply to all regulated firms.

The CBI will have power via regulations to rollout the SEAR to other sectors in due course and it is intended to increase the scope of application of the SEAR over time with lessons from the initial roll-out to be incorporated as the scope is extended.

Following the receipt and review of feedback to the consultation paper and the publication of the related feedback statement, a transitional period for firms and holding companies to implement the relevant changes introduced by the IAF will be put in place. From an investment funds perspective, this would see:

  • 31 December 2023 - conduct standards, including additional conduct standards and business standards, apply
  • 31 December 2023 - Fitness & Probity Regime – certification requirements apply

You can read about how firms should prepare for these changes in our updated IAF and SEAR guide HERE.

You can read our new guide on the CBI IAF consultation and draft regulations HERE.

The framework also introduces changes to the CBI's fitness and probity enforcement processes (see below).

The CBI intends to launch a separate public consultation on the changes to the ASP in mid-2023. This consultation package will include consolidated end-to-end ASP guidance which will include draft investigation, inquiry, settlement and sanctions guidance. ​

Updated CBI fitness and probity enforcement procedures

The CBI updated its fitness and probity enforcement procedures effective 20 April 2023 (see CBI website here) with the following:

CBI note on liability driven investment funds

The CBI issued an information note on liability driven investment funds (LDI) funds.

Department of Finance review and consultation on the funds sector

The Department of Finance (DoF) is to conduct a review of Ireland’s funds sector and produce a report ‘Funds Sector 2030: A Framework for Open, Resilient & Developing Markets. The DoF is establishing a multi-disciplinary review team including the DoF, CBI, Revenue and experts from outside the State sector. It aims to engage with stakeholders including a public consultation and present a draft report to the Minister of Finance by Summer 2024. The review will include:

  • relevant peer comparisons (most notably from other EU jurisdictions)
  • relevant commitments in the programme for government
  • consideration of the Commission on Taxation and Welfare recommendations 6.6 & 6.7 which called for:
    • an examination of the taxation regime for funds, life assurance policies and other related investment products, with the goal of simplification and harmonisation where possible, and to do so with a net revenue-raising or neutral mandate
    • an examination of the regimes for real estate investment trusts (REITs) the Irish real estate funds (IREFs) and their role in the property sector, including how they support housing policy objectives
    • the use and scope of the Section 110 regime, both in the context of the property sector and more generally so as to ensure that the regime is fit for purpose and meeting agreed policy objectives

CBI ETF survey 

The CBI commenced its themed review of ETFs by issuing the first of two surveys to industry regarding the operationalisation of ETFs, including authorised participants, market makers and ETF providers (fund management companies). A qualitative survey was issued initially with a quantitative survey to follow.
 
CBI Regulatory Service Standards Performance Report for July to December 2022

The CBI published its Regulatory Service Standards Performance Report for July to December 2022. The report provides interesting data on the performance of the CBI against the service standards to which it has committed in respect of topics including:

  • authorisation of financial service providers (FSPs) and investment funds
  • assessment of fitness and probity pre-approval control function (PCF) individual questionnaire (IQ) applications

The report provides detail on its authorisation and approval applications. It also gives insights into the reasons why applications are returned.

CBI letter to investment firms (MiFID​ investment firms & market operators)  

The CBI issued a Dear CEO letter to investment firms (MiFID investment firms & market operators) following its targeted reviews of control frameworks and risk appetite statements. The CBI expects all firms to discuss the letter at the next board meeting, and review their frameworks against both the deficiencies identified in Appendix 2 and the good practices identified in Appendix 1. It expects gaps and weaknesses to be dealt with promptly.

Appendix 1 sets out a number of good practices found across a number of investment firms on the following topics:

  • risk and compliance control functions and risk management frameworks
  • holistic risk appetite statement dashboard
  • risk appetite statement linked to strategic objectives
  • individual responsibility and ownership of the risk appetite statement
  • unacceptable risks formally documented

Appendix 2 sets out key findings and CBI expectations on the following areas: 

  • risk management frameworks and governance
  • board oversight
  • risk appetite statement (RAS) as a risk management tool
  • RAS design 
  • reporting 
  • cascading risk appetite

Proposal for a Companies (Corporate Governance and Regulatory Provisions) Bill

A public consultation will be launched a proposed C​ompanies (Corporate Governance and Regulatory Provisions) Bill (Bill). The Bill aims "enhance" the Companies Act 2014, with a focus on corporate governance, enforcement, administration and insolvency. 

The consultation will include a proposal to give companies the option to hold fully virtual AGMs and general meetings on a permanent basis.

The Corporate Enforcement Authority has also put forward a number of proposals to enhance its powers and capabilities.

​Stakeholders will be invited to comment on specific proposals and also to "highlight potential amendments that would enhance the company law regime". 

Companies Registration Office - directors PPSN requirement

The Companies Registration Office (CRO) announced a change to its process for filing Forms A1, B1, B10 and B69, in that company directors will be required to provide their personal public service number (PPSN). The PPSN will be used for identity verification to ensure that the company director is alive and is a natural person. It will need to be provided every time a form is filed to:

  • incorporate a company (A1)
  • make an annual return (B1)
  • notify a change of director (B10 or B69)

CRO will announce the go live date for the new process shortly. You can read more on the CRO's PPSN – FAQ.

CBI markets update

The CBI published issue 5 of 2023 of its markets update, including the following points of interest (discussed above):

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 2 May 2023