Asset Management & Investment Funds: Irish Practice Developments: Feb 2020
Asset Management & Investment Funds: Irish Practice Developments: Feb 2020
The Central Bank of Ireland (CBI) contacted certain Irish UCITS fund management companies and Irish UCITS on 6 February 2020 to advise that a detailed UCITS liquidity questionnaire will become available for completion in March 2020. Recipients of the questionnaire will have about 3 weeks to complete it. The CBI included the template liquidity questionnaire in its communication and asked that it be shared with all board members.
This is stage 1 of the common supervisory action with national competent authorities on UCITS liquidity risk management announced by ESMA on 30 January 2020. The ESMA press release and the CBI communication both describe 2 stages of the assessment. Stage 1 is the request for information and quantitative data, to be provided by completing the liquidity questionnaire. Stage 2 will involve focussing on a sample of UCITS managers and UCITS to carry out more in-depth supervisory analyses
The CBI, referring to its previous correspondence of 7 August 2019, repeated that the responsibility for liquidity risk management, including compliance with all legislative and regulatory obligations, rests with the board of the fund management company, the individual directors and the relevant designated persons. The liquidity questionnaire will be available to complete in March 2020 only via the CBI's ONR system. As the CBI is providing the content of the questionnaire in advance of the start of the reporting window, we can expect that there will be a hard submission deadline date.
UCITS management companies who have received the questionnaire will need to advise their Irish UCITS under management. The CBI communication and questionnaire should be brought to the attention of all board members of UCITS and UCITS management companies in scope of the liquidity review. The process of compiling data should have begun as soon as possible in preparation for completion of the questionnaire via the CBI's ONR system when the reporting window opens in March 2020.
Irish Fund Service Providers have been reporting on the daily and weekly liquidity of Irish domiciled fund since January 2019.
CBI PRISM Review
The Probability Risk and Impact SysteM™ (PRISM™) is the CBI's risk-based framework for the supervision of regulated firms. It was introduced in 2011 and is now being revised.
The CBI issued a paper, "PRISM Impact Review – Revised Prudential Impact Models", to provide a high-level overview of the PRISM Impact Review. It includes information on the revisions to the prudential impact models, including their metrics, in the asset management and fund service provider sectors (and other sectors)
Impact is just one aspect of the risk-based supervisory approach. Previously, the size of a firm was the key driver of impact. Under the new model, various dimensions of impact are assessed, such as substitutability, connectivity, scale, spread of failure etc
The CBI will revise the number of prudential impact models it utilises to determine the overall impact and consequential PRISM rating of a firm
The CBI will also revise the metrics and weightings used in its prudential models to assess impact
The review does not affect Credit Institutions as there is a distinct SSM prioritisation methodology for Significant and Less Significant Institutions
Changes to the prudential impact models applied by the CBI in conducting a risk rating will follow a retrospective data collection initiative followed by ongoing quarterly data submissions (via ONR)
CBI will write to affected asset managers and funds service providers to inform them of their revised impact category in the first half of 2020
As the CBI operates a risk-based model of supervision, changes to a firm's PRISM rating wil affect the intensity of supervisory engagement. Financial service providers will be supervised accordingly in 2020
The CBI also intends to test alternative levy methodologies based on impact models. These will be communicated to industry if changes arise. No changes to levy methodologies are planned in the 2019 cycle (2020 billing cycle)
The CBI announced in December 2019 that it would be conducting a deep dive on property funds. The aim of the deep dive is to assess the resilience of this growing form of market-based finance to the domestic economy. CBI will also assess whether there is a need for a macroprudential response to any potential risks. CBI will continue to work with colleagues in Europe and in global fora on these issues.
CBI has issued a survey to property funds (responses due by 20 March 2020) with questions on a variety of topics:
CBI will also hold information sharing sessions in the coming months.
CBI Review of Stakeholder Engagement and Key Frameworks
CBI Governor Gabriel Makhlouf announced that the CBI is undertaking a review of its stakeholder engagement to identify best practice in this area to deliver "a consistent, comprehensive and inclusive approach to how we engage and who we engage with." Governor Makhlouf also announced that the CBI is looking at its key frameworks to ensure that they are fit for purpose for the decade ahead.
Speaking at the European Financial Forum on 12 February 2020 on The Decade Ahead, Governor Makhlouf's key points included:
The UK's withdrawal from the Single Market represents a substantive change for the Irish economy
The impact of the coronavirus outbreak in China adds to already existing uncertainties and risks at the global level
We must ensure that our regulatory frameworks are fit for purpose for the decade ahead. As a central bank, we must also be agile and responsive to change, adapting to and shaping the world around us
Governor Makhlouf cautioned that:
"The economic impact of the new trading arrangements with the UK will depend on how close or how far they are from current arrangements. But it seems likely and unsurprising that any future economic relationship between the EU and the UK will have more hurdles than the status quo. Consumers, businesses and regulators should expect, and plan for, more frictions and divergence. There are no straightforward answers here and it is inevitable that uncertainty will have an impact on economic activity. But minimising that uncertainty by using the transition period to plan for change would be my advice to all businesses, all consumers and all regulators."
CBI wants the firms it regulates to be sufficiently diverse and inclusive, particularly at senior level, to prevent groupthink, guard against overconfidence, and promote internal challenge
DG Rowland spoke about two specific aspects of CBI work – firstly, senior appointments, and secondly, wider diversity and inclusion throughout firms
CBI observes that there remains a pronounced gender imbalance at board level and in revenue generating roles. While gender diversity is only one aspect of diversity, it is a very important one and one that is easy to measure. When the CBI speaks to the need for diversity at senior levels, it is not only referring to gender diversity. CBI also wants to see improvements in the diversity of experience, thought, background and attributes at senior levels
In particular, the CBI expects regulated firms to:
show more ambition, including in targets and measures
pay more than lip service to diversity programmes
build better pipelines of talent
identify and reduce barriers to change
Increasingly, the CBI is incorporating diversity and inclusion into its supervisory thinking as the regulated firms and markets it supervises grow in scale and complexity, requiring the quality of firms' decision making and risk management apparatus to be ever more sophisticated and balanced
The importance of firms having high quality and fully embedded conduct risk frameworks to manage risks was referenced in CBI's recent letter to industry on conduct risk in securities markets. The taxonomy used to complete that work included specific modules on culture and people, and the findings included output from over 150 interviews of not just directors, CEOs and other officers but also frontline staff in the firms inspected
CBI Expectations on Securities Market Conduct Risk and Market Abuse
The CBI published a Dear CEO letter on Securities Market Conduct Risk. Please see A&L Goodbody's summary of CBI expectations in respect of both Securities Market Conduct Risk and Market Abuse here.