Asset Management & Investment Funds: Irish Practice Developments – Feb 2022
Asset Management & Investment Funds: Irish Practice Developments – Feb 2022
CBI Securities Markets Risk Outlook Report 2022
The Central Bank of Ireland (CBI) published its Securities Markets Risk Outlook Report.The report details key conduct risks to securities markets and sets out actions firms should take to identify, mitigate and manage those risks. The report also outlines the CBI's supervisory priorities for securities markets in 2022.
The report is published against a backdrop of continued uncertainty due to the impact of Covid-19 and an acceleration in the pace of change across securities markets, including investor behaviours, technological developments, and the transition to a carbon-neutral economy.
The report identifies key areas that the CBI expects firms to address. These include the following.
Misconduct Risk: As the scale and complexity of securities markets grow, so too does the risk of misconduct. Firms have extensive obligations to detect, prevent and report misconduct, and must review their compliance with the Market Abuse Regulations.
The CBI reiterated concerns around potential for ‘greenwashing’.
The CBI expect sufficient resources and management focus to be devoted to ensuring obligations are met.
“Ensuring investors are fully informed of a financial product’s sustainability characteristics in a manner that is measurable and quantifiable, using transparent parameters, is important in building trust in investments to fund the transition to a carbon neutral economy”.
Governance: Boards should not only receive but also challenge the information they receive to effect good governance. “The 2021 Securities Markets Risk Outlook Report highlighted the risks arising from failings related to Board oversight of delegates and third-party intermediaries. The risks relating to ineffective Board oversight of delegates and third-party intermediaries remain a major factor in the regulatory deficiencies we see across our mandate, including funds, FSPs, investment firms and trading venues”.
Conflicts of interest: As the financial services sector is increasingly interconnected, CBI expect firms to ensure regulatory requirements on identifying, mitigating and managing conflicts of interest are being met.
Innovation presents both opportunities and risks to securities markets and investors. CBI expect firms to have regard to the features and complexities of the product they are offering to consumers.
The CBI operate a limit of 10% exposure to special purpose acquisition companies (SPACs).
“At the moment, while such assets may be suitable for wholesale or professional investors, the CBI is highly unlikely to approve a UCITS or a RIAIF proposing any exposure (either direct or indirect) to crypto-assets, taking into account the specific risks attached to crypto-assets and the possibility that appropriate risk assessment could be difficult for a retail investor without a high degree of expertise”.
Data: Given its importance, firms can "expect increased engagement with the CBI in respect of data quality issues. This engagement may take the form of supervisory action where it has been identified that firms do not have sufficient frameworks in place in order to meet their reporting obligations and to ensure data is reported in a complete, accurate and timely manner”.
Cyber Security: Digital transformation has increased the risk of cyberattacks, with cyber security becoming a threat to financial stability. Firms need to take steps to understand critical business services and ensure they are more resilient to disruption from operational and cyber risk.
Market Dynamics: CBI expect firms to have an appropriate risk management framework in place to identify, manage and mitigate the potential risks arising from the use of leverage and liquidity risk within a fund's portfolio, including regular stress testing scenarios.
Key CBI initiatives that relate specifically to the risk outlook in the report include the following:
completing the Common Supervisory Action (CSA) on valuations in the funds sector
following up on the fund management company guidance review
following up on the CSA on UCITS costs and fees
engaging with depositaries and fund administrators, including conducting targeted risk assessments focussing particularly on governance, operational and capital risk
undertaking a number of full conduct risk assessments on firms while continuing to develop and enhance its supervisory approach to market abuse risks
a defined plan of work with enforcement, to include both specific cases across the CBI’s mandate and assessment and investigation of suspected market abuse
continuing the planned supervisory review framework project for SMSD’s mandates, focusing on the review of the PRISM impact rating model for funds and related supervisory engagement
further revisions to the CBI’s gatekeeper approach, applying their ROBUST principles to evaluate authorisation proposals and business expansion applications from a conduct risk perspective
Looking back on 2021, CBI noted: “Supervision of the funds sector placed a focus on money market funds (MMFs), property funds and corporate bond funds, as these sectors were identified as being particularly sensitive to recent external market events on matters such as liquidity and asset valuations”
Irish Funds produced a helpful summary of the report. Please speak with your usual contact on our Asset Management and Investment Funds team if you would like a copy.
CBI Speech – update on the Individual Accountability Framework
Gerry Cross, CBI Director of Financial Regulation, gave a speech at the Compliance Institute entitled "The spirit in the machine: considering evolving financial regulation". The update on the Individual Accountability Framework (the IAF) is of particular interest.
Subject to the legislative process, the Central Bank (Individual Accountability Framework) Bill 2021 should be enacted into law in the months ahead. The CBI have been working in parallel on the regulations and guidance which will complete the new framework. CBI intend to publish the proposed CBI regulations for consultation soon after the finalisation of the legislation. The new framework will be focused on the substance of senior manager roles and not on their titles.
The proposed IAF retains the existing accountability requirements for the collective actions of firms and includes effective participation in collective decision-making as a component of individual accountability. In terms of expectations of individuals, and their role in collective decision-making, these have been reinforced. The continued expectation that they participate appropriately in collective decision making, actively challenge and exercise sound judgement, ensuring that all such decisions are robust and properly informed, is now integrated in the IAF.
As noted in previous bulletins, the IAF includes the Senior Executive Accountability Regime (SEAR). SEAR will be introduced on a phased basis but will apply, in the first instance, to:
credit institutions (excluding credit unions)
insurance undertakings (excluding reinsurance undertakings, captive (re)insurance undertakings and Insurance special purpose vehicles)
investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorised to hold client monies/assets
Third country branches of the above categories of firms will also fall within the first phase of SEAR.
SEAR will be one of the most impactful regulatory changes of recent years, requiring firms to map regulatory responsibilities to a senior individual within the organisation who is accountable for regulatory contraventions that may occur in their remit. In addition to enhancing the regulator's ability to hold individuals to account for regulatory contraventions, the reforms will impose 'conduct standards' on many individuals working in financial services in Ireland, not just senior executives.
Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment firms) (Amendment) Regulations 2022
To reflect Ireland's progress, the FATF has now re-rated the country on Recommendations 22 (DNFBPs: Customer due diligence), from partially compliant, to largely compliant.
The report also looks at whether Ireland's measures meet the requirements of FATF Recommendations that have changed since the 2017 mutual evaluation and 2019 follow-up report. The FATF agreed to maintain the rating of largely compliant for Recommendation 15 (New Technologies).
Today, Ireland is compliant on 17 recommendations of the 40 recommendations and largely compliant on 17 of them. It remains partially compliant on six of the 40 recommendations.
Ireland will continue to report back to the FATF on progress to strengthen its implementation of AML/CFT measures."
The EU published details of further sanctions in response to the crisis in Ukraine.
The CBI has a dedicated webpage where supervised entities can access relevant information on these sanctions
The CBI wrote to supervised entities noting that:
It is imperative that firms have processes in place to operationalise these sanctions as they pertain to the business. Firms should be monitoring the situation closely given the potential for further sanctions.
Firms are reminded of their obligation to ensure that they have robust controls in place, including policies and processes, to ensure that risks to the business are effectively identified, monitored and mitigated on an ongoing basis.
Firms need to be aware of the significantly increased cyber threat landscape resulting from Russia's invasion into Ukraine. Firms need to be on heightened alert for cyber-attack and have measures in place to detect, defend and recover as needed, to both protect and ensure continuity of their operations.
Firms should assess their exposure to cyber risks, including indirect exposures via third parties, and keep a watching brief for notifications from the National Cyber Security Centre. In particular, firms should review this advisory which provides recommendations on actions firms should be already taking.
This is part of a global move to impose sanctions in response to the crisis in Ukraine
Earlier this month A&L Goodbody's Disputes and Investigations team published an analysis of the (then proposed) sanctions and outlined tips to prepare your business. Go to publication