Asset Management & Investment Funds: Irish Practice Developments – March 2023
Asset Management & Investment Funds: Irish Practice Developments – March 2023
CBI industry letter on costs and fees of UCITS and AIFs
The Central Bank of Ireland (CBI) issued an industry letter to management companies of Irish funds highlighting the main findings of its inspection of costs and fees charged to UCITS as part of the European Securities and Markets Authority's 2021 Common Supervisory Action (CSA).
The CBI letter sets out its supervisory expectations and the actions that management companies of Irish funds should take to ensure compliance. Notably, while the CSA related to costs and fees charged to UCITS, the CBI expects that the findings and actions of its review are also considered by AIFMs with respect to costs and fees charged to AIFs managed by them. Read more here.
The Individual Accountability Framework - CBI consultation
The consultation paper, regulations and guidance seek to provide clarity in terms of the CBI's expectations for the implementation of, and seeks stakeholder feedback with respect to, the Senior Executive Accountability Regime (SEAR), the Conduct Standards and certain enhancements to the Fitness and Probity (F&P) regime.
The consultation paper sets out the following implementation timeline for the IAF package of reforms.
From 31 December 2023:
Conduct Standards, including accountability of senior individuals for running their parts of the business effectively (individuals holding pre-approval controlled function (PCF) roles, or who otherwise exercise a significant influence on the conduct of a firm's affairs, complying with the 'Additional Conduct Standards').
F&P regime enhancements, including certification requirements.
From 1 July 2024:
SEAR (includes the separate statutory 'Duty of Responsibility' imposed on individuals holding PCF roles with the responsibilities set out under SEAR) to apply to firms listed as being initially in scope. These include (with some exclusions) credit institutions, insurance undertakings and some investment firms.
The CBI's annual Securities Markets Risk Outlook Report provides regulated financial service providers (RFSPs), investors and market participants with insight into the key risks and areas of focus for markets supervision, which will inform supervisory engagements over the coming year. Read more here.
CBI Deputy Governors Derville Rowland and Sharon Donnery spoke to the CBI's 2023 regulatory and supervisory priorities, building on the priorities letter which the Deputy Governors issued to all regulated firms earlier this year.
Deputy Governor, Consumer and Investor Protection, Rowland said: “We have made clear our expectations to firms on the steps they must take to mitigate risk to consumers and investors in this changing and challenging economic environment. Our Consumer Protection Outlook Report sets out the key risks on which financial firms should take action in this regard. Similarly, our Securities Markets Risk Outlook Report emphasises the need for firms and market participants to recognise and respond to the new market conditions and adapt their risk management and compliance frameworks in order to protect investors and promote orderly markets."
Core areas of focus will include:
progressing actions on the systemic risks generated by non-banks, in particular advancing a macro-prudential framework for non-banks
continuing vigilance of the financial system, supervising firms' compliance with AML/CFT obligations, detecting and sanctioning market abuse, and enforcing financial sanctions (working closely with An Garda Síochána and other relevant bodies in all these areas)
implementing new EU regulations on digital operational resilience (DORA) and markets in crypto assets (MiCA), as well as contributing to the development of other regulations, such as the review of the Payment Services Directive (PSD2)
strengthening the resilience of the financial system to climate change risks and its ability to support the transition to a climate-neutral economy, along with implementing the EU's Sustainable Finance Disclosures Regulation
The Securities Markets Risk Outlook Report highlights key risk areas for 2023. It sets out CBI expectations of what RFSPs (which includes Funds) need to do to effectively identify, mitigate and manage these risks.
External Risk Environment. CBI expect RFSPs to:
conduct robust stress testing, updated regularly, to take due account of market dynamics so that all funds are positioned to ensure their liquidity arrangements are sufficient to meet redemptions and margin calls
ensure that liquidity management tools (LMTs) are being utilised when needed and that appropriate LMTs are in place
verify valuations of assets affected by rising interest rates and sanctions
have appropriate systems and controls in place to identify relevant sanctioned investments and individuals to ensure they are compliant with their obligations in relation to financial sanctions
Sustainable Investing. CBI expect RFSPs to:
ensure they adhere to their regulatory obligations regarding the correct disclosure of sustainability related information in product offerings
have robust procedures and policies in place to ensure products marketed as 'green' or 'sustainable' meet the criteria to be described as such
Market Integrity. CBI expect RFSPs and issuers of financial instruments to:
ensure that frameworks for the identification, assessment and reporting of suspected instances of market abuse are sufficiently robust to identify, manage and mitigate emerging risks in what is a rapidly changing market environment
monitor all orders and trades, including cancelled and amended orders
submit a Suspicious Transaction and Order Report (STOR) to the CBI without delay once there is a reasonable suspicion that the relevant conduct could constitute market abuse
maintain robust frameworks and associated controls to comply with the provisions in MAR concerning inside information
Market Conduct Risk Management. CBI expect RFSPs to:
develop and embed more robust frameworks for the identification and assessment of market conduct risk inherent to their business
manage and mitigate emerging risks in what is a rapidly changing geopolitical and economic environment
record business telephone and electronic communications including when alternative working arrangements are in place and ensure communications are not taking place through unauthorised channels
Delegation and Outsourcing. CBI expect RFSPs to have regard to:
the CBI cross industry guidance on outsourcing
the requirements of MAR and MiFID, and ensuring that the firm outsourcing activities retains ultimate responsibility for governance and oversight of the delegated activities
oversight and continuous monitoring of any digital processes outsourced to third parties
Cybersecurity. CBI expect RFSPs to:
ensure adequate tools and governance frameworks are in place locally to identify, measure, manage, monitor and report ICT/cybersecurity risks
ensure ICT governance and ICT risk management frameworks are appropriately designed and implemented
ensure they have robust ICT/cybersecurity risk management practices in place
note the priorities identified in existing guidance published by the CBI in recent years, many of which are closely aligned to DORA
cross industry guidance in respect of information technology and cybersecurity risks
cross industry guidance on operational resilience
cross industry guidance on outsourcing
Data Quality. CBI expect RFSPs to:
submit accurate data on a timely basis in line with their obligations
have appropriate oversight of data reporting from Board level down (including where data reporting is outsourced)
ensure escalation channels are in place to promptly address data reporting issues
engage with the CBI as soon as possible after any data issues are identified. Failure to do so may warrant supervisory intervention up to and including enforcement action
Digital Innovation. CBI expect RFSPs and Issuers of financial instruments to:
note the requirements of the upcoming MiCA Regulation
be aware that the CBI presently considers exposure to crypto assets to be unsuitable for retail investors in line with the joint position of the ESAs
ensure that risk frameworks support the identification, mitigation and management of risks arising from the implementation of new technologies
CBI clarifications of UCITS PRIIPS KID filing requirements
CBI updated its guidance on PRIIPs Key Investor Document (PRIIPs KID) filing requirements for UCITS. The update clarifies requirements and process for UCITS seeking authorisation from 1 January 2023 and for UCITS authorised prior to January 2023.
The CBI published the 38th edition of its UCITS Q&A with amendments to three Q&As (ID 1107, 1108, 1109) concerning PRIIPs filing requirements and two new Q&As (ID 1110 and 1111).
new Q&A 1110 confirms that an authorised UCITS that markets separate share classes to only professional investors may submit a UCITS KIID to the CBI for those share classes
new Q&A 1111 confirms that a foreign domiciled UCITS registered to market in Ireland that intends to market to retail investors in Ireland must submit its PRIIPs KID as part of the passporting notification to the UCITS' home regulator for onward submission to the CBI
Q&A 1107 aligns with CBI website guidance confirming that a PRIIPs KID should be submitted to the CBI where a UCITS is required to produce a PRIIPs KID and is applying for authorisation of a new UCITS umbrella or sub-fund from 1 January 2023
Q&A 1108 is deleted
Q&A 1109 aligns with website guidance confirming a UCITS authorised prior to 1 January 2023 that has not submitted a PRIIPs KID as part of its authorisation is not required to submit a PRIIPs KID to the CBI at this time. The CBI will issue further guidance on the PRIIPs KID filing requirements for these UCITS in due course.
CBI guidance on marketing requirement for UCITS and AIFs
The CBI published revised website guidance on national provisions governing marketing requirement for UCITS and AIFs. The revised contains updated information on the format and content of marketing material and the CBI's approach to verification of marketing communications.
National provisions governing marketing requirements for UCITS are here.
National provisions governing marketing requirements for AIFs are here.
The CBI may request and verify marketing communications on a case-by-case basis, for instance, where the CBI identifies that there is a heightened risk of potentially misleading marketing communications being made available to investors or potential investors.
Changes to CBI's Fitness & Probity application process, effective 24 April 2023
The CBI process for submission of applications to become a holder of a PCF role is changing with effect from 24 April 2023. An overview of the changes to the system is provided in the CBI's document on the new F&P application process. In summary:
Individual questionnaires (IQs) will no longer be submitted via the online reporting system (ONR), but will instead be submitted via the CBI portal.
A new IQ must be used for PCF applications submitted from 24 April. Draft guidance has also been published. The CBI document gives detail on the new IQ which reflects ongoing CBI concerns with time commitments, outsourcing, conflicts of interest and diversity.
IQs which have been submitted and which are clear of comment/no queries outstanding (at 24 April) will be completed on the old system in the normal way.
After the new system is operational (24 April) any in-progress IQs which need to be unlocked will be returned to the applicant to be re-entered and submitted on new system as a new application.
All IQs at the pre-submission stage on ONR will need to be re-entered and submitted on the new system.
CBI winds down its COVID-19 regulatory flexibility measures
The CBI confirmed that, as of 28 February 2023, it no longer considers any remaining flexibility measures (introduced for regulated firms in response to COVID-19) to be necessary.
During 2020, in response to the challenges faced by firms and market participants as a result of the COVID-19 crisis, the CBI allowed flexibilities for regulated firms in specified areas, including the suspension of certain due diligence arrangements and periodic on-site visits to outsourcing providers and delegates by fund service providers.
Many of these measures have now expired under their own terms and, with the lifting of COVID-19 restrictions, the CBI no longer considers the remaining flexibility to be necessary.
CBI emphasis on the importance of diversity and inclusion within the financial services sector
CBI Deputy Governor Derville Rowland delivered a speech on the importance of enhanced diversity and inclusion within the financial services sector. The speech highlighted the importance that the CBI attach to ensuring that boards and leadership teams promote gender equality, diversity and inclusion. The CBI also issued its seventh annual demographic analysis of applications for PCF roles within regulated firms. CBI Deputy Governor Sharon Donnery also highlighted CBI requirements for regulated firms subject to CBI's corporate governance code to have diversity policies and what CBI expect to see such policies.
CBI markets updates
The CBI published issue 3 of 2023 of its markets update, including the following points of interest (discussed above):
regulatory flexibility for securities markets, investment management, investment firms and fund service providers in light of COVID-19
CBI updated its website guidance on national provisions governing marketing requirement for UCITS and AIFs
The CBI published issue 4 of 2023 of its markets update, including the following points of interest (discussed above):
CBI notice of intention in relation to the application of the ESMA guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation
the CBI updated its guidance in relation to UCITS PRIIPs KIDs
CBI published the 38th Edition of the Central Bank UCITS Q&A
common supervisory action on costs and fees
changes to the Fitness & Probity application process
“The importance of enhanced diversity and inclusion within the financial services sector" – remarks by Deputy Governor Derville Rowland
“Review of the Consumer Protection Code: securing customers' interests" – remarks by Gerry Cross, Director of Financial Regulation – Policy & Risk