Asset Management & Investment Funds: Irish Practice Developments – March 2024

Deadlines

  • 31 March 2024 - Macroprudential measures for GBP Liability Driven Investment Funds - Q1 2024. Following the review of the feedback to CBI CP 157 (discussed here) the CBI is expected to publish a feedback statement and announcement of the final measures in the first quarter of 2024.
  • 29 April 2024 - EMIR - When reporting under EMIR REFIT (from 29 April 2024), counterparties and entities responsible for reporting should take also into account the EMIR standards and related ESMA guidelines and guidance (including Q&A, validation rules and so on).
  • 6 May 2024 - Money Market Funds - ESMA 2023 guidelines on stress test scenarios - revisions apply from 6 May 2024, as discussed below.
  • 24 May 2024 - Property Funds - Irish regulated funds authorised before 24 November 2022 which invest 50% or more directly or indirectly in Irish property assets (existing property funds) and which are not closed ended must comply with mandatory liquidity requirements by 24 May 2024 (following an 18 month implementation period). The CBI allowed a five-year implementation period, ending 24 November 2027, in respect of leverage limits (60% total debt-to-total assets limit). This allows for the gradual and orderly adjustment of leverage in existing property funds, whether open or closed ended or with limited liquidity. The CBI expects that existing property funds will make any necessary changes to their structure and fund documentation at the earliest possible opportunity to make early and steady progress towards lower leverage levels over the five-year implementation period. Existing property funds with leverage levels above the limit would not increase the quantum of their debt during the five-year implementation period. The CBI requires that any de-leveraging must be done on a “gradual and orderly manner” and that such de-leveraging should be “significantly progressed” by the end of year three (i.e. November 2025), You can read more here.
  • 27 May 2024 - Own funds requirements for UCITS ManCos and AIFMs authorised for discretionary portfolio management services - New “own funds” capital requirements (introduced on 27 November 2023) will apply to all Irish fund management companies and AIFMs which were authorised by the CBI on or before 27 November 2023 to provide individual portfolio management. Read more here.
  • 28 May 2024 - T+1 - New rules being implemented by the Securities & Exchange Commission in the United States to shorten the standard settlement cycle for most broker-dealer transactions in US securities from T+2 to T+1 take effect, discussed here.
  • 30 June 2024 - SFDR - Fund management companies which are obliged due to their size, or which have opted to report on the principal adverse impacts of investment decisions on sustainability factors under Article 4 of the SFDR must publish a full PAI statement (which for the first time must include historical comparisons against last year’s PAI report) on their website on or before 30 June 2024.
  • 30 June 2024 - Asset Valuation Frameworks - Irish fund management companies are required to review asset valuation frameworks by end Q2 2024, in line with CBI letter to industry discussed here.

The above list does not cover:

  • tax, FATCA or CRS filings, director's compliance statement obligations, which apply to listed UCITS VCCs
  • diversity reporting obligations, which may apply to listed AIF and UCITS VCCs
  • ad hoc filings, such as regulatory reports, or filings of annual accounts (and related documents which include annual FDI returns) and semi-annual accounts or other similar returns (which deadlines vary to reflect the particular entity's year-end)

By way of example, the Companies (Accounting) Act 2017 obliges UCITS investment companies and AIF investment companies to file annual accounts with the CRO within eleven months of their financial year-end.

CBI’s authorisation process for ELTIF 2.0

The Central Bank of Ireland (CBI) published its new stand-alone European Long Term Investment Fund (ELTIF) chapter in the AIF Rulebook together with ELTIF application forms and updated website guidance enabling the CBI to authorise ELTIFs under domestic fund legislation. This follows from an expedited CBI consultation process (CP155) and further engagement with stakeholders.

Irish ELTIFs can be established as retail investor ELTIFs, qualified investor ELTIFs or professional investor ELTIFs. However, until such time as the final RTS is available (see further below), the CBI’s authorisation process is available only to closed-ended ELTIFs.

The AIF Rulebook also facilitates existing or new Retail Investor Alternative Investment Funds (RIAIFs) and Qualifying Investor Alternative Investment Funds (QIAIFs) to incorporate retail or professional only ELTIF and non-ELTIF sub-funds respectively.

The ELTIF Chapter of the AIF Rulebook contains ELTIF requirements under the headings of general rules, supervisory requirements, prospectus requirements, general operational requirements, and annual and half-yearly reports.

The ELTIF Regulation (as amended by ELTIF 2.0) contains uniform rules on authorisation, liability of ELTIF managers, investment policies, redemption policies and requirements, information that must be made available to investors and how ELTIFs can be marketed. 

Visit our Spotlight below to read more about Irish ELTIFs.

ELTIF RTS

The European Commission published its decision to adopt the draft ELTIF Regulatory Technical Standards (RTS) subject to amendments. The proposed amendments are outlined in the Commission’s letter to ESMA, included in the decision Annex. The Commission explains in the letter that it doesn’t believe that ESMA’s draft RTS sufficiently cater for the individual characteristics of different ELTIFs and that a more proportionate approach to the drafting is necessary, in particular regarding redemptions and liquidity management tools.

ESMA has six weeks to amend the draft RTS on the basis of the Commission’s proposed amendments and to resubmit the RTS to the Commission. If ESMA fails to do so, or the amended RTS are inconsistent with the Commission’s proposals, the Commission may adopt the RTS with the amendments it considers relevant or reject it.

CBI Financial Regulation priorities 2024

The CBI published its new Regulatory Supervisory Outlook Report 2024 (Report) and related priorities letter addressed to the Minister for Finance. The letter sets out the CBI’s financial regulation priorities for 2024, which include:

  • Working with the Department of Finance on priority policy areas including the completion of the 2030 Funds Review.
  • Updated Consumer Protection Code (see below).
  • Work (internationally and domestically) to address systemic risks from the non-bank sector and deepening CBI analysis and understanding of macroprudential risks in this sector.
  • Implementing the Individual Accountability Framework (including within CBI’s supervision of firms) and supporting external stakeholders to embed the new standards.

The Report is the first of what will be an annual report setting out the CBI’s view on the key trends and risks facing the financial sector, along with its consequent regulatory and supervisory priorities for the next two years.

Key risks for funds and fund management companies

  • The way investment funds manage their leverage, liquidity, pricing and fund entry-exit mechanics has implications for the financial system as a whole. In the Report, the CBI highlights the recent European Securities and Markets Authority (ESMA) Common Supervisory Action (CSA) on Asset Valuation in which the CBI identified deficiencies with asset valuations. Irish fund management companies (FMCs) are required to review asset valuation frameworks by end of Q2 2024, in line with CBI letter to industry discussed here.
  • Conflicts of interest must be carefully governed.
  • Responsibility for delegation and outsourcing rests with the regulated firm for the activities delegated and outsourced. The CBI highlights the activities of White Label Fund FMCs and their business partners who, in turn, act as investment managers. The Report includes that while all regulated entities must ensure appropriate oversight of delegated/outsourced activities, the CBI has observed a lack of oversight and scrutiny by White Label FMCs of their business partners’ structures where such partners have been appointed investment manager.
  • On sustainable finance, the CBI notes that to support the transition to net zero, it is imperative that investors are fully informed, and in no way misled, regarding the stated sustainability credentials of financial products.
    • The CBI refers to “greenwashing” risks and the new phenomenon of “green bleaching” observed in the funds sector, where a FMC does not want to risk non-compliance with the more onerous Article 9 SFDR requirements. The Report also highlights ESMA’s ongoing CSA on Sustainability and Disclosure Risk.
    • The CBI notes that the sustainability related data the CBI receives from FMCs is generally of low quality and FMCs are also struggling to obtain adequate sustainability data of their own investments, leading to a risk of investors being poorly informed, or misled.
  • The CBI identifies that the threat of cyber-attacks remains ever present.
  • The CBI identifies artificial intelligence (AI) as one of the technologies with the greatest potential for transformation and if not governed properly it may create or amplify certain risks. The Report includes that misaligned AI systems may malfunction and cause investor harm. The CBI will be looking ahead to the new EU AI Act and its application by firms and covers AI in more detail in Spotlight 2 of the Report.

Key supervisory activities 2024/25

  • Risk-based scrutiny and approval of prospectus applications, fund applications, fund service provider applications and new trading venues.
  • Participation in ESMA’s Depositary Peer Review.
  • Implementation and operationalisation of EU Green Bond (EUGB) authorisations and post-authorisation filings for issuers.
  • Sectoral/thematic assessments, including the completion of the ESMA CSA on the SFDR.
  • Further development of an understanding of the use of AI and related governance processes from a conduct perspective, in particular for trading activities and corresponding opportunities and/or potential negative impacts on market integrity.
  • Continuing to enhance the capacity to identify and pursue instances of market abuse.

The Report includes three spotlight chapters covering consumer protection, AI and financial crime. We look closely at the CBI’s spotlight on financial crime below.

See our Financial Regulation update on the Report on key trends and risks applicable to the broader Irish financial sector.

CBI spotlight on financial crime

Key CBI activities in 2024/25 – financial crime

The CBI will continue to apply a risk-based approach in its regulatory and supervisory activities to prevent financial crime. Specific activities highlighted for 2024/25 include:

 AML/CFT supervision

  • Ensuring the highest risk entities have effective AML/CFT control frameworks in place through the CBI’s risk-based supervision.
  • More targeted focus on supervising the Payment and E-money sectors to assess whether significant AML/CFT issues that have already been identified or reported are specific to firms or sector wide.
  • Thematic supervision across sectors focusing on firms’ ML/TF risk assessment arising from international money flows and the appropriateness of control frameworks to manage and mitigate these risks. This work will inform the CBI’s further thinking and approach in this area.
  • Further enhancements to the CBI’s data collection and analysis from its Risk Evaluation. Questionnaires, resulting in bespoke questionnaires for sectors. This will require firms to submit more quantitative data that will be utilised in determining the risk rating of firms and sectors and decision-making on areas of focus.

Financial sanctions

  • Maintaining the CBI’s focus on implementing EU financial sanctions through working with other competent authorities and agencies, assessing derogation requests, engaging with entities on their financial sanctions control frameworks, including substantive testing of screening tools, and communicating sanctions developments as they arise.

 Market abuse

  • Focus on the requirement for firms to report suspicious orders and transactions to the CBI without delay, building on its extensive communication in recent years to industry on market abuse obligations and the CBI’s priorities.
  • Enhancing the CBI’s surveillance of the market and extending surveillance across multiple trading venues, including working with other national competent authorities (NCAs) and ESMA. In this regard, it will look to leverage the ESMA order book sharing initiative.
  • Focus on improving the extent and quality of suspicious transaction and orders reporting (STORs). While noticeable improvements have been made, particularly relating to the provision of comprehensive rationales and evidence by reporting firms, there remain anomalies, where the number of STORs reported by some cohorts, for example, high frequency trading firms and asset management, remains unreasonably low.
  • Enhancing the CBI’s approach to the analysis, investigation and enforcement of suspected market abuse. It will continue to prioritise for investigation instances of potential market abuse, including via the review of STORs received and its own market surveillance activities.

 Fraud

  • Proactively detect, filter and triage suspected fraud and scams operating online and help disrupt these activities.
  • Intensify cooperation and collaboration with other agencies (for example, An Garda Siochána, the Competition and Consumer Protection Commission and Coimisiún na Meán) and with technology firms, to combat fraud in financial services.
  • Proactive and targeted communications to consumers and the wider public on fraud and unauthorised provision of financial services. This will build greater awareness of fraud and scams being perpetrated and need for heightened vigilance.
  • Further develop the CBI’s technology capabilities to improve its surveillance of social media in order to identify potential abusive practices.

CBI Markets Updates

The CBI published Issue 3 2024 of its markets update which included:

And the CBI published Issue 2 2024 of its markets update which included

And in respect of the European Securities and Markets Authority (ESMA)

  • Obligation to publish RTS 28 reports after 13 February 2024. The CBI welcomes the statement issued by ESMA on 13 February 2024 (concerning certain best execution reporting requirements under MiFID II) that, from 13 February 2024 until the forthcoming legislative amendment to Article 27(6) of MiFID applies, ESMA expects NCAs not to prioritise supervisory actions towards investment firms relating to the periodic reporting obligation to publish RTS 28 reports. The CBI confirms that it will apply the measures outlined in this ESMA statement.

Consumer Protection Code review

The CBI published a consultation paper on its review of the Consumer Protection Code 2012 (Code), together with two sets of draft Regulations, which will replace the Code once finalised, and two Guidance documents. These measures reflect both a consolidation of consumer protection rules and an expansion of these principles in terms of scope and details.

Draft Regulations

  • The Standards for Business, which are complemented by Supporting Standards for Business will replace the existing General Principles in the Code. The Standards for Business are intended to align with the application of the individual conduct standards under the Individual Accountability Framework. The Standards for Business will apply to all regulated financial service providers (RFSPs), with exceptions that include RFSPs providing MiFID services.
  • The second set of Regulations will contain the General Requirements, which will include new and existing requirements and protections set out on a cross-sectoral and a sector specific basis. The General Requirements will apply to all RFSPs, with exceptions that include RFSPs providing MiFID services.

Draft Guidance

  • Guidance on Securing Customers’ Interests - containing expectations for firms in meeting their obligations under the Standards for Business to secure customers’ interests and to support firms to effectively implement their consumer protection obligations.
  • Guidance on Protecting Consumers in Vulnerable Circumstances.

The consultation period will run until 7 June 2024. Following completion of the consultation process, the CBI expects to publish the new Regulations in early 2025, with a proposed 12-month period for implementation. The CBI also confirms that it intends to make further updates to the revised Code in light of ongoing legal and regulatory developments.

Please refer to our related insight for further information. We will be publishing detailed analysis of the wide-ranging changes to the Code in due course. See also the associated press release and speech by Derville Rowland, CBI Deputy Governor.

CBI Fitness and Probity Review

Following the first successful appeal of a CBI decision to refuse a PCF application, discussed here, the CBI made a public statement confirming that it would conduct a reassessment of the PCF application, in accordance with the Tribunal’s directions. The CBI s also announced its intention to commission an independent review of the F&P approval process to ensure it remains effective going forward. Meanwhile, the F&P approval process will continue to operate with the current service standards.

The CBI announced details of the independent review on the manner in which the CBI exercises its statutory functions in relation to fitness and probity. The CBI published the F&P Review - Terms of Reference (centralbank.ie).

  • The review will consider the transparency, efficiency and effectiveness of the CBI’s operation of the fitness and probity regime, considering the purpose and objectives of this regime to support the safety and soundness of firms, threats to consumer and investor protection and the stability of the system overall.
  • The focus of the review should be on the processes, systems and structures used by the CBI to exercise its functions under section 23 of the Central Bank Reform Act 2010 (PCFs).
  • The reviewer is welcome to make any other observations to improve the overall operation of the regime.
  • The review is to be on the implementation of the framework, rather than the legislative framework itself. 

The objective of the independent review is to be determined by reference to the following considerations:

  • To evaluate the effectiveness of the performance of the fitness and probity functions by reference to both the quality and quantity of work undertaken and to the current structure, and internal governance structures.
  • To evaluate whether the standards applied to fitness and probity assessments by the CBI are broadly consistent with comparable F&P supervisory practices internationally.
  • To evaluate the calibration, efficiency and timeliness of how fitness and probity functions are carried out in the CBI having regard to organisational priorities and available resources.
  • To make suggestions that the reviewer considers would likely improve effectiveness of the performance of the fitness and probity functions, including as to reporting or organisational structures, HR issues including, for example, training and other measures which would enhance the effectiveness of the fitness and probity work in the CBI.
  • To consider the transparency of fitness and probity activities both for the public and the firms involved and individuals who may be impacted and whether any enhancements can be made in this regard.

On conclusion of the review, the reviewer will provide a report including recommendations to the Governor of the CBI.

For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.

Date published: 26 March 2024