Asset Management & Investment Funds: Irish Practice Developments – November 2023
Asset Management & Investment Funds: Irish Practice Developments – November 2023
1 December 2023 - Operational Resilience Guidelines - Deadline by which firms are expected to be able to evidence actions/plans to apply the the Central Bank of Ireland's (CBI) Cross-Industry Operational Resilience Guidelines (published 1 December 2021). Irish Funds have published a guide on operational resilience implementation.
29 December 2023 - Individual Accountability Framework (IAF) - The individual conduct standards under the CBI’s IAF are scheduled to apply. Regulated financial service providers (RFSPs) will need to:
notify CFs of the application of the Common Conduct Standards to their role
notify PCFs/CF1s of the application of the Additional Conduct Standards to their role
provide training to all CFs (including PCFs) on the Common Conduct Standards and Additional Conduct Standards, respectively, and how they apply to their function
establish, maintain and give effect to policies on how the Common Conduct Standards are integrated into the conduct of the affairs of the RFSP
29 December 2023 - Enhanced Fitness and Probity Regime - Effective 29 December 2023. RFSPs need to have an additional certification process as regards compliance with standards of F&P, for each of their PCFs and CFs. The first annual CBI submission of confirmation of the completion of the certification process for each PCF role holder and of confirmation of the completion of the overall certification process for all CFs, will relate to the 2024 calendar year and will be required in 2025.
31 December 2023 - Corporate governance - Completion of reviews of board and individual director performance. Under the Irish Funds Corporate Governance Code, the overall board's performance and that of individual members must be reviewed annually. Once every three years a formal documented review and a review of the chairperson must take place. Length of service and ongoing independence of directors, as well as gender diversity at board level, should be considered in line with the CBI's CP86 expectations. Compliance with procedures for dealing with conflicts of interest and the terms of reference of any board committees should be reviewed at least on an annual basis.
31 December 2023 - Business plan/programme of activity- Fund management companies (FMCs), where they have not already done so, may need to complete their annual performance review on service providers. FMCs delegating functions must maintain adequate oversight and perform ongoing due diligence on delegates. Accordingly, FMCs should review and confirm their delegate due diligence plans, including making preparations for any necessary on-site visits. FMCs should also obtain annual confirmations from service providers and relevant persons in accordance with their business plan/programme of activity, complete onsite visits with service providers (albeit remotely), ensure adoption of valuation policy and make disclosure in respect of connected party transactions.
1 January 2024 - UCITS KIID/PRIIPs KID - UCITS authorised prior to 1 January 2023 that are required to produce a PRIIPs KID and AIFs that are required to produce a PRIIPs KID can make their initial submission of the KID through the CBI portal with the written declaration (detailed on the CBI PRIIPs guidance) from 1 January 2024. See more detail below.
31 January 2024-UCITS ManCo and AIFM ownership confirmation - UCITS ManCos and AIFMs must file their annual ownership confirmation by 31 January 2024.
20 February 2024 - UCITS KIID/PRIIPs KID - All UCITS made available to "retail investors" in the EEA are required to provide such investors with a PRIIPs KID prior to their investment. In this context, "retail investor" includes any investor that does not fall within the definition of a "professional client" under MiFID. A UCITS which is not made available to "retail investors" in the EEA is not obliged to provide a PRIIPs KID and may continue to produce a UCITS KID. This may be important for marketing in the UK. A UCITS producing a UCITS KIID must update its KIID on an annual basis for each sub-fund/standalone fund within 35 business days of the end of each calendar year. The annual update of the UCITS KIID must be filed with the CBI. Any update to the KIID filed with the CBI must be translated and filed in other host jurisdictions as necessary. It must then be uploaded on the UCITS' website. See below for more detail on filing UCITS KIIDs and PRIIPs KIDs with the CBI. Unlike the UCITS KIID, there is no annual refresh deadline for the PRIIPs KID. The PRIIPs KID must be reviewed regularly and revised when there is a significant change, and at least annually.
29 February 2024 (expected deadline) - Fund profile return - The annual CBI fund profile return is required for all Irish authorised sub-funds. It is to be prepared for the period up to 31 December 2023, with an anticipated submission deadline of 29 February 2024. The CBI does not anticipate that the fund profile will change from year to year, as changes would most probably reflect changes within the fund's offering documents. Therefore, year-to-year updates to the fund profile are expected to be minimal and reflect significant changes. The CBI updated its fund profile guidance and template in 2022.
29 February 2024 - Fitness & Probity- RFSPs, as part of their annual fitness and probity audit due diligence and depending on their compliance calendar, may need to obtain their annual certification from persons performing PCFs (e.g. directors) and CFs (e.g. money laundering reporting officer and company secretary) that they are aware of the Fitness & Probity Standards, agree to continue to abide by those standards and will notify the board without delay if they no longer comply. This forms part of ongoing performance monitoring set out in Section 22 of the Guidance on Fitness and Probity Standards. RFSPs will need to submit their annual PCF confirmation return to the CBI by 29 February 2024. The CBI is currently updating the return. The first annual submission of confirmation of the completion of the new F&P certification process for each PCF role holder and of confirmation of the completion of the overall certification process for all CFs will relate to the 2024 calendar year and will be required in 2025.
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. The CBI issued:
The CBI published final guidance on the Individual Accountability Framework, three sets of draft Regulations as well as a feedback statement in respect of its consultation process (CP153) on the IAF.
Conduct Standards to apply to CFs, PCFs (including NEDs and INEDs) from 29 December 2023. In advance of the 29 December 2023 deadline, regulated financial service providers (RFSPs) should ensure that they have complied with the IAF requirements to:
notify CFs (including PCFs) of the application date of the Common Conduct Standards to their role
notify PCFs/CF1s of the application date of the Additional Conduct Standards to their role
provide training to them in this regard
ensure that policies are in place to demonstrate the integration of the Common Conduct Standards into the culture and conduct of the affairs of the RFSP
F&P Regime enhancements come into effect on 29 December 2023. The supporting draft Certification Regulations for the implementation of the F&P Regime enhancements are timed to coincide with this date. RFSPs need to have an additional certification process as regards compliance with standards of F&P, for each of their PCFs and CFs. The first annual CBI submission of confirmation of the completion of the certification process for each PCF role holder and of confirmation of the completion of the overall certification process for all CFs, will relate to the 2024 calendar year and will be required in 2025.
In respect of the Business Standards, the IAF provides the CBI with a regulation-making power to prescribe standards for the purposes of ensuring that in the conduct of its affairs a RFSP:
acts in the best interests of customers and of the integrity of the market
acts honestly, fairly and professionally
acts with due, skill, care and diligence
In its feedback statement the CBI confirms that currently such standards are set out in the Consumer Protection Code (Code) and are being reviewed and updated as part of the review of the Code. As such, the Business Standards will not be effective until the revised Code is being implemented.
The CBI’s final guidance contains some other minor and non-material amendments for clarification purposes, to the reasonable steps requirements and Conducts Standards.
The A&L Goodbody team have assessed this Final Guidance in light of our practical experience and summarise, in this publication, what these changes and this guidance means for you and your firm. Read the publication here.
ELTIF 2.0 - CBI consultation on new ELTIF chapter of AIF Rulebook
On 1 November 2023, the CBI published Consultation Paper 155 on a proposed new European Long Term Investment Fund (ELTIF) chapter of the CBI’s AIF Rulebook (CP155) enabling the authorisation in Ireland of ELTIFs using Ireland’s popular regulated fund vehicles, including the ICAV.
CP155 proposes a stand-alone ELTIF chapter for inclusion in the CBI’s AIF Rulebook to facilitate the establishment of ELTIFs in Ireland. This is a welcome development and means that the ELTIF will be a stand-alone product that will benefit from the well understood Irish tax regime applicable to Irish regulated funds. The proposed ELTIF chapter will include supervisory and operational conditions that align with those applicable under other Irish regulated fund regimes, and does not gold-plate the product features set out in the ELTIF 2.0 regulation on eligible investments, portfolio composition and diversification, etc. CP155 includes draft sections from the new ELTIF chapter in the AIF Rulebook addressing:
ELTIF general restrictions and applicable transparency requirements
supervisory requirements and applicable operational policies and processes
prospectus disclosure requirements
general operational requirements including in relation to dealing in an ELTIF
annual and semi-annual financial statement disclosure requirements
requirements applicable to the marketing of ELTIFs established outside Ireland to retail investors in Ireland
CP155 asks stakeholders to confirm if they agree with the proposed rules under each of the chapter sections and to provide any further comments they may have. The consultation concludes on 13 December 2023 and it is expected that the AIF Rulebook will be updated to reflect the new ELTIF chapter in time for the implementation of the revised European Long Term Investment Funds Regulation (EU) 2023/606 (ELTIF 2.0) which will apply across the EU from 10 January 2024.
ESMA is considering responses to its consultation on draft regulatory technical standards (RTS) under ELTIF 2.0, which will provide detail on:
the use of financial derivative instruments solely for hedging
redemption policy and asset composition
circumstances for the use of the matching mechanism (i.e. the possibility of full or partial matching, before the end of the life of the ELTIF, of transfer requests of units or shares of the ELTIF by exiting ELTIF investors with transfer requests by potential investors)
New Q&A 1156 sets out the process for an investment limited partnership (ILP) to obtain an exemption from the provisions of the European Union (Qualifying Partnerships: Accounting and Auditing) Regulations 2019 (S.I. 597 of 2019), which in turn enables the financial statements of the ILP to be prepared in accordance with GAAP or other accepted accounting standards. CBI requirements are set out in Q&A 1156 as follows.
A general partner that wishes to obtain such an exemption must:
Ensure that the limited partnership agreement provides that the ILP’s sole business is the investment of its funds in property with the aim of spreading investment risk and giving its partners the benefit of the management of its assets
In its letter of application for authorisation:
confirm that the limited partnership agreement (which is the constitutional document of the ILP) provides that the ILP’s sole business is the investment of its funds in property with the aim of spreading investment risk and giving its partners the benefit of the management of its assets
request the exemption
confirm the basis on which the financial statements of the ILP will be prepared
In its prospectus:
disclose that the exemption has been obtained
disclose the basis on which the financial statements of the ILP will be prepared
Existing ILPs may also apply to CBI to avail of this exemption.
CBI AIFMD Q&A - QIAIF exemption from loan origination regime
Q&A 1084 is updated to extend the exemption from the loan origination regime (which is currently available to AIFs who grant loans to subsidiaries) to AIFs who grant loans to co-investment vehicles in which they have a majority interest, provided that such lending is ancillary to the QIAIF’s predominant investment strategy.
CBI AIFMD Q&A - subsidiaries
The CBI’s 49th Edition of its AIFMD Q&A included three Q&As on subsidiaries.
New Q&A 1157 notes that, where a QIAIF/RIAIF intends to invest through a wholly owned company or a subsidiary and the wholly owned company or subsidiary was established, with the intention of the QIAIF/RIAIF using it for investment purposes, prior to the establishment of the QIAIF/RIAIF, the CBI considers the wholly owned company or subsidiary as being established by the QIAIF/RIAIF, including in circumstances where the wholly owned company or subsidiary existed prior to the establishment of the QIAIF/ RIAIF.
New Q&A 1158 notes that, where a QIAIF/RIAIF intends to invest through a wholly owned company or subsidiary and the wholly owned company or subsidiary has been established with the intention of the QIAIF/RIAIF using it for investment purposes, the wholly owned company or subsidiary can establish or participate in the establishment of a further vehicle that is also used for investment purposes. This is permitted subject to compliance with the CBI’s requirements in relation to subsidiaries (as set out in the AIF Rulebook) and the requirements of this Q&A 1158 as well as Q&As 1157 and 1159.
New Q&A 1159 notes that where a QIAIF/RIAIF intends to invest through a co-investment vehicle that includes other third party investors and is not a wholly owned subsidiary of the QIAIF/RIAIF, the CBI requires that the ownership/control of the co-investment vehicle must reflect the actual economic interest that the QIAIF/RIAIF has in that vehicle and the QIAIF/RIAIF must demonstrate that such arrangements reflect the true economic interests of the parties holding shares in that vehicle. The reasons for use of a co-investment vehicle, rather than a wholly owned subsidiary, must be documented by the board of the AIFM and approved by the depositary in writing and be available to the CBI on request. The arrangement should not be structured in such a way as to circumvent the policy objectives of this QA.
PRIIPs KID filings
The CBI published the 40th Edition of its UCITS Q&A with a revised Q&A 1109 to clarify that from 1 January 2024, UCITS authorised prior to 1 January 2023 that are required to provide a PRIIPs KID should submit the PRIIPs KID to the CBI through the CBI portal in accordance with CBI website guidance.
The CBI also published the 49th Edition of its AIFMD Q&A with a revised Q&A 1126 to clarify that where an AIF is required to produce a PRIIPs KID, this should be filed through the portal in accordance with the CBI guidance.
As before, the submission of the PRIIPs KIID for new UCITS umbrellas should be made by email on authorisation day with the other authorisation documents to: firstname.lastname@example.org.
UCITS authorised prior to 1 January 2023 that are required to produce a PRIIPs KID and AIFs that are required to produce a PRIIPs KID can make their initial submission of the KID through the portal under the section “Investment Funds – Ad Hoc returns” from 1 January 2024.
The PRIIPs KID Return will not be a scheduled return on the portal and is set up as an Ad Hoc return.
It is the responsibility of the UCITS/ AIF to be aware of and comply with its regulatory reporting obligations in respect to the initial filing and the submission of any subsequent amendments to the PRIIPs KID to the CBI.
As before, the PRIIPs KID must be filed with the written declaration (detailed on the CBI PRIIPs guidance).
Where a PRIIPs KID that has been previously submitted to the CBI is updated, the amended PRIIPs KID should be submitted to the CBI Bank through the portal.
Where a UCITS produces both a UCITS KIID and PRIIPs KID, the latest versions of both should be filed with the CBI through the portal.
Own funds requirements for UCITS ManCos and AIFMs authorised for discretionary portfolio management services
The CBI held a consultation on own funds requirements for UCITS management companies (ManCos) and AIFMs authorised for discretionary portfolio management services to perform discretionary portfolio management and provide additional non-core services (discussed in our December 2022 bulletin here). The aim was to ensure consistency with the own funds requirement applicable to MiFID portfolio managers and to impact the risks for UCITS ManCos and AIFMs to be undercapitalised when compared to MiFID portfolio managers performing similar services.
New own funds requirements are being introduced and the CBI have published:
Updated Minimum Capital Requirements Reporting Template for AIFMs and UCITS Management Companies
The CBI believes that the new requirements represent a more proportionate prudential regime for UCITS ManCos and AIFMs, which, once implemented, should result in a reduction in the on-going operational and regulatory costs for UCITS ManCos and AIFMs. The CBI notes that:
UCITS ManCos and AIFMs will no longer be subject to the current condition of authorisation requiring them to comply with the own funds requirements in Regulation 18(2) of the European Communities (Capital Adequacy of Investment Firms) Regulations 2006 (S.I. No. 660 of 2006) (CRD III).
UCITS ManCos and AIFMs that will be classified as small and non-interconnected will only be required to calculate the own funds requirements set out in the AIFM Regulations or UCITS Regulations, as applicable.
UCITS ManCos and AIFMs that do not meet the conditions to be classified as small and non-interconnected will be required to calculate a risk to client K-factor own funds requirement. This calculation is a more simplified and appropriate calculation relative to the requirements in Regulation 18(2) of CRD III, thereby reducing the administrative burden on impacted UCITS ManCos and AIFMs.
UCITS ManCos and AIFMs which obtain authorisation to provide individual portfolio management services after 27 November 2023 will be subject to these new requirements upon authorisation.
The new requirements will not apply to UCITS ManCos/AIFMs authorised to provide individual portfolio management services on or before 27 November 2023 until 27 May 2024.
CBI Director of Securities and Markets Supervision, Patricia Dunne, delivered a speech on “An evolving supervisory approach in the funds sector". Key takeaways included:
The CBI's supervisory approach to the funds sector is evolving. While direct fund supervision continues to be an important part of CBI engagement, CBI's intention is to also direct greater attention towards ManCos and their underlying funds. Firms should feel this change in approach in engagement with the CBI, with a greater focus on product and product risk based discussion, as well as traditional prudential topics. Industry will see greater focus and use of thematics and sector analysis and an increased focus on potential systemic risks from funds.
ESMA will conduct a peer review on depositaries in 2024/2025.
ESMA will conduct a peer review on outsourcing in 2024/2025.
The AIFMD review is likely to bring targeted changes to the current regime to enhance the reporting of delegation activity, particularly to third countries. The proposals contained in the AIFMD review mark the start of a longer-term process that will take a more comprehensive look into delegation in Europe.
Sustainable Finance/ESG - The CBI hosted a workshop with funds industry stakeholders to discuss supervisory observations following the implementation of SFDR and Taxonomy Regulation (please speak with your usual contact on the ALG Asset Management & Investment Funds team for more detail).
Some areas of Sustainable Finance/ESG supervisory focus are:
The Adaptation of Risk Management Frameworks – AIFMs and UCITS ManCos are required to consider sustainability risk factors when undertaking their due diligence on investments and must take sustainability risks into account in their organisational procedures and risk management policies.
Securities Lending – CBI plans to examine whether funds which engage in securities lending are in a position to meet their environmental or social characteristics if they have lent shares and those loaned shares lead to positions which would not qualify as sustainable investments.
Machine learning – CBI intends to expand its ESG analysis to incorporate machine learning practices, in particular natural language processing, in order to extract information from fund and industry documentation. CBI is examining ways to convert fund documentation and text data into database formats. In time, this will allow CBI to assess new types of data ranging from social indicators to hazardous waste, water, land usage and recycling practices. CBI's goal is to implement a broad data approach, incorporating data which can be used to assess the veracity of individual claims made within fund documentation.
CBI Deputy Governor Sharon Donnery delivered a speech on “Maintaining stability in the face of volatility – financial regulation in a rapidly changing world". Among other topics, the speech covered regulation, supervision and compliance in the age of artificial intelligence (AI):
The way generative AI models are currently constructed, and the lack of transparency regarding their training data, makes their reasoning extremely difficult to interpret. For management, compliance professionals and regulators, this, in turn, leads to the risks of inadequate understanding, and an inability for adequate oversight of such tools. This poses risks especially in consumer-facing uses of AI – with risks of bias, unfairness, and consumer harm from potentially non-transparent and un-explainable decisions by the AI.
If the models are not understood, trust can be easily lost.
Both of these challenges come on top of other macro risks from the widespread use of AI, which include misinformation and market manipulation risks (colluding for optimisation); as well as the risk that being trained on common data sets, or having similar models, will lead to highly correlated output predictions or herding behaviour with implications for financial stability. While this end result is not new, this type of amplification channel clearly is.
In the context of all these challenges and CBI's future responsibilities under the EU's AI Act, the CBI will be further developing its supervisory approach to the use of AI by regulated firms over the coming year. This will include engaging the industry in dialogue and building CBI capabilities.
At this stage some fundamentals in CBI's approach to supervising AI include:
CBI will take a risk-based, proportionate approach.
The fundamental supervisory principle that boards, senior management and the management bodies of regulated firms are responsible for all activities undertaken by the regulated firm will remain.
CBI Markets Updates
The CBI published Issue 9 of 2023 of its markets updates including the following topics: