Asset Management & Investment Funds: Irish Practice Developments Sept 2018
Some approaching compliance deadlines
- 5 October 2018. UCITS investing in a non-UCITS investment fund- Irish UCITS which currently invest in non-UCITS investment funds must review their holdings (of those non- UCITS investment funds) to ensure compliance with the new requirements detailed in our July update and may need to disinvest where compliance cannot be achieved by 5 October 2018
- 30 November 2018. Filing annual accounts of variable capital companies in CRO - The Companies (Accounting) Act 2017 obliges UCITS investment companies and AIF investment companies to file annual accounts for financial years commencing on or after 1 January 2017 with the CRO within eleven months of the relevant financial year end. By 30 November 2018 we will see the first such accounts being filed. Form FS1 is the form which will accompany the filing. It is available from the following webpage and will incur a filing fee of €15
- 30 November 2018. UCITS Performance Fees - The Chairman of UCITS management companies which manage UCITS that charge performance fees must confirm by 30 November 2018 that a review of the performance fees (as detailed below) has taken place
- 1 January 2019. Securitisation Regime - Due diligence and disclosures on securitisations will need to be applied (in the case of UCITS) or updated and refreshed (in the case of AIFMs). Where AIFMs and UCITS are exposed to securitisation positions which do not meet the requirements, they must, acting in the best interest of the investors, take corrective action
- 1 January 2019. Benchmarks Regulation - Prospectuses of UCITS and of funds which are subject to the Prospectus Directive, which reference a benchmark and which have been approved prior to 1 January 2018, will need to be updated at the next update and in any event by no later than 1 January 2019 to include information on the benchmark
- 21 January 2019. Money Market Funds (MMFs) - The MMF Regulation introduces new requirements for MMFs, in particular portfolio composition, valuation of assets, diversification, liquidity management and credit quality of investment instruments. Existing UCITS and AIF MMFs must comply with the new rules by 21 January 2019. The European Union (money market funds) Regulations 2018 (S.I. No. 269 of 2018) came into operation on 21 July 2018
The above list does not cover tax, FATCA or CRS filings, ad hoc filings (such as regulatory reports) or filings of annual accounts (and related documents which include any annual FDI Return) and semi-annual accounts or other similar returns which deadlines will vary to reflect the particular entity's year end.
Action required for UCITS charging performance fees
The Central Bank of Ireland (Central Bank) requires all UCITS management companies which manage UCITS that charge performance fees to:
- Carry out a review of their existing methodologies in order to be satisfied that:
- Any performance fees charged comply with Central Bank UCITS Performance Fees Guidance
- The findings of the Central Bank’s outcome of an inspection into UCITS performance fees (discussed below) have been considered in the review
- The Chairman of the UCITS management company must submit written confirmation to the Central Bank by 30 November 2018 that this review has taken place.
The confirmation should identify whether, in the course of the review:
- Any required changes to existing methodologies have been identified
- Any required changes to prospectus disclosure have been identified
- Any instances of improper payment of performance fee have been identified
- Actions are being taken to remedy the above.
Helpfully, the Central Bank identified good practices which included:
- UCITS that had clear and unambiguous prospectus disclosure in respect of the performance fee methodology
- UCITS that clearly disclosed the version of the index to which the performance fee methodology related
- Transparent, comprehensive and frequent review of performance fee calculations by Fund Service Providers
- Fund Service Providers with dedicated performance fee teams.
The findings which should be factored into such a review are detailed in the Central Bank's outcome of an inspection into UCITS' performance fees and include:
- Fund Management Companies are responsible for the effective oversight of performance fee charges
- Guidance is not being applied consistently across industry
- Performance fees were not always calculated in accordance with the UCITS Performance Fees Guidance
- Instances of inadequate disclosure informing investors that where performance fees are paid on the basis of the High Water Mark approach, fees may be accrued as a result of market movements rather than due to the performance of the investment manager
- Where performance fees are based on the outperformance of an index, it was sometimes unclear as to which version of the index was being used
- Poor practices were observed within some Depositaries in the verification of the calculation of performance fees
- Poor practices were observed within some Fund Administrators in certain areas of the calculation of performance fees.
The Central Bank will also commence supervisory engagement with the individual UCITS that were the subject of the review. This review was carried out in parallel to Consultation Paper 119, which proposes that this Guidance will be transitioned into Central Bank UCITS Regulations by the end of 2018.
Central Bank announces increased flexibility in ETF share classes and retention of daily portfolio disclosure requirement
The Central Bank Feedback Statement on DP6-Exchange Traded Funds (ETFs) was published on 14 September 2018.
Key highlights include:
- Increased flexibility in ETF share class arrangements introduced in that -
- different dealing times will be permitted for hedged and unhedged share classes within the same ETF
- investment funds will be permitted to establish both listed and unlisted share classes within a single fund structure. The Central Bank will develop guidance on appropriate disclosure requirements to apply for both types of classes
- There will be no change in the requirement to have daily portfolio disclosure at this time. However, we can expect to see ongoing Central Bank dialogue on this topic with stakeholders via domestic, European and international workstreams.
This Feedback Statement is very illuminating. It summarises the response to the Central Bank's Discussion Paper 6 –Exchange Traded Funds (DP6), which was published in May 2017. The Central Bank is of the view that, where regulatory change is needed, it is most effective when implemented on a consistent basis. Accordingly, the Central Bank will continue to actively contribute and collaborate within Europe as well as at the International Organisation of Securities Commissions (IOSCO) which recently launched an ETF work stream and other forums including the Financial Stability Board and the European Systemic Risk Board.
The topics for possible future work are detailed in the feedback statement.
- investor centric matters (whether investors understand the characteristics and risks associated with an ETF). These include:
- whether investor expectations are managed appropriately
- the suitability of more complex ETF strategies for retail investors
- investor recourse and related operational challenges
- investor awareness in relation to ETF related costs
- issues related to the usefulness of portfolio disclosure to investors
- the effectiveness of other disclosures (such as the iNAV)
- market structure considerations of the broader ETF market. These include:
- the selection and monitoring of Authorised Participants
- the role of index providers and how these are monitored
- managing potential conflicts of interest between parties
- risk transmission between primary and secondary markets
- the potential challenges of market fragmentation where ETFs are listed or traded on multiple exchanges.
Speech by Michael Hodson, CBI Director of Asset Management Supervision, on the asset management sector
Michael Hodson, Central Bank Director of Asset Management Supervision delivered a speech on Taking stock of the past and insights on the future of the asset management sector at an IDA event in New York. The speech covers a number of important topics such as Brexit, culture and Fund Management Company Effectiveness and the evolution of the asset management sector in Ireland. Mr Hodson concluded by pointing out that industry should expect regulatory authorities to be completing cultural assessments on firms on a more regular basis.
Central Bank of Ireland speeches on cybersecurity, accountability and money laundering controls
The Central Bank delivered a number of addresses on cybersecurity, accountability and money laundering controls
- Sylvia Cronin, Director of Insurance Supervision: Making the financial sector more cyber resilient is a key concern for regulators
- Sylvia Cronin, Director of Insurance Supervision: Cyber risks present more than just a new set of risks to supervised firms, but also risks to consumers
- Seana Cunningham, Director of Enforcement and AML: Protected Disclosure reports as an important supervisory tool to assist the Central Bank in discharging its supervision and enforcement mandate
- Seana Cunningham, Director of Enforcement and AML: Improvement seen in controls around money laundering, but there is still some work to be done
- Seana Cunningham, Director of Enforcement and AML: Enforcement and AML – CBI approach and priorities. The speech covered:
- CBI AML/CFT mandate
- Upcoming legislative changes
- Making Suspicious Transactions Reports promptly
- Technology and Innovation
- Effective compliance
- Individual Accountability
Ms Cunningham highlighted that the Central Bank expects that compliance professionals and employees across all levels of a firm should be empowered to provide senior management with an honest appraisal of both the risks that are inherent and the effectiveness of a firm's systems and controls. Employees should also feel empowered to raise questions of ethics and have the necessary communication channels in place to facilitate this. The correct culture needs to live and breathe in every part of the firm. While roles might differ, there should be a shared sense among staff across a firm of the importance of protecting the firm and, more generally, maintaining the integrity of the financial system. When firms get this right, the rest should flow into everything from strategy, to decision-making, and down to simple everyday tasks.
Central Bank AML Bulletin
The CBI published a new AML Bulletin. While the bulletin is aimed at the Money Remittance Sector, it is of general interest because it sets out some clear CBI expectations and guidelines for an effective AML/CFT training programme.
These include detail on:
- Quality of training
- Optimising face-to-face engagement
- System for delivery
The bulletin contains a further reminder of the European Supervisory Authorities Risk Factor Guidelines in June 2017. The Bulletin notes that all Designated Persons in Ireland are expected to have considered, and where applicable implemented, these Guidelines by 26 June 2018.
Central Bank Markets Updates
The Central Bank published issue 13 of its Markets Update on 14 September 2018. Some key developments are detailed below.
Central Bank of Ireland
- Feedback Statement on Discussion Paper 6 - Exchange Traded Funds
- Press Release: Review of UCITS Performance Fees highlights instances of non-compliance with Guidance
- Central Bank publishes a notice of intention to amend the Central Bank Prospectus Handbook and a notice of intention to amend the Central Bank Transparency Guidance
- A Properly and Effectively Supervised Private Equity Market – Remarks by Colm Kincaid, Director of Securities and Markets Supervision
European Securities and Markets Authority (ESMA)
- ESMA finds high level of diversity in national markets for structured retail products
- MIFID II: ESMA issues latest Double Volume Cap Data
- ESMA publishes the responses to the CP No. 6 under EMIR
- ESMA updates its Benchmarks Register
- Volatility spikes underline fragilities and risks to EU securities markets and investors
- ESMA publishes opinion on proposed amendments to SFTR technical standards
- ESAs report finds automation in financial advice slowly growing but scale of market remains limited
- Steven Maijoor addresses Econ Committee on Securitisation
- ESMA to renew prohibition on binary options for a further three months
- ESMA defines disclosure standards under Securitisation Regulation
International Organisation of Securities Commissions (IOSCO)
IOSCO call for comments on governance of OTC derivatives data
Money Market Funds Regulation
Irish Funds published a Q&A document in relation to the implementation of the EU MMF Regulation (MMFR) as it relates to the Irish funds industry. The Q&A will be updated as further questions arise. It addresses questions in relation to:
- Product categories and rules
- Transition to MMFR
- Valuations and fund accounting considerations
- Transfer agency considerations
- Depositary considerations
- Transparency and regulatory reporting
The MMFR applies from 21 July 2018 and was implemented in Ireland by the EU (money market funds) Regulations 2018 which designate the Central Bank as the competent authority for the purposes of the MMFR. Existing MMFs benefit from a transitional period and are required to comply with the MMFR by 21 January 2019. In order that a decision on application for authorisation could be made for existing MMFs by 21 January 2019 deadline, the Central Bank required draft documentation for review to be submitted by 1 September 2018. Industry continues to engage with the Central Bank on the transition process and the Central Bank has published application forms for compliance with the requirements.
UK FCA survey for firms wishing to avail of the Temporary Permissions Regime (TPR)
As noted in the March edition of this ezine, the UK FCA published a survey for firms wishing to avail of the TPR. The deadline of this survey has been extended due to a lack of responses. We understand that it is important that all firms intending to make use of the TPR to continue marketing their funds to or providing services in the UK complete the survey. This will allow both the FCA and HM Treasury to make adequate preparations for the TPR.
The FCA have published information about how they plan to implement the TPR for firms that passport into the UK or market funds in the UK after 29 March 2019 as detailed in last month's question of the month.
Irish Real Estate Funds are to file accounts with the Revenue Commissioners annually.
The Revenue Commissioners made the Investment Undertaking Electronic Account Filing Requirements Regulations 2018 (S.I. No. 368 of 2018). These regulations require Irish Real Estate Funds, as defined by section 739K of the Taxes Consolidation Act 1997, to electronically file financial statements with the Revenue Commissioners annually. The first deadline is 30 January 2019.
11 new platforms and 83 new funds (including sub-funds) were authorised by the Central Bank in August 2018.
For more information please contact a member of the Asset Management & Investment Funds Team.
Date Published: 28 September 2018