Financial Services Regulation and Compliance - Investment Firms March 2023
Domestic
Dear CEO letter - MiFID Structured Retail Product Review - Supervisory Guidance
Following a series of targeted reviews of structured retail products (SRPs), the CBI published a 'Dear CEO' letter on SRPs (SRP Letter) in April 2022. The CBI has now published further supervisory guidance to supplement the April 2022 letter and provide clarification to firms on complying with the relevant MiFID II investor protection requirements and meeting the expectations set out in the SRP Letter. It is relevant to firms who currently (or plan to) manufacture or distribute SRPs and/or produce marketing material for SRPs. The guidance is based on further engagement with firms and observation of marketing practices since the issuance of the SRP Letter.
The two Q&A's in this document specifically address two aspects of the SRP Letter:
- the use of underlying decrement indices in SPRs
- the presentation of past performance data / back-testing
The intention of these Q&A's is to promote consistency in the interpretation and application of the expectations set out in the SRP Letter, specifically with regard to these two important information disclosure items. By providing this additional clarity, the CBI expects that firms will take every available measure to ensure the information they provide to clients regarding their SRPs is fair, clear and not misleading, in compliance with MiFID II.
Dear CEO Letter - Targeted Reviews on Control Frameworks and Risk Appetite Statements in MiFID Investment Firms and Market Operators
On 30 March 2023, the CBI published a 'Dear CEO' letter to all investment firms to outline best practices and key findings which it identified from a series of targeted reviews of control frameworks and risk appetite statements (RAS) across a sample of MiFID investment firms.
The CBI expects investment firms to fully consider the best practices set out in letter, as well as the key findings and evaluate their own risk and compliance governance structures, risk management frameworks and risk appetite statements and assess whether any improvements are required.
The CBI, as a result of the targeted reviews, identified deficiencies across a number of areas including:
- risk management frameworks and governance
- board oversight of risk and compliance matters
- application of risk appetite statement as a risk management tool
- poor risk appetite statement design
- risk appetite reporting to the risk committee and board
- cascading of risk appetite through the organisation
The CBI requires this letter to be discussed at the next Board meeting of all investment firms, and for the discussion to be recorded in the meeting minutes.
CBI publishes the Securities Markets Risk Outlook Report 2023
On 2 March 2023, the CBI published its Securities Markets Risk Outlook Report. It identifies the key risks and areas of focus it sees securities markets facing in 2023, and the areas of market supervision for the forthcoming year.
The report sets out the CBI's expectations of regulated financial service providers in respect of the following eight identified securities market risks:
- external risk environment
- sustainable investing
- market integrity
- market conduct risk management
- delegation and outsourcing
- cyber security
- data quality
- digital innovation
The CBI outlines that it is essential that regulated firms and market participants recognise and respond to these new market conditions and adapt their risk management and compliance frameworks to protect investors and promote orderly markets.
European
ESMA raises concerns with the proposed changes to the insider list regime
On 10 March 2023, ESMA published a letter addressed to the European Parliament and Council raising concerns with proposed changes to the insider list regime in the Markets Abuse Regulation. The proposed changes, which were put forward by the European Commission in December 2022 as part of the Listings Act proposal, would result in insider lists only including individuals who have regular access to inside information and not those who may have access to such information on a case by case basis.
The letter also outlines how the proposed changes could have detrimental effects for national competent authorities and their ability to enforce against market abuse. The letter outlines that it could also have a detrimental effect on issuers, as it would diminish awareness and could weaken the issuer's control of the flow of inside information.
ESMA publishes updated guidance on product governance
On 27 March 2023, ESMA published its final report on guidelines on MiFID II product governance guidelines. The key amendments to the guidelines include:
- the specification of any sustainability-related objectives a product is compatible with
- the practice of identifying a target market per cluster of products instead of per individual product ("clustering approach")
- the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales
- the periodic review of products, including the application of the proportionality principle
The guidelines will be translated into the official languages of the EU and published on ESMA's website. The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines.
For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.
Date published: 13 April 2023