On 7 October, Michael Hodson provided key regulatory insights to INEDs of Asset and Wealth Management firms, and highlighted the important role they play in the oversight of firms. (Link to speech).
The Central Bank has indicated that it is essential that boards of fund management companies ensure that all necessary processes, policies, procedures and resources are in place, and that INEDs satisfy themselves that these were operating as expected and delivering on their intended outcomes.
The Central Bank is also now reviewing the results of the questionnaires issued to over 300 in-scope UCITS management companies, AIFMs, self-managed UCITS and AIFs as part of its Consultation on Fund Management Company Effectiveness – Delegate Oversight (CP86). On-site inspections are expected to commence in November and into Q1 2020, with a target completion date of H1 2020.
A number of regulatory ‘Hot Topics’ were also highlighted, which INEDs should consider, namely:
The Central Bank has also asked INEDs are to examine the proposed new prudential regime for investment firms (‘the Investment Firms Regulation and Directive’) and to begin to consider how it will apply to their respective firms.
On 1 October ESMA published its 2020 Annual Work Programme detailing its areas of focus for the coming 12 months, specifically:
In a speech delivered on 20 November, the Central Bank’s Director of Consumer Protection, Grainne McEvoy, has emphasised the importance of adopting a consumer-focused culture in financial services firms through the implementation of cultural values and behaviours, setting ‘tone from the top’, and ensuring that there are appropriate performance management and remuneration systems in place.
The Central Bank uses its ‘Consumer Protection Risk Assessment Model’ (CPRA) to test how well firms are performing by examining how firms assess and manage the risks they pose to customers. In this regard, the Central Bank considers that there is still room for improvement in relation to performance management processes, which includes consumer protection as a performance metric.
With respect to funds, this consumer-centric approach aligns with the Central Bank’s focus on Key Investor Information Documents (KIIDs) and prospectuses for investors in UCITS, as was seen from the Central Bank’s recent reviews of performance fees and closet indexing. The Central Bank expects any necessary updates to prospectuses and KIIDs to be submitted by 31 March 2020, as identified in its industry letter of 18 July 2019.
The Central Bank’s Director General of Financial Conduct, Derville Rowland, launched the Central Bank’s new Administrative Sanctions Guidance on 14 November. In light of the volume and value of fines issued by the Central Bank in recent years (approximately €100m in over 130 settled cases since 2006), it behoves all regulated firms to familiarise themselves with the new guidance, and the factors taken into account by the Central Bank in issuing such sanctions.
The Guidance states that the Central Bank will have regard to both aggravating factors (e.g. failure to report contraventions) as well as mitigating factors (e.g. exemplary cooperation) in its investigations, examined under four headings:
The Guidance is a welcome addition, which will serve to ensure that regulated firms are clear on the precise approach adopted by the Central Bank in its application of the ASP regime.
A letter has been issued to all TCSPs informing those firms of findings identified from supervisory engagement since 2017. Among the findings include issues related to Board oversight, money laundering risk assessments, and AML/CTF policies and procedures.
The letter also sets out the Central Bank’s expectations in respect of each of these areas.
In light of the UK’s delayed withdrawal from the EU, on 30 October the FCA announced that it will be extending the date by which firms and funds should notify it for entry into the Temporary Permissions Regime (TPR) to 30 January 2020.
Fund managers will have until 15 January 2020 to inform the FCA if they want to make changes to their existing notification, but have been advised to continue to comply with existing regulatory requirements, including those relating to MiFID transaction reporting and EMIR trade reporting requirements.
ESMA has recently published its final report on the supervisory actions of six national regulators, including the Central Bank of Ireland and UK Financial Conduct Authority, regarding their approaches to enhance the quality of derivative data reported under EMIR, to include:
(1) Supervisory approach to EMIR data quality;
(2) Integration of EMIR into regulator’s overall supervisory approach; and
(3) Regulators’ assessment and analysis of data.
Mixed results were found for the six regulators, with the majority having a supervisory approach to EMIR data quality in place. Two regulators lagged behind when it comes to integrating EMIR data quality controls into their overall supervisory approach, which negatively impacted the NCAs’ ability to access, assess and analyse EMIR data.
In respect of the Central Bank, although it was found that EMIR had been fully integrated into its overall supervisory approach, the review identified areas where coverage could be further enhanced, such as monitoring of consistency and timeliness of reporting. ESMA has identified potential improvements, to include exhibiting a more assertive approach to taking enforcement or administrative action against counterparties who mis-report.
A number of relevant Questions and Answers have recently been published or amended by ESMA:
On 9 September, the Central Bank published a Consultation Paper (CP130) which seeks feedback on a proposed regulatory framework that establishes rules and guidance in relation to the treatment, correction and redress of errors in investment funds. This will have implications for fund management companies, which the Central Bank considers as being ultimately responsible for ensuring that where any such errors occur, they are appropriately rectified.
The consultation arises following a programme of themed reviews carried out during 2015 in relation to the fund industry’s approach to the treatment of NAV pricing errors. While the Central Bank notes the existence of industry guidance issued by Irish Funds, which is widely adopted and applied, it also notes that it is neither sanctioned nor approved by the Central Bank, and there remain a number of areas requiring attention, including reporting.
It is proposed that the regulatory framework be applicable to fund management companies acting for Irish authorised UCITS or AIFs, in addition to Irish Fund Management Companies (which may be acting for non-Irish authorised funds). The proposed regulatory framework covers four error types, to include:
The framework also proposes the setting of both qualitative and quantitative materiality thresholds in the assessment of errors. The quantitative thresholds for determining materiality will depend on the type of investment fund (0.1% of NAV for Money Market Funds; 0.5% of NAV for Other Investment Funds).
The Central Bank also proposes to amend reporting obligations imposed on fund management companies to consist of an obligation to either:
The Central Bank also considers that redress is a critical component of investment fund error, and considers that the de minimis limits currently applied by the industry appear excessive, although acknowledging that they may have some utility where no net benefit would accrue to investors. A proposed approach to redress, which takes into account a number of elements to be applied in certain circumstances, is set out in the Consultation Paper.
Stakeholders were asked to provide responses to each of the questions contained in the Consultation paper, as well as general observations on the proposals by 9 December 2019.
On 3 October, ESMA launched its consultation on the provisions of the Market Abuse Regulation, which concerns a number of important issues for investment funds trading on a regulated market in the EU which fall within the scope of the Regulation.
In particular, section 10 of the Consultation Paper addresses the different impacts derived from considering collective investment undertakings within the scope of MAR. ESMA seeks to analyse whether there is a genuine need to for MAR to be amended to explicitly include or exclude such entities, not only with respect to PDMR (‘persons discharging managerial responsibilities’) obligations, but also in respect of other interlinkages between CIUs (and their management companies), and MAR, which have been the subject of previous ESMA Q&As. ESMA’s preliminary view is that there are grounds to consider that MAR should explicitly cover PDMR obligations to CIUs and their management companies. In this respect, ESMA considers that there are at least two categories of PDMR:
The deadline for submissions was 29 November 2019.
On 11 October, the European Commission launched its consultation on a review of the EU Benchmarks Regulation (Regulation (EU) 2016/1011), seeking feedback from stakeholders who have experience of the regulatory regime for benchmarks in their capacity as benchmark administrator, contributor or user. This may impact UCITS, UCITS management companies, AIFMs and MiFID firms who are “users” of a benchmark.
The Commission seeks feedback on the functioning of the regime to determine whether there is a need for amendment to the Regulation, in particular:
The deadline for submissions was 6 December 2019.
On 16 October, the European Supervisory Authorities (ESMA, EBA, EIOPA) issued a joint Consultation Paper on proposed amendments to existing rules on the Key Information Document for Packaged Retail and Insurance-based Investment Products (PRIIPs).
The aims of the review are to address issues already identified by stakeholders and supervisors since the inception of the KID in 2018, and to make specific changes to allow the rules to be applied to investment funds expected to be required to prepare a KID from 1 January 2022. As part of this review, the European Commission, in cooperation with the ESAs, is undertaking a consumer testing exercise to assess the effectiveness of the different presentation of performance scenarios, with results expected in Q1 2020.
The consultation paper proposes changes in relation to the following:
The deadline for submissions is 13 January 2020.
On 5 November, ESMA launched a consultation on the impact of position limits on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivative markets, and seeks stakeholders’ views on some proposed amendments to the legal framework.
The consultation paper will primarily be of interest to investment firms, trading venues and non-financial counterparties trading in commodity derivatives. ESMA’s proposals include the revision of the Technical Advice provided to the Commission on the MIFID II delegated acts on position reporting by categories of position holders. Specifically, ESMA suggests revising the minimum number and size of open positions to be met by commodity derivatives, emission allowances and derivatives thereof to be subject to weekly position reports by the relevant trading venue.
The proposals also address structural aspects of the position limit regime, including a review of the same contract provisions, and a reconsideration of the C(6) carve-out exemption. ESMA further recommends excluding securitised derivatives from the scope of position limits in Article 57 of MiFID II, and sets out two options to address the negative impact of position limits on new and illiquid commodity derivatives under the position limit regime.
ESMA sees merit in introducing a position limit exemption in Level 1 for “mandatory” liquidity provision obligations, but notes concerns that introducing significant exemptions to the position limit regime for financial counterparties would not be consistent with the objective of limiting excessive speculation in commodity derivatives by financial firms. ESMA also considers that there may be legitimate circumstances where financial counterparties could be eligible for a hedging exemption, and suggests that a financial counterparty could benefit from this for the positions which are objectively measurable as reducing risks directly related to the commercial activities of the non-financial entities of the group, where the financial counterparty within a predominantly commercial group acts as the market facing entity for the group and manages the positions of the non-financial group entities.
Finally, ESMA considers that there would be value in providing further clarity on the expected scope and content of position management controls to support a more convergent implementation across trading venues. In this regard, ESMA proposes to amend Article 57(8)(b) of MiFID II and to introduce Level 2 measures on position management controls.
The deadline for submissions is 8 January 2020.
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.