close
Share with your friends

Central Bank of Ireland’s Director of Asset Management and Investment Banking highlights regulatory priorities

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:

  • Sustainable Finance – directors must be alive to the developments in sustainable finance (to include the EU Action Plan on Sustainable Finance published in May 2018), noting that ESMA has already published technical advice to the European Commission on the integration of sustainability risk and factors in MiFID II, AIFMD and the UCITS Directive.
  • Cyber Security – a thematic inspection was recently carried out across four asset management firms with varying business models to determine the adequacy of cybersecurity controls and cybersecurity risk management practices. Risk Mitigation Programmes (RMPs) have been issued to all firms included in the review and an industry letter will follow, which all firms should closely consider. While some firms had made good progress in IT security, many of the weaknesses highlighted in the Central Bank’s 2016 Cybersecurity Guidance were still prevalent in firms three years later.
  • Corporate Governance – a thematic review was carried out during 2019 relating to the risk, compliance and internal audit functions across the fund service providers and MiFID sectors. One of the key findings was that boards and senior management were not spending enough time reviewing the control frameworks in place. For a number of firms, the risk framework document underpinning a firm’s operations was not complete or being kept up-to-date. This document must be reviewed on an annual basis to ensure it reflects not only the risk environment that the firm operates in, but also has a clear outline on how these risks will be managed in line with the firm’s own risk appetite. An industry letter will be issued on these findings in the coming months.
  • Liquidity Management – in August, the Central Bank wrote to all external fund management companies and internally managed funds on the importance of ongoing, effective liquidity management and ensuring compliance with relevant legislation and regulatory obligations for UCITS and AIFs. Particularly important was the requirement to have an appropriately calibrated liquidity risk management framework for each fund under management, taking into account: (i) dealing frequency of the fund; (ii) the fund’s investment strategy; and (iii) the fund’s portfolio composition and investor profile. The Central Bank expects fund management companies to conduct ongoing assessments of the liquidity position of each fund’s portfolio, taking into account potential investor redemption requests.

    Fund managers will also need to ensure that they are complying with the ESMA Guidelines on Liquidity Stress Testing in UCITS and AIFs to test the resilience of their funds to different types of market risks, including liquidity risk.
  • Outsourcing – the European Banking Authority’s (EBA) guidelines on outsourcing arrangements entered into force on 30 September 2019. Although these are not applicable to fund management companies, their principles are equally applicable and firms may have regard to these guidelines in evaluating the suitability of outsourcing arrangements in place.

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. 

Back to top

ESMA publishes 2020 Work Programme setting out priorities for next 12 months

On 1 October ESMA published its 2020 Annual Work Programme detailing its areas of focus for the coming 12 months, specifically:

  1. Implementation of New Mandates such as the implementation of a new supervisory and regulatory framework under EMIR 2.2, finalisation of the Technical Standards in relation to cross-border marketing activities by funds, development of Technical Standards and other legal acts under the new prudential framework for investment firms, and strengthening and improving the disclosure of information by manufacturers of sustainable financial products and financial products towards end-investors.
  2. Promoting Supervisory Convergence, to include strengthening the convergence powers under the new ESMA Regulation, while ensuring consistency in the application of MiFID II/MiFIR for secondary markets. ESMA will seek to deliver the Money Market Funds (MMF) database and register, and update its guidance on MMF stress testing, in addition to continuing its coordination work in relation to closet indexing and to ensure the convergence of NCA practices in relation to performance fee structures and the circumstances in which such fees may be paid.
  3. Assessing Risks to Investors, Markets and Financial Stability through ongoing monitoring of retail investor trends, financial activities and innovation (fintech, crypto assets, tokenisation, crowdfunding, AI etc.) and the publication of its annual statistical report series based on EMIR, AIFMD and MiFID II data, and promoting cooperation on risk analysis.
  4. Completing a Single Rulebook for EU Financial Markets, through the preparation of a revised PRIIPs Technical Standard, and contributing to the implementation of the Capital Markets Union, Fintech and Sustainable Finance Action Plans, developing the necessary rules under EMIR 2.2/EMIR Refit and reviewing MIFID II/MiFIR.
  5. Directly Supervising Specific Financial Entities to ensure effective supervision of credit rating agencies (CRA), trade repositories (TR), entities under the Securitisation Regulation and SFTR and Tier 2 CCPs under EMIR 2.2, along with the recognition of third-country CCPs.

Back to top

Central Bank Emphasises Importance of Consumer-Focused Culture

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. 

Back to top

Administrative Sanctions Guidance Issued by Central Bank

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:

  1. The Nature, Seriousness and Impact of the Contravention;
  2. The Conduct of the Firm after the Contravention;
  3. The Previous Record of the Firm; and,
  4. Other General Considerations – e.g. deterrent effects, previous actions taken by the Central Bank in similar cases.

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.

Back to top

Dear CEO Letter to Trust or Company Service Providers (TCSPs)

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. 

Back to top

Extension of FCA’s Temporary Permission Regime

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. 

Back to top

EMIR Peer Review to Enhance Data Reporting

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.

Back to top

ESMA Q&As

A number of relevant Questions and Answers have recently been published or amended by ESMA:

  1. On MiFID II and MiFIR investor protection and intermediaries an Answer previously provided on the subject of disclosure of reports to the public (RTS 27 and 28) was amended on 3 October. ESMA has clarified that venues and firms should provide RTS 27 and 28 reports in an electronic format that allows for computerised calculations and mass processing that is compatible with standard and easily accessible machine-reading processes. Firms should also ensure that the format is clear and easily readable for retail clients.

    Similarly, an Answer previously provided on the understanding of the term “ongoing relationship” under MiFID II was amended to clarify the indicators of such of an ongoing relationship in the context of client-held trading accounts.
  2. On MiFID II and MiFIR transparency, with respect to equity transparency, an Answer previously provided on the determination of the turnover to be used for the average value of transaction (AVT) calculation was amended on 2 October, clarifying the treatment for shares, depositary receipts and certificates, as well as ETFs.

    An Answer provided in respect of pre-arranged / negotiated transactions for non-equity instruments was amended on 12 July, which clarified that such transactions may benefit from the hedging exemption under Art. 8(1) of MiFIR, subject to meeting certain conditions.

    New Answers were also published on 12 July. The first of these clarified that the hedging exemption under Art. 8(1) of MiFIR was not applicable to orders or quotes. The second Answer clarified the treatment to be applied to Constant Maturity Swaps (CMS) or futures (CMW) under RTS 2 for the purpose of determining whether they have a liquid market.
  3. On MiFID II and MiFIR market structures a minor amendment to an Answer concerning the application of tick size regimes to periodic auction systems was published on 2 October.
  4. On OTC Derivatives, Central Counterparties and Trade Repositories (EMIR), in respect of trade repositories, ESMA has clarified that transactions within the same legal entity should be reported  in circumstances where a Clearing Member defaults and the CCP temporarily assumes both sides of the outstanding transactions. ESMA has also amended its Answer in respect of position level reporting, and has published a new Answer in respect of the reporting of reference rates not included in Regulation (EU) 2017/105.

    With respect to OTC Derivatives, ESMA has clarified the timing of the first time calculation and notification by counterparties that start taking positions in OTC derivatives only after the entry into force of the EMIR refit. In that respect, new counterparties or counterparties that start taking positions in OTC derivatives, and which choose to calculate their aggregate month-end average position for the previous 12 months, need to perform the calculation 12 months after they start taking such positions, and must notify ESMA and their regulator immediately should they exceed the clearing thresholds or choose not to calculate their positions.

    Further, ESMA has provided clarity on how counterparties are to determine whether entities established in a third country would be a financial counterparty, either above or below clearing thresholds, if they were established in the EU.
  5. On the Securitisation Regulation (Regulation 2017/2402)ESMA has provided 19 new Answers and updated 34 others, which provides additional clarity on various templates contained in the draft technical standards on disclosure published by the European Commission.

Back to top

Central Bank consults on rules and guidance on the treatment and redress of errors in Investment Funds

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:

  • errors in the calculation of the Net Asset Value (‘NAV’);
  • errors relating to the investments of a fund and non-compliance with the applicable investment  restrictions;
  • errors related to the overpayment of a fee; and,
  • other errors which do not fall into the above three categories.

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:

  • report errors to the depositary, which in turn would fulfil the regulatory reporting obligation as required; or
  • report any material errors which have not been reported by the depositary to the Central Bank.

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.

Back to top

ESMA consults on the Markets Abuse Regulation (‘MAR’)

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:

  1.  'relevant persons' from the management company for CIUs without legal personality;
  2. For CIUs with legal personality managed by an external management company:

    (a)    individuals currently meeting the definition of PDMR, e.g. as members of the administrative body of an investment company; and

    (b)     'relevant persons' from the management company (or from external service providers acting for the CIU in question).

The deadline for submissions was 29 November 2019.

Back to top

European Commission consults on review of the EU Benchmarks Regulation

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 effectiveness of the rules applicable to critical benchmarks;
  • the effectiveness of the authorisation, registration and supervision regime applicable to benchmark administrators and colleges;
  • the functioning and effectiveness of certain commodity benchmarks;
  • the supervision of climate-related benchmarks;
  • the ESMA register of administrators and benchmarks; and
  • third country (non-EEA) benchmarks.

The deadline for submissions was 6 December 2019.

Back to top

ESAs consult on Changes to the Key Information Document (KID) for PRIIPs

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:

  • performance scenarios which illustrate what the retail investor might receive in return from their investment;
  • information on the costs of the investment;
  • specific issues for different types of investment funds; and,
  • specific issues for PRIIPs offering a range of options for investment (‘Multi-Option Products’).

The deadline for submissions is 13 January 2020.

Back to top

ESMA consults on position limits in commodity derivatives under MIFID II

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.

Back to top

Contact us for more

For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management