Asset Management Insights April 2020 Asset Management Insights April 2020 Asset Management Insights April 2020

Welcome to our monthly KPMG Asset Management Insights newsletter, which has been designed to keep you up to date on topical issues within the Asset Management sector.

1. Central Bank response to COVID-19
2. Central Bank continues to identify need for diversity in the financial services sector
3. Cybersecurity arrangements at Asset Management firms need to be improved
4. Central Bank of Ireland publishes Consumer Protection Outlook Report
5. ESMA publishes final guidance on performance fees in investments for UCITS and AIFs
6. Addendum to Central Bank Consumer Protection Code comes into effect
7. Transposition of Revised Shareholders Rights Directive in Irish law
8. ESMA response to COVID-19
9. ESMA reports on the cost and performance of retail investment products
10. ESMA Consultations
11. ESMA publishes call for evidence on credit rating information and data
12. ESMA announces update to reporting under the Money Market Funds Regulation
13. ESMA publishes final technical advice to the European Commission on fines and penalties for 3rd country CCPs
14. ESMA publishes review of MiFID II commodity derivatives regime
15. ESMA advises European Commission on inducements and costs and charges disclosures under MiFID II
16. Commission consults on digital finance strategy for Europe / FinTech action plan
17. HM Treasury consults on treatment of overseas funds
18. ESMA withdraws registration of DTCC Data Repository (Ireland) plc
19. EFAMA responds to ESMA consultation on MiFIR report on systematic internalisers in non-equity instruments
20. EFAMA responds to ESMA’s consultation on MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the DVC and the trading obligations for shares
21. EFAMA responds to EIOPA consultation on the Pan-European Personal Pension Product (PEPP)
22. EFAMA responds to Commission consultation on potential initiative on digital operational resilience in financial services 

The Central Bank has published a number of public statements in response to the COVID-19 developments, including on 3 April 2020 advising that this has triggered a severe negative shock to the Irish economy that is fundamentally different in nature and scope from anything previously witnessed. The Central Bank’s second quarterly bulletin of 2020 focuses entirely on the impact of the COVID-19 pandemic.

On 23 March 2020, Governor Makhlouf advised on the measures being taken by the Central Bank, and at a European level, by the ECB through a new Pandemic Emergency Purchase Programme with an envelope of €750 billion until end-2020 on top of the €120 billion announced earlier in March, in addition to the release of the counter-cyclical capital buffer for banks.

The Central Bank has also launched a dedicated COVID-19 hub, which aims to bring together relevant and timely information, guidance and policy decisions for regulated firms and consumers from both the Central Bank and other European authorities. 

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On 10 March 2020, the Central Bank published its 4^th Demographic Analysis of over 4,500 applications for senior roles within regulated firms in Ireland under the Fitness & Probity regime during 2019. The report notes that during 2019, 26% of such applicants were female (24% in 2018), while female applications for board-level positions increased to 24%, with a majority of applicants (63%) for PCF roles being Irish. In respect of current role holders, the lack of gender diversity is more pronounced, with 87% of current PCF positions in the largest Asset Management firms being men, and 85% of men holding revenue-generating roles across the financial services sector.

The report stated that more work was needed to enhance diversity at senior levels across the entire financial services industry, and noted that in 2020, the Central Bank’s attention would be directed towards the Asset Management and Investment Banking sector, having recently conducted a review of the insurance sector.

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On 10 March 2020, the Central Bank published an industry letter, highlighting the findings of on-site inspections of cybersecurity risk management at Asset Management firms as part of a thematic review. The findings include:

• While some firms have made good progress in certain areas, many of the weaknesses previously highlighted in the Central Bank’s 2016 Cross-Industry guidance on IT and cybersecurity risks are still prevalent three years later;
• Boards and senior management are not prioritising the need to have a strong culture of cybersecurity embedded throughout the organisation. Firms should have a comprehensive, documented and Board-approved IT and cybersecurity strategy, supported by sufficient resources and aligned with the overall business strategy;
• Deficiencies in IT asset inventories. These should be classified by business criticality, and should be established and maintained to support an effective IT Risk Management framework;
• Inadequate vulnerability management planning and mitigation;
• Cybersecurity incident response and recovery plans did not meet expectations, with many being in draft form, incomplete or not tested with appropriate frequency;
• Variable quality in cybersecurity risk reporting, with insufficient use of quantitative indicators. Firms should implement, maintain and communicate an appropriate cybersecurity risk management framework that includes risk identification, assessment and monitoring, the design and implementation of risk mitigation and recovery strategies, and testing for effectiveness.

The Central Bank’s Director of Asset Management and Investment Banking, Michael Hodson, stated that firms must focus on increasing the maturity of their cybersecurity model by driving a process of continuous improvement, and noted that the Central Bank expected all Asset Management firms to fully consider these findings and evaluate their own cybersecurity risk management practices to establish if any improvements are required. 

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On 9 March 2020 the Central Bank published its Consumer Protection Outlook Report 2020, which identifies key cross-sectoral risks to consumers of financial services, sets out the Central Bank’s expectations in order to minimise risks to consumers, and identifies the consumer protection priorities for 2020, including key policy and supervision work. The Central Bank also expects firms to protect consumers from risks that may emerge from COVID-19.

The key cross-sectoral risks which are to be addressed by firms include:

• a lack of a consumer-focused culture in firms;
• ineffective disclosure by firms about the benefits, risks and costs of financial products;
• poor governance and oversight of outsourcing arrangements;
• information Technology and cyber risks; and
• risks arising from Brexit

The Central Bank’s 2020 priorities include the advancing of the review of the Consumer Protection Code (‘CPC’), driving firms to embed effective consumer-focused cultures, and to deploy risk-based supervision of firms’ management of conduct risk. In particular, with respect to asset management firms, the Central Bank intends to assess how the asset management sector applies appropriateness and suitability requirements when selling products to investors.

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On 3 April, ESMA published its final guidance for fund managers when designing performance fee models for managed funds. The guidelines aim to harmonise the charging of performance fees to retail investors, as well as the circumstances in which performance fees can be paid, and specifically addresses:

• Performance fee calculation method, to include specific elements, and designed to ensure that performance fees are proportionate to investment performance;
• Consistency between the performance fee model and investment objectives, strategy and policy, through periodic review and consideration of the appropriateness of benchmarks and the use of consistency indicators;
• Frequency for the crystallisation of the performance fee, which should be defined to ensure alignment of interests between portfolio managers and investors, and generally not more than once per year;
• Negative performance recovery, including the assessment and remuneration of mangers on a time horizon consistent with the recommended investors’ holding period;
• Disclosure of the performance fee model within the prospectus, KIID and any ex-ante information documents, as well as disclosure requirements in the annual and half-yearly reports. 

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On 30 March 2020, the European Union (Shareholders’ Rights) Regulations 2020 came into operation, which transpose the revised Shareholders’ Rights Directive (Directive 2017/828) into Irish law. The Directive aims to promote the exercise of shareholder rights, and provides for the identification of shareholders, the transmission of information to them, in addition to transparency requirements for institutional investors, asset managers and proxy advisors.

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On 31 March 2020, the Central Bank of Ireland’s addendum to the CPC became effective, amending consumer protection requirements concerning conflicts of interest, the provision of information, and certain definitions. The addendum sets out that regulated entities receiving or paying fees, commissions, or other reward or remuneration in connection with the provision of a regulated activity to a consumer must ensure that the fees, commissions, and rewards do not impair compliance with the entity’s duty to act in the best interests of the consumer, nor impair the entity’s ability to satisfy conflicts of interest or suitability requirements, as applicable.

The addendum further provides for restrictions on the use of the word “independent” in entities’ legal or trading name or in the description of its regulated activities, including in respect of “MiFID Article 3 services” which are permitted only where certain criteria are fulfilled. The addendum also provides that intermediaries must publish a summary of the details of all arrangements for any fee, commission, or other reward or remuneration paid or provided to the intermediary which have been agreed with product producers, to include the basis on which such commission is paid, an explanation of the arrangement, and any agreed fees, administration costs and additional non-monetary benefits that may be provided to the intermediary. 

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ESMA has similarly made a number of public statements in response to the COVID-19 pandemic, including:

• Recommendations to financial market participants - On 11 March, a number of recommendations were made to financial market participants, namely:
  • contingency plans should be ready to be applied, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations;
  • issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation;
  • issuers should provide transparency on the actual and potential impacts of COVID-19, based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures;
  • asset managers should continue to apply the requirements on risk management, and react accordingly.
• Net short position holders - On 16 March, ESMA issued a decision temporarily requiring net short position holders to report positions of 0.1% and above of the issued shared capital of companies admitted to trading on a regulated market to the relevant national competent authority,
• SFTR supervisory actions - On 19 March, a public statement was issued to ensure coordinated supervisory actions on the application of the Securities Finance Transactions Regulation (SFTR), in particular on the requirements regarding the reporting start date, and the registration of Trade Repositories. This statement was revised on 26 March to clarify that SFTs concluded between 13 April 2020 and 13 July 2020 and subject to backloading under SFTR also falls within those issues in respect of which competent authorities are not expected to prioritise in their supervisory actions towards counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations under SFTR or MiFIR.
• MiFIR tick-size regime for systematic internalisers – On 20 March, ESMA issued a public statement to ensure coordinated supervisory actions by competent authorities on the application of the new tick-size regime for systematic internalisers under MiFIR and the Investment Firms Regulation (IFR). In this respect, ESMA expects competent authorities not to prioritise their supervisory actions in relation to the new tick-size regime introduced in MiFIR towards SIs until 26 June 2020, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.
• Call Taping under MiFID II - On 20 March, ESMA issued a public statement clarifying its position on call-taping under MiFID II. Recognising that it may not be practicable to record relevant conversations during the exceptional circumstances brought about by COVID-19 pandemic, ESMA advised that it expects firms to consider what alternative steps could be taken to mitigate the risks related to the lack of recording. In this respect, firms are expected to deploy all possible efforts to ensure that such measures remain temporary and that usual recording of telephone conversations is restored as soon as possible.
• Accounting implications of economic support - On 25 March, a public statement was issued on the accounting implications of the economic support and relief measures adopted by EU Member States in response to COVID-19, in order to avoid divergence in practice on the application of IFRS 9, specifically in respect of the calculation of expected credit losses and related disclosure requirements.
• Publishing deadlines under Transparency Directive - On 27 March, ESMA issued a public statement on the implications of the COVID-19 pandemic on deadlines for publishing financial reports for listed issuers under the Transparency Directive, and recommends that that national competent authorities apply forbearance powers for issuers who need to delay publication of financial reports beyond the statutory deadline.
• Positive Opinions on short selling - ESMA issued four positive opinions during March agreeing to emergency prohibitions on short selling on all transactions which might constitute or increase net short positions on shares traded on regulated markets in Italy, France, Belgium and Greece, as well as to all related instruments relevant for the calculation of the net short position. The prohibitions are to remain in effect for various periods, and each of the ESMA opinions can be found here:
  • Italy
  • France
  • Belgium
  • Greece.
• Application Date of Equity Transparency Calculations – On 27 March, ESMA confirmed that the date of application of the transparency calculations for equity instruments of 1 April 2020 remans unchanged. ESMA considered that adapting to new transparency results for equity instruments was a process that market participants have performed several times in the past and should not require new IT releases. In this respect, ESMA considered that delaying the application of the new transparency results would in itself entail some risks and may even create additional operational burdens to market participants.
• Clarification of best-execution reports under MiFID II – On 31 March, ESMA issued a public statement regarding the publication by execution venues and firms of the general best execution reports required under RTS 27 and RTS 28 of MiFID II, and encouraged competent authorities not to prioritise supervisory action against execution venues in respect of missed reporting deadlines.
• Update to Risk Dashboard – On 2 April, ESMA updated its risk dashboard report in light of the COVID-19 pandemic. The report notes that the pandemic has led to massive equity market corrections since mid-February driven by a sharp deterioration in the outlook for consumers, businesses and of the economic environment. The report notes that macroeconomic forecasts predict a global recession for 2020, with Europe particularly affected. ESMA’s outlook foresees a prolonged period of risk to institutional and retail investors of further, and possibly significant, market corrections.

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On 6 April 2020, ESMA published its second annual statistical report, which highlights the impact of costs on the final returns received by retail investors on their UCITS investments, which are significantly higher than those paid by institutional investors. The report also finds that the net returns on actively managed funds were lower on average than those for passively managed funds, attributable to these higher costs. Among the report’s key finds were the presence of volatile returns, although broad stability in fund costs, with higher risk exposures entailing higher costs, irrespective of asset class.

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Technical Standards for Benchmarks – On 9 March 2020, ESMA launched a consultation on its draft Regulatory Technical Standards under the Benchmarks Regulation (BMR). The draft standards further specify certain of the BMR’s requirements, including ensuring the existence of robust governance arrangements, conditions surrounding the use of methodologies for benchmarks, the characteristics of systems and controls to ensure the integrity of input data, the assessment criteria used by competent authorities when transitioning to new administrators, and the criteria under which competent authorities may require changes to the compliance statement.

This consultation will be of specific interest to administrators and contributors to benchmarks. The deadline for submissions is 8 June 2020.

MiFIR Transparency regime for non-equity instruments – On 10 March 2020, ESMA launched a consultation reviewing the transparency regime for non-equity instruments and the trading obligation for derivatives under MiFIR. The purpose of the consultation paper is to simplify the current trade reporting regime by creating a uniform set of rules while trying to improve the overall trade transparency available to market participants for non-equity instruments. The consultation paper also includes ESMA’s report on the impact of the newly established trading obligation for derivatives and the progress made in moving trading in standardised OTC derivatives to exchanges or electronic trading platforms.

This consultation will be of interest to all stakeholders involved in the securities markets. The deadline for submissions is 19 April 2020, with ESMA intending to submit its final review report to the European Commission in July 2020.

Technical Standards on Trade Repositories under EMIR Refit – On 26 March 2020, ESMA launched a consultation on draft Implementing and Regulatory Technical Standards under the EMIR Refit (Regulation (EU) 2019/834. The proposals build on existing rules and on ESMA’s experience in implementing EMIR since 2012, and address several aspects on the enhancement of the quality of the reported derivatives data. ESMA has also revised certain aspects of reporting to trade repositories in order to align the reporting requirements in the EU with the global guidance on harmonisation on the reporting of OTC derivatives data elements.

This consultation will be of relevance to counterparties of derivatives, CCPs and trade repositories. The deadline for submissions is 19 June 2020.

Post-Trade Risk Reduction Services under EMIR – On 26 March 2020, ESMA launched a consultation on Post Trade Risk Reduction Services (PTRR) under the European Market Infrastructure Regulation (EMIR). The consultation paper seeks feedback on how the clearing obligation affects PTRR services, and whether there ought to be an exemption to the clearing obligation for trades directly resulting for such services, and if so, the scope of same and whether it should be subject to conditions or restrictions.

This consultation will be of relevance to counterparties of derivatives, CCPs and trade repositories. The deadline for submissions is 15 June 2020.

Guidance to address leverage risk in the AIF sector – On 27 March 2020, ESMA launched a consultation paper on its draft guidance addressing leverage risks in the AIF sector. This paper forms part of the ESMA response to recommendations of the ESRB in April 2018 to address liquidity and leverage risk in investment funds. The draft guidelines address the assessment of leverage related systemic risk and the imposition of leverage limits, and aims to promote supervisory convergence in respect of these areas.

This consultation will be interest to asset managers managing AIFs. The deadline for comments is 1 September 2020.

Standardised information to facilitate cross-border funds distribution – On 31 March 2020, ESMA launched a consultation on the standard forms, templates and procedures the competent authorities should use to publish information on their websites to facilitate cross-border distribution of funds, which includes national laws and regulations governing marketing requirements, as well as regulatory fees and charges levied.

This consultation will be of interest to AIF managers, UCITS management companies, EuSEF managers, as well as distributers of UCITS and AIFs. The deadline for comments is 30 June 2020. 

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On 30 March 2020, ESMA published a call for evidence on the availability and use of credit rating information and data in order to gather information on the specific uses of credit ratings as well as how their users are currently accessing such information. Feedback provided will enable ESMA to map the activities undertaken by users of credit ratings, to identify specific data needs, and to understand why third-party service providers are used rather than the information provided free of charge on the European Rating Platform and credit ratings agencies public websites.

The closing date for responses is 3 August 2020. 

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On 31 March 2020, ESMA announced that the first reports by MMF managers should be submitted in September 2020, rather than the original date of April 2020. This is as a result of an update to the XML schemas to be used for reporting, which will require additional time being needed for MMF managers to comply with the reporting obligation. The revised schemas and reporting instructions are expected to be published shortly.

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On 31 March 2020, ESMA published its final technical advice on the procedural rules for imposing fines and penalties on third country central counterparties, trade repositories and credit rating agencies. The advice covers a number of areas, including: the right to be heard by the by the independent investigation officer (IIO); the content of the file to be submitted by the IIO; access to the file; the procedure for imposing fines; the adoption of interim decisions; the limitation periods for imposition and enforcement of penalties; and the relevant calculation periods. This advice will now be considered by the European Commission in its drafting of a delegated act in accordance with Article 82 of EMIR. 

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On 1 April 2020, ESMA published a report on the impact of position limits and position management on commodity derivatives markets. The report contains proposals aimed at making the commodity derivatives framework operate more efficiently, through balancing the requirements of an ambitious application of position limits, reporting and management that focusses on the main issues while simplifying the regime to the extent possible. The review report has been submitted to the European Commission and is expected to feed into the Commission review of MiFID II on the impact of the application of position limits and position management on liquidity, market abuse and orderly pricing and settlement conditions in commodity derivatives markets.

ESMA has also published technical advice to the European Commission on the weekly aggregated information to be published by trading venues on open positions per category of stakeholders, which aims to ensure that this information is made available for a larger number of commodity derivatives traded on EU trading venues to ensure more transparency in EU commodity derivative markets.

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On 1 April 2020, ESMA published its advice to the European Commission on inducements and costs and charges disclosures under MiFID II. The advice recommends that further analysis be taken on inducements, and makes a number of proposals aimed at improving clients’ understanding of inducements through clarifications under the Delegated Regulation, and by introducing an obligation to include in all inducements disclosures an explanation of the terms used to refer to these, such as third-party payments. With respect to costs and charges disclosures, ESMA advises that the MiFID II disclosure regime generally worked well and helped investors to make informed decisions, however it recommended that some disclosure obligations regarding eligible counterparties and professional investors be reduced.

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On 3 April 2020, the European Commission launched a consultation on its new digital finance strategy/Fintech action plan, to be published in Q3 2020, that will set out a number of areas on which public policy should focus in the coming 5 years. In this respect, the Commission is considering four key areas of policy action in order to spur the development of digital finance, namely:

• ensuring that the EU financial services regulatory framework is technology-neutral and innovation friendly;
• reaping the opportunities offered by the EU-wide single market for digital financial services for consumers and firms;
• promoting a data-driven financial sector for the benefit of EU consumers and firms; and
• enhancing the operational resilience of the financial sector.

The deadline for responses is 26 June 2020.

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On 11 March 2020, HM Treasury launched a consultation on the treatment of overseas funds recognition post-Brexit. The consultation sets out two regimes based on the principle of equivalence: one in respect of retail investment funds, and another for money market funds, which will enable HM Treasury to grant equivalence to a country or territory and to allow streamlined access to marketing in the UK. The consultation paper notes that two conditions must be met before HM Treasury can grant equivalence to a country, namely:

• that the regulatory regime meets the required standard on an outcomes basis:
  • with respect to retail funds, the regulatory regime must achieve at least equivalent investor protection to comparable UK authorised funds;
  • with respect to MMFs, the regulatory regime must be at least equivalent to the regulations that apply to UK MMFs.
• there are, or there will be, adequate supervisory cooperation arrangements between the FCA and the competent authority in the other country.

Irish Funds has publicly advised that it will be responding to the consultation through its Brexit Steering Group and notes that any contributions can be provided to it directly. The deadline for submissions is 11 May 2020.

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On 31 March 2020, ESMA withdrew the trade repository registration of DDRIE, which had been registered since 1 March 2019 as part of a no-deal Brexit contingency plan. This follows DDRIE’s official notification to ESMA on 3 February 2020. 

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On 18 March 2020, the European Fund and Asset Management Association responded to the ESMA consultation on MIFIR report on systematic internalisers in non-equity instruments (which remains open until 15 April 2020). In its response, EFAMA notes that it is supportive of a voluntary use based consolidated tape, subject to it being operated by ESMA and a number of other conditions. With respect to the role of systematic internalisers (SIs), EFAMA notes that there is no evidence to indicate that SIs have had any negative impact on liquidity or price discovery, and were they to be restricted, the only beneficiaries would be primary markets which risks establishing an oligopoly in European markets. Finally, EFAMA notes that the timeline imposed under the consultation was insufficient to collect data required and urges ESMA to bear in mind the cost to industry that would be brought about through a change in regulatory reporting.

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On 17 March 2020, EFAMA responded to the ESMA consultation on MiFID II/ MiFIR review report on the transparency regime for equity and equity-like instruments, the DVC and the trading obligations for shares (which remains open until 14 April 2020). In its response, EFAMA stated that it did not believe there ought to be any limitations on the ability to execute in a manner befitting the association’s needs as market participants, and that it supported the removal of the share trading obligation and the double volume cap mechanism, as both requirements do not result in positive outcomes for market participants but end up creating a complex market structure in Europe to the benefit of primary exchanges only and the detriment of end-users.

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In March 2020, EFAMA responded to EIOPA’s consultation on the PEPP. Among EFAMA’s key messages were:

• With respect to the fee cap of 1% on the basic PEPP, that all costs should be fully transparent to create an open and competitive market;
• The exclusion of the guarantee from the fee cap appeared to suggest that regulators did not recognise the value that lifecycle strategies can offer savers, which operated against the principle of a level playing field.
• Transaction costs may vary significantly according to asset class and prevailing market conditions, and therefore should not be included in the fee cap.
• That the PEPP provider should ensure that its investment strategy allows to recoup the capital at the start of the decumulation phase with a certain probability.
• PEPP documentation should be designed both to be digitally delivered and subject to rigorous customer testing to ensure it provides robust but accessible information for products.

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On 24 March 2020, EFAMA published its response to the European Commission’s consultation on a digital operational resilience framework for financial services. EFAMA supported the Commission’s approach with respect to the development of a harmonised reporting template for individual companies to report incidents to their competent national cyber-security authorities, in addition to the adoption of a general set of principles to orient financial market players when selecting third party service providers. However, with respect to ICT and security requirements, EFAMA cautioned the Commission against the adoption of too rigid or prescriptive legislative solutions, which could ultimately fragment global markets and harm the European asset management industry from a competitiveness standpoint. With respect to ICT and security incident reporting requirements, EFAMA considered that involvement of other public bodies beyond national competent authorities should be strictly conditioned by their expertise and supervisory remit over asset management companies. In this regard, EFAMA strongly cautioned the Commission against entrusting the design and conduct of cyber-testing frameworks for the industry to pan-EU bank or macroprudential supervisors (i.e. ECB/SSM and ESRB). Finally, EFAMA also expressed its desire to develop initiatives to foster more cyber-threat intelligence sharing among industry peers, as well as the gradual development of cyber-insurance policies.

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

• March 2020
• February 2020
• January 2020
• December 2019