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.
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.
On 10 March 2020, the Central Bank published its 4th 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.
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:
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.
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:
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
The deadline for responses is 26 June 2020.
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:
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.
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.
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.
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.
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.
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.