September 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.

Central Bank of Ireland Updates

1. Central Bank of Ireland publishes reporting requirements for fund management companies of Irish-authorised Money Market Investment Funds

In August, the Central Bank published the first version of a Guidance Note on reporting relevant for: (i) all Irish-authorised Money Market Investment Funds (MMFs) authorised under the Money Market Funds Regulation (MMFR) and (ii) fund management companies of MMFs. 

The purpose of the Guidance Note is to provide information and direction on the completion of MMF reporting by fund management companies, including:

(i) The “Money Market Fund Returns” for authorised MMFs under Article 37 of the MMFR;

(ii) Ad-hoc Stress Test Reporting under Article 28 of the MMFR;

(iii) Other Ad-Hoc reporting under MMFR outside of points (i) and (ii); and

(iv) Daily Reporting for MMFs.

The Central Bank advises that the guidance may be updated periodically.

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2. Central Bank of Ireland sets out expectations of investment firms when engaging in unregulated activities

On 25 June, the Central Bank of Ireland issued a letter to investment firms setting out its expectations when investment firms offer products and services considered to be outside of the scope of regulation. The letter notes that where firms engage in both regulated and unregulated activities, there is a significant risk that clients may misunderstand the protections afforded when investing in unregulated products. In order to avoid such risks, the Central Bank expects, at a minimum, that firms:

  • communicate the regulatory status of such products or services at all stages of the sales process;
  • include appropriate disclosures and risk warnings on all information provided to clients;
  • do not use the firm’s regulatory status as a promotional tool; and
  • distinguish on their websites regulated and unregulated activities.

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European Supervisory Authorities Updates

3. ESMA recommends priority topics In AIFMD review

On 18 August, the European Securities and Markets Authority (ESMA) wrote to the European Commission highlighting areas to consider in respect of the forthcoming review of the Alternative Investment Fund Managers Directive (AIFMD). The letter sets out recommendations for changes in 19 areas, including:

  • Harmonisation of the AIFMD and UCITS regimes through more granular rules for UCITS and harmonised UCITS reporting;
  • Harmonisation of the scope of additional MiFID services and application of rules;
  • Additional legislative clarifications in the AIFMD and UCITS frameworks with respect to delegation and substance requirements;
  • Liquidity management tools governed through a common EU framework;
  • Leverage and the need to amend the current reporting of the gross method calculation; and
  • Harmonisation of supervision of cross-border entities, particularly with respect to cross-border marketing, management and delegation.

The Commission is expected to publish a consultation in relation to AIFMD this month, following which a legislative proposal will be published in 2021.

In its response to this letter on 28 August, Irish Funds stated that while there were some positive elements, many of ESMA’s suggestions could pose challenges for its member firms from both a cost and business model perspective, and has advised that it will be engaging with the European Commission and ESMA in advance of the publication of any legislative proposals. 

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4. ESMA updates risk parameters in guidelines on stress test scenarios under MMF Regulation

On 27 August, ESMA issued a public statement notifying market participants that the 2019 Guidelines on stress test scenarios under the Money Market Funds Regulation will be updated in 2020 to include a modification of the risk parameters to reflect recent market developments related to the COVID-19 crisis. Pending the application date for the 2020 update, all sections of the 2019 guidelines continue to apply, including the existing calibrated scenarios and the internal stress test exercise to be carried out by managers of MMFs. ESMA notes that it will calibrate the risk parameters in collaboration with the European Systemic Risk Board (ESRB) and the European Central Bank (ECB).

It is expected that the updated guidelines will be published in Q4 2020 but ESMA is not planning to conduct a public consultation in relation to the update.

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5. ESMA publishes list of thresholds for shareholder identification

On 31 August, ESMA published a document listing the thresholds above which shareholders can be identified in various EU Member States in order to enhance transparency around regimes adopted across the EU. The document sets out the various national thresholds for shareholder identification in Member States that have established such a threshold. At present, Ireland has no such threshold

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6. ESMA published second Trends, Risks and Vulnerabilities (TRV) Report of 2020

On 2 September, ESMA published its second Trends, Risks and Vulnerabilities (TRV) Report of 2020, which analyses the impact of COVID-19 on financial markets during Q1-Q2 2020, and highlights the risk of a potential decoupling of financial market performance and underlying economic activity. The TRV report also highlights specific risks for financial stability and investors regarding model risk in collateralised loan obligations, EU fund industry interconnectedness, MiFID II research unbundling and closet index funds’ costs and performance.

The report notes that although markets experienced a remarkable rebound during Q2, assisted by public policy interventions, the market environment remains fragile, and foresees a prolonged period of risk to institutional and retail investors, with the potential for significant market corrections. The report expresses concerns about the sustainability of the recent market rebound with a high risk of decoupling between market performance and economic activity; whereas equity markets have surged by 40% in the Euro-area since mid-March, the International Monetary Fund expects GDP to drop by more than 10% during 2020.

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7. EFAMA’s European fund classification updated

On 26 August, EFAMA published the second edition of “The European Fund Classification – EFC Categories”, adapting the classification criteria to meet market evolutions. The EFC is a pan-European classification system of investment funds developed by EFAMA in order to provide a single methodology for comparing funds, first published in 2012. 

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8. EFAMA responds to the EBA consultation paper on the implementation measures of the new regulatory framework for investments firms

On 4 September, EFAMA responded to the European Banking Authority’s (EBA) consultation papers on prudential requirements, reporting and disclosures, and remuneration requirements for investment firms. This follows the entering into force of the Investment Firms Directive (IFD) and Regulation (IFR) in 2019. In particular, EFAMA called on the EBA to carefully consider the circumstances of COVID-19 and requested that the European Commission postpone the date for the application of the IFD/IFR framework, currently set at 26 June 2021, including the timetable for the implementation of level 2 measures. 

With respect to the substantive requirements set out under the proposed technical standards, EFAMA has disagreed with the approach proposed by the EBA in a number of areas, including:

  • The calculation of assets under management in relation to asset management companies and other entities in third countries had they been authorised in the EU; and
  •  The scope of inclusion of group constellations set out under Articles 2 to 5 of the draft RTS, which it contends would extend the scope of consolidation in a significant way.

EFAMA also expresses a concern that the EBA has not taken into account the ESMA principle-based remuneration requirements under UCITS and AIFMD, and that there is a lack of proportionality and consideration of the business model related to asset management companies. Further, EFAMA strongly disagrees with the proposed approach to define quantitative criteria to identify categories of staff of non-systemic investment firms in the absence of a Level 1 obligation in the IFD. EFAMA also disagrees with the proposal to implement a qualitative criterion which refers to staff members which have managerial responsibility for a business unit that contributes a percentage amount of the investment firm’s total own funds requirements.

However, EFAMA expresses full support for an EU-wide standardisation of reporting obligations under the IFD framework.

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9. EFAMA responds to ESA consultation on the draft RTS under the Sustainable Finance Disclosures Regulation

On 1 September, EFAMA published its response to the ESA consultation on the draft RTS under the Sustainable Finance Disclosures Regulation (SFDR) The draft regulatory technical standards concern disclosure obligations at an entity and product level under the SFDR, which applies to AIFMs and UCITS management companies. The standards aim to strengthen protection for end-investors, improve disclosures to investors from a broad range of financial market participants and financial advisors, as well as to improve disclosures to investors in respect of financial products.

Among EFAMA’s key recommendations were:

  •  To substantially reduce the number of mandatory uniform indicators, emphasising proportionality and materiality considerations in order to strike a balance between comparability and meaningful disclosures;
  • To adopt a phased approach to disclosure requirements, which focuses on optional indicators, narrative disclosures and qualitative information in order to take account of the lack of relevant comparable, and publicly available data on investee companies;
  • To adopt a more principles-based approach to entity-level disclosures, which attempts to avoid disproportionate disclosure requirements;
  • To ensure flexibility for pre-contractual, website and periodic product disclosures by making it easy to include disclosure templates in existing documentation, with separate approaches for retail and professional investors;
  • To clarify the distinction between Article 8 and Article 9 products; and
  • To ensure a realistic timeframe for the implementation of the new rules, supporting the ESAs’ suggestion to the Commission to revisit the application date of the SFDR. 

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10. EFAMA responds to ESMA consultation paper on guidelines to address leverage risk under AIFMD

On 31 August, EFAMA published its response to ESMA’s consultation paper on its draft guidance addressing leverage risks in the AIF sector. The consultation paper forms part of the ESMA response to recommendations of the ESRB in April 2018 to address liquidity and leverage risk in investment funds, and addresses the assessment of leverage-related systemic risk and the imposition of leverage limits, and aims to promote supervisory convergence in respect of these areas.

Among the points made by EFAMA in its response were:

  •  That the use of an holistic approach was welcome in establishing whether the use of leverage in AIFs poses leverage-related systemic risk and materially contributes to financial instability. EFAMA emphasises the importance of focusing on the potential procyclicality of increasing margin calls during stressed situations more than on the level of leverage in a fund, particularly as high leverage is rare in AIFs;
  • The need to ensure international consistency and alignment with IOSCO recommendations, noting that the ESMA requirements may have unintended effects of extending the scope of requirements beyond those required at a global level, which may harm competitiveness of EU-based funds;
  • That there is no need for new reporting requirements, which would be costly and difficult to implement. In this regard, EFAMA requests that ESMA uses data already provided through existing AIFM fund reporting.

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11. EFAMA responds to Commission consultation on money laundering and terrorism financing action plan

On 26 August, EFAMA responded to the European Commission’s consultation on its action plan for a comprehensive EU policy on preventing money laundering and terrorist financing, which reflects the growing consensus that the AML/CFT framework requires significant improvement, notwithstanding recent legislative changes, in particular with respect to the application and enforcement of rules.

The response notes that increased harmonisation is particularly important in the following areas:

  • Implementation of the customer due diligence rules;
  • The definitions of certain predicate offences as well as enforcement and legal action for non-compliance;
  • Obligations around suspicious activity or transaction reporting and submitting reports;
  • EU-wide sanctions; and
  • Centralisation of beneficial ownership registers and other reporting requirements.

EFAMA states that the adoption of an EU AML Regulation, based on the AMLD principles, would help to create a more level playing field and close loopholes created by the current discrepancies in AML laws and enforcement. However, EFAMA considers it important that the asset management sector’s specific characteristics be taken into account in the event that a single supervisory authority be given responsibility for the coordination and consistent implementation of the AMLD across the EU, with such a centralised authority having only indirect powers of intervention, save in justified cases.

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12. EFAMA reports sales of UCITS of €100bn in June

On 27 August, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for June 2020. EFAMA notes that “investor confidence further strengthened in June, maintaining the good momentum built in April and May and bringing net sales of UCITS to the EUR 100 billion mark”. Net sales of UCITS and AIFs in June totalled €108bn, up from €84bn in May. While UCITS recorded net inflows of €101bn (€78bn in May), AIFs recorded net inflows of €7bn (€6bn in May). Total net assets of UCITS and AIFs increased by 1.8% to EUR 17.1tn.

Further, on 8 September, EFAMA released its European quarterly statistical data for Q2 2020, noting that “the substantial monetary and fiscal stimulus packages taken in response to Covid-19 and the easing of lockdown measures boosted investor confidence in the second quarter, which led to a sharp rebound in sales of UCITS”. Net sales for UCITS during Q2 rose to €272bn, a level not seen since Q1 2015, whereas net sales for AIFs during the same period dropped to just €1bn during Q2 2020.

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13. EFAMA reports funds processing automation rates reach new heights in 2019

On 24 August, the European Fund and Asset Management Association (EFAMA) published a report on the automation and standardisation rates of fund orders received by transfer agents in Luxembourg and Ireland during 2019. Among the key findings of the report were:

  • The total volume of orders processed by participants reached 42.2 million in 2019 (38 million in 2018).
  • The total automation rate of orders processed by Irish transfer agents increased to 94.6% in Q4 2019, from 92.8% in Q4 2018, with the ISO automation rate increasing from 34.7% to 36.6%, and a reduction in the use of manual processes from 7.2% to 5.4% during the same period.

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Other Articles

14. Irish Funds responds to consultation by the ESAs on ESG disclosures

On 3 September, Irish Funds published its response to the Joint Consultation Paper issued by the European Supervisory Authorities in relation to ESG disclosures in April this year. In its response, Irish Funds notes that it is supportive of the goals of the EU’s Action Plan on Sustainable Finance, and is keen to ensure that the industry is well positioned to harness the opportunities presented. A number of key observations and proposals were made in respect of the overall approach to the implementation of the Sustainable Finance Disclosure Regulation (SFDR), namely:

  • The need for a revised Principal Adverse Impact Statement, which contains only information that is relevant at the entity level, and applies the concept of materiality to the disclosures;
  • Requesting an appropriate delay to give financial market participants and competent authorities sufficient time to implement the RTS requirements. To the extent possible, Irish Funds requests that SFDR obligations be aligned to a 1 January 2022 implementation date;
  • Striking an appropriate balance in disclosures between qualitative and quantitative information in order to facilitate more meaningful disclosures for investors;
  • Achieving greater consistency within the sustainable finance regime between similar concepts and requirements in the SFDR and the Taxonomy Regulation. In this regard, Irish Funds have requested that the ESAs use the RTS as an opportunity to address the misalignment between the proposed approach in the consultation paper and the ‘Do no significant harm’ requirement under the Taxonomy Regulation; and
  • Publication of the pre-contractual disclosures templates as soon as possible.

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Contact us for more

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