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November 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

European Commission, UK and Supervisory Authorities updates


Central Bank of Ireland Updates

1. Central Bank of Ireland publishes outcome of thematic review of fund management companies’ governance, management and effectiveness

On 20 October, the Central Bank of Ireland published the outcome of a thematic review of the effectiveness of fund management companies (‘FMCs’)(comprising UCITS Managers and AIFMs, including self-managed UCITS/AIFs). This review examined requirements introduced in 2017 for new firms and in 2018 for existing firms, after an iterative period of consultation which commenced in 2015, commonly referred to within the industry as “CP86”.

The Central Bank’s expectation was that existing firms had been compliant since 2018, however, it was found that a significant number of firms had not implemented a governance framework to the standard set out by CP86, particularly those firms that were authorised pre-CP86. The Central Bank has warned that follow-ups with firms where shortcomings were identified will be conducted and that this would not be a once-off review.

All fund management companies are now required to critically assess their daily operations against the requirements, while taking into account the findings of the review, and implement the necessary changes to ensure full adherence to CP86. This assessment should be completed and an action plan discussed and approved by the Board by the end of Q1 2021.

Some of the key findings include:

  • Resourcing: Many firms did not meet the Central Bank’s expectation that FMCs have a minimum of 3 full-time locally based employees or equivalent and full-time designated person roles for larger FMCs.
  • Designated Persons: Significant shortcomings were identified in how some Designated Persons carried out their roles, including inadequate quality reviews and insufficient support and time allocated to discharge responsibilities.
  • Delegate oversight: Some FMCs were unable to evidence that appropriate due diligence/review had been carried out on delegates initially, and on an on-going basis, with some not having formal SLAs documented.
  • Risk management framework: A high level of over-reliance on group frameworks was found. Each FMC is required to have a local risk appetite statement and risk register which are relevant to their operations.
  • Board approval of new funds: Not all companies could evidence approval by the Board of the launch of sub-funds, or in cases of approval, insufficient time was dedicated to discussion and challenge of these.
  • Director for Organisational Effectiveness (‘OED’): In many cases, it could not be demonstrated that the OED acted as a change leader due to a lack of Board reporting, evidence of resource evaluation, and formal records of meetings with Designated Persons
  • Governance and culture trends identified: A significant gender imbalance was found, with only 16% of Director roles held by women. In addition, the majority of firms have not appointed a CEO, with some INEDs having excessive tenures.

KPMG has recently published a more detailed guidance document, which is a useful resource for firms in addressing the issues identified by the Central Bank at a more granular level.

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2. Director General of the Central Bank of Ireland delivers speech addressing regulatory concerns for the asset management and non-bank sector

On 21 October, Derville Rowland, Director General of the Central Bank of Ireland delivered a speech at the Irish Funds Annual Global Funds Conference in which addressed the impact of COVID-19 on the funds sector. Noting that although the financial sector, including the funds industry, had demonstrated operational resilience during 2020, certain issues arose in particular segments of the funds sector that warranted specific consideration.

Ms Rowland noted that the return to pre-crisis conditions in money markets is very slow, with liquidity ratios within Irish-resident MMFs remaining elevated, even as liquidity returned to the markets, and stated that this, among the other vulnerabilities identified, should be given consideration as to how these can be mitigated. Ms Rowland noted that although macroprudential policy for the market-based finance sector remains at an early stage of development, the Central Bank’s view was that a completed framework would be beneficial for the stability of both the financial system and the real economy.

Ms Rowland also commented on the Central Bank’s recent CP86 review, and stated that fund management companies must be well governed and operate to the highest standards, with no compromise on these objectives in order to meet the trust reposed in them by investors.

Finally, Ms Rowland also referred to two papers presenting research by the Central Bank on how COVID-19 had impacted the funds industry, in particular the effect of the pandemic on money market funds, as well as the repricing of risk and emerging market economies assets and the behaviour of Irish-domiciled funds

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3. Central Bank of Ireland publishes amending regulations and FAQ relating to additions to pre-approval control functions

In October, the Central Bank of Ireland published the amending regulations and FAQ document relating to the addition of three new PCF roles, in addition to the splitting of the PCF-39 “Designated Person” role, the latter being of particular relevance for UCITS. The FAQs note that the PCF-39 role is being split to correspond to the specific managerial functions set out in the Central Bank of Ireland’s UCITs Regulation, the AIF Rulebook and the Fund Management Companies Guidance. The FAQs also clarify that individuals in situ on 5 October when the Amending Regulations 2020 came into effect will not be required to seek the approval of the Central Bank to continue to perform one of the new PCF roles. Regulated financial service providers will be required to submit a list of the individuals performing each of the PCF-39 roles via an in situ return to the Central Bank.

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4. Central Bank of Ireland publishes 35th edition of AIFMD Q&As and 30th edition of UCITS Q&As

On 9 October, the Central Bank of Ireland published the 35th edition of the AIFMD Q&As and the 30th edition of the UCITS Q&As, containing additional guidance (ID 1133 and ID 1098 respectively) relating to the Central Bank’s reporting expectations regarding material risks identified during stress testing. Such reporting is to take the form of a two-stage process via an immediate ONR regulatory report, and a subsequent notification taking the form of an extensive report with the results of the stress testing and a proposed action plan.

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5. Central Bank of Ireland publishes 6th Anti-Money Laundering Bulletin

In October, the Central Bank of Ireland published its latest Anti-Money Laundering Bulletin, in which it sets out the Central Bank’s findings following multiple engagements across financial institutions, and sets out the Central Bank’s expectations with regard to the application of transaction monitoring controls. Among the Central Bank’s findings include the following themes:

  • a failure to use the business and customer risk assessments to configure appropriate transaction monitoring controls;
  • insufficient testing of transaction monitoring controls by the second and third lines of defence and failure by the board and senior management to take appropriate measures to addresses these;
  • inordinate time delays in reviewing and assessing unusual activity, resulting in delays in reporting STRs;
  • placing reliance on automated transaction monitoring solutions without conducting assessments as to their adequacy, where the designated person has no input into the governance or management of the solution, or where the designated person lacks the ability to request necessary changes to transaction monitoring controls; and
  • failure to implement robust AML/CFT control frameworks.

The Central Bank notes that while automated transaction monitoring may be desirable, it is expected that a full assessment be conducted on any automated solution regarding its suitability for the risks inherent to the designated person’s specific business, including jurisdictional considerations. The designated person should also be able to effect changes to the configuration of the transaction monitoring controls as necessary, with such controls reflecting the risks identified in the designated person’s business and customer risk assessments. The bulletin notes that focus will remain on the compliance of designated persons with the sections of the Act pertaining to transaction monitoring, and that the expectations outlined in this bulletin, in addition to the guidance in the Guidelines, be fully considered, evidenced and implemented where appropriate.

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European Commission, UK and Supervisory Authorities updates

6. European Commission reviews EU rules on AIFMs

On 22 October, the European Commission launched a public consultation on the review of the Alternative Investment Fund Managers’ Directive (‘AIFMs’) seeking the views of stakeholders on how to ensure a more effective and efficient functioning of the EU AIFM market.

The consultation focuses on improving the utility of the AIFM passport and overall competitiveness of the EU AIF industry, and seeks stakeholders views on the following areas:

  • the scope of the AIFM licence, whether it is achieving its objectives, and what other functions could be included;
  • investor protection and the conditions that would make it possible to open up the AIF regime to a larger pool of investors, as well as rules on depositaries;
  • international relations - seeking where to strike the balance of having a functioning efficient AIF market and ensuring that it operates under the conditions of fair competition without undermining financial stability, as well ways in which the EU market could interact with international partners;
  • financial stability – seeking views as to whether the intervention powers available to supervisors are sufficient to take account of severe market disruption, in addition to modifications to the Level II reporting template;
  • investment in private companies - whether existing rules were delivering on their stated objectives, and whether there are alternative means of achieving same;
  • sustainability/ESG – seeking input as to the appropriateness of the AIFMD rules in assessing sustainability risks, and the integration of non-financially material factors into the investment decision process.

Irish Funds has stated that it will submit a detailed response on behalf of its members. The deadline for submissions is 29 January 2021.

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7. European Commission consults on the EU rules for long-term investment funds (‘ELTIF’)

On 19 October, the European Commission launched a public consultation on the EU rules for or long-term investment funds (‘ELTIF’). The ELTIF regulation, adopted in 2015, sets out an investment regime designed to attract investors seeking long-term investments in companies and projects, with such funds aimed at enhancing the finance available to companies across a range of sectors.

However, with only 27 ELTIFs in the EU and a relatively small amount of net assets under management (<€2bn), the Commission wishes to consult with interested parties to gather evidence and stakeholders’ feedback on the challenges, barriers and opportunities for improvements to the ELTIF regulatory framework, with the aim of boosting the attractiveness of ELTIFs for long-term investment projects, and increasing the amount of non-bank funding available to companies investing in the real economy.

The deadline for submissions is 19 January 2021

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8. UK temporary permissions regime open for notifications

On 30 September, the UK Financial Conduct Authority (FCA) advised that EEA firms and funds can now notify the FCA if they wish to avail of the temporary permissions regime. This regime will enable firms and funds passporting into the UK to continue to operate there when the passporting regime falls away at the end of the transition period on 31 December 2020.  EEA firms and fund managers should notify the FCA if they wish to use the Temporary Permissions Regime before the end of 30 December 2020.

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9. ESMA consults on firms’ disclosure obligations on environmentally sustainable activities

On 5 November, the European Securities and Markets Authority (‘ESMA’) published a consultation paper, which contains its draft advice to the European Commission on Article 8 of the Taxonomy Regulation. Article 8 obliges undertakings covered by the Non-Financial Reporting Directive (‘NFRD’) to publish information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Regulation.

Section 4 of the consultation paper is of particular relevance to asset managers as it concerns how asset managers that report under the NFRD should disclose how their activities are directed at funding environmentally sustainable economic activities. The consultation paper proposes a KPI calculation model that is based on eligible investments aligned to the taxonomy, together with advice on how the KPI should be both calculated and presented to allow uniform disclosure on how the activities concerned are directed at funding environmentally sustainable economic activities. ESMA notes that the starting point for the KPI is the investment process itself and the assets held in the funds of the fund manager; while recognising that alternative possibilities exist for the basis of the KPI, ESMA considers that that a share of investment based approach is preferable in order to provide investors with meaningful information.

The draft advice, subject to consultation, proposes that the KPI for asset managers should consist of a ratio of taxonomy aligned eligible investments, with the numerator consisting of the value of green bonds complying with the Green Bond Standard, and a weighted average of the investment in Taxonomy aligned activities of investee companies. The denominator should consist of the value of the total set of investments in investments in investee companies held by the asset manager’s funds, where eligible investments are equity and fixed income assets of eligible investee entities.

The deadline for submissions is 4 December 2020, with ESMA scheduled to deliver its final advice on 28 February 2021.

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10. ESMA consults on MiFID II / MiFIR obligations on market data

On 6 November, ESMA published a consultation paper, seeking input from market participants on draft guidelines on the MiFID II / MiFIR obligations on market data. The proposed guidelines follow the 2019 ESMA report on market data and provide guidance on the requirement to publish market data on a reasonable commercial basis and the requirement to make market data available free of charge 15 minutes after publication.

The proposed guidelines aim to ensure better and uniform application of MiFID II / MiFIR obligations, and address specific areas, such as: the provision of market data on the basis of costs; the obligation to provide market data on a non-discriminatory basis; the per-user fee obligation; the obligation to keep market data unbundled; and the standardisation of publication formats and terminology, auditing practices, and accounting methodologies for setting market data fees.

The deadline for submissions is 11 January 2020.

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11. ESMA Executive Director delivers keynote address at Irish Funds annual global funds online conference

On 21 October, Steven Maijoor, ESMA’s Executive Director delivered the keynote address at the Irish Funds annual global funds online conference. The speech noted the key focus of Capital Markets Union and addressed the measures that might be taken by the EU’s capital markets to further engage with retail and household participants in order to address the low level of capital market activity across Europe, including:

  • enhancement of investor protection, noting that ESMA will coordinate a Common Supervisory Action exercise on investment funds’ costs and fees in 2021, concurrent with investigations undertaken by national competent authorities into whether market participants adhere to the key regulatory requirements on costs and fees in their day-to-day business;
  • further restrictions on the acceptance of inducements, with Mr Maijoor supporting a fundamental assessment of the role of inducements in the distribution of investment products in the EU;
  • proposals to reform the MiFID client categories in order to reduce the information flow addressed to non-retail clients;
  • adoption by the European Commission of the technical proposals to improve the PRIIPS KID, which was voted on by the European Supervisory Agencies during 2020 in order to pave the way to bring UCITS within the scope of the PRIIPS regulation, subject to past performance information forming part of the KID;
  • financial education programmes delivered jointly by public institutions and the private sector; and,
  • development of private pension systems to facilitate indirect participation of households in capital markets.

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12. ESMA submits two draft technical standards to the European Commission under the revised Market Abuse Regulation

On 6 November, ESMA published the final report and draft technical standards on the amendments to the Market Abuse Regulation (‘MAR’) for the promotion of the use of SME Growth Markets, which focused on liquidity contracts and insider lists.

The draft RTS on liquidity contracts sets out those elements to be identified by liquidity contracts, the limits to resources allocated to the performance of such contracts, the obligations on liquidity providers, and transparency provisions. The draft ITS on insider lists sets out the applicable format for drawing up and updating insider lists, as well as the provisions applicable to SME growth market issuers.

The technical standards must be endorsed via Commission Delegated Regulation. Given the delays in producing this report, ESMA notes that it is unlikely that the standards will be adopted by the date of application of the SME GM Regulation (1 January 2021).

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13. ESMA sets out final position on share trading obligation

On 26 October, ESMA issued a public statement clarifying the application of the EU’s trading obligation for shares (‘STO’) following the end of the UK’s transition from the EU on 31 December 2020. The statement provides following the end of the transition period, the trading of shares by EU investment firms with an EEA ISIN on a UK trading venue denominated in pounds sterling will not be subject to the EU STO.

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14. ESMA updates statement to address credit ratings from the United Kingdom

On 27 October, ESMA published an update to its March 2019 statement on the endorsement of credit ratings from the UK, in which it confirms that EU credit rating agencies will be able to endorse credit ratings elaborated in the UK after the end of the transition period (31 December 2020).

The statement clarifies that following 31 December 2020, until the EU adopts an equivalence decision in respect of the UK legal and supervisory framework for CRAs, the outstanding credit ratings of UK-based CRAs can only continue to be usable for regulatory purposes in the EU if these credit ratings are “endorsed” by a CRA which is located in an EU Member State. Where the outstanding credit ratings of UK-based CRAs are not endorsed by an EU CRA, these credit ratings will cease to be usable for regulatory purposes in the EU as set out in Article 24(4) of the CRA Regulation.

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15. ESMA publishes updated Q&As on the Benchmarks Regulation (BMR)

On 6 November, ESMA updated its Q&A on the Benchmarks Regulation, in particular providing clarification on transitional provisions of the Regulation as related to critical benchmarks (Q9.4). In its answer, ESMA clarifies that the BMR allows an EU index provider to continue to provide an existing benchmark that has been recognised as a critical benchmark by an implementing act adopted by the Commission in accordance with Article 20 of the BMR, until 31 December 2021 or unless and until the EU index provider’s authorisation is refused. Further, the BMR allows supervised entities to use critical benchmarks provided for the first time on or before 10 December 2019 by an EU index provider for existing and new financial instruments, financial contracts, or for measuring the performance of an investment fund until 31 December 2021 or until and unless the authorisation of the EU index provider is refused.

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16. ESMA publishes three new Q&As on product governance

On 6 November, ESMA updated its Q&A on the implementation of investor protection topics under MiFID II / MiFIR relating to product governance. The three new Q&As relate to firms manufacturing financial instruments, and how they can ensure:

  • the costs and charges of the financial instruments are compatible with the needs, objectives and characteristics of the target market;
  • the costs and charges do not undermine the financial instrument’s return expectations; and,
  • the charging structure of the financial instrument is appropriately transparent for the target market.

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17. ESMA publishes first Q&As on Securities Financing Transactions Regulation (SFTR) reporting

On 6 November, ESMA published the first Q&As on SFTR data reporting in order to provide further clarity to market participants on their reporting requirements under the Regulation. The Q&A provides clarifications on how reporting of certain business events should be performed, such as:

  • the frequency of reports, including a definition of “working day” for determining deadlines;
  • reporting of settlement fails;
  • reporting of repos initially collateralised on a transaction basis and then subsequently on a net exposure basis;
  • reporting of trading venue for cleared and non-cleared SFTs;
  • reporting of zero collateral for margin lending.

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18. EFAMA Director General addresses challenges faced by investment fund industry in Europe

On 8 October, in a speech delivered at the CMVM 2020 Conference, EFAMA’s Director General, Tanguy van de Werve, focussed on the three main challenges facing the industry, namely:

  • increasing retail participation in capital markets;
  • contributing to the transition towards a more sustainable economy; and
  • maintaining the UCITS and AIM Directives as globally recognised gold standards.

With respect to increasing market participation, Mr van de Werve noted that EFAMA fully supported the High-Level Forum on Capital Markets Union’s recommendations, and also highlighted a number of policy recommendations made to the Commission in this area, namely:

  • the promotion of auto-enrolment for occupational pensions and grating of the pan-European Personal Pension Product the same tax relief as is granted to national pension products;
  • Member States’ ensuring that their respective tax regimes do not treat investment products as less suitable long-term savings products for retail investors compared to capital guaranteed insurance products; and
  • the use of KPIs to measure national progress and incentivise Member States to support retail investment in capital markets.

Having regard to the sustainable finance agenda, Mr van de Werve highlighted the current availability of sufficient meaningful, reliable, comparable and public ESG data, noting that new initiatives, such as the review of the NFRD and disclosures requirements under the Taxonomy Regulation will help to address this, as well as the Renewed Sustainable Finance Strategy, which was later published in November.

Finally, Mr van de Werve addressed the review of the AIFMD, and considered that every effort should be made to maintain the UCITS Directive and AIFMD as a gold standard. In particular, Mr van de Werve stated that any attempt to restrict the outsourcing of portfolio management functions to entities based in non-EU domiciles risked jeopardising current delegation practices beyond repair and that in order to counter any possible shortcomings in the way delegation agreements are currently authorised and monitored, a full-fledged legislative review should not be undertaken, but instead addressed through ESMA making appropriate use of the tools currently at its disposal.

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19. EFAMA responds to ESAs survey on environmental and/or social financial product templates

On 16 October, EFAMA responded to the European Supervisory Authorities’ survey on the presentation of information to be disclosed under provisions of the Sustainability-Related Disclosures in the Financial Services sector (‘SFDR’). The ESAs propose to standardise the disclosure of information for financial products that promote environmental and/or social characteristics or have a sustainable objective, to be included in existing disclosures provided by AIFMs and UCITS.

EFAMA’s feedback suggests the following:

  • Standardised templates should be mandatory for products made available to retail investors and optional for products intended for institutional/professional investors, reflecting their different needs;
  • Templates should reflect a sufficient level of flexibility to enable investment managers to adapt information to each specific product and strategy;
  • The use of icons should be avoided, as they risk misleading users and diverting attention from more important information;
  • the use of graphs should not be mandated as visual aids in pre-contractual disclosures, and should be left to the discretion of the financial market participant;
  • the length of documents should be limited to 2-3 pages to improve clarity and conciseness.

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20. EFAMA reports that European money market funds navigated the COVID-19 crisis successfully

On 8 October, in its Market Insights publication, EFAMA reports that despite the liquidity challenges that affected the market for short-term instruments in March 2020, all MMFs were fully able to meet investor redemption requests, with no European MMF being required to consider the imposition of redemption fees or gates. This was notwithstanding what was characterised as the “limited effects” of the ECB’s intervention during this period. EFAMA also reports that although MMFs suffered a significant increase in redemptions, there was also a sharp increase in gross sales as certain investors moved into MMFs, viewing these as safe, diversified assets that would protect against volatility in the capital markets. 

EFAMA suggests that the resilience shown by MMFs during this period demonstrate that the financial reforms taken in response to the 2008 financial crisis were successful in avoiding similar problems arising once again during the COVID pandemic.

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21. EFAMA supports the construction of an EU consolidated tape

On 26 October, EFAMA welcomed the recommendations contained in a recent study on the creation of an EU consolidated tape for the European Commission, which concludes that the delivery of such consolidated tape data is already long overdue, and recommends that the European Commission uses its powers to create an exclusive consolidated tape provider alongside implementing legislative changes to support a full solution.

The report concludes that while a consolidated pre-trade data tape cannot be implemented under current legislation, the establishment of an exclusive consolidated tape provider (‘ECTP’) with a post-trade solution that meets most of the design requirements could be achieved, and that the Commission could use its existing powers to set clear parameters for the creation of an ECTP and request ESMA to use its procurement process to follow those parameters to achieve the desired outcome.

EFAMA considers that an appropriately constructed consolidated tape could help to build deeper and more open capital markets in Europe, but noted that this would not be a solution to increasing market data costs, which should rather be addressed through proper enforcement of MiFIR / MiFID II requirements, irrespective of the existence of such a consolidated tape.

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22. EFAMA reports continued net inflows for UCITS and AIFs during August

On 26 October, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for August 2020, noting that “thanks to positive news on the global economic recovery, long-term UCITS continued to record net inflows in August, albeit at a slower pace than during the previous four months”.

Net sales of UCITS and AIFs in August totalled €30bn, down from €124bn in July. While UCITS recorded net inflows of €25bn (€109bn in July), AIFs recorded net inflows of €5bn (€15bn in July). Total net assets of UCITS and AIFs increased by 1.6% to €17.64tn.

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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