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.
European Commission and ESMA updates
Industry and other updates
On 3 December, the Central Bank of Ireland issued a consultation paper (‘CP134’) on new Central Bank performance fee guidance for UCITS and certain types of retail AIFs. With the coming into effect of the ESMA guidelines on performance fees in UCITS and certain types of AIFs on 5 January 2021, the Central Bank now seeks to incorporate the ESMA guidelines into the existing domestic framework on performance fees to ensure a consistent approach to the application of the ESMA guidelines to in-scope retail open-ended AIFs that impose performance fees.
Specifically, the Central Bank proposes to issue its own Performance Fee Guidance. The Central Bank notes that although it would be possible to implement the ESMA guidelines in full, this would lead to different approaches to performance fees for the two forms of retail fund authorised by the Central Bank. The Central Bank therefore proposes the following approach:
Due to certain provisions of the Central Bank UCITS Regulations 2019, the Central Bank notes that it is not currently possible to provide for the following matters, and intends that the same approach be adopted for certain types of retail AIFs to which the Guidance applies:
Section A of the Consultation Paper sets out the draft guidelines proposed, to include the following headings:
The deadline for comments is 15 January 2021.
On 20 October, the Central Bank of Ireland published an industry letter on the outcome of a thematic review of the effectiveness of fund management companies (‘FMCs’)(comprising UCITS Managers and AIFMs, including self-managed UCITS/AIFs)(‘the industry letter’). The 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”.
Following this, the Central Bank received queries relating to the impact of the Central Bank’s resourcing expectations on Regulation 104 of the Central Bank UCITS Regulations 2019 (‘the Effective Supervision Rule’), and on 8 December, issued a letter to industry to clarify its expectations in respect of a number of matters to be considered by fund management companies:
On 23 November, the Central Bank published the 36th edition of the AIFMD Q&As, containing additional guidance (ID 1134 and 1135) relating to the requirements that apply to general partners of an Investment Limited Partnership (‘ILP’) and authorisations as AIF management companies. This clarification came just weeks prior to the signing into law of the Investment Limited Partnership (Amendment) Act 2020 on 23 December 2020.
In December, the International Organization of Securities Commission’s (‘IOSCO’) Retail Market Conduct Task Force (‘RMCTF’), co-chaired by the Central Bank of Ireland and the Australian Securities & Investments Commission, published the Retail Market Conduct Task Force Report: Initial Findings and Observations About the Impact of COVID-19 on Retail Market Conduct. The report addresses common retail market conduct risks that have been caused or exacerbated by COVID-19, which includes:
The report notes that common forms of harmful behaviour during stress times include mis-selling, mis-labelling and misleading disclosure, as well as other such investment advice. While misconduct relating to complex products continues to be prevalent, the surge of retail investor interest in the share market during lockdown periods has been notable. The report further notes that as the pandemic continues to unfold, there are challenges for retail investors in navigating volatile markets, along with corresponding challenges for regulated firms to effectively and continuously assess these effects and to support informed decision-making by retail investors.
On 8 December, the European Commission launched a targeted public consultation seeking feedback on a wide range of areas where targeted action might be necessary in order to fulfil the objectives of the Regulation on central securities depositories (‘CSDR’), which aims to improve the safety and settlement efficiency of EU CSDs through common requirements. The Commission is interested in the views of a wide range of stakeholders, in particular those participating in the settlement process, such as fund managers, in respect of the following areas:
The deadline for submissions is 2 February 2021.
On 8 December, the Chair of the European Securities and Markets Authority, Steven Maijoor, delivered a keynote speech at a webinar entitled “A new standard for a new capitalism: accelerating corporate responsibility through non-financial information” organised by the French Ministry of the Economy, Finance and Recovery. In his speech, Mr Maijoor referred to three apparent paradoxes of sustainability reporting, namely:
On 14 December, the Chair of the European Securities and Markets Authority, Steven Maijoor, delivered an address at the third roundtable on euro risk-free rates. Noting that from January 2022, ESMA will substitute the Belgian FSMA as supervisor of EURIBOR administrator, EMMI, Mr Maijoor noted the ability of EURIBOR to cope with the adverse circumstances of 2020, and noted that there was no discontinuation of EURIBOR in sight.
Notwithstanding this, Mr Maijoor advised that market participants must include fallback provisions in their EURIBOR contracts, these being the most effective way to increase contractual robustness. In this regard, Mr Maijoor stated that ESMA will work with NCAs during 2021 to monitor the implementation of the final recommendations on EURIBOR fallback provisions by the Working Group on Euro Risk-Free Rates.
Mr Maijoor also called on market participants to take every necessary action to ensure the full and timely transition from the Euro Overnight Index Average (‘EONIA’) to the Euro short-term rate (‘€STR’) – financial firms should now actively use €STR instead of EONIA in all new contracts, as well as in their internal systems and calculations.
On 16 December, ESMA published the 2020 update of its guidelines on stress tests under the Money Market Funds ('MMF') Regulation, which take account of MMFs’ recent experience during March 2020, particularly with respect to redemption scenarios. Noting that risks have increased for MMFs and the instruments in which they invest, ESMA assessed whether the scenarios set out in the 2019 guidelines continued to be appropriate. For some parameters, the 2019 scenarios have been exceeded by the extreme market movements observed during the COVID-19 crisis, and the relevant factors will be modified in light of recent market developments, having calibrated these in close cooperation with the European Systemic Risk Board and European Central Bank.
The 2020 updated guidelines include:
On 15 December, ESMA also published its guidelines compliance table, setting out those competent authorities that comply or intend to comply with ESMA guidelines on stress test scenarios under the MMF Regulation.
On 16 December, ESMA renewed its decision to require net short position holders to report positions of 0.1% and above. This follows the previous decision by ESMA taken on 16 September. ESMA considers that this measure will maintain the ability of NCAs to deal with threats to the orderly functioning of markets and financial stability at an early stage. The measure applies from 19 December for a period of three months.
On 6 January, ESMA launched a Common Supervisory Action (‘CSA’) with National Competent Authorities (‘NCAs’) on the supervision of costs and fees of UCITS across the EU, to be conducted during 2021. ESMA has advised that the CSA’s aim is to assess the compliance of supervised entities with the relevant cost-related provisions under the UCITS framework, taking account of the supervisory briefing on the supervision of costs, published in June 2020. The CSA will also cover entities employing Efficient Portfolio Management (‘EPM’) techniques to assess whether they adhere to the requirements set out in the UCITS framework and under the ESMA Guidelines on ETFs and other UCITS issues.
As noted in the June 2020 Asset Management Insights, the supervisory briefing on the supervision of costs sets out criteria to support NCAs in assessing the notion of “undue costs” and supervising the obligation to prevent undue costs being charged to investors by reference to the following issues:
The supervisory briefing also sets out that NCAs are expected to review management companies’ pricing processes as part of their supervisory activity at different stages (e.g. authorisation, on-site inspections, thematic reviews) to cover an assessment of cost disclosure and transparency, as well as business conduct, strategic and reputational risk. Further, NCAs are expected to ensure that management companies develop documented pricing processes that clearly set out responsibilities among the management bodies of firms, address conflicts of interest and the risk of damage to investors, which should be periodically reviewed.
ESMA notes that the action will be done on the basis of a common methodology developed by ESMA, with knowledge-sharing among NCAs throughout 2021 to ensure supervisory convergence.
On 17 December, following a consultation launched in March, ESMA published its final guidance to address leverage risks in the Alternative Investment Fund (‘AIF’) sector. These guidelines set out common criteria to promote convergence in the manner in which NCAs assess the extent to which the use of leverage in the AIF sector contributes to the build-up of systemic risk in the financial system, as well as the assessment of the design calibration and implementation of leverage limits. The guidelines adopt the two-stage approach set out by IOSCO in its final report on recommendations for a framework assessing leverage in investment funds, namely:
On 17 December, following a consultation launched in March, ESMA published the final report on technical standards under the EMIR REFIT Regulation, addressing data reporting to trade repositories, procedures to reconcile and validate the data, access by relevant authorities to the data, and registration of the trade repositories. The final report largely reflects the original proposals, and focuses on further harmonisation of the reporting requirements, in addition to enhancements in the counterparties’ and trade repositories’ procedures on ensuring data quality.
Section 4 of the report sets out a summary of the feedback on ESMA’s proposals regarding reporting by the counterparties to trade repositories, and on the methods and arrangements that the counterparties should have in place to notify competent authorities about errors and omissions in reporting, as well as methods and arrangements to ensure resolution of reconciliation failures and correct reporting under new EMIR REFIT provisions on responsibility for reporting. Section 5 includes a summary of feedback on ESMA’s proposals on procedures that trade repositories should have in place for data collection, updating LEI and reconciliation of data. Section 6 sets out the feedback to the requirements regarding types of responses that trade repositories are expected to provide to reporting counterparties, entities responsible for reporting, and report-submitting entities. Section 7 explains the additional provisions related to the registration of the trade repositories, and includes a specific provision concerning the extension of registration from the Securities Financing Transaction Regulation (‘SFTR’) to EMIR. Section 8 set out the proposals regarding the terms and conditions of data access by authorities.
The draft technical standards contained in the final report have been submitted to the European Commission, which must decide whether to endorse the standards within three months, or inform the European Parliament and Council where adoption cannot take place within this time. Following entry into force of the technical standards, an implementation time of 18 months is envisaged by ESMA.
On 17 December, ESMA published a second report on clearing solutions for Pension Scheme Arrangements (‘PSA’) under the European Market Infrastructure Regulation (‘EMIR’). ESMA reaffirmed its strong commitment to a broad implementation of the clearing obligation, including by PSAs, while also recognising that more time was needed in order to make sufficient progress on various solutions to collectively enable PSAs to clear derivative contracts. In 2019, the EMIR REFIT Regulation further extended the temporary exemption from the clearing obligation for PSAs until June 2021.
The report follows the publication of ESMA’s first report in April 2020, which served as basis for conducting a public consultation to collect views and updated data on European PSAs’ portfolios and the quantitative impact of moving their OTC derivatives portfolios to central clearing. Following efforts made, the second report states that it is unlikely for a new ‘silver bullet’ solution to emerge at this juncture, and that the solution towards which market participants are working appears to be the optimisation by different actors of pre-existing solutions. Although some of these need further development, as well as regulatory consideration, ESMA notes that their addition should provide the conditions necessary for PSAs to be able to clear and meet variation margin calls in all states of the market that were considered in discussions.
The second report will inform the next report of the European Commission, which will need to decide whether to extend the current exemption, which is due to expire in June 2021.
On 18 December, ESMA published its final report on guidelines on outsourcing to cloud service providers in order to assist firms and competent authorities to identify, address and monitor the risks and challenges arising from cloud outsourcing arrangements. The guidelines are directed to AIFMs, UCITS and UCITS management companies, depositaries of UCITS/AIFs, central counterparties, trade repositories, investment firms, as well as other financial market participants, and address a number of areas, including:
On 18 December, ESMA published its annual report on administrative and criminal sanctions issued under the Market Abuse Regulation (‘MAR’), which highlights that 279 sanctions and measures, and 60 criminal sanctions, for infringements of MAR were imposed in 2019. The value of financial penalties imposed for administrative sanctions exceeded €82m, whereas financial penalties for criminal infringements were nearly €6m. France imposed the highest level of sanctions (€46m), followed by Greece (€28m). There were no MAR sanctions issued by the Central Bank of Ireland.
On 21 December, ESMA updated its Questions and Answers on the implementation of EMIR, which provides clarification on the status of derivative contracts executed in the UK after the post-Brexit transition period, as well as amendments to Parts IV and V in order to clarify the reporting for derivatives executed on a third country venue and cleared on the same day.
In addition, ESMA updated it Questions and Answers on MiFID II and MiFIR investor protection and intermediaries topics relating to costs and charges. Specifically, ESMA has clarified how firms can present ex-post costs and charges information to clients in a fair, clear and non-misleading manner in accordance with the requirements of Article 24(3) of MiFID II, which can be achieved either through a standalone document or within a document of wider content, provided that it is given sufficient prominence to allow clients to find the information easily.
On 18 December, the European Fund and Asset Management Association (‘EFAMA’), joining with the French and Dutch financial market authorities, called for a European regulation on ESG data, research and ratings, noting that asset managers wished to encourage the ESG investment trend by expanding their offering of sustainable products by providing investors with trustworthy and comparable information. In this regard, the following reasons are offered to justify such a regulation:
On 18 December EFAMA provided a response to the European Commission’s public consultation on a draft Delegated Regulation under the EU Taxonomy Regulation relating to the technical screening criteria for determining the conditions under which economic activities qualify as contributing substantially to climate change mitigation and adaptation, and whether economic activities cause no significant harm to any of the other environmental objectives under the Regulation. EFAMA notes that it sees the taxonomy as a critical tool to unleashing the potential of sustainable finance in Europe by assisting issuers, project promoters, investors and others to identify sustainable economic activities.
However, EFAMA’s response also notes the challenges involved in making the taxonomy work in practice, and to that end, has made 26 policy recommendations to the Commission. In particular, EFAMA notes the following concerns:
In order to address the problem of the availability of meaningful, reliable, comparable and public ESG data, EFAMA suggests that the European Commission focuses on prioritising the revision and extending the scope of non-financial reporting, the development of European reporting standards, supporting greater reliance on third-party verification, and advancing the European Single Access Point.
On 23 December, EFAMA published its response to the IFRS consultation on sustainability reporting. EFAMA advises that it recognises the urgent need to improve the consistency and comparability of sustainability reporting at a global level as a crucial enabling factor to mainstream sustainability in the financial sector. In this regard, EFAMA notes what it considers as the requirements for success in this area, namely
EFAMA also makes specific recommendations in respect of the development of a ‘climate-first’ approach, adopting a focused definition of climate-related risks, as well as a definition of materiality primarily focused on all decision-useful information on how the performance and risk profile of the investment might be affected by ESG factors. Finally, EFAMA recommends that, over time, sustainability information should gradually become auditable and subject to third party assurance.
On 22 December, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for October 2020. EFAMA notes that “net sales of UCITS equity funds, although remaining positive, fell to a very low level in October against the backdrop of increases in Covid-19 cases and new lockdown measures”. Net sales of UCITS and AIFs in October totalled €33bn, up from €32bn in September. While UCITS recorded net inflows of €31bn (€12bn in September), AIFs recorded net inflows of just €2bn (€19bn in September). Total net assets of UCITS and AIFs decreased by 0.3% to EUR 17.6tn.
Further, in December, EFAMA released its European quarterly statistical data for Q3 2020, which notes growth in net assets of UCITS and AIFs by 2.8% during Q3 to €17.6tn, net inflows from UCITS and AIFs of €195bn, and a sharp decline in net sales for money market funds, dropping from €136bn in Q2 2020 to €41bn in Q3 2020.
On 23 December, EFAMA issued a press release in which it stated that it regretted the decision taken by the European Commission on EIOPA’s proposal to include the initial cost of advice under the 1% fee cap for the Basic pan-European Personal Pension Product (‘PEPP’). EFAMA notes that while the investment management industry is keen to manufacture PEPPs that will deliver retirement savings benefits to savers, the Commission’s decision to include the initial advice costs under the fee cap will prevent potential providers from developing an economically viable business model for the PEPP. Instead, EFAMA suggests that the best approach to avoid the failure of the PEPP would be to exclude the initial cost of the advice until the first review of the fee cap.
On 11 December, EFAMA published a response to the Joint Research Centre (‘JRC’) consultation on the 3rd technical report on development of EU ecolabel criteria for retail financial products. In particular, EFAMA makes the following observations:
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.