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March 2021

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 issues guidance on share class features of closed-ended QIAIFs

On 2 February, the Central Bank of Ireland published guidance addressing operational matters for closed-ended QIAIFs (‘CE QIAIFs’) and the application of certain provisions of the AIF Rulebook to those CE QIAIFs, following a consultation paper (‘CP132’) issued in November 2020. The guidance sets out that the establishment of differentiated share classes are permissible to reflect:

  • the issue of shares at a price other than net asset value without prior approval of the Central Bank;
  • the use of excuse and exclude provisions;
  • stage investing; and
  • management participation.

The guidance further sets out that permissibility is subject to the following general conditions, in addition to a number of other further conditions:

  • the ability to establish such share classes providing for the above is provided for in the CE QIAIF’s constitutional document and has been disclosed to unitholders in advance;
  • the CE QIAIF’s prospectus permits the establishment of share classes which provide for different levels of participation in the CE QIAIF;
  • the unitholder’s interest in a CE QIAIF is proportionate to:
    • the capital it has paid into the CE QIAIF at a particular point in time; and / or
    • the pre-determined flow of capital returns to the share class; and / or
    • the extent to which the share class held by the unitholder participates in the assets of the CE QIAIF.
  • where the investor has subscribed in the CE QIAIF on the basis of a capital commitment and periodic drawdowns from the investor, the CE QIAIF maintains records on an individual investor basis to enable it to clearly identify commitments paid and commitments outstanding for each investor (“capital accounting”), and
  • the capital accounting methodology is consistent with the AIFMD. 

2. Central Bank of Ireland issues guidance on depositaries for AIFs

On 2 February, the Central Bank of Ireland published guidance setting out authorisation requirements for Depositaries of Assets other than Financial Instruments (‘DAoFI’). The Central Bank recognises that DAoFI may only act for AIFs that have no redemption rights exercisable for at least five years from the date of initial investment and which generally do not invest in financial instruments that can be held in custody. Such a category is provided for in the AIFMD to take account of the nature of assets held by certain AIFs that attract less onerous depositary requirements.

There are a number of headings under which applicants must satisfy the Central Bank’s requirements, including:

  • being an investment business firm authorised under the Investment Intermediaries Act 1995, who can demonstrate, inter alia: its capacity and ability to meet safekeeping and oversight obligations; the existence of effective policies and procedures for depositary oversight; and the existence of necessary systems to effectively oversee the AIFM and any delegates;
  • compliance with a number of requirements set out under chapter 5 of the AIF Rulebook;
  • meeting certain capital requirements, including using either additional funds or appropriate professional indemnity insurance to cover potential risks of professional liability;
  • holding additional capital, or appointing a sub-custodian, where a DAoFI invests in financial instruments which are the subject of custody obligations;
  • further requirements in respect of assets other than financial instruments; and,
  • disclosure requirements. 

3. Central Bank of Ireland publishes Securities Markets Risk Outlook Report

On 8 February, the Central Bank of Ireland published its first Securities Markets Risk Outlook Report, detailing key conduct risks to securities markets participants, including investment funds, trading venue operators, and investment firms such as asset managers. The report sets out actions firms should take in order to identify, mitigate and manage those conduct risks, in addition to setting out the Central Bank’s supervisory priorities for securities markets in 2021, which include:

  • work on the potential reform of the framework for money market funds, and the wider consideration of a better macro-prudential framework for investment funds;
  • reviews of MAR, MIFID and AIFMD;
  • development and implementation of the framework for sustainable finance; and,
  • working with IOSCO to undertake a review of conduct-related issues in relation to index providers, with a  specific focus on the asset management industry.

The Central Bank expects firms to take proactive steps in 2021 in respect of the following areas:

  • dealing with the impact of external shocks, including shocks arising from COVID 19 and Brexit;
  • successfully managing the migration to greener securities markets;
  • managing the increasing complexity in securities markets and the rules that govern them;
  • ensuring meaningful transparency for investors and other market participants, in particular on costs and fees;
  • understanding the risks and implications of the increased use of indices, as well as being transparent with the market on their use;
  • bolstering systems to identify, mitigate and manage misconduct risk, with a particular focus on the risk of market abuse;
  • ensuring governance arrangements are fit for purpose and properly resourced, including as businesses expand or change; and
  • improving the quality of the data firms use in their business and report to the Central Bank.

In particular, following the Common Supervisory Action commenced in conjunction with ESMA, the Central Bank undertook an in depth supervisory review of 55 UCIT managers, which included an examination of key indicators, specific datasets and direct engagement with these firms. A public communication on the results of the Common Supervisory Action is expected to be published in 2021. 

4. Central Bank of Ireland publishes consultation paper on enhancing engagement with stakeholders

On 11 February, the Central Bank of Ireland published a consultation paper (‘CP 136’) outlining its proposals to enhance its stakeholder engagement in certain areas, building on existing engagement with relevant stakeholders to facilitate greater discussion of cross-sector strategic issues that affect the Central Bank’s oversight of the financial system. In respect of industry engagement, the Central Bank proposes to formalise the current industry roundtables to meet twice yearly, with a strategic and cross-sectoral focus. This forum would be capped at 20 members comprised of relevant industry representatives. The Central Bank also proposes to host a regular Financial System Conference that would be open to the public, taking place over 1.5-2 days, which is aimed to serve as a vehicle to discuss high-level cross-sector strategic issues concerning the financial system amongst a broad and diverse range of stakeholders.

The consultation closes on 11 May 2021. 

5. Central Bank of Ireland publishes consultation paper on cross-industry guidance on outsourcing

On 25 February, the Central Bank of Ireland published a consultation paper (‘CP 138’) together with the draft cross-industry guidance on outsourcing, which has relevance to all regulated firms that engage in outsourcing. The proposed guidance is designed to assist regulated firms in developing their outsourcing risk management frameworks so as to effectively identify, monitor and manage their outsourcing risks, and also reminds regulated firms of their existing (and future) statutory and regulatory obligations relevant to their sector. In this regard, the guidance is supplemental to existing sectoral legislation, regulations and guidance with which regulated firms are expected to comply. The guidance seeks to:

  • communicate the Central Bank’s expectations with respect to the management of outsourcing risk to the boards and senior management of regulated firms;
  • remind boards and senior management of regulated firms of their responsibilities when considering and utilising outsourcing; and
  • promote the adoption of standards and good practice such that boards and senior management of regulated firms take appropriate action to ensure that their outsourcing frameworks are well designed, operating effectively and are sufficiently robust to oversee and manage the associated risks.

The draft guidelines address the following areas in particular:

  • the assessment of criticality/importance, setting out factors to be considered by FSPs when determining whether an outsourced function is critical or important.
  • intragroup arrangements – the Central Bank considers that the guidance applies equally to intragroup outsourcing as it does to third party outsource service providers (‘OSPs’), but acknowledges potential differences in how the guidance is applied for intragroup arrangements;
  • outsourcing and delegation, clarifying that the Central Bank’s view is that outsourcing and delegation are not different concepts.
  • governance – setting out the Central Bank’s expectation that regulated firms undertake appropriate due diligence in respect of their OSPs prior to entering into an outsourcing arrangement and at appropriate intervals during the lifecycle of the arrangement.
  • risk Assessment and Management of outsourced activities, including putting controls in place to monitor risks;
  • due diligence requirements when outsourcing activities to OSPs;
  • implementation of contractual arrangements and Service Level Agreements, and the key provisions that should be incorporated within them;
  • ongoing monitoring of the delivery of the outsourced activity;
  • disaster recovery planning and business continuity management and the measures in place to support continuity of outsourced functions; and
  • provision of outsourcing information to the Central Bank, including notification of planned outsourcing of critical or important activities, and the establishment of registers of all outsourcing arrangements, with particular information recorded, which will be submitted to the Central Bank from 2022 onwards.

The consultation closes on 26 July 2021, with publication of the final guidelines later in 2021.

European Commission and ESMA updates

6. ESAs issue letter to Commission on the adoption of the PRIIPs KID regulatory technical standards

On 4 February, the Chairs of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ‘ESAs’) wrote to the European Commission advising that the draft regulatory technical standards to amend Commission Delegated Regulation (EU) 2017/653 (‘the PRIIPS Delegated Regulation’) had been approved by EIOPA’s Board of Supervisors, and hence can be submitted to the Commission for adoption.

In July 2020 the ESAs advised the European Commission of the outcome of a review conducted on the PRIIPs key information document, at which stage the draft RTS was adopted by both the EBA and ESMA, but did not have the support of EIOPA. While some national competent authorities continued to express reservations on the draft RTS through EIOPA, they supported the proposal based on further details provided by the European Commission on their approach to the broader review of the PRIIPs Regulation, to include an examination of:

  • how to achieve better alignment between PRIIPs, the Insurance Distribution Directive and MiFID II regarding provisions on costs disclosure;
  • the scope of products as foreseen by the PRIIPs Regulation;
  • how to ensure that the key information document (KID) contains the necessary information for retail investors without having too much or complex information;
  • how to allow for the creation of a digitalised KID allowing for layered information; and
  • the need for a more tailored approach, such as for multi-option products (‘MOPs’), in order to maximise understanding and use of information, while allowing for comparability of similar products. 

7. ESAs publish final report and draft regulatory technical standards on disclosures under SFDR

On 4 February, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered to the European Commission the final report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR). The proposed RTS aim to strengthen protection for end-investors by improving environmental, social and governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of certain financial products. The draft RTS also contain templates for pre-contractual and periodic product disclosures.

The proposals can be divided into two categories, namely:

  • Entity-level principal adverse impact disclosures, which should take the form of a statement showing how investments adversely impact indicators in relation to the climate and the environment, as well as social and employee matters, human rights, anti-corruption and bribery;
  • Pre-contractual, website and periodic product-level disclosures setting out the sustainability characteristics or objectives of financial products.

The draft RTS relate to several disclosure obligations under the SFDR, including:

  • Presentation and content of information relating to the principle of “do not significantly harm” under article 2(17) SFDR, and presentation of indicators under article 4(6) and (7);
  • Pre-contractual information on how a product with environmental or social characteristics meets those characteristics, and whether an index has been designated as a reference benchmark (article 8 SFDR);
  • Pre-contractual information to show how products with sustainable investment objectives and a designated index as a reference benchmark that the index is aligned with the sustainable investment objective, and how that differs from a broad market index (article 9(1) SFDR);
  • the environmental or social characteristics of financial products or the sustainable investment and the methodologies used (article 10 SFDR); and,
  • Information contained in period reports specifying the extent to which products with ESG characteristics meet those characteristics, and other information in respect of products with an objective of a reduction in carbon emissions.

The European Commission is expected to endorse the RTS within three months of their publication. The ESAs have proposed that the RTS should apply from 1 January 2022.

8. ESAs publish joint supervisory statement on the application of the Sustainable Finance Disclosure Regulation

On 25 February, the three European Supervisory Agencies (‘ESAs’) published a joint supervisory statement on the effective and consistent application and national supervision on the SFDR, which aims to achieve an effective and consistent application and national supervision of the SFDR. The statement complements the final report issued on 4 February (see above), and recommends that the draft RTS be used as a reference when applying the provisions of the SFTR in the interim period between the application of the SFDR (10 March 2021) and the later application of the RTS. The statement includes in the annex specific guidance on the application of timelines of certain provisions of the SFDR, the Taxonomy Regulation and the related RTS. 

9. ESMA proposes rules for taxonomy alignment of non-financial undertakings and asset managers

On 1 March, the European Securities and Markets Authority (‘ESMA’) published its final report on advice to the European Commission under article 8 of the Taxonomy Regulation, setting out information to be provided by non-financial undertakings and asset managers to comply with their disclosure obligations under the Non-Financial Reporting Directive (‘NFRD’). The recommendations define the Key Performance Indicators (‘KPIs’) disclosing how, and to what extent, the activities of businesses that fall within the scope of the NFRD qualify as environmentally sustainable under the Taxonomy Regulation. The key recommendations relate to the definitions to be used by non-financial undertakings for the calculation of certain KPIs, including the KPI that asset managers should disclose.

In respect of asset managers in particular, ESMA’s proposals also set out the methodology to be applied in the calculation of the KPI and recommendations for the development of a coefficient methodology to assess Taxonomy-alignment of investments in investee companies that do not report under the NFRD. ESMA proposes the use of standardised tables for article 8 disclosures by non-financial undertakings and asset managers, and recommends a transitional application of the Level 2 provisions

Separate advice was also provided by the EBA and EIOPA.

10. ESMA publishes consultation paper for guidelines on methodology to be used in exceptional circumstances and amendment to the guidelines on non-significant benchmarks

On 25 February, ESMA published a consultation paper setting out guidelines on the methodology to be used in exceptional circumstances, and draft guidelines amending the guidelines on non-significant benchmarks. The first set of guidelines aim to provide further guidance to market participants and competent authorities on the application of requirements relating to the use of a methodology for calculating a benchmark in exceptional circumstances, arising against the background of COVID-19.

The draft guidelines address a number of areas, including:

  1. the transparency of the methodology used, including its key elements, and where material changes are proposed;
  2. benchmark statements, and minimum information to be included about its limitations;
  3. the oversight function and its responsibilities; and
  4.  specific record keeping requirements of changes or deviations from standard procedures and methodologies, including during periods of market stress or disruption.

The consultation closes on 30 April 2021. 

Industry and other updates

11. EFAMA welcomes European Commission’s proposal for an initiative on sustainable corporate governance

On 9 February, EFAMA published a reply strongly welcoming the European Commission’s consultation for an initiative on sustainable corporate governance. EFAMA supported the objective of ensuring that environmental and social interests were fully embedded into business strategies, and believed that this could contribute to improving the reliability of information disclosed by companies under the Non-Financial Reporting Directive (‘NFRD’). EFAMA also considered that the initiative had the potential to strengthen the stewardship role of asset managers by improving shareholders’ understanding of the company’s sustainability practices and stakeholder considerations, ultimately enhancing the disclosures made by asset managers to their clients, and enabling better-informed investment decisions. 

EFAMA noted that investors would benefit from an EU legal framework with due diligence guidelines and reporting requirements for companies and the real economy; this framework should be consistent with the reporting requirements under the NFRD and disclosures under SFDR while promoting and cooperating with similar initiatives at an international level.

In respect of directors’ duty of care and stakeholders’ interests, EFAMA notes the following:

  • Being able to clearly define and identify stakeholders and their interests is considered essential to manage sustainability risks and opportunities. This should be left to a materiality assessment carried out by each company.
  • Requiring companies to set up measurable science-based targets is premature, as existing methodologies and the current ESG landscape do not support this.
  • The assumption that shareholders are only interested in short-term financial performance is strongly opposed.
  • Any enforcement role for stakeholders in relation to the directors’ duty of care is strongly opposed, and would raise several unintended legal and practical issues.

In respect of the duty of due diligence, EFAMA supports a balanced and proportionate definition of due diligence duty, consistent with international principles, and supports, in principle, the adoption of a principles-based approach consisting of guidelines and transparency requirements. EFAMA suggests that to reduce competitive disadvantages for the EU industry, non-EU companies listed on EU regulated markets should be subject to the same obligations, with lighter reporting requirements for SMEs.

Finally, EFAMA supports variable pay being linked to the achievement of long-term sustainability goals, but notes that these requirements should not be disproportionate and fail to adapt performance criteria to different activities, risks, and investment strategies. EFAMA believes that prescriptive measures designed to enhance sustainability expertise at board level should be considered with great caution, and notes that it does not see any merits for further legislative action in the area of share buybacks.

Industry and other updates

12. EFAMA reports record net sales for UCITS and AIFs for December

On 1 March, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for December 2020, which totalled €174bn, up from €78bn in November. While UCITS recorded net inflows of €121bn (€75bn in November), AIFs recorded net inflows of €53bn (€3bn in November). Total net assets of UCITS and AIFs increased by 2.3% to EUR 18.82tn.

In addition, on 1 March, EFAMA published its trends in the European Investment Fund Industry for Q4 2020, in which it noted that net inflows into UCITS and AIFs brought European fund assets to an all-time high, with net assets of UCITS and AIFs growing by 6.6% to €18.87tn, attracting €290bn in net inflows compared to €196bn in Q3 2020.

For Ireland, total net assets at end-Q4 stood at €3.324tn (€3.077tn end-Q3), with net sales for UCITS and AIFs increasing from €35.9bn in Q3 to €115bn in Q4. Net sales in Ireland for 2020 was €213.7bn and €21.5bn for UCITS and AIFs respectively.

13. EFAMA publishes response to the IOSCO consultation on market data in the secondary equity market

On 26 February, EFAMA published its response to the IOSCO consultation on market data in the secondary equity market, noting its support for the initiatives launched by IOSCO and other regulators to analyse issues surrounding this market. EFAMA considers that, from the investment managers’ perspective, the scope of the Consultation Report is too restrictive in that it does not fully consider the issues relating to data provided by data vendors, in respect of which market participants are confronted with significant issues.

EFAMA also notes that market participants face challenges relating to excessively high market data fees and unfair licencing provisions from some market data providers. In order to provide data on a reasonable commercial basis, EFAMA suggests that market data fees should have some relation to the cost of production of the data, and notes that the abuse of dominant positions by monopolies poses a problem.

EFAMA further notes that it supports the use of Consolidated Tape on a voluntary basis, to the extent that this is properly constructed and governed, but notes that this is not a solution to the fundamental issues of the costs of market data, which must be addressed regardless of the existence of a Consolidated Tape. EFAMA suggests the development of guidance by IOSCO concerning market data licencing practices and terminology used by exchanges for basic market data products, and that IOSCO should recognise that exchanges hold disproportionate market power. 

Contact us for more

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