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 and ESA updates
Industry and other updates
On 13 May 2021, the Central Bank of Ireland announced its participation in the US dollar-denominated green bond investment fund for central banks established by the Bank for International Settlements, forming part of the Central Bank’s aim to further integrate climate-related sustainability and responsible investment principles within its investment assets. The investment also aligns with the recent agreement on a common Eurosystem stance for climate change-related sustainable investments in non-monetary policy portfolios for Eurosystem central banks.
On 18 May 2021, the Central Bank of Ireland wrote to all Irish UCITS managers following the Common Supervisory Action (‘CSA’) coordinated by the European Securities and Markets Authority (‘ESMA’) to assess UCITS’ compliance with liquidity risk management obligations across the EU. Following the publication of the results by ESMA in March, which include a number of adverse supervisory findings, the Central Bank has engaged with a number of UCITS managers where specific concerns were identified, resulting in 35 Risk Mitigation Programmes to date. The CSA’s findings will also inform policy development at both a national and EU level.
The letter requires all UCITS managers to carry out a review of their activities in light of the findings of the CSA. Specifically, UCITS managers are required to conduct a specific review of their practices, documentation, systems and controls by reference to ESMA’s findings and the contents of the letter, which must be documented, and must also include details of any actions taken to address related findings.
In particular, the Central Bank has highlighted the following as matters to be addressed in the course of this review:
This review should be completed, with an action plan discussed and approved by the board of each UCIT manager, by end-Q4 2021.
On 19 May 2021, the Central Bank of Ireland’s Director General of Financial Conduct, Derville Rowland, delivered a speech on “Covid-19, funds sector, and sustainably serving the economy” at the Irish Global Funds Conference. In her speech, Ms Rowland addressed the impact that COVID-19 has had on the financial services industry, and noted that in light of the events of the last year, including the significant turbulence experienced in the funds sector, money market funds and liquidity management practices in the funds sector were currently under the Central Bank’s consideration. Further, the experience of COVID-19 has further highlighted the need to develop of a comprehensive macroprudential framework for the non-bank sector, which remains a priority for the Central Bank.
Ms Rowland also addressed the Central Bank’s expectations of the Irish funds sector, noting the ‘enhanced scrutiny’ applied by the Central Bank to certain funds in 2019, and the recent in-depth thematic review of fund management companies concerning governance, management, oversight and control, and the consequent remedial action plans developed by individual firms. Further, Ms Rowland addressed the recent letter issued to UCITS managers following ESMA’s CSA (see above), which outlined the actions now required to be taken by all Irish UCITS managers on foot of those findings.
Ms Rowland also highlighted, inter alia, the need for diversity at senior management and board level across all firms, having regard to the Central Bank’s recently-published data on PCF roles in the financial sector. Further, in respect of ESG issues, Ms Rowland highlighted the “very significant role” for the investment management sector in the transition to a sustainable economy, noting that the Central Bank expected all industry participants to move forward to ensure compliance with the various new sustainability requirements.
On 2 June 2021, the Central Bank of Ireland published its Annual Report 2020 and Annual Performance Statement 2020-2021. In relation to asset management and investments supervision, the report notes that the Central Bank’s supervision activities were particularly focused on the operational resilience of the sector and the continuity of services, which contributed to a number of important supervision outcomes, namely:
The conclusion of a thematic review on Fund Management Company (‘FMC’) Effectiveness Guidance, further to which the Central Bank has required prompt remediation by those firms where shortcomings were identified, with all other FMCs required to critically assess their daily operations against the requirements, taking into account the findings of the review, and implementing the necessary changes to ensure full and effective embedding of all aspects of the Central Bank’s requirements and guidance.
The report also sets out the Central Bank’s strategic priorities for 2021 across the regulated financial services sector, which it will address through a number of activities, namely:
On 26 May 2021, ESMA published its response to the European Commission’s targeted consultation on the functioning of the European Supervisory Agencies (‘ESAs’). The review comes just two years following the culmination of the latest review of the ESAs in late 2019, which in ESMA’s view, meant that it was too early to meaningfully assess the full impact of most of the changes consequently agreed by the co-legislators. However, in light of COVID-19 and Brexit, ESMA acknowledges that the environment in which it now operates has changed dramatically in just a short period of time, which presents new challenges for it, national competent authorities, and market participants.
ESMA considers that in light of the 2020 Capital Markets Union Action Plan, ESMA’s mandate must continue to be appraised in order to ensure that it continues to have the appropriate tools and capabilities to drive EU supervisory convergence and ensure a level playing field among market participants. To this end, ESMA makes some general recommendations for the Commission’s consideration, namely:
On 27 May 2021, ESMA published its final report on the guidelines under the Regulation on cross-border distribution of funds, specifying the requirements that funds’ marketing communications must meet, namely to:
The guidelines apply to UCITS management companies (including any UCITS which has not designated a UCITS management company), Alternative Investment Fund Managers, EuVECA managers and EuSEF managers, and apply in respect of all marketing communications addressed to investors or potential investors, including when they are set up as EuVECAs, EuSEFs, ELTIFs and MMFs.
The guidelines provide examples of those materials which may be considered as marketing communications, such as messages advertising UCITS or AIFs, or messages broadcasted on any social media platform when such messages refer to any characteristics of a UCITS or AIF. The guidelines also set out those communications that should not be considered as marketing materials, including any legal and regulatory documents of a fund (such as the prospectus), or short messages broadcast online that only include a link to a webpage where a marketing communication is available, but which do not contain any information on a specific AIF, UCITS or group of AIFs or UCITS.
The guidelines apply 6 months after the date of the publication of the guidelines on ESMA’s website in all EU official languages.
The updated UCITS Q&As provide 2 new answers in relation to the performance reference period for the benchmark model and in the case of funds’ mergers. In respect of the AIFMD Q&A, 6 new answers are provided in relation to reporting requirements under Articles 3, 24 and 42, and in relation to the scope of ESMA’s guidelines on performance fees. The AIFMD Q&A also provides similar answers in relation to the performance reference period in respect of the benchmark model and in the case of funds’ mergers.
On 28 May 2021, ESMA updated its Opinion on the collection of information for the effective monitoring of systemic risk under the AIFMD, which provides details on a set of additional information that, in ESMA’s view, NCAs could require AIFMs to report on a periodic basis under Article 24(5) of the AIFMD, namely:
On 3 June 2021, ESMA published its first risk dashboard for 2021 covering the first quarter of the year, highlighting that the main risk for EU financial markets remains the risk posed by a sudden risk reassessment amid the general decoupling of securities prices from economic fundamentals. Consequently, ESMA maintains its risk assessment at a “very high” level.
ESMA notes that valuations in EU financial markets for most market segments are either at or above pre-COVID-19 levels, and remain highly sensitive to events and are volatile. ESMA considers that credit risk is likely to increase further due to increasing corporate and public debt levels, and going forward it sees a prolonged period of risk to institutional and retail investors of further – and possibly significant – market corrections. Very high risks are seen by ESMA across the whole of its remit, and it considers that the extent to which those risks will further materialise will critically depend on market expectations on monetary and fiscal policy support, as well as on the pace of the economic recovery.
With respect to the asset management sector specifically, the report notes that as stress receded after the beginning of the pandemic, bond funds reduced their cash holdings, while the credit risk profile of investment grade bond funds has slightly deteriorated. EU MMFs continued to expand their NAVs, although liquidity buffers deteriorated slightly, though remaining substantially above pre-stress levels and regulatory requirements. While EU-domiciled hedge funds reduced their leverage through derivatives, they increased their financial leverage through borrowings. Further, while overall interconnectedness of the financial system through bank-to-fund connections remains below pre-crisis levels across fund-types, ESMA notes that concerns over valuation of portfolio assets have clearly emerged, especially for real estate funds, while Liquidity Management Tools’ availability varies considerably across fund types and jurisdiction.
On 18 May 2021, the European Fund and Asset Management Association (‘EFAMA’) published its response to the joint ESA consultation on taxonomy-related sustainability disclosures under the Sustainable Finance Disclosure Regulation (‘SFDR’).
The response identifies six key issues which EFAMA thinks the ESAs ought to address, namely:
On 2 June 2021, EFAMA published its response to the draft Delegated Act under Article 8 of the Taxonomy Regulation, welcoming the Commission’s proposal for a transitional period under Article 11 of the Delegated Act, as it considers that this will address numerous practical implementation challenges previously identified.
Notwithstanding this, EFAMA has made a number of recommendations in relation to the delegated act, namely:
On 25 May 2021, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for March 2021, which totalled €78bn (up from €38bn in February). While UCITS recorded net inflows of €69bn (€34bn in February), AIFs recorded net inflows of €8bn (€4bn in February). Total net assets of UCITS and AIFs increased by 2.9% to €19.66tn (€19.1tn in February).
In addition, on 2 June, EFAMA published its quarterly statistical data release describing the trends in the European investment fund industry in Q1 2021. Net assets of UCITS and AIFs grew by 4.5% over the quarter to €19.6tn, attracting €201bn in net inflows.
For Ireland, net assets at end-Q1 stood at €3.5tn (€3.3 end-Q4 2020), with net sales for UCITS and AIFs dropping from €115bn in Q4 2020 to €40.5bn in Q1 2021.
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.