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July 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 publishes fitness and probity interview guide and emphasises the importance of fitness, probity, ensuring responsibility, and diversity and inclusion

In June 2021, the Central Bank of Ireland published a Fitness and Probity interview Guide, which provides an overview of the fitness and probity interview process, and sets out what to expect as part of that process.

The guide applies to pre-approval controlled functions (‘PCFs’) that may be approved by the Central Bank, who may be called for either an ‘assessment interview’ or a ‘specific interview’ or both. Whereas assessment interviews are more frequent, and are used to determine the applicant’s professional experience, skill set and how they intend to discharge the key accountabilities of the relevant role, specific interviews are used to gather more detailed information on particular matters relevant to an applicant’s fitness or probity. The guide also provides some useful information on how applicants can prepare for such interviews.

Speaking at the Institute of Directors’ Briefing Webinar on 10 June, the Central Bank’s Director General for Financial Conduct, Derville Rowland, stated that the guide “provides practical assistance and is a one-stop shop for all the information that a PCF applicant and firm may need”. Ms Rowland also emphasised that it was the Central Bank’s expectation that certain standards and values be embedded in the firms it regulates, namely those of professionalism, honesty, integrity, accountability, and to deliver fair outcomes that have the interests of consumers and investors at heart. Ms Rowland went on to state that such standards must be reflected across a firm in every aspect of how it conducts its business, from corporate governance structures to individual accountability; from strategy-setting to product development; from risk management to people management; and from internal challenge to how whistle-blowers are treated.

Reflecting on the experience of the fitness and probity regime over the last ten years, Ms Rowland also highlighted the Central Bank’s proposal for an Individual Accountability Framework, including the introduction of conduct standards for individuals in regulated firms, conduct standards for the firms themselves, and a Senior Executive Accountability Regime (‘SEAR’), and noted that the Central Bank continues to work closely with the Department of Finance in progressing the Framework.

Finally, Ms Rowland underlined the importance of diversity and inclusion within firms, given its intrinsic link to behaviour and culture, noting that the fitness and probity regime was one of the ways in which progress in this area is being measured. In this regard, the Central Bank expected to see all regulated firms commit to addressing, and significantly improving, diversity and inclusion. For example, firms should have and implement a board-approved diversity and inclusion strategy, which aligns to the business strategy of the firm. Over the medium to long-term, the Central Bank will continue to expect to see evidence of the effectiveness of culture, behaviours, structures and controls such that the diversity of candidates is clear in PCF applications, in the talent pipeline as well as in the succession plans of companies and in appointments.

2. Central Bank of Ireland updates its guidelines on anti-money laundering and countering the financing of terrorism for the financial sector

On 23 June 2021, the Central Bank of Ireland updated its guidelines, initially published in 2019, for the financial sector on anti-money laundering and countering the financing of terrorism. The guidelines set out the Central Bank’s expectations of firms when identifying, assessing and managing money laundering and terrorism financing (‘ML/TF’) risks, and address these issues from the perspective of risk management, customer due diligence, governance, reporting of suspicious transactions, staff training, record keeping and financial sanctions.

Among the changes made to the 2019 guidelines include:

  • A new section on the identification and appointment of a member of senior management with responsibility for ML/TF risk, and the tasks and role of that person (Section 6.3);
  • A section on the appointment of a compliance officer with responsibility for AML/CFT matters (formerly the Money Laundering Reporting Officer), the skills and experience that are expected of an individual in that role, and reporting to the board (Section 6.4);
  • A new section on policies and procedures, including the obligation on firms to put in place appropriate procedures for staff to report a contravention of the Criminal Justice Act 2010 Act internally through a specific, independent and anonymous channel, proportionate to the nature and size of firm (Section 6.7).

The guidelines also seek to highlight where the Criminal Justice Act 2010 has been materially amended since 2019, in particular with respect to the recent transposition of the 5th Anti-Money Laundering Directive into Irish law.

3. Central Bank of Ireland publishes 39th edition of AIFMD Q&As and 31st edition of UCITS Q&As

On 24 June 2021, the Central Bank of Ireland published the 39th edition of the AIFMD Q&As and the 31st edition of the UCITS Q&As.

The AIFMD Q&As contain updates to ID 1021 and ID 1136, as well as two new Q&As – ID1143 and ID1144. ID 1021 has been updated generally and to clarify the extent to which an Irish entity can perform duties for non-EU AIFs pursuant to Article 36(1)(a) of the AIFMD. ID 1136 updates the types of AIF for which a Depositary of Assets other than Financial Instruments (‘DAoFI’) can act.

ID 1143, outlines the circumstances in which a DAoFI can accept an appointment from a non-EU AIFs pursuant to Article 36(1)(a) of the AIFMD to perform the duties set out in Article 21(7)-(9) of the AIFMD. ID 1144 confirms the Central Bank’s position in relation to AIFs having a share class that makes distributions to charity. The Q&A confirms that this is permissible, subject to a number of conditions being met by the AIF.

In respect of the UCITS Q&As, one new Q&A (ID 1099) confirms the Central Bank’s position in relation to a UCITS having a share class that makes distributions to charity – this is permissible, subject to a number of requirements being met by the UCITS, such as the investor actively electing to subscribe to such a share class, and that the charity be approved/registered in the relevant jurisdiction. There are also certain matters to be included in the prospectus/supplement, as well as a requirement for periodic reporting to investors in respect of amounts distributed to charity.

European Commission and ESA updates

4. EBA and ESMA publish provisional list of instruments and funds for smallest investment firms under the Investment Firms Regulation

On 31 May 2021, the EBA and ESMA jointly published a provisional list of additional instruments and funds that national competent authorities (‘NCAs’) may allow to use as own funds for some of the smallest investment firms, based on information received from NCAs across the EU. As noted, this list is provisional, and the EBA and ESMA will assess the terms and conditions of all instruments and funds included against regulatory provisions at a later stage, and will update, maintain and publish the list on a regular basis.

5. ESMA publishes 2020 annual report

On 15 June 2021, ESMA published its 2020 annual report setting out ESMA’s key actions taken over the previous year. With respect to activities concerning funds, the report notes that in 2020:

  • With respect to monitoring of liquidity risk in investment funds, in response to the COVID-19 crisis, ESMA reinforced its coordination role regarding the supervision of investment funds through the organisation of frequent exchanges with NCAs on market developments and supervisory risks, in particular on liquidity issues. Further, since end-March 2020, ESMA has collected data on the use of ‘extraordinary’ liquidity management tools. In addition, ESMA’s final report on the recommendation of the European Systemic Risk Board (‘ESRB’) on liquidity risk in investment funds, published in November 2020, identified five priority areas to enhance the preparedness of investment funds with significant exposures to corporate debt and real estate assets, for potential future adverse liquidity and valuation shocks.
  • With respect to money market funds, ESMA published a 2020 update of guidelines on MMF stress tests, taking account of the experience during March 2020, and participated in ongoing work at the international level on the potential need to amend the MMF regulatory framework in order to make MMFs more resilient, with a view to prepare for the review of the MMF regulation in 2022.
  • ESMA also published its final guidance on performance fees, aimed to harmonise the way fund managers charge performance fees to retail investors, as well as the circumstances in which performance fees can be paid.
  • In respect of its risk monitoring and analysis activities, in its Trends Risks and Vulnerabilities report (September 2020), ESMA assessed the connectedness among EU fixed-income funds, which suggested high spillover effects, indicating that funds exposed to less liquid asset classes were more likely to be affected by shocks originating in other markets than funds invested in more liquid assets. Whereas alternative funds were found to be the main transmitters of shocks, high-yield and corporate bond funds were net shock receivers during the COVID-19 market stress period. Furthermore, related to that report, in respect of the costs and performance of closet index funds, it was found that overall, the net performance of potential closet indexers was worse than the net performance of genuinely active funds, as the marginally lower fees of potential closet indexers were outweighed by reduced performance.
  • In August 2020, ESMA wrote to the European Commission highlighting areas to consider as part of the forthcoming review of the AIFMD, recommending changes in 19 areas, including: harmonising the AIFMD and UCITS regimes; delegation and substance; liquidity management tools; leverage; the AIFMD reporting regime and data use; and the harmonisation of supervision of cross-border entities.
  • In 2020, ESMA also conducted a consultation on the standard forms, templates and procedures NCAs should use to publish information on their websites to facilitate the cross-border distribution of funds, publishing its final report in January 2021.

6. European Commission, ECB Banking Supervision, ESMA and EBA issue joint statement encouraging market participants to cease all LIBOR settings

On 24 June 2021, the European Commission, the European Central Bank in its banking supervisory capacity, the EBA and ESMA issued a joint statement in which they strongly encourage market participants to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposures to these rates. In order to achieve that, these bodies strongly encourage market participants to:

  • stop using the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021;
  • limit the use of synthetic LIBOR only to contracts that are particularly difficult to amend ahead of LIBOR’s cessation; and
  • include robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.

7. ESMA publishes first overview of national rules governing fund marketing

On 30 June 2021, ESMA published its first report setting out an overview of the marketing requirements and marketing communications that apply across EU member states under the Regulation on cross-border distribution of funds, and analysing the effects of national laws, regulations and administrative provisions that govern the marketing of investment funds.

Among the key findings identified in the report were:

  • National laws, regulations and administrative provisions that govern marketing requirements are usually based on the transposition of the AIFM and the UCITS Directives, although some additional national requirements may be applicable;
  • Only a very limited number of NCAs carried out ex-ante or ex-post verification of marketing communications. Ireland was among the countries whose competent authority did not carry out such verifications;
  • It is expected that greater harmonisation of the marketing requirements will be achieved after the transposition of the Directive on cross-border distribution of collective investment undertakings by 2 August 2021.

ESMA notes that it will submit to the European Parliament, the Council and the Commission a new iteration of this report in two years’ time.

8. European Commission sets out strategy on making the EU’s financial system more sustainable and proposes new European Green Bond Standard.

On 6 July 2021, the European Commission adopted a number of measures in respect of its policy objectives in the area of sustainable finance, namely:

  • A new sustainable finance strategy;
  • A European Green Bond Standard;
  • A Delegated Act supplementing Article 8 of the Taxonomy Regulation.

In respect of the new sustainable finance strategy, the strategy builds on the building blocks identified in 2018 for a sustainable financial framework, namely: (1) an EU taxonomy, providing a robust and science-based classification system that allows non-financial and financial companies to share a common definition of sustainability and thereby providing protection against greenwashing; (2) a mandatory disclosure regime for both non-financial and financial companies that provides investors with information to make informed sustainable investment decisions; and (3) a set of investment tools, including benchmarks, standards and label that make it easier for financial market participants to align their investment strategies with the EU’s climate and environmental goals.

The new strategy identifies four main areas where additional actions are needed in order for the financial system to fully support the transition of the economy towards sustainability:

  1. Financing the transition of the real economy towards sustainability. As a first step, the Commission will consider proposing legislation to recognise and support the financing of certain economic activities, primarily in the energy sector, and will also consider options for an extension of the Taxonomy framework beyond environmentally sustainable activities to possibly recognise activities with an intermediate level of environmental performance. It will also consider extending the framework of sustainable finance standards and labels for financial instruments, which would enable and cater for future market innovation, while ensuring a minimum level of transparency and credibility with regards to sustainability factors of labels developed by the market.
  2. Moving towards a more inclusive sustainable finance framework by empowering retail investors and SMEs to access sustainable finance opportunities, and leveraging the opportunities offered by digital technologies for sustainable finance. In respect of insurance, the Commission notes that by increasing insurance coverage, the financial system can better protect the economy and society against certain climate-related and natural disaster risks, and it will initiate a Climate Resilience Dialogue between insurers, re-insurers, public authorities and other stakeholders to exchange best practices and identify ways to address the climate protection gap. The Commission will also put forward a proposal on sustainable corporate governance to ensure that companies manage sustainability risks and benefit from its opportunities. The Commission is also strengthening climate and biodiversity mainstreaming in the EU budget, and is working closely with member states to increase the use of green budgeting tools.
  3. Improving the financial sector’s resilience and contribution to sustainability, which consists of the systematic integration of both financially material sustainability risks (outside-in) and sustainability impacts (inside-out) in financial decision-making processes. The Commission will seek to improve the transparency of credit ratings and ratings outlooks, and in respect of banks, will propose amendments to the prudential framework to ensure ESG factors are consistently included in risk management systems and in supervision. Amendments will also be proposed in respect of the Solvency II directive for insurance companies. The Commission also identifies the need to accelerate the contribution of the financial sector to transition efforts through inter alia translating EU sustainability goals into the long-term financing strategies and decision-making processes of firms, and consideration will be given to whether supervisory powers, capabilities and obligations are fit for purpose to address the issue of greenwashing.
  4. Fostering global ambition. The Commission sees the need for an ambitious and robust international sustainable finance architecture that embraces the concept of double materiality and supports EU partner countries. In this regard, the EU will advocate for international forums and standard-setters to develop ambitious standards and principles for disclosure, building where appropriate on the recommendations of the Task Force on Climate-related Financial Disclosures and other international initiatives. The Commission will continue to cooperate with its partners in international forums to agree on common objectives and principles for taxonomies and, going forward, to increase comparability and consistency of taxonomies’ metrics and thresholds. The Commission will also seek to advance and deepen the work of the International Platform on Sustainable Finance (IPSF), launched in 2019, and will develop a comprehensive strategy to help increase sustainable finance in EU partner countries.

The strategy itself comprises six sets of actions, on which the Commission is to report by end-2023:

  1. Extending the existing sustainable finance toolbox to facilitate access to transition finance;
  2. Improving the inclusiveness of small and medium-sized enterprises (SMEs), and consumers, by giving them the right tools and incentives to access transition finance;
  3. Enhancing the resilience of the economic and financial system to sustainability risks;
  4. Increasing the contribution of the financial sector to sustainability by inter alia improving financial institutions’ disclosures of sustainability targets and transition planning;
  5. Ensuring the integrity of the EU financial system and monitoring its orderly transition to sustainability, by inter alia monitoring greenwashing risks and reviewing the current supervisory and enforcement toolkit;
  6. Developing international sustainable finance initiatives and standards, and supporting EU partner countries, through seeking an ambitious consensus in international forums, mainstreaming the concept of double materiality, stress the importance of disclosure frameworks, and agreeing on objectives and principles for taxonomies.

Secondly, the Commission published a proposal for a regulation on European Green Bonds, which aims to create a high-quality voluntary standard available to all EU and non-EU issuers in order to help finance sustainable investments, setting a “gold standard” for how entities can use green bonds to raise funds while meeting sustainability requirements and protecting investors from greenwashing. The Commission notes four key requirements under the proposed framework, namely:

  1. That funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy;
  2. That there must be full transparency on how bond proceeds are allocated through detailed reporting requirements;
  3. That all EU green bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the Taxonomy.
  4. That external reviewers providing services to issuers of EU green bonds must be registered with, and supervised by, ESMA, with limited flexibility for sovereign issuers.

Finally, the Commission adopted a delegated act supplementing Article 8 of the Taxonomy Regulation, which provides that financial and non-financial companies are to provide information to investors about the environmental performance of their assets and economic activities. This will be sent to the European Parliament and Council for their consideration for a period of 4-6 months.

In his remarks concerning the adoption of these measures, the Executive Vice-President of the European Commission, Valdis Dombrovskis, noted that the targets the EU has set for itself in the area of sustainable finance were ambitious, and would not be cheap – over the course of the next decade, the Commission estimates that the EU will need €350bn of annual extra investment to meet its 2030 emissions target in energy systems, in addition to the €130bn required for other environmental goals. As public money will not be enough, the private sector is being relied on to address this gap.

Commenting on these measures, the European Fund and Asset Management Association (‘EFAMA’) noted that it strongly supported three particular policy actions introduced by the new strategy, namely: (1) enhancing the reliability and comparability of ESG ratings; (2) ensuring consistent integration of the double materiality perspective; and (3) completion, extension and operationalisation of the EU taxonomy, and noted that it would continue to review the details of the strategy in due course.

Industry and other updates

9. EFAMA responds to ESMA consultation on the legislative review of the Money Market Fund Regulation

As noted in our April update, on 26 March 2021, ESMA published a consultation report setting out proposals for reforms of the Money Market Funds Regulation (‘MMFR’), which aims to review the stresses experienced by MMFs in March 2020 and to assess the roles played by markets, investors and regulation.

On 30 June 2021, EFAMA responded to this consultation, welcoming the preparatory work conducted by ESMA against the backdrop of a broader international discussion on MMF reform options by IOSCO and the FSB. EFAMA expressed the view that such reforms should aim to preserve the intermediary role that MMFs play in short-term money markets, while continuing to offer a critical alternative to traditional bank financing. However, EFAMA also agrees with the necessity of exploring options to improve the functioning of the secondary market, especially under stressed conditions. In this regard, it recommends, as a matter of priority, an in-depth exploration of options aimed at incentivising liquidity provision by dealers, by at least not hampering it via punitive capital constraints.

EFAMA goes on to note that despite the broadly accurate analysis conducted by ESMA in the opening sections of the consultation document, there were a few key aspects that it considers have not been adequately reflected, namely relating to the prudent management of liquidity by European MMFs before and after March 2020, and the exclusion of financial commercial paper and of securities denominated in non-Euro currencies in March 2020 from the scope of the ECB’s Pandemic Emergency Purchase Programme (‘PEPP’).

EFAMA expressed a preference for decoupling the potential activation of liquidity fees or gates from a possible breach of the prescribed weekly and daily liquidity thresholds for LVNAV and public debt CNAV funds. Further, with respect to the different liquidity management tools put forward by ESMA, EFAMA considered that anti-dilution levies in the form of fixed liquidity fees represented the most appropriate solution for managers to counter unanticipated surges in redemption demands.

In addition, EFAMA notes that given that no European MMF resorted to liquidity management tools in H1 2020, this demonstrated that far-reaching changes to the MMFR were not required; it therefore opposed the proposed recalibration of the existing liquidity levels under the options presented, noting that some of these options risk the introduction of an inevitable “performance drag” to the detriment of institutional and corporate investors, and diminishing the attractiveness of non-public debt MMFs in particular. Further, EFAMA remains concerned at the option to eliminate LVNAV and public CNAV, especially in light of the resilience demonstrated by these structures, along with VNAV structures, in the course of the 2020 market correction.

Finally, EFAMA noted that it was not in favour of ESMA’s option to clarify and to potentially amend the current ban on “external support” under Article 35 of the MMFR, as it marks an important difference with other global jurisdictions. EFAMA also considers that amendments to MMFs’ disclosure requirements, a “Liquidity Exchange Facility” (LEF), and the clarifications to the scope of the MMFR under Article 1 and 6, were not warranted, nor would they help mitigate some of the core fragilities identified in the structure and functioning of the underlying money markets.

10. EFAMA reports that net inflows into long-term UCITS funds remain at an historically high level in April

On 23 June 2021, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for April 2021, which totalled €96bn (up from €78bn in March). While UCITS recorded net inflows of €97bn (€69bn in March), AIFs recorded net outflows of €1bn (€8bn of net inflows in March). Total net assets of UCITS and AIFs increased month-on-month by 1.1% to €19.87tn (€19.66tn in March).

Contact us for more

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

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