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
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.
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:
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.
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.
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.
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:
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:
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:
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.
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:
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:
The strategy itself comprises six sets of actions, on which the Commission is to report by end-2023:
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:
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.
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.
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).
For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management.