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August 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.

Contents

Central Bank of Ireland updates

European Commission and ESA updates

Industry and other updates

Central Bank of Ireland updates

1. Central Bank of Ireland emphasises importance of the designated person in fund management companies

On 23 July 2021, the Central Bank of Ireland’s Director General for Financial Conduct, Derville Rowland, delivered a speech at the launch of the Institute of Banking’s Professional Certificate for Designated Persons in a Fund Management Company in which she addressed the fund management companies’ guidance framework and the importance of the role of the Designated Person. Ms Rowland noted that guidance framework was introduced to ensure good governance and organisation, as well as effective management, in fund management companies for the protection of investors, the integrity of the market and in order to promote systemic stability. Further, the role of the Designated Person was a key component of the framework, and one of significant responsibility.

In this respect, Ms Rowland noted that there were some shortcomings identified by the Central Bank as part of its 2020 thematic review of fund management companies, including the level of review and constructive challenge that Designated Persons had in their engagements with delegates, noting that in many cases, the Designated Person did not have a sufficient time commitment allocated to their role and/or did not have sufficient support available to enable them to discharge their responsibilities appropriately. Following on from the thematic review, Ms Rowland noted that the Central Bank was now working with firms to assess action plans put in place to address its findings in order to ensure that the Central Bank’s expectations were being met.

2. Central Bank of Ireland publishes feedback statement on discretions under IFD/IFR

On 24 June 2021, the Central Bank of Ireland published a feedback statement following the consultation on competent authority discretions under the Investment Firms Directive (‘IFD’) and Regulation (‘IFR’) (CP135), which signals the Central Bank’s proposed approach to provisions in the IFD/IFR where the Central Bank can or must exercise its discretion. In response to queries received, the feedback statement notes that AIFMs and UCITS management companies with MiFID top-up permissions should continue to comply with the current prudential regime specified in their conditions of authorisation. The Central Bank goes on to note that it will engage separately in relation to any proposed change in the future prudential regime.

3. Central Bank of Ireland publishes findings of review into market abuse risks

On 12 July 2021, the Central Bank of Ireland published its findings and expectations from an industry-wide review of the Market Abuse Regulation, which examined how regulated firms, issuers and their advisors ensured that organisational arrangements were effective in mitigating the risk of market abuse and ensured market transparency. While the review observed some good practices, such as tailored risk assessment processes and active monitoring and dissemination of EU enforcement cases, it also identified the need for significant improvements in other areas, including:

  • Regulated firms must improve their frameworks to identify and mitigate market abuse by implementing a documented process to identify all market abuse risks specifically applicable to their business model, considering the materiality of those risks, and taking steps to mitigate and manage these. Firms must also improve staff awareness of the role they play in the detection and assessment of market abuse risk, including through the provision of training to all staff.  
  • Regulated firms must enhance trade surveillance and Suspicious Transaction and Order Reporting. Firms are expected, inter alia, to implement and maintain a robust and effective surveillance framework to detect and report suspected market abuse through appropriately calibrated alert systems and robust quality assurance processes.
  • Firms are also expected enhance governance arrangements for trade surveillance by assessing their governance arrangements for ensuring their compliance with legal and regulatory obligations in order to detect and report market abuse. Further, they must implement detailed policies that ensure a consistent level of understanding of the arrangements by frontline staff, and the maintenance of an alert review standard.
  • Firms are required to assess and enhance their resourcing arrangements to avoid key person risk, and in this regard, the Central Bank expects that firms assign dedicated and competent resources to the daily management and supervision of market abuse surveillance relative to the firm’s nature, scale and complexity. Such resources must take a proactive approach to support the firm’s surveillance framework and regularly consider the potential impacts that new and existing market abuse risks could have on the firm and the overall market.
  • Firms must also improve the quality, frequency and distribution of management information (‘MI’) by generating and using MI specific to market abuse risk, which is accurate, timely and relevant to the business of the firm and its risks. That MI should be used by boards and senior management to assess, challenge and manage market abuse risk.

4. Central Bank of Ireland welcomes publication of the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021

On 27 July 2021, the Central Bank of Ireland welcomed the publication by the Department of Finance of the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021. This follows active engagement by the Central Bank with the Department of Finance on the Bill’s proposals. The draft legislation provides for:

  • The introduction of a Senior Executive Accountability Regime (‘SEAR’), which places obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies. This will be rolled out on a phased basis, and will apply, in the first instance, to banks, insurance companies, and other sectors with a high degree of retail consumer interaction. Additional sectors may be brought within the scope of SEAR by the Minister in the future.
  • The introduction of common conduct standards to apply to all persons in controlled function roles, additional conduct standards for individuals in senior positions, as well as business conduct standards for all regulated firms in the financial sector. The introduction of these conduct standards will give the Central Bank powers to set and impose binding and enforceable obligations on all regulated financial service providers  and individuals working within them with respect to expected standards of conduct. Such standards include acting honestly, ethically, with integrity and with due skill, care and diligence, as well as observing proper market conduct standards.
  • Enhancements to the Fitness and Probity Regime to ensure the effective operation of, and the ability of the regime to support, the Individual Accountability Framework and the conduct standards for individuals and firms. This includes a new certification requirement whereby regulated financial services providers must certify in writing that a person proposed for a controlled function role complies with the applicable fitness and probity standards.
  • Strengthening the Central Bank’s enforcement capabilities by breaking the “participation link”, which addresses the deficiency in the legislation requiring the Central Bank to first prove a contravention of financial services legislation against a regulated financial service provider before it can take action against an individual.

The Minister for Finance will now write to the Chair of the Committee on Finance, Public Expenditure and Reform and the Taoiseach regarding pre-legislative scrutiny to begin drafting the legislation on the basis of the General Scheme. In remarks made following Cabinet approval to publish the heads of the Bill, the Minister for Finance indicated that it would take between 12 and 18 months for the Framework to come into effect.

5. Central Bank of Ireland publishes website guidance relating to articles 1 and 2 of the Commission Implementing Regulation on the marketing rules for AIFs and UCITS

On 29 July 2021, the Central Bank of Ireland published website guidance under articles 1 and 2 of the Commission Implementing Regulation (EU) 2021/955 on information on:

  • National provisions governing marketing requirements for UCITS and AIFs; and
  • Information on the fees and charges levied by the Central Bank of Ireland for carrying out its duties in relation to UCITS and AIFs). In this respect, no fees and charges are currently levied by the Central Bank in relation to cross-border management or marketing fees and charges, such as registration, pre-marketing or passporting.

6. Central Bank of Ireland publishes 40th edition of AIFMD Q&As and 32nd edition of UCITS Q&As

On 29 July 2021, the Central Bank of Ireland published the 40th edition of the AIFMD Q&As and the 32nd edition of the UCITS Q&As.

The Q&A documents each contain one new Q&A (IDs 1145 and 1100 respectively), which set out the Central Bank’s position with respect to retail investor AIFs, qualified investor AIFs and UCITS gaining exposure (either directly or indirectly) to crypto-assets. As of the date of publication of the Q&A, the Central Bank notes that it has not seen information to satisfy it that either direct or indirect exposure to crypto-assets is capable of being appropriately risk-managed, and further notes that such crypto-assets can present significant risks, including, inter alia, liquidity, credit, market and operational risk, as well as money laundering and terrorist financing risk.

Consequently, taking into account the specific risks attached to crypto-assets and the potential that retail investors will not be able to appropriately assess the risks of making an investment in a fund which gives rise to such exposures, the Central Bank advises that it is highly unlikely to approve a RIAIF or UCITS proposing any direct or indirect exposure to crypto-assets. However, in the case of QIAIFs, the relevant QIAIF would need to make a submission to the Central Bank outlining how the risks associated with such exposures could be managed effectively by the AIFM. The Central Bank goes on to note, however, that its approach in relation to crypto-assets will be kept under review, and that it will continue to be informed by European regulatory discussions on the topic, which may change should new information or developments emerge in the future.

European Commission and ESA updates

7. ESMA consults on the review of transparency requirements under MiFIR

On 9 July 2021, the European Securities and Markets Authority published a consultation paper on the review of transparency requirements under the Markets in Financial Instruments Regulation (‘MiFIR’). The paper focuses on amendments to the level 2 texts identified in the 2020 ESMA review report on the transparency regime that do not require a level 1 amendment, amendments to improve the quality of transparency data and to prepare for the establishment of a consolidated tape, as well as a number of technical issues raised by stakeholders or identified by ESMA over the last number of years.

The paper concerns changes to two RTSs relating to equity and non-equity transparency, respectively. In respect of RTS 1 (Delegated Regulation (EU) 2017/587), ESMA proposes to increase the pre- and post-trade large-in-scale thresholds for exchange traded funds, to develop a more consistent and clearer approach on non-price forming transactions, and to strengthen the pre-trade transparency requirements by introducing tailored requirements for frequent batch auction and hybrid systems, as well as specifying fields to be populated when disclosing pre-trade transparency information.

In respect of RTS 2 (Delegated Regulation (EU) 2017/583, a number of changes mirror the approach proposed for RTS 1, e.g. on pre-trade transparency. Further, ESMA seeks feedback on the potential review of the calibration of non-equity instruments other than commodity derivatives, in addition to other proposals relating to commodity derivatives.

The proposals for both RTSs also contain an extensive review of files and flags to be published when publishing post-trade information, as well as for providing reference and quantitative data to ESMA for transparency calculations. The paper also addresses the need to provide all stakeholders with sufficient time for implementation of any proposed changes, with a minimum period of 6 months suggested. The consultation closes on 1 October 2021.

8. ESMA updates Q&As on UCITS and AIFMD

On 16 July 2021, ESMA updated it Q&A documents on the application of the UCITS Directive, as well as on the application of the AIFMD.

The updated UCITS and AIFMD Q&As each provide 2 new Q&As in relation to performance fees, namely: (i) the application of the guidelines to funds with multiple portfolio managers; and (ii) the crystallisation of performance fees where there is the creation of a new AIF/UCITS/compartment/share class in the course of the financial year.

In the case of the first question, the Q&A provides that it would not be permissible to pay a performance fee to delegated portfolio managers who have overperformed during the reference period, despite a global underperformance of the fund during the same period; performance fees should only be paid where positive performance has been accrued during the performance reference period, and could be paid where the fund has overperformed the reference benchmark but had a negative performance. This treatment also applies in cases of delegation by the management company to different delegated portfolio managers.

In respect of the second question, ESMA states that performance fees cannot be crystallised after less than 12 months from the date of creation of a new compartment/share class in an existing UCITS/AIFM, or from the creation of a new UCITS/AIFM. 

9. ESMA publishes annual reports on sanctions imposed under the UCITS Directive and AIFMD

On 20 July 2021, ESMA issued its fourth annual report on penalties and measures imposed by national competent authorities under the UCITS Directive during 2020. The report notes that the number of national competent authorities (‘NCAs’) issuing sanctions increased slightly to 17 as compared to 2019, with a total of 100 sanctions imposed with a total monetary amount of €1.1m issued during 2020.

Further, ESMA also issued its second annual report on penalties and measures imposed by national competent authorities under the AIFM Directive during 2020. The report notes that during 2020, 17 NCAs imposed a total of 131 penalties and measures (87 in 2019) with a total monetary amount of €3.3m (€9m in 2019).

The Central Bank of Ireland imposed no penalties under UCITS or AIFMD during 2020.

10. European Commission writes to European Parliament and Council on application of SFDR RTS

On 9 July, the European Commission wrote to the European Parliament and Council in relation to the regulatory technical standards under the Sustainable Finance Disclosure Regulation, advising that due to the length and detail of the technical standards, the late submissions to the Commission, and envisaged amendments, it was deemed necessary to defer the dates of application of 1 January 2022 by six months to 1 July 2022, as well as bundling the 13 regulatory technical standards in a single delegated act. 

11. European Commission publishes Q&A on sustainability-related disclosures

On 14 July 2021, the European Commission published Q&As on sustainability-related disclosures. The Q&As address a range of areas, including:

  • the application of SFDR to non-EU AIFMs and sub-threshold EU AIFMs;
  • the calculation of the 500-employee threshold under article 4 SFDR;
  • the application of article 9 SFDR in relation to “sustainable investments”;
  • whether the name of a product can be considered to qualify a product to be promoting an environmental or social characteristic or to have sustainable investment as its objective; and
  • other sustainable finance disclosures requirements.

12. European Commission launches consultation on extension of PRIIPs transitional arrangements

On 15 July 2021, the European Commission launched a public consultation on the proposal for a regulation amending the Packaged Retail and Insurance-based Investment Products (‘PRIIPs’) Regulation. The proposal extends by six months the exemption under article 32 of the PRIIPs Regulation providing for a transitional arrangement whereby management companies, investment companies and persons advising on, or selling, units of UCITS and non-UCITS are temporarily exempted from the requirement to provide retail investors with a key information document. The arrangement currently applies until 31 December 2021.

The deadline for submissions is 9 September 2021.

13. European Commission overhauls anti-money laundering and countering the financing of terrorism rules

On 20 July 2021, the European Commission published an extensive package of legislative proposals aimed to strengthen the EU’s anti-money laundering and countering terrorism financing rules. This follows the Action Plan for a comprehensive EU policy on preventing money laundering and terrorism financing published by the Commission in 2020. The package contains four legislative proposals, including:

The proposal to establish AMLA forms the centrepiece of the legislative proposals. AMLA, which aims to have a total of 250 staff, will have the purpose of establishing a single integrated system of AML/CFT supervision across the EU, directly supervising some of the riskiest financial institutions operating in a large number of member states, or requiring immediate action to address imminent risks, as well as to monitor and coordinate national supervisors responsible for other financial entities. It is proposed that the authority will commence most of its activities in 2024, and begin direct supervision of certain high-risk financial entities in 2026.

The establishment of a single rulebook for AML/CFT, targeted for 2025, aims to harmonise AML/CFT rules across the EU, with the connection of existing national registers of bank accounts, and will provide financial intelligence units with faster access to this information. The Commission will also provide law enforcement authorities with access to the system. Further, the proposed revision of the 2015 Regulation is designed to ensure that there is full traceability of crypto-asset transfers, and will allow for the prevention and detection of their possible use for ML/TF.

Finally, in respect of third countries, the Commission press release notes that there will be two EU lists – a black list and a grey list, reflecting the listing used by the Financial Action Task Force (‘FATF’), which will enable the EU to apply measures proportionate to the risks posed by that country, and to list countries not listed by FATF, but which pose a threat to the EU’s financial system.

14. European Commission issues call for feedback on draft reports by the Platform on Sustainable Finance

On 12 July 2021, the European Commission issued calls for feedback on the draft report on a social taxonomy and the draft report on taxonomy extension options linked to environmental objectives. The draft reports form part of the advice to the Commission on potential extensions of the taxonomy framework beyond environmentally sustainable activities, to cover social objectives and activities that are significantly harmful to environmental sustainability, and those that have no significant impact on it. The draft report on a social taxonomy argues that a social taxonomy would help investors to identify opportunities to finance solutions around ensuring decent work, enabling inclusive and sustainable communities and affordable healthcare and housing. The draft report on taxonomy extension options linked to environmental objectives recommends further clarity, both in relation to activities that are significantly harmful to environmental stability, and those that have no significant impact on it. The closing date for providing feedback on these reports is 27 August 2021.

On 3 August 2021, the Platform on Sustainable Finance published a draft report on preliminary recommendations for technical screening criteria for the EU taxonomy. This is a working document by the Platform focusing primarily on presenting a first set of preliminary priority economic activities and draft recommendations for ‘associated substantial contribution’ and ‘do no significant harm’ technical screening criteria in relation to the four non-climate environmental objectives. There are also a small number of economic activities and draft recommendations for technical criteria related to climate mitigation and adaptation objectives. The Commission stresses that non-inclusion by the Platform in the first batch of priority activities does not imply that the activity will not be considered for inclusion in the EU taxonomy as part of the second batch. The closing date for providing feedback on these reports is 24 September 2021.

15. European Commission issues call for advice to the European Supervisory Authorities on the protection of retail investors

On 3 August 2021, the European Commission issued a call for advice to ESMA, EIOPA, and the joint committee of the European Supervisory Authorities on the protection of retail investors, with a view to assisting the Commission in the preparation of legislative proposals implementing aspects of the retail investment strategy. With respect to the call for advice to ESMA, the Commission seeks advice on a number of focused areas:

  • Addressing and enhancing investor engagement with disclosures through the identification of any significant overlaps, gaps, redundancies and inconsistencies across investor protection legislation that might have a detrimental effect on investors, in addition to those identified as part of the PRIIPS level 2 work.
  • Drawing out the benefits of digital disclosures for consumers in a digital a smartphone age.
  • Assessing the risks and opportunities presented by new digital tools and channels, and whether the existing regulatory requirements continue to be appropriate given the new risks presented. Further, advice is sought as to whether and how far value chains should be opened up by the sharing of specific investor data amongst investor firms and third party providers.

The Commission requests ESMA to deliver the report to the Commission by 30 April 2022, and also requests that ESMA consult as widely as possible within the available timeframe.

16. European Banking Authority launches public consultation on draft regulatory technical standards setting out criteria for the identification of shadow banking entities

On 26 July 2021, the European Banking Authority (‘EBA’) launched a public consultation on draft regulatory technical standards setting out criteria for the identification of shadow banking entities for the purpose of large exposures reporting. The draft RTS sets out the criteria for identifying shadow banking entities, which includes AIFs and UCITS as money market funds, the services and activities considered to be ‘banking services and activities’, as well as the criteria for excluding entities established in third countries from being deemed as shadow banking entities. A public hearing will take place on 29 September 2021, with a deadline for submissions of 26 October 2021.

17. European Banking Authority consults on new guidelines on the role of AML/CFT compliance officers

On 29 July 2021, the European Banking Authority launched a public consultation on new guidelines on the role, tasks and responsibilities of AML/CFT compliance officers. Once adopted, the guidelines will apply to all ‘financial sector operators’ within the scope of the AML Directive. The guidelines address, inter alia:

  • the role and responsibilities of the management body within the AML/CFT framework and specific tasks to be performed by it, as well as the role and responsibilities of the senior manager responsible for AML/CFT;
  • the minimum information to be provided to the management body to enable informed decision-making in relation to AML/CFT issues;
  • the role and responsibilities of the AML/CFT compliance officer, conditions to ensure their independence, as well as screening criteria to determine their suitability, skills and expertise;
  • the organisation of the AML/CFT compliance function at group level, including the obligations on parent and subsidiary entities; and
  • the review of the AML/CFT compliance function by competent authorities.

The deadline for submissions is 2 November 2021.

18. Delegated Regulation and Directive on sustainability risks and sustainability factors to be taken into account by AIFMs and UCITS published in the Official Journal

On 2 August 2021, Commission Delegated Regulation (EU) 2021/1255 and Commission Delegated Directive (EU) 2021/1270 on sustainability risks and sustainability factors to be taken into account for AIFMs and UCITS respectively were published in the Official Journal of the European Union. The measures will apply from 1 August 2022.

Industry and other updates

19. EFAMA records net assets of UCITS and AIFs reach €20tn for the first time

On 27 July 2021, the European Fund and Asset Management Association (‘EFAMA’) published its latest monthly Investment Fund Industry Fact Sheet, providing net sales data of UCITS and AIFs for May 2021, which totalled €64bn (down from €96bn in April). While UCITS recorded net inflows of €55bn (€97bn in April), AIFs recorded net inflows of €8bn (€1bn net outflows in April). Total net assets of UCITS and AIFs increased by 0.8% to €20.04tn.

20. EFAMA responds to European Commission consultation on a retail investment strategy for Europe

On 3 August 2021, EFAMA published a reply supporting the European Commission’s proposals on a retail investment  strategy for Europe, however noted that the consultation failed to outline a comprehensive strategy to increase retail investors’ participation in capital markets. In this regard, EFAMA stated that a successful retail investment strategy would also need to integrate a number of other recommendations, namely:

  • Easy access to financial advice for retail investors, suited to their individual needs and preferences, noting that the ban on inducements contemplated by the Commission would make it harder for less affluent citizens to access financial advice, contradicting the CMU objective.
  • Early education of EU citizens to increase financial literacy, with the Commission playing a coordinating role in bringing together best practices of member states.
  • Aligning financial disclosures across various regimes in order to provide meaningful information, noting that digital disclosures can provide a more tailored experience and enable well-informed investment decisions.
  • A PRIIP KID that focuses on information relevant for each type of investment product, suggesting that any loss in theoretical comparability between products would be offset by improved explanations of the fundamentals for each type of investment product and more meaningful information.

EFAMA also considers it vital that the Commission invest more time and resources into proper consumer testing of policy options prior to submission of any legislative proposals, ensuring that any proposed changes produce tangible incentives and clear benefits for retail investors and the financial industry.

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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