October 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 notice of intention on the application of the ESMA Guidelines on marketing communications under the Regulation on cross-border distribution of funds

On 1 October 2021, the Central Bank of Ireland published a notice of intention in respect of the ESMA Guidelines on marketing communications under the Regulation on cross-border distribution of funds, published on 2 August 2021, which, inter alia, establish common principles on the identification of marketing communications, the description of risks and rewards of purchasing units or shares of an AIF or units of a UCITS in an equally prominent manner, and the fair, clear and not-misleading character of marketing communications.

The notice provides that while the Central Bank will consult, in due course, on the incorporation of a provision in both the Central Bank UCITS Regulations and AIF Rulebook setting out that compliance with the guidelines is required, the Central Bank expects full compliance with the guidelines from 2 February 2022. 

2. Central Bank of Ireland publishes new AIFMD and UCITS Q&As

On 10 September 2021, the Central Bank of Ireland published the 41st edition of the AIMFD Q&As, which contains two new Q&As:

  • ID 1146 sets out the Central Bank’s position concerning an AIFM where its respective AIF is of the view that it no longer meets the criteria of an AIF under Regulation 5(1) of the AIFM Regulations. In such a circumstance, it is expected that such an AIFM would engage with the Central Bank.
  • ID 1147 sets out the Central Bank’s expectations in relation to an AIFM operating or planning to operate in the manner of a third-party management company. The Q&A confirms, inter alia, that where new business results in a material increase in the nature, scale or complexity of a firm’s business, the Central Bank deems this to be a change that materially affects the basis on which authorisation has been granted and requires notification to the Central Bank in accordance with Regulation 11 of the AIFM Regulations 2013. The Q&A goes on to set out non-exhaustive circumstances in which such notification would be required.

On 1 October 2021, the Central Bank of Ireland published the 42nd edition of the AIMFD Q&As, containing three new Q&As:

  • ID 1148 concerns the implementation of para. 47 of the ESMA Guidelines on marketing communications under the Regulation on cross-border distribution of funds and clarifies that the statement in this paragraph, which is required when presenting information on past performance, satisfies the requirements of 9.36 of the Consumer Protection Code;
  • IDs 1149 and 1150 relate to investment by Qualifying Investor AIFs and Retail Investor AIFs in UK investment funds, and the categorisation of such funds under the Central Bank’s AIF Rulebook.

On 10 September 2021, the Central Bank published the 33rd edition of the UCITS Q&As, which includes one new Q&A, ID 1101, which sets out the Central Bank’s expectations in relation to a UCITS management company operating or planning to operate in the manner of a third-party management company, and confirms, inter alia, that where new business results in a material increase in the nature, scale or complexity of a firm’s business, this is deemed to be a material change to the firm’s operating model which requires consultation with the Central Bank in accordance with Regulation 107 of the Central Bank UCITS Regulations. The Q&A goes on to set out non-exhaustive circumstances in which such notification would be required.

On 1 October 2021, the Central Bank published the 34th edition of the UCITS Q&As, which contains two new Q&As, IDs 1102 and 1103, relating to the implementation of the ESMA Guidelines on marketing communications under the Regulation on cross-border distribution of funds, and whether certain of the required statements contained therein satisfy the requirements under the Central Bank UCITS Regulations.

3. Central Bank of Ireland updates website to include reference to recently published UCITS and AIFM Statutory Instruments

On 1 October 2021, the Central Bank of Ireland updated its website to include references to the recently published European Union (Alternative Investment Fund Managers)(Amendment) Regulations 2021 and European Union (Undertakings for Collective Investment in Transferable Securities)(Amendment) Regulations 2021, both of which came into operation on 6 August 2021.

4. Central Bank of Ireland publishes notice of intention on amendments to the list of Pre-approval Controlled Functions (‘PCFs’)

On 22 September 2021, the Central Bank of Ireland published a notice of intention, which proposes to amend the list of PCFs pursuant to s. 22 of the Central Bank Reform Act 2010. The amendments are considered necessary on the basis of the Central Bank’s supervisory experience on the use of current PCFs, and in view of the changing structure of the Irish financial services industry. With the exception of the removal of PCF-31 (Head of Investment), which is relevant to investment firms alone, the proposed amendments will apply to all regulated financial services providers (‘RSFPs’), other than credit unions.

The other proposed amendments concern:

  • Expansion of PCF-16 (Branch Manager of branches in other EEA countries): This amendment is made in the context of the changing structure of, and landscape surrounding, Irish financial services, including, inter alia, in the lead up to and post-Brexit. As such, the Central Bank considered it necessary to amend this PCF such that it includes managers of branches of Irish RSFPs in non-EEA countries, given the level of control and autonomy that such individuals may have.
  • Segregation of PCF-2 (Non-executive Director): In the interest of greater clarity, and to reflect the distinction between Non-executive Directors and Independent Non-Executive Directors and the role that the latter plays as a fundamental safeguard within an RFSP’s governance framework, the Central Bank proposes that this role be split into two separate PCFs.
  • Segregation of PCF-15 (Head of Compliance with responsibility for Anti-Money Laundering and Counter Terrorist Financing Legislation): The Central Bank considers it necessary to replace this PCF with a dedicated role for Anti-Money Laundering and Counter Terrorist Financing (PCF-52).

With respect to individuals in existing PCFs on the date that the amended regulations come into effect, these will not be required to seek the approval of the Central Bank to continue to perform one or more of the amended PCF roles. However, individual processes, including notification to the Central Bank, will apply in respect of each amended PCF. Details of these processes are contained in the notice of intention.

European Commission and ESA updates

5. ESMA publishes annual work programme for 2022

On 27 September 2021, ESMA published its annual work programme for 2022. ESMA advises that its work will focus on its objectives of enhancing investor protection and promoting stable and orderly financial markets through a number of work streams. These include:

  1. Cross-cutting themes, assisting with new initiatives resulting from the European Commission’s Capital Markets Union new action plan, renewed sustainable finance strategy, and new digital finance strategy and fintech action plan.
  2. Supervisory convergence, including contributing to a risk-based, consistent, and coordinated approach to supervision in the EU, which focuses on assessing the results of the Union Strategic Supervisory Priorities and reviewing its supervisory convergence toolkit.
  3. Strengthening of risk identification work and co-operating with NCAs and other public authorities, in addition to supporting stress-testing for risk identification and supervisory responses to financial stability risks.
  4. Continuing to develop itself as a source of expertise and strategic direction on financial market regulation. On the single rulebook, priority areas include contributing to the reviews of the Prospectus and Transparency Directives, MiFID II/MiFIR, PRIIPS, the Short Selling Regulation, and CSDR, as well as maintaining a high degree of transparency when developing regulatory provisions.
  5. Direct supervision of Credit Rating Agencies and Securitisation and Trade Repositories, in addition to new entities coming under direct supervision, such as critical benchmarks, data reporting service providers and Tier 2 CCPs.

With respect to fund management activities, the work programme notes that the review of the AIFMD (and possibly of the UCITS Directive) and ELTIF Regulation may lead to some additional single rulebook work in relation to these pieces of legislation. Further, ESMA expects to launch a discretionary peer review on the depositary obligations under the UCITS Directive and AIFMD, which would focus on the oversight and safekeeping functions of depositaries. ESMA also expects to follow up on the peer review on the Guidelines on ETFs and other UCITS issues commenced in 2021. Further, in relation to sustainable finance, ESMA will implement a roadmap for supervisory convergence in the area of sustainable finance, covering a number of priority sectors, including asset management and issuer disclosure.

6. Joint Committee of ESAs publish second joint assessment on risks and vulnerabilities for 2021

On 8 September 2021, the Joint Committee of the European Supervisory Authorities (‘ESAs’) issued their second joint risk assessment report of 2021, highlighting increasing vulnerabilities across the financial sector, the rise of cyber risk and the materialisation of event-driven risks.

The report notes that despite the positive outlook, the expectations for economic recovery remain uncertain and uneven across member states, with vulnerabilities in the financial sector increasing, not least because of the side effects of the crisis measures. Expectations of inflation- and yield growth, as well as increased investor risk-taking and financial interconnectedness issues might put additional pressure on the financial sector. Further, the financial sector is increasingly exposed to cyber risk and information and communication technology-related vulnerabilities.

The Joint Committee has therefore advised the ESAs, national competent authorities, financial institutions, and market participants to take the following policy actions:

  1. Financial institutions and supervisors should continue to be prepared for a possible deterioration of asset quality in the financial sector, notwithstanding the improved economic outlook.
  2. As the economic environment gradually improves, the focus should shift to allow a proper assessment of the consequences of the pandemic on banks' lending books, and banks should adequately manage the transition towards the recovery phase.
  3. Disorderly increases in yields and sudden reversals of risk premia should be closely monitored in terms of their impacts for financial institutions as well as for investors.
  4. Financial institutions and supervisors should continue to carefully manage their ICT and cyber risks.
  5. Policymakers, regulators, financial institutions, and supervisors can also start reflecting on lessons learnt from the COVID-19 crisis.

With respect to the funds sector, the report notes that, overall, risks have remained elevated amid increased risk taking and high levels of valuations across asset categories. Asset quality is also a concern for bond funds, which further increased their exposure to credit risk, reflecting the impact of the macroeconomic crisis on corporate solvency and ratings. In respect of the potential risks from rapidly increasing yields in the low interest rate environment, the report also notes that duration risk is another potential concern for bond funds that could expose them to credit and interest rate shocks or exacerbate liquidity risk in a stressed environment. 

7. ESMA calls for legislative changes to improve access to and use of credit ratings

On 30 September 2021, ESMA published an Opinion on how access to, and use of, credit ratings can be improved in the EU, drawing on the findings of a report on fees charged by Credit Rating Agencies and Trade Repositories in 2018, a follow-up report in 2019, and a call for evidence in 2020. ESMA considers that in order to achieve the objectives of the Credit Rating Agencies Regulation to ensure that credit ratings used in the EU are independent, objective and of adequate quality, legislative amendments are needed to establish the conditions under which these credit ratings can be accessed and used for regulatory reporting purposes.

In particular, ESMA considers that the CRA Regulation should be amended either to clarify how the primary distribution of credit ratings and ancillary services by CRAs’ affiliates falls within its scope, or instead to require the credit ratings published on CRAs’ websites or the European Rating Platform (‘ERP’) to be accessible in machine-readable format and to be downloadable for use in regulatory reporting. Should legislators opt not to make changes to the ERP, ESMA highlights that Article 11a of the Regulation has not achieved the stated objective of improving the comparability of credit ratings available in the EU and requests that the obligation for ESMA to maintain the ERP should be removed.

8. European Commission adopts PRIIPs Regulatory Technical Standards

On 7 September 2021, the European Commission adopted the PRIIPs regulatory technical standards and supporting Annexes, which amends Commission Delegated Regulation (EU) 2017/653 on the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents by setting out, in particular:

  • new methodologies underpinning the calculation of appropriate performance scenarios and a revised presentation of these scenarios;
  • revised summary cost indicators and changes to the content and presentation of information on the costs of PRIIPs;
  • a modified methodology underpinning the calculation of transaction costs;
  • modified rules for PRIIPs that offer a range of options for investment; and
  • standards for information on past performance, which is to be provided by certain types of UCITS, retail AIFs and insurance based investment products.

The draft RTS is now subject to approval by the European Parliament and Council. The text proposes that the draft RTS apply from 1 July 2022.

Industry and other updates

9. EFAMA calls for reasonable implementation timeline for PRIIPs changes

On 9 September 2021, EFAMA and a number of other financial industry associations published a joint response raising concerns in respect of a consultation conducted by the European Commission on planned changes to the Packaged Retail and Insurance-based Investment Products (PRIIPs) framework. The response notes that the Commission is proposing to maintain 1 July 2022 as the date upon which the new requirements apply to all product manufacturers, and states that the unexpected delay to the adoption of the revised PRIIPs RTS cuts the implementation period for the industry by more than two months, leaving PRIIPs manufacturers and distributors with too short a period to implement the new rules.

In order to ensure a smooth and orderly implementation and application of the revised RTS, the associations urge the Commission to maintain a 12-month implementation period from the adoption of the RTS proposals as the minimum time needed for all products and all market participants. Further, in order to ensure a consistent transitional regime across providers, the necessary legal certainty while UCITS remain exempted from the PRIIPs Regulation, and a smooth implementation of the new PRIIPs RTS, the associations reiterate the importance to align the expiry date of Article 18 of the PRIIPs RTS with the new end date of the UCITS exemption.

10. EFAMA publishes latest statistics on funds

On 14 September 2021, the European Fund and Asset Management Association (‘EFAMA’) published its quarterly statistical data release describing the trends in the European investment fund industry in Q2 2021. Net assets of UCITS and AIFs grew by 4.1% over the quarter to over €20tn, attracting €228bn in net inflows, with demand for equity funds staying strong, and net sales of other long-term funds remaining robust. The report also notes a record-breaking level of investment by European households, which invested €55bn in investment funds in Q1 2021.

Further, on 23 September, EFAMA released its latest international quarterly statistics, describing trends in the worldwide investment fund industry in Q2 2021. The report indicates that net assets of worldwide investment funds continued to grow, with worldwide regulated open-ended fund assets increasing by 4.7% to €62.2tn in Q2 2021. 

Finally, on 27 September, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for July 2021. Net sales of UCITS and AIFs totalled €138bn (up from €75bn in June), with UCITS having net inflows of €107bn (€60bn in June), and net inflows for AIFs of €31bn (€15bn in June). Total net assets of UCITS and AIFs increased by 1.4% during the period to €20.58tn.

11. EFAMA responds to call for feedback on the Platform on Sustainable Finance’s draft report on social taxonomy

On 6 September 2021, EFAMA published its response to the call for feedback on the Platform on Sustainable Finance’s draft report on social taxonomy. The response notes that EFAMA supported the development of a social taxonomy due to the increasing ESG awareness of investors and to in order to enable funds with social objectives to show their degree of taxonomy alignment, and therefore be distributed according to clients’ sustainability preferences under the MiFID Delegated Acts. EFAMA notes that such a taxonomy should provide a clear framework for defining business activities and performance that are widely accepted as socially beneficial.

EFAMA notes that such a taxonomy should, above all, be usable and implementable by investee companies and financial market participants, and considers that usability is dependent on clear definitions, universally accepted metrics and standard-setting. Therefore, EFAMA believes it is essential to base the social taxonomy on globally recognised principles and to use the concepts embedded in international treaties and conventions instead of referring to the standards enshrined in EU law. Further, EFAMA notes the scarcity of social data, and therefore advises that the usability of the social taxonomy would be enhanced by considering the current data availability situation.

As a first step, EFAMA considers that the policy objectives of a social taxonomy need to be defined. In this regard, in a first stage, EFAMA has a slight preference for a standalone social taxonomy, as this would not require re-opening of the level 1 of environmental taxonomy. However, applying the social taxonomy in combination with environmental taxonomy could be considered in the long term, once both taxonomies were established in practice, to avoid conflicting situations with one activity qualifying as taxonomy-aligned from an environmental perspective, while undermining some social objectives, and vice-versa. EFAMA also recommends that the social taxonomy ‘do no significant harm’ dimension be harmonised with SFDR principal adverse impacts indicators in order to improve usability and further legislative consistency.

12. EFAMA responds to call for feedback on the Platform on Sustainable Finance’s draft proposal for an extended taxonomy to support economic transition

On 6 September 2021, EFAMA published its response to the call for feedback on the Platform on Sustainable Finance’s draft proposal for an extended taxonomy to support economic transition. The response notes that EFAMA supported the extension of the taxonomy framework to significantly harmful activities and provided five policy recommendations, namely:

  1. That a significantly harmful taxonomy should not blacklist companies but support their transition away from such activities. EFAMA considers that by distinguishing significantly harmful activities that have the potential to improve to no longer cause harm, asset managers will be able to design better, bigger and safer decarbonisation financial products.
  2. The avoidance of a “blacklist”-based approach to the extended taxonomy, given that if investors are asked to stop investing in some companies, it will disincentivise their existing transition efforts and ignore the benefits of engagement.
  3. The development of Paris-aligned reference trajectories for every relevant sector to make firms’ emission reduction strategies credible, comparable and science-based.
  4. The establishment of a “Transition Asset Ratio” alongside the Green Asset Ratio to reward companies entering the transition and incentivising their access to financing without misrepresenting transitioning activities as green.
  5. Non-prioritisation of a legally binding “no significant impact” taxonomy, given the marginal significance of such companies for the transition at a macro-level.

13. IOSCO publishes guidance for intermediaries and asset managers using artificial intelligence and machine learning.

On 7 September 2021, IOSCO published a report containing guidance for intermediaries and asset managers using artificial intelligence (‘AI’) and machine learning (‘ML’). IOSCO notes that while use of this technology by market intermediaries and asset managers may create significant efficiencies and benefits for firms and investors, it may also create or amplify certain risks, which could potentially have an impact on the efficiency of financial markets and could result in consumer harm. This follows a Consultation Report released in June 2020, highlighting a number of areas where potential risk and harms may arise in relation to the development, testing and deployment of AI and ML, namely: governance and oversight; algorithm development, testing and ongoing monitoring; data quality and bias; transparency and explainability; outsourcing; and ethical concerns. The report also describes how regulators are currently addressing the challenges created by AI and ML, and the guidance issued by supranational bodies in this area.

The guidance consists of six measures that reflect expected standards of conduct by market intermediaries and asset managers using AI and ML. Although the guidance is not binding, IOSCO members are encouraged to consider these measures carefully in the context of their legal and regulatory frameworks. IOSCO members and firms should also consider the proportionality of any response when implementing these measures. The guidance also acknowledges that the use of AI and ML will likely increase as technology advances, and that it was therefore plausible that the regulatory framework will need to evolve in tandem to address the associated emerging risks. The measures included in the guidance are as follows:

  • Measure 1: Regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML. This includes a documented internal governance framework, with clear lines of accountability, and an appropriately senior designated individual (or groups), with the relevant skill set and knowledge to sign off on initial deployment and substantial updates of the technology.
  • Measure 2: Regulators should require firms to adequately test and monitor the algorithms to validate the results of an AI and ML technique on a continuous basis. This should be conducted in an environment that is segregated from the live environment prior to deployment to ensure that AI and ML behave as expected in stressed and unstressed market conditions and operate in a way that complies with regulatory obligations.
  • Measure 3: Regulators should require firms to have the adequate skills, expertise, and experience to develop, test, deploy, monitor, and oversee the controls over the AI and ML that the firm utilises. In this regard, the compliance and risk management functions should be able to understand and challenge the algorithms that are produced and conduct due diligence on any third-party provider, including on the level of knowledge, expertise, and experience present.
  • Measure 4: Regulators should require firms to understand their reliance and manage their relationship with third-party providers, including monitoring their performance and conducting oversight, and putting in place clear service level agreements and contracts, which clarify the scope of the outsourced functions and the responsibility of the service provider, and which should also contain clear performance indicators and clearly determine rights and remedies for poor performance.
  • Measure 5: Regulators should consider what level of disclosure of the use of AI and ML is required by firms, including consideration of a requirement that firms disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes, and consideration of what types of information may be required from firms to ensure appropriate oversight.
  • Measure 6: Regulators should consider requiring firms to have appropriate controls in place to ensure that the data that the performance of the AI and ML is dependent on is of sufficient quality to prevent biases, as well as being sufficiently broad for a well-founded application of AI and ML.

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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