February 2022

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 announces new crowdfunding regulatory regime

On 13 January 2022, the Central Bank of Ireland announced a new regulatory regime for crowdfunding service providers (“CSPs”) under the EU Regulation on crowdfunding service providers for business, which covers investment-based and peer-to-peer/loan-based crowdfunding. This will require in-scope CSPs to be authorised, and who will then be subject to operational, prudential, and investor protection requirements.

A number of provisions of the Consumer Protection Code 2012 now apply to advertising by CSPs in Ireland, including the requirement that all advertisements be fair, clear and not misleading, and do not seek to influence consumers unduly in their investment decisions. CSPs must also display a prominent warning message in advertisements in relation to the risks associated with crowdfunding.

2. Central Bank of Ireland issues statement for MiFID investment firms authorised to deal on own account or to underwrite financial instruments on a firm commitment basis

On 26 January 2022, the Central Bank of Ireland updated the statement for MiFID Investment Firms authorised to deal on own account or to underwrite financial instruments on a firm commitment basis (MiFID activities (3) or (6)). This statement sets out the Central Bank’s expectations following the EBA publication of two final draft regulatory technical standards relating to the authorisation of MiFID investment firms as credit institutions. The Central Bank advises that all MiFID investment firms authorised to provide the MiFID investment services of dealing on own account or underwriting of financial instruments on a firm commitment basis should give due regard to both the threshold reporting requirements and the threshold calculation methodology for determining the need for reclassification of an investment firm as a credit institution set out in these publications.

3. European Union (Markets in Financial Instruments) (Amendment) Regulations 2022 published

On 11 January 2022, the European Union (Markets in Financial Instruments) (Amendment) Regulations 2022 were published and will come into operation on 28 February 2022. Among the changes include reducing the information on costs and charges to be provided to professional investors and eligible counterparties. Paper-based investment information will also be phased out, save where retail clients ask to continue to receive it. Bundling of research costs will also be allowed for research on small and mid-cap issuers. 

ESA updates

4. ESMA launches a common supervisory action with NCAs on valuation of UCITS and open-ended AIFs

On 20 January 2022, ESMA launched a Common Supervisory Action (“CSA”) with NCAs on the valuation of UCITS and open-ended AIFs across the EU. This will be conducted throughout 2022, focusing on fund managers that invest in less liquid assets, i.e. unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans etc.

The CSA aims to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, with the main purpose being the consistent and effective supervision of valuation methodologies, policies and procedures of supervised entities to ensure that less liquid assets are valued fairly during normal and stressed market conditions. ESMA confirmed that the work will be done using a common assessment framework setting out the scope, methodology, supervisory expectations and timeline for how to carry out a comprehensive supervisory action in a convergent manner. Amid sensitive market uncertainty and the current economic environment, the necessity of assessing valuation risks that may pose a potential threat to financial stability is of extreme importance.

This is the third CSA that ESMA and NCAs have launched on asset management. The first two covered UCITS liquidity risk management and supervision of costs and fees in UCITS. It is expected that NCAs will issue the CSA shortly, and will share knowledge and experiences through ESMA to foster convergence in how they supervise valuation-related issues.

5. ESMA consults on certain aspects of the MiFID II suitability requirements

On 27 January 2022, the European Securities and Markets Authority (“ESMA”) published a consultation paper setting out draft guidelines on certain aspects of the MiFID II suitability requirements. While the paper is primarily of interest to national competent authorities (“NCAs”) and firms subject to MiFID II and their clients, due to its focus on investor protection issues, the paper is also addressed to UCITS management companies and external Alternative Investment Fund Managers when providing the investment services of investment advice or individual portfolio management.

The consultation paper builds on the text of the previous 2018 guidelines, which are being reviewed following the adoption by the European Commission of changes to the MiFID II delegated regulation to integrate sustainability factors, risk and preferences into certain organisational requirements and operating conditions for investment firms. The review also takes into account the results of the 2020 Common Supervisory Action conducted by NCAs on MiFID II suitability requirements, and the changes introduced by the Capital Markets Recovery Package.

Among the changes include proposed amendments in relation to:

  • Integration of the definition of “sustainability preferences” concerning the suitability assessment, which should be incorporated into firms’ processes and procedures on suitability;
  • Collection of information from clients on sustainability preferences, which firms should assist clients to understand, and should provide staff with appropriate training in relation to same;
  • Consideration and assessment of sustainability preferences as a secondary step as part of the suitability assessment;
  • The possibility for clients to adapt their sustainability preferences, which should be documented in suitability reports.

The consultation closes on 27 April 2022, with the publication of a final report expected in Q3 2022.

6. ESMA report highlights liquidity concerns for alternative investment funds

On 3 February 2022, ESMA published its fourth annual statistical report on the AIF sector, showing that the sector increased by 8% in 2020 in net assets. The report also notes that the main risk faced by the sector relates to a mismatch between the potential liquidity of the assets, and the redemption timeframe offered to investors. Although the report notes that, at an aggregate level, the mismatch is unlikely to materialise, it indicates that AIFs with a liquidity deficit would face challenges if large redemptions were to occur, particularly for real estate funds and funds of funds.

The report covers 30 members of the European Economic Area (“EEA”), and notes, inter alia, the following main findings:

  • The size of the EEA AIF market continued to expand to reach €5.9tn in Net Asset Value (“NAV”) at the end of 2020, an 8% increase from €5.5tn in 2019. The growth of the EU AIF market results from the launch of new AIFs in 2020 and positive valuation effects.
  • Funds of Funds (“FOFs”) accounted for 15% of the NAV of EU AIFs, at around €0.9tn. These have the second-largest retail investor participation at 20% of NAV, with open-ended FoFs remaining exposed to significant liquidity mismatch across all time horizons, including FoFs investing mainly in UCITS. The potential liquidity shortage for FoFs with a liquidity deficit is 16% of their NAV short-term (within 1 week).
  • Real Estate Funds accounted for 13% of the NAV of AIFs, at €766bn and continued to grow in 2020. These funds are exposed mostly to illiquid physical assets which take time to sell, so liquidity risk remains a concern.
  • Following the withdrawal of the UK from the EU, the size of the EEA30 Hedge Fund sector declined to €89bn from €354bn in 2019 (including the UK). Leverage remains very high, particularly for some strategies highly reliant on derivatives.
  • Private Equity Funds accounted for 6% of the NAV of all AIFs (€363bn), and experienced the largest growth in 2020 (+29% compared with 2019). They follow a range of strategies and are almost exclusively sold to professional investors.
  • Other AIFs accounted for 62% of the NAV of EEA30 AIFs, at c. €3.7tn (+4% compared with 2019). The category covers a range of strategies, with fixed income and equity strategies accounting for 68% of the NAV and an additional residual category amounting to 29%. Other AIFs are mainly sold to professional investors, although there is a significant retail investor presence.
  • EU Member States can allow non-EU asset managers to market alternative funds at a national level under the National Private Placement Regime (“NPPR”), even though such funds cannot subsequently be passported to other Members States. The market for such non-EU funds is comparatively large, with the NAV of non-EU AIFs marketed under NPPRs’ rules amounting to €1.3tn. NPPR fund marketing is concentrated in a small number of Member States, with 99% of investors being professional investors.

7. European Commission publishes Complementary Climate Delegated Act to accelerate decarbonisation

On 2 February 2022, the European Commission published a Taxonomy Complementary Climate Delegated Act on climate change mitigation and adaptation covering certain gas and nuclear activities. The Taxonomy aims to guide private investment to activities that are needed to achieve climate neutrality, but the classification does not determine whether a certain technology will or will not be part of Member State energy mixes. The objective is to step up the transition, by drawing on all possible solutions to help the EU reach its climate goals, for which the Commission sees a role for private investment in gas and nuclear activities. Among the measures introduced by the Delegated Act include:

  • The introduction of additional economic activities from the energy sector. Under strict conditions pursuant to Article 10(2) of the Taxonomy Regulation, certain nuclear and gas activities can be added as transitional activities to those already covered by the first Delegated Act on climate mitigation and adaptation, which have applied from 1 January this year.
  • The introduction of disclosure requirements for businesses related to their activities in the gas and nuclear energy sectors.

Once translated into all official EU languages, the Complementary Delegated Act will be formally transmitted to the co-legislators for their scrutiny; if neither of the co-legislators objects, the Complementary Delegated Act will enter into force and apply from 1 January 2023.

8. ESMA launches call for evidence on ESG ratings

On 3 February 2022, ESMA published a Call for Evidence on Environmental, Social and Governance (“ESG”) ratings in order to gather information on the market structure for ESG rating providers in the EU. In particular, ESMA wishes to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU. The call is mainly addressed to ESG rating providers, users of ESG ratings, as well as entities subject to rating assessment of ESG rating providers, and is intended to complement a separate consultation to be launched by the European Commission seeking stakeholder views on the use of ESG ratings by market participants and the functioning and dynamics of the market.

The call for evidence closes for comments on 11 March 2022.

Industry and other updates

9. EFAMA publishes latest statistics on funds

On 31 January 2022, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for November 2021. Net sales of UCITS and AIFs totalled €72bn (down from €74bn in October), with UCITS having net inflows of €79bn (compared to net inflows of €109bn in October), and net outflows for AIFs of €8bn (compared to net outflows of €36bn in October). Total net assets of UCITS and AIFs increased by 0.8% in November to €21.49tn.

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