Thu, Apr 28, 2022
Kroll’s compliance experts round up key regulatory news and publications for the Irish Market
In response to the invasion of Ukraine, the EU has announced a wide range of sanctions targeting Russia. These sanctions include sectoral provisions (defense, energy, transport, aviation, capital markets and financial services), asset freezes and the exclusion of certain Russian banks from the SWIFT messaging system. All natural and legal persons are required to comply with EU regulations relating to financial sanctions as soon as they are adopted.
On March 7, the Central Bank of Ireland (CBI) published a communication to all fund service providers in response to the Russian invasion of Ukraine. This communication reminded firms of their obligations in relation to the financial sanctions and of the risks relating to valuation, liquidity and fund suspensions. Fair, appropriate and consistent pricing models and valuation procedures should be used by firms and the liquidity position of funds should be continuously monitored to ensure the liquidity profile of funds remain in line with their redemption policies.
The CBI published its 2022 Securities Markets Risk Outlook Report on February 8, 2022. The report highlights a number of key areas the CBI expects firms to address. This includes cyber security, data quality, sustainable finance, misconduct risks, market dynamics and financial innovation. The CBI states firms must demonstrate leadership on climate issues and have robust governance processes in place in relation to cyber risk.
On October 22, 2021, the European Supervisory Authorities (ESA) published the final Regulatory Technical Standards (RTS) for compliance with the Sustainable Finance Disclosures Regulation (SFDR) rules, effective January 1, 2022, that require a cross-section of green funds to disclose whether and to what extent asset allocation strategies use the Taxonomy's classification system (SFDR taxonomy-related rules). The October RTS will now be combined with those published in February 2021 to comply with the SFDR rules (in effect since March 2021 before being adopted by the Commission as a single Level 2 delegated regulation (SFDR Level 2). On November 25, 2021, the European Commission (EC) announced a further delay to the implementation of SFDR-related RTS (including Taxonomy Articles 5 and 6 RTS) from July 1, 2022 to January 1, 2023. The EC further added that the first disclosure of Principal Adverse Impacts (PAI) reports would be due on June 30, 2023, and must cover the reference period of January 1, 2022, to December 31, 2022.
EU Taxonomy Delegated Act on Gas and Nuclear Energy On February 2, 2022, the EC approved the Complementary Climate Delegated Act in principle, which approves specific nuclear and gas energy activities to be included in the list of economic activities covered by the EU Taxonomy. The Act amends Commission Delegated Regulation (EU) 2021/2178 supplementing Article 8 of the Taxonomy Regulation to require large listed non-financial and financial companies to disclose the proportion of their activities linked to natural gas and nuclear energy. Subject to approval by the European Parliament and Council, the Act will enter into force on January 1, 2023.
On September 7, 2021, the EC published an updated delegated regulation and supporting annexes to amend the RTS for packaged retail and insurance-based investment products (PRIIPs). Although the delegated regulation was initially scheduled to be in effect starting July 1, 2022—following the interinstitutional agreement between the Council and the European Parliament to extend the UCITS exemption from the PRIIPs regulation by six more months compared to the EC proposal (i.e. until 31 December 2022) —it will instead begin on January 1, 2023.
The Irish government announced on July 27 that it had reached a cabinet agreement to proceed with drafting the Central Bank (Individual Accountability Framework) bill.
This bill will provide for the following:
SEAR will apply to those holding management roles within:
All regulated firms should note:
Gerry Cross, Director of Financial Regulation , Policy Risk at the CBI confirmed in a speech to the Compliance Institute in February 2022 that the bill is expected to be enacted in the coming months.
The CBI issued its 3final Cross-Industry Guidance on Outsourcing on December 17, which comes into immediate effect. This guidance remains largely unchanged from the draft issued in February 2021 (CP138). It is relevant to all regulated firms that use outsourcing as part of their business model and is applicable proportionately, based on the nature, scale and complexity of each firm's business model and the degree to which it engages in outsourcing. Each firm must develop and maintain an outsourcing register to include prescribed information for all existing and future outsourcing arrangements. All firms with a PRISM impact rating of medium-low or above will be required to submit their outsourcing register annually via a new online return. The first submission is planned for Q2 2022.Boards and senior management are expected to review the guidance and enhance their outsourcing risk management frameworks to effectively identify, monitor and manage their outsourcing risks.
The CBI issued its final Cross-Industry Guidance on Operational Resilience on 1 December 1. The guidance is built around three pillars of operational resilience:
These pillars are supported by 15 guidelines that have been developed by the CBI following engagement with other national competent authorities (NCAs). The CBI expects regulated firms to take action at the board and senior management level to ensure operational resilience frameworks are well designed, operating effectively and sufficiently robust. Firms should be able to demonstrate they have applied the guidelines within an appropriate timeframe and in a flexible and proportionate manner based on the nature, scale and complexity of the business. The CBI expects firms to actively and promptly address their operational resilience vulnerabilities and be in a position to show evidence of future actions/plans to apply the guidance by the end of 2023. The guidance remains largely unchanged from the consultation paper (CP140) published in early 2021.
The CBI published a consultation paper on macroprudential measures for the property fund sector on November 25, 2021 (CP145). The CBI is proposing measures to address (1) the elevated leverage in property funds and (2) liquidity mismatches. For the purposes of CP145, “property funds” are defined as alternative investment funds (AIFs) domiciled in Ireland, authorized under domestic legislation and investing over 50 percent directly or indirectly in Irish property assets. There is a proposed three-year transition period for the measures should they be adopted. They would be imposed through existing regulation under the Irish transposition of the AIFMD and in line with ESMA guidelines. The closing date of the consultation is February 18, 2022.
The European Commission released the results of the Alternative Investment Fund Managers Directive (AIFMD) review on November 25. The key points include the following:
This supervisory action will be conducted throughout 2022 and will:
The briefing sets out ESMA’s and NCA’s common understanding on the supervision of firms using tied agents to provide investment services and/or activities. ESMA’s monitoring of the activities of market participants from the UK and the EU has shown that such a briefing will contribute to the development of a convergent EU supervisory culture. It will also foster improved investor protection.
This supervisory briefing covers the following aspects:
The supervisory expectations when firms appoint tied agents
The supervisory expectations on firms using tied agents in their ongoing activities
This briefing may have implications for the chaperoning model some management companies have implemented for European distribution post-Brexit.
ESMA published updated guidelines on stress test scenarios under the Money Market Fund regulation on February 14, 2022. MMFs and managers of MMFs are expected to measure the impact of the common reference stress test scenarios specified in the guidelines. ESMA intends to conduct a further review of the guidelines in 2022 and will publish a consultation paper on the topic in Q2 2022.
On February 8, 2022, ESMA launched a common supervisory action (CSA) with NCAs on the application of MiFID II costs and charges disclosure rules across the EU. The CSA will be conducted in 2022.
The focus of the CSA will be on information provided to retail clients. NCAs will review how firms ensure that these disclosures:
In February 2022, ESMA published its roadmap to ensure the coordinated implementation of its broad sustainable finance mandate for the period 2022-2024. The roadmap provides transparency on ESMA’s sustainable finance deliverables and how they are expected to be sequenced over the coming years. The roadmap identifies three priorities for ESMA:
Tackling greenwashing and promoting transparency
Building the NCA’s and ESMA’s capacities
Monitoring, assessing and analyzing environmental, social and governance (ESG) markets and risks
The roadmap also provides cross-sector and specific actions for the investment management sector. Cross-sector planned actions include:
Assessing/contributing to the consistency of sustainable finance legislation across sectors and the convergence in their application/supervision
Assessing the greenwashing practices observed
Mapping and developing a common understanding of NCAs’ supervisory role across sectors, notably on greenwashing, and identifying legal impediments
Contributing, as needed, to the EC‘s efforts in developing EU-wide labels, including the EU Green Bond Standard. And in the future, helping develop ESG labels for instruments (e.g., sustainability-linked bonds) and investment products)
In the investment management sector, planned actions include:
The CBI published details of a reprimand and fine against BNY Mellon Fund Services (Ireland) DAC (BNYM) on March 24. A fine of €10,780,000 was issued against BNYM for regulatory breaches relating to outsourcing. Sixteen regulatory breaches in total were identified by the CBI between July 2013 and December 2019, and a number of risk mitigation programs (RMPs) have been issued by the CBI over the same period. The breaches cover both BNYM’s outsourcing governance arrangements and their notification and reporting obligations relating to outsourcing. The fine was issued under the CBI’s Administrative Sanctions Procedure and is considered proportionate to the nature, seriousness and impact of the issues identified. BNYM has now confirmed to the CBI it has taken all necessary steps to remediate and rectify the breaches identified by the CBI.
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