Kroll’s compliance experts round up key regulatory news and publications for the Irish Market
- EU Restrictive Measures: Russia’s War on Ukraine
- CBI Industry Communication Related to Fund Service Providers Effectively Managing Risks Due to the Russian War on Ukraine
- Central Bank of Ireland’s Securities Markets Risk Outlook Report
- Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards & EU Taxonomy Regulation
- EU Taxonomy Delegated Act on Gas and Nuclear Energy
- Packaged Retail Investment and Insurance Products KID
- Individual Accountability Framework
- CP138: Cross-Industry Guidance on Outsourcing
- CP140: Cross-Industry Guidance on Operational Resilience
- CP145: - Macroprudential Measures for the Property Fund Sector
- AIFMD Review
- ESMA Common Supervisory Action on the valuation of UCITS and Open-Ended Alternative Investment Funds
- ESMA Supervisory Briefing on the Use of Tied Agents Under MiFID
- ESMA Guidelines on Stress Test Scenarios Under the Money Market Fund Regulation
- ESMA Common Supervisory Action on MIFID II Costs and Charges
- ESMA Sustainable Finance Roadmap 2022-2024
- Central Bank of Ireland’s Enforcement Action Against BNY Mellon Fund Services (Ireland) DAC
EU Restrictive Measures: Russia’s War on Ukraine
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.
Central Back of Ireland’s Industry Communication Related to Fund Service Providers Effectively Managing Risks Due to the Russian War on Ukraine
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.
CBI Securities Markets Risk Outlook Report
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.
Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards & EU Taxonomy Regulation
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.
Packaged Retail Investment and Insurance Products KID
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.
Individual Accountability Framework
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:
- Senior Executive Accountability Regime (SEAR)
- Common Conduct Standards for individuals in control functions (CF), Additional Conduct Standards for individuals in senior positions and Business Conduct Standards for all firms
- Enhancements to the fitness and probity regime to support the new conduct standards
- Allowing the CBI to take action against individuals without first proving contravention of financial services legislation against a firm
SEAR will apply to those holding management roles within:
- Credit institutions (excluding credit unions)
- Insurance undertakings (excluding reinsurance undertakings, captive (re)insurance undertakings and insurance special purpose vehicles)
- Investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorized to hold client monies/assets
- Third country branches of the above
All regulated firms should note:
- Those performing pre-approval-controlled functions (PCF) roles will be subject to the Common Conduct Standards and the Additional Conduct Standards
- Additional Conduct Standards will apply regardless of whether the regulated financial service providers (RFSPs) in question is in scope of the SEAR
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.
CP138: Cross-Industry Guidance on Outsourcing
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.
CP140: Cross-Industry Guidance on Operational Resilience
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:
- Identify and prepare
- Respond and adapt
- Recover and learn
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.
CP145: - Macroprudential Measures for the Property Fund Sector
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:
- Various UCITS and AIFMD requirements are to be aligned. Changes to delegation, liquidity risk management, data reporting and regulatory treatment of custodians will also be applied to the UCITS directive. Amendments relating to loan origination and cross-border depositary appointments will only apply to AIFMD.
- Delegation arrangements will continue and there is no proposal to require the delegating AIFM/ManCo to retain a minimum proportion of activities in-house. There are however increased supervisory requirements, including requirements to report annually details of delegations to third country managers to the relevant NCAs (ESMA will be required to develop technical standards on this).
- Additional requirements for the marketing of non-EU funds under Art.36 or Art.42 include a prohibition on the marketing of funds domiciled in countries:
- On the EU tax haven blacklist
- Categorized as high-risk under the fifth money laundering directive (5MLD). Managers will be required to adopt at least one of the liquidity risk management tools (suspensions, gates, redemption fees, etc.) that will be included in an annex to the directives. There is also a proposal allowing NCAs to force managers to activate some of these tools even if they are not included in the funds’ prospectus.
- Depositaries should also not be established in countries:
- On the EU tax haven blacklist
- Categorized as high-risk under the 5MLD
- AIFMD Annex IV style reporting is being introduced to UCITS management companies, which will significantly add to their workload
ESMA Common Supervisory Action on the Valuation of UCITS and Open-Ended Alternative Investment Funds (AIFs)
This supervisory action will be conducted throughout 2022 and will:
- Aim to assess the compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets
- Focus on authorized managers of UCITS and open-ended AIFs investing 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 or bank loans)
- Use a common assessment framework developed by ESMA, which sets out the scope, methodology, supervisory expectations and timeline for how to carry out a comprehensive supervisory action in a convergent manner. A core objective of this exercise is to ensure consistent and effective supervision of valuation methodologies, policies and procedures of supervised entities to ensure fewer liquid assets are valued fairly both during normal and stressed market conditions and in line with applicable rules.
ESMA Supervisory Briefing on the Use of Tied Agents Under MiFID
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:
This briefing may have implications for the chaperoning model some management companies have implemented for European distribution post-Brexit.
ESMA Guidelines on Stress Test Scenarios Under Money Market Fund Regulations
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.
ESMA Common Supervisory Action on MIFID II Costs and Charges.
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:
- Are provided to clients in a timely manner
- Are fair, clear and not misleading
- Are based on accurate data reflecting all explicit and implicit costs and charges
- Adequately disclose inducements
ESMA Sustainable Finance Roadmap 2022-2024
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:
- Reviewing the regulatory technical standards under SFDR) to clarify:
- Indicators for climate and environment related PAI
- PAI on social and employee matters, respect for human rights, anti-corruption and anti-bribery matters
- Contributing to the EC’s work on possible further changes to the UCITS directive and AIFMD to enable financial market participants to systematically consider positive and negative sustainability impacts of their investment decisions
- Mapping NCAs’ supervisory role, notably on greenwashing, taking into account SF requirements applicable to asset managers (SFDR, Taxonomy Regulation, AIFMD, UCITS Directive)
- Analyzing disclosures under SFDR Article 8 and 9 in the investment management sector to support supervisory convergence efforts and the identification of greenwashing case.
Central Bank of Ireland’s Enforcement Action Against BNY Mellon Fund Services (Ireland) DAC
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.