Kroll’s compliance experts round up key regulatory news and publications for the Irish Market
- Central Bank of Ireland Annual Report and Performance Statement
- Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards and EU Taxonomy Regulation
- Undertakings for Collective Investment in Transferable Securities, Alternative Investment Fund Managers Directive and MiFID Delegated Acts
- Packaged Retail Investment and Insurance Products Key Information Document
- Individual Accountability Framework
- ESMA Common Supervisory Action on the Valuation of UCITS and Open-Ended Alternative Investment Funds
- ESMA Report on Supervision of Costs and Fees in Investment Funds
- ESMA Supervisory Briefing on Sustainability Risks and Disclosures in the Area of Investment Management
- Changes to Beneficial Ownership Register for Certain Financial Vehicles
- UCITS Side-Pocket Arrangements
- ESMA Consultation on Notifications for Cross-Border Marketing and Management of UCITS and AIFs
- Notice of Intention in Relation to the Application of the ESMA Guidelines on Stress Test Scenarios under the Money Market Fund Regulation
- Calculation of Performance Fees in UCITS and AIFs
Central Bank of Ireland Annual Report and Performance Statement
The Central Bank of Ireland (CBI) published its annual report and performance statement on May 30 2022. The report outlines the CBI’s strategic priorities for financial regulation in 2022. In relation to investment funds and MiFID firms, the CBI will continue to work with the Department of Finance on legislative changes that may arise from the Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive (MiFID) reviews. The CBI will also continue work on developing a macro-prudential framework for investment funds and prepare for the EU anti-money laundering and counter terrorist financing regime, which is expected to take effect in 2025.
Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards and EU Taxonomy Regulation
On April 6, 2022, the European Commission (EC) adopted the regulatory technical standards (RTS) to be used when disclosing sustainability-related information under the Sustainable Finance Disclosures Regulation (SFDR). The RTS will now be scrutinized by the European Parliament and the Council. When the final text is agreed, the RTS will be published in the Official Journal of the EU. The RTS is scheduled to apply from January 1, 2023; however, this has been subject to several previous delays and will not be definitive until confirmed by the Parliament and Council. The current expectation is that January 1, 2023, will remain the effective date.
Separately, the EC has previously confirmed the first disclosure of Principle Adverse Impacts reports would be due on June 30, 2023, covering the reference period of January 1, 2022, to December 31, 2022.
UCITS, AIFMD and MiFID Delegated Acts
On August 1, 2022, a number of legislative measures on sustainable finance are due to come into effect. These measures are designed to complement the SFDR and the Taxonomy Regulation and include delegated acts for Undertakings for Collective Investment in Transferable Securities (UCITS), Alternative Investment Fund Managers Directive (AIFMD) and MiFID. With respect to UCITS and AIFMD, these delegated acts will require management companies to consider the following:
- Integrate sustainability risks into the management of funds.
- Consider conflicts of interest that may arise a result of the integration of sustainability risks.
- Consider sustainability risks and principal adverse impacts when conducting due diligence and investment oversight.
- Include sustainability risk as part of the risk management policy.
For MiFID firms, the delegated act introduces provisions on the integration of sustainability risk into organizational requirements and risk management policies. Firms carrying out portfolio management or providing financial advice are required to perform an assessment of the sustainability preferences of their clients. European Securities and Markets Authority (ESMA) is also expected to publish updated guidelines on MiFID suitability requirements in Q3 2022.
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) regulation. Although the Delegated Regulation was initially scheduled to apply from July 1, 2022, following the interinstitutional agreement between the Council and the European Parliament to extend the UCITS exemption from the PRIIPs Regulation by a further six months compared to the EC proposal (i.e., until December 31, 2022), it will apply from January 1, 2023. On May 31, 2022, the Irish Statutory Instrument was published.
Individual Accountability Framework
The Irish government announced on July 27, 2021, that it had reached cabinet agreement to proceed with drafting the Central Bank (Individual Accountability Framework) Bill. This bill will provide for the following:
- Senior Executive Accountability Regime
- Common conduct standards for individuals in control functions, 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
The bill has been subject to delay, but Gerry Cross (Director of Financial Regulation—Policy and Risk at the CBI) confirmed at a speech to the Compliance Institute in February 2022 that the bill is expected to be enacted in the coming months. The CBI’s recently published annual report also notes the final legislation is expected in 2022.
ESMA Common Supervisory Action on the Valuation of UCITS and Open-Ended Alternative Investment Funds
This supervisory action will be conducted throughout 2022 and it will:
- Aim to assess 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 alternative investment funds (AIFs) investing in less liquid assets.
- 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 less liquid assets are valued fairly during both normal and stressed market conditions, in line with applicable rules.
ESMA Report on Supervision of Costs and Fees in Investment Funds
On May 31, 2022, ESMA published a report on the Common Supervisory Action carried out by national competent authorities (NCAs) during 2021. The main results of the exercise were as follows:
- There is room for improvement on the application of the ESMA supervisory briefing on the supervision of costs in UCITS and AIFs, in particular, for smaller management companies.
- There are questions around compliance with delegation rules in relation to the influence exercised by portfolio managers over costs.
- There is divergence among the industry relating to the reporting of “due” or “undue” costs.
- Some NCAs found conflicts of interest in particular in the case of related party transactions at some UCITS managers.
- A lack of policies and procedures on efficient portfolio management were found at some managers.
- Fixed fee splits arrangements for securities lending were also found with unfavorable results for retail investor
ESMA Supervisory Briefing on Sustainability Risks and Disclosures in the Area of Investment Management
On May 31, 2022, ESMA published a supervisory briefing to ensure convergence across the EU in the supervision of investment funds with sustainability features and to combat greenwashing by investment funds. The briefing supports ESMA’s actions to implement its Sustainable Finance Roadmap. ESMA intends to work closely with NCAs on these matters.
The briefing covers the following:
- Guidance for the supervision of fund documentation and marketing material and on the use of sustainability-related terms in funds’ names
- Guidance for convergent supervision of the integration of sustainability risks by Alternative Investment Fund Managers (AIFMs) and UCITS managers
Changes to Beneficial Ownership Register for Certain Financial Vehicles
The CBI recently published an industry letter outlining additional information required to be submitted as part of beneficial ownership filings by Certain Financial Vehicles (this is applicable to regulated investment funds). Personal Public Service (PPS) numbers will be required to be submitted with beneficial ownership filings from Q3 onwards. If beneficial owners do not have PPS numbers, the CBI has outlined a separate process to complete the filing. The CBI will communicate further information and provide a guidance in relation to submissions in Q2 2022 ahead of the submission.
UCITS Side-Pocket Arrangements
On May 17 2022, the CBI published a notice of intention in relation to the establishment of side-pockets for Russian, Belarusian and Ukrainian assets that are directly and/or indirectly impacted by the Russian invasion of Ukraine and the accompanying sanctions. The assets in question must have become illiquid or untradeable and thus difficult to value accurately. The arrangement should be implemented by way of establishment of a clone fund into which the relevant assets can be transferred. This side-pocket arrangement is only available to assets impacted by the Russian invasion of Ukraine and cannot be used in other circumstances.
This notice from the CBI comes on the back of a public statement from ESMA on May 16 2022 to promote convergence in relation to actions taken to manage the impact of the Russian invasion of Ukraine on investment funds.
ESMA Consultation on Notifications for Cross-Border Marketing and Management of UCITS and AIFs
ESMA launched a consultation on May 17 2022 on the development of draft technical standards for cross-border marketing and management of UCITS and AIFs.
The consultation paper is the first step in the process of developing RTS and Implementing Technical Standards, which will specify the information to be provided, as well as the content and format of notification letters to be submitted by UCITS, Management Companies and AIFMs to the NCAs to undertake cross-border marketing or management activities in host member states.
The closing date of the consultation is September 9, 2022.
Notice of Intention in Relation to the Application of the ESMA Guidelines on Stress Test Scenarios under the Money Market Fund Regulation
On July 4, 2022, the CBI published a notice of intention in relation to the application of ESMA Guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation. The CBI intends to consult on the incorporation of a provision in the CBI UCITS Regulations and AIF Rulebook that all managers of MMFs adhere to the guidelines. The notice of intention clearly indicates the CBI expects full compliance with the guidelines in the interim.
Calculation of Performance Fees in UCITS and AIFs
ESMA published updated Q&As on the application of the UCITS Directive and AIFMD on May 20, 2022. The updates relate to the calculation of performance fees and confirm the requirement for any underperformance is brought forward for a minimum period of five years before a performance fee becomes payable. The Q&As include a number of worked examples that will be useful to investment managers and management companies.