Kroll’s compliance experts round up key regulatory news and publications for the Irish Market
- Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards & EU Taxonomy Regulation
- Central Bank of Ireland Information Note on Sustainable Finance and the Asset Management Sector
- Packaged Retail Investment and Insurance Products KID
- Individual Accountability Framework
- Central Bank of Ireland—Outsourcing Register
- Changes to Beneficial Ownership Register for Certain Financial Vehicles
- Protected Disclosures (Amendment) Act 2022
- Central Bank of Ireland Enforcement Action: Mercer Global Investments Management Limited
- Notice of Intention in Relation to the Application of the ESMA Guidelines on Stress-Test Scenarios Under the Money Market Fund Regulation
- ESMA Supervisory Briefing on Sustainability Risks and Disclosures in the Area of Investment Management
- ESMA Report on the Supervision of Costs and Fees in Investment Funds
- ESMA Publishes Final Guidelines on MiFID II Suitability Requirements
Sustainable Finance Disclosures Regulation Level 2 Regulatory Technical Standards & Eu Taxonomy Regulation
On July 25, the final Sustainable Finance Disclosure Regulation (SFDR) Regulatory Technical Standards (RTS)—commonly referred to as the SFDR Level 2 Regulations—were published in the Official Journal of the European Union. These regulations, which take effect from January 1, 2023, include the templates firms are required to complete for pre-contractual and periodic disclosures under the SFDR, along with Principal Adverse Impacts (PAI) reporting templates. There have been no material changes since the final draft was published by the European Commission (EC) in April.
The Central Bank of Ireland (CBI) has now confirmed it will set up a fast-track process for updates to pre-contractual documentation to be filed by December 1, 2022, ahead of the deadline. These filings will be subject to spot checks ahead of the implementation deadline rather than a full review. The CBI is also expected to carry out a themed inspection in 2023 to review environmental, social and governance disclosures.
Separately, the EC has previously confirmed the first disclosure of PAI reports would be due on June 30, 2023, covering the reference period of January 1, 2022 to December 31, 2022.
Central Bank of Ireland Information Note on Sustainable Finance and the Asset Management Sector
The CBI published an information note in November 2022 on Sustainable Finance and the Asset Management Sector. The note focuses on disclosures, investment processes and risk management. Findings of the CBI’s initial gatekeeper review on disclosures submitted under Level 1 of the SFDR and the Taxonomy Regulation are outlined in the note including details of the shortcomings identified following these reviews.
Areas of interest, which may form part of future supervisory roadmaps, are included such as risk management; marketing materials; minimum sustainability criteria for financial products, fees and costs; securities lending and the role of depositaries.
In addition, it was also noted that the CBI will be conducting a review of disclosures as part of the European Securities and Markets Authority (ESMA) Common Supervisory Action (CSA) on sustainability risks and disclosures, which is planned for 2023.
Packaged Retail Investment and Insurance Products KID
On September 7, 2021, the EC published updated Delegated Regulation and supporting Annexes to amend the RTS for packaged retail and insurance-based investment products (PRIIP). 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 Department of Finance published the Central Bank (Individual Accountability Framework) Bill 2022 (the “Bill”) on July 28, 2022. This Bill provides for the following:
- A 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
- Permission for the CBI to take action against individuals without first proving contravention of financial services legislation against a firm
The Central Bank has announced it will continue to work with the Department of Finance as the Bill progresses through the Dáil. Once the Bill has been enacted, the Central Bank intends to issue a public consultation. This is expected sometime in Q4 2022.
Central Bank of Ireland—Outsourcing Register
As indicated in the Cross Industry Guidance on Outsourcing (CP 138) published in December 2021, the CBI now requires all regulated firms to maintain an outsourcing register. The CBI has developed template registers for each financial services sector under its jurisdiction. The relevant template for fund management companies is the investment outsourcing template. There are also accompanying guidance notes to assist with completion. Firms with a PRISM rating of medium- low or above are required to submit their registers to the CBI by October 19. From 2023 onwards, this will be an annual submission with a due date in February and a reference date of December 31 the previous year. Firms who are not required to submit the register to the CBI are still required to maintain one for internal purposes, and this should be available to submit to the CBI on request.
Changes to Beneficial Ownership Register for Certain Financial Vehicles
Further to previous correspondence issued on July 22, 2022, regarding changes to the beneficial ownership filing process for certain financial vehicles (CFV), the CBI has now published an updated industry letter outlining the timelines and process for filing the updated template. This change is applicable to ICAVs, Investment Limited Partnerships, Common Contractual Funds and Unit Trusts. From November 11, 2022, PPS numbers will be required to be submitted with beneficial ownership filings. Where beneficial owners do not have PPS numbers or a Central Bank of Ireland reference number (as applicable), the CBI outlined a separate process to be followed in order to complete the filing in its July communication. All CFVs have until December 7, 2022, to make an updated filing.
Protected Disclosures (Amendment) Act 2022
The Protected Disclosures (Amendment) Act 2022 (the “Act”) was signed into law on October 12, 2022 and will commence with effect from January 1, 2023. The Act transposes the EU Whistleblowing Directive into Irish law and is intended to enhance the protections for whistleblowers in Ireland.
The Act places an obligation on all private sector organizations with 50 or more employees to establish formal channels and procedures for their employees to make protected disclosures. It provides a derogation from these obligations until December 17, 2023, for organizations with between 50 and 249 employees.
The threshold of 50 employees does not apply to organizations that are public bodies or which fall within the scope of a broad range of EU acts and areas listed in Schedule 2 of the Act, including in relation to financial services, which will include funds and fund- management companies. Such organizations—regardless of size—must comply with the obligations contained in the Act and will be required to have appropriate whistleblowing policies and procedures in place from January 1, 2023.
Central Bank of Ireland Enforcement Action: Mercer Global Investments Management Limited
On November 14, 2022, the CBI published details of an enforcement action taken against Mercer Global Investments Management Limited (MGIM). MGIM were fined €117.6K for six breaches of the UCITS Regulations.
The enforcement action noted that for varying periods between July 1, 2011 and December 31, 2018, the prospectuses and key investor information documents (KIID) for five sub funds failed to disclose that the sub funds relied upon an index-tracking strategy or to provide the details of the index being tracked. The CBI investigation found that MGIM failed in its obligations to both investors and to the CBI by not including required information regarding index-tracking strategy in the prospectuses and KIIDs of five investment funds managed by MGIM.
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 is clear that the CBI expects full compliance with the guidelines in the interim.
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 National Competent Authorities (NCA) on these matters.
The briefing covers the following:
- Guidance for the supervision of fund documentation and marketing material and guidance on the use of sustainability-related terms in funds’ names
- Guidance for convergent supervision of the integration of sustainability risks by AIFMs and UCITS managers
ESMA Report on Supervision of Costs and Fees in Investment Funds
On May 31, 2022, ESMA published a report on the CSA carried out by NCAs during 2021. The main findings 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.
- Conflicts of Interest in relation to related party transactions at UCITS managers were found by some NCAs.
- A lack of policies and procedures on efficient portfolio management were found at some managers.
- Fixed-fee split arrangements for securities lending were also found with unfavorable results for retail investors.
ESMA Publishes Final Guidelines on MIFID II Suitability Requirements
ESMA published its final report on guidelines on MIFID II Suitability Requirements on September 23, 2022. The amendments to the guidelines focus on sustainability and are consistent with the relevant regulations (SFDR and Taxonomy Regulation). Firms will now need to confirm their clients’ sustainability preferences and the extent to which they want to invest in sustainable products, in addition to helping them understand the concept of sustainability. Firms will also need to identify suitable products that align with clients’ sustainability preferences and provide appropriate training to staff on sustainability topics.