December 2021

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.

Contents

KPMG publications

Central Bank of Ireland updates

ESA updates

Industry and other updates

KPMG publications

1. Your essential guide to disclosures for investment funds

Our Guide to annual financial statements – Illustrative disclosures for investment funds will help you prepare financial statements in accordance with IFRS® Standards. The 2021 edition reflects standards in issue at 30 November 2021 that are required to be applied by an entity with an annual period beginning on 1 January 2021. As in the previous year, it includes disclosures relating to the IBOR reform Phase 2 amendments. This edition also includes an appendix showing a new statement of cash flows prepared using the indirect method.

Central Bank of Ireland updates

2. Central Bank of Ireland publishes new strategy

On 30 September 2021, the Central Bank of Ireland published its new strategy, setting out its strategic direction for the period 2022-2024 under four connected themes: future-focused, open & engaged, transforming and safeguarding. In particular, under the safeguarding theme, the Central Bank is aiming to:

  • Review and develop the macro-prudential framework for banks, borrowers and non-banks.
  • Accelerate the evolution of its risk-based supervisory approach, such that it becomes more data-driven, agile and scalable.
  • Enhance the regulatory framework and its supervisory execution, prioritising:
    • the interests of consumers,
    • governance, accountability, behaviours and conduct in firms,
    • financial and operational resilience in firms, and
    • anti-money laundering / countering the financing of terrorism compliance.
  • Continue to strengthen its crisis management capabilities and ensure that relevant regulated firms progress towards resolvability.

3. Central Bank of Ireland publishes latest AML bulletin relating to funds and management companies

In November 2021, the Central Bank of Ireland published its latest Anti-Money Laundering Bulletin, focusing on supervisory engagements with funds and fund management companies concerning anti-money laundering/counter financing of terrorism/financial sanctions (‘AML/CFT/FS’). In the course of these supervisory engagements with funds (UCITS and AIFs) and fund management companies to monitor compliance with the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, findings and regulatory expectations in four key areas have been identified, namely:

  1. Corporate governance;
  2. AML/CFT/FS business risk assessment;
  3. Outsourced AML/CFT/FS activities;
  4. Customer due diligence.

The Central Bank expects firms to be in a position to demonstrate that appropriate governance structures are in place to manage and oversee existing and emerging ML/TF/FS risks, including addressing the deficiencies highlighted in the bulletin. Further, the Central Bank expects firms to have implemented effective governance, risk and control functions and to be able to demonstrate:

  • Sufficient oversight of the AML/CFT/FS framework to ensure compliance with the requirements of CJA 2010;
  • Identification and management of ML/TF/FS risks to which they are exposed is an iterative and ongoing cornerstone of the firm’s AML/CFT/FS framework; and
  • Continual review and assessment of existing processes and procedures to enhance the AML/CFT/FS framework on an ongoing basis.

The Central Bank will continue to conduct supervisory engagements with firms, and expects firms to be in a position to demonstrate that they have reviewed the findings and expectations detailed in this bulletin and have remediated identified gaps.

4. Central Bank of Ireland issues process clarifications on the EU Taxonomy and SFDR filing deadlines

On 16 November 2021, the Central Bank of Ireland published Process clarifications for UCITS and AIFs pre-contractual documentation updates in relation to the Taxonomy Regulation and Level 2 measures in relation to the Sustainable Finance Disclosure Regulation. This document provides guidance relating to UCITS and AIFs in light of the upcoming deadline of 1 January 2022 in respect of updates to pre-contractual documentation for UCITS, RIAIFs and QIAIFs under the Taxonomy Regulation, and the deadline of 1 July 2022 in respect of pre-contractual and ongoing disclosures for UCITS management companies and AIFMs under the Sustainable Finance Disclosure Regulation (‘SFDR’) RTS.

To facilitate the orderly implementation of these requirements, the Central Bank has established a fast-track filing process for pre-contractual document updates based on the Taxonomy Regulation and the SFDR RTS, under which both UCITS management companies and AIFMs will be required to certify compliance with the requirements through an attestation. This fast-track process will not be available for making other changes to the prospectus.

The document advises on the documents that need to be filed with the Central Bank for UCITS and AIFs, and the prescribed format for the email submissions and the relevant attestation. To ensure compliance with the Taxonomy Regulation deadline, filings must be made by no later than 14 December 2021 (with extensions allowed on an exceptional basis). To ensure compliance with the SFDR RTS, filings may be made between 31 March 2022 and 27 May 2022.

5. Central Bank of Ireland publishes latest financial stability review

On 25 November 2021, the Central Bank of Ireland published its latest Financial Stability Review, evaluating the main risks facing the financial system and assessing the resilience of the financial system to those risks. Speaking at the launch of the review, Central Bank Governor Gabriel Makhlouf stated that the Central Bank’s overall assessment of the macro-financial environment was that near-term macro-financial risks had receded since June 2021, although noted there was inherent uncertainty in the current environment.

The Review also notes that leverage was high among Irish resident property funds (46%) as compared to European peers (25% in 2020), creating additional vulnerability to price falls. Given that Irish property funds own over 40% of the investable commercial real estate market, they may be of systemic importance if they were forced to sell a large volume of assets simultaneously. This would be amplified by certain vulnerabilities, such as leverage and liquidity mismatches.  

As such, the Central Bank seeks feedback on new macroprudential policy measures, which will aim to increase the resilience of the Irish resident property fund sector, to enable this form of financial intermediation to be able to better absorb – rather than amplify – adverse shocks. See below for further information.

6. Central Bank of Ireland publishes consultation paper on macroprudential measures for the property fund sector

As noted above, on 25 November 2021, the Central Bank of Ireland published a consultation paper (‘CP145’) seeking feedback from stakeholders on proposed measures to address leverage and liquidity mismatch in the property funds sector. The consultation paper notes that property funds (being AIFs domiciled in Ireland and authorised under domestic legislation and investing over 50% directly or indirectly in Irish property assets) have become a key participant in the Irish commercial real estate market in recent years, which given the changing nature of financial intermediation, also raises the potential that new vulnerabilities could emerge. The Central Bank notes that it has conducted an analysis of the sector, which inter alia has established that:

  • A cohort of Irish property funds have elevated levels of leverage and – on average – Irish property funds have higher levels of leverage than equivalent property funds in Europe.
  • Although Irish property funds typically have a low dealing frequency, liquidity mismatch is evident for a subset of property funds, given the very illiquid nature of commercial property assets.

The Central Bank notes that these vulnerabilities have the potential to grow or become more widespread in the future, and the sector could potentially respond to future adverse shocks through sales of property assets within a short period, which has the potential to amplify adverse shocks to the commercial real estate market and the wider economy. The measures proposed in the consultation paper, set out below, aim to safeguard resilience in the sector so that it is better able to absorb, rather than amplify, future adverse shocks, and include:

  • Proposed measures to address leverage – The Central Bank proposes to introduce a 50% leverage limit on the ratio of a property fund’s total loans to total assets, imposed under the European Union (Alternative Investment Fund Managers) Regulations 2013. The Central Bank will carefully consider feedback on the proposed calibration of the limit given the significant variation in observed levels of leverage across the sector. Further, the Central Bank proposes a three-year transition period for this measure to give existing property funds with leverage above the proposed limit time to adjust in a gradual manner. The Central Bank would, however, have the ability to temporarily remove or tighten the limit depending on market conditions. Newly authorised funds would be expected to meet the leverage limit upon authorisation.
  • Proposed measures to address liquidity mismatch – The Central Bank proposes to introduce additional guidance for property funds to align their redemption terms with the liquidity of their assets. In particular, the Central Bank expects to see a lengthening of the timeframe between the point at which investors would submit a redemption request and the point at which funds would need to pay those investors in order to better reflect the significant amount of time it takes to sell property assets, particularly under stressed market conditions. Based on the Central Bank’s current analysis, the liquidity timeframes for Irish property funds would typically be expected to be a minimum of 12 months, but the Central Bank recognises that liquidity timeframes may vary depending on funds’ specific characteristics. The guidance would also outline the Central Bank’s judgement that longer notice periods are better able to guard against ‘first mover advantage’ dynamics than longer settlement periods.

The deadline for submissions is 18 February 2022. 

7. Central Bank of Ireland review finds firms providing investment services need to improve suitability assessments

On 1 December 2021, the Central Bank of Ireland published a Dear CEO letter, setting out the findings of a review of investment firms’ compliance with suitability requirements under MiFID II, conducted as part of a Common Supervisory Action (‘CSA’) coordinated with the European Securities and Markets Authority (‘ESMA’). The CSA involved an assessment of MiFID-authorised firms and credit institutions across the EU offering MiFID services that require an assessment of suitability to be undertaken. While the review identified evidence of positive practices, it also identified instances where further action was required by firms, such as:

  • Taking a more client-focused approach, using tailored suitability assessments specific to their businesses and client needs and circumstances.
  • Improving the assessment of clients’ knowledge and experience, financial situation and investment objectives, particularly concerning information relating to clients’ financial situation and their capacity to withstand losses, instead of relying on clients’ risk tolerance.
  • Ensuring suitability reports are sufficiently detailed and personalised to clients’ objectives and individual circumstances, avoiding a ‘tick-box’ approach.
  • There is also a particular concern at the quality of firms’ oversight of exception processes, where a client insists on proceeding with a transaction at their own initiative against the firm's suitability advice. In such a case, clients should be clearly informed that the transaction is not considered by the firm to be suitable, including a clear explanation of the potential risks involved if the client proceeds.

In light of these findings, all Irish-authorised MiFID firms and credit institutions providing portfolio management and advisory services to retail clients are required to conduct a thorough review of their individual sales practices and suitability arrangements. This must be documented and must include details of actions taken to address the findings in the ESMA public statement and the Dear CEO letter. This review should be completed and an action plan discussed and approved by the board of each firm by end-Q1 2022.

ESA updates

8. ESMA publishes consultation on highly liquid financial instruments with regard to the investment policy of central counterparties

On 19 November 2021, ESMA published a consultation paper on highly liquid financial instruments with regard to the investment policy of central counterparties (‘CCPs’), seeking feedback from, inter alia, money market fund managers and UCITS managers on this topic. ESMA was originally required to provide a report to the European Commission in 2020 on whether the list of financial instruments that are considered highly liquid with minimal market and credit risk in accordance with Article 47 of EMIR, could include one or more money market funds (‘MMFs’) authorised under the Money Market Funds Regulation. That work was paused in light of the market turmoil experienced in March/April 2020, and has now resumed, with ESMA issuing a consultation paper to receive additional feedback on the implications of potential changes to investment policies for CCPs and the broader market.

Section 5 of the consultation paper deals with the appropriateness of including MMFs in the list of allowed investments for CCPs, including an examination of the regulatory practices in other jurisdictions, and the investment practices of non-EU CCPs in MMFs. Under this section, stakeholders are asked for their views on:

  • The extent to which MMFs are currently used as collateral or CCP investments outside the EU;
  • Whether assets held by eligible MMFs for CCP investment should at least meet the same criteria as for other financial instruments;
  • The means by which ESMA could bridge the need for macroprudential tools for MMFs and the need for high quality and highly liquid collateral for CCPs; and
  • Whether it is appropriate to decide, at this stage, on the potential eligibility of MMFs for CCP investments before policy discussions on MMFs at an international/EU level are finalised.

The deadline for submissions is 24 January 2022. 

9. ESMA Chair delivers keynote speech at DSW ESG conference

On 19 November 2021, ESMA Chair, Verena Ross, delivered the keynote speech at the DSW ESG conference, at which she stated that ambitious and targeted measures to address greenwashing will play an important role in ESMA’s forthcoming activities, in respect of which it expects to work closely with national securities regulators to promote a coordinated approach.

Ms Ross stated that the current disclosure rules under the Non-Financial Reporting Directive do not go far enough, which was recognised by the European Commission, who earlier this year introduced a legislative proposal for a Corporate Sustainability Reporting Directive (‘CSRD’), which expands the requirement to publish non-financial or sustainability information to a much larger group of companies, and establishes more detailed mandatory disclosure rules, as well as strengthens the role of auditors. This takes place against the background of similar international developments, including the creation of a new International Sustainability Standards Board to exist in parallel to the International Accounting Standards Board. Ms Ross also noted the Commission’s proposal for a Sustainable Corporate Governance Initiative, which would complement the provisions of the CSRD, in respect of which a legislative proposal was expected by end-2021.

Separately, on 4 November, ESMA announced its commitment to contributing to a more sustainable financial system as part of the European Green Deal and the global efforts to deliver on the UN COP26 objectives to combat climate change, setting out its key contributions in this area.

10. ESMA Executive Director discusses how the asset management industry can contribute to the Capital Markets Union and the climate transition

On 19 November 2021, ESMA Executive Director, Natasha Cazenave, delivered a speech to the EFAMA Investment Management Forum 2021, sharing her thoughts on how the asset management industry can contribute to meeting the challenges facing the EU, and in particular, how the industry can contribute to the Capital Markets Union (‘CMU’) and the climate transition.

Ms Cazenave noted the importance of ensuring that the regulatory framework remains fit for purpose, and that the resilience of non-bank funding be strengthened as it becomes more prominent, catering for different investment vehicles while also protecting investors and minimising financial stability risks. In this regard, ESMA believes that the introduction of a specific framework for loan origination and participation under the AIFMD review could support that objective. In addition to this, the ELTIF framework could be improved by making it a more attractive investment vehicle for professional investors. Ms Cazenave remarked that investor protection remained at the forefront of regulators’ concerns as asset managers take a greater share of savers’ funds, and that ensuring greater convergence in the supervision of costs was an integral part of ESMA’s broader efforts on the cost of retail investment products.

Ms Cazenave also noted the pivotal role of supervision in supporting the single market in the funds sector, advising that in recent years, ESMA has significantly stepped up its efforts to promote supervisory convergence. Two examples of ESMA’s new activities being its recent work on the 2020 ESRB recommendation on liquidity risks in investment funds, and the common supervisory actions in the investment funds sector, including the 2020 CSA on UCITS liquidity risk management.

Finally, having regard to the need for credible sustainability disclosures to mitigate against the risk of greenwashing, Ms Cazenave advised that the asset management industry would be assisted by the European Supervisory Agencies in the effort to increase transparency and comparability for investors with the preparation of Level 3 guidance in the form of Q&A on key issues related to the practical application of disclosure rules. ESMA will also work with national competent authorities to promote convergence in supervisory approaches in order to foster consistency of supervisory checks performed at a national level on asset managers’ disclosures.

11. European Commission publishes proposal for the revision of the AIFMD and UCITS framework

On 25 November 2021, the European Commission published a proposal for revisions to the AIFMD and UCITS frameworks as part of the EU Capital Markets Union package, setting out what are described by the Commission as targeted and proportionate improvements to the current regulatory framework, addressing regulatory gaps and areas where EU action is required. Changes are proposed to both the AIFMD and the UCITS Directive in areas such as delegation, liquidity risk management, data reporting for market monitoring purposes and regulatory treatment of custodians. The AIFMD alone will be amended as regards activities of loan originating investment funds and access to depositary services across borders. Some of the key features of the proposal include, inter alia:

  • Improved clarity on the rules on delegation to ensure that fund managers adhere to high standards applicable across the EU when delegation is used.
  • Peer review, at least every two years, conducted by ESMA on the application of the delegation arrangements to third-country entities.
  • A requirement that AIFMs should have appropriate technical and human resources when applying for authorisation
  • A requirement that AIFMs employ or commit at least two natural persons who are resident in the EU on a full-time basis.
  • Notification requirements for delegation arrangements where more risk or portfolio management is delegated to third countries than is retained.
  • The introduction of common minimal rules regarding direct lending by AIFs to companies, which will allow loan-originating funds to operate cross-border and ensure that they can be used as an alternative source of funding for companies in addition to bank lending. The proposed rules will also address potential risks related to this type of lending.
  • Improved access to relevant data collection for both national and EU authorities and removing inefficient reporting duplications.
  • Harmonisation of the set of liquidity management tools to better facilitate liquidity risk management by managers of open-ended AIFs, in line with recommendations by the ESRB and ESMA.
  • The ability of fund managers managing open-ended funds to suspend the repurchase or redemption of the AIF or UCITS units or shares temporarily or to activate other liquidity management tools selected from a newly defined list, and included in the fund rules or the instruments of incorporation of the AIFM.
  • Improved availability of depositaries in concentrated markets by enabling NCAs to allow the AIFs to appoint a depositary situated in another Member State.
  • Central securities depositaries appearing in the custody chain will be regarded as delegates of the depositary, which will enable depositaries to obtain the necessary information on portfolio movements and to perform their oversight duties where the fund's assets are kept by a Central securities depositary.

The proposal was welcomed by the European Fund and Asset Management Association (‘EFAMA’), stating that the targeted improvements will make strides in advancing the Capital Markets Union, while at the same time maintaining the framework that has underpinned a decade of growth of the European AIF market. However, EFAMA noted, inter alia, that it remained cautious around some of the proposed changes to the delegation and outsourcing requirements and the unintended consequences such changes may have on the existing delegation regime.

12. European Commission publishes proposal to amend ELTIF Regulation

On 25 November 2021, the Commission also published a proposal setting out suggested amendments to the European Long-Term Investment Funds (‘ELTIF’) Regulation as part of the CMU package. Amendments are proposed in three key areas, namely:

  1. Broadening the scope of eligible assets and investments, and reducing certain fund rule limitations to allow greater flexibility for fund managers to design appropriate investment strategies and portfolio compositions for ELTIFs.
  2. Reducing the barriers to entry for retail investors while also ensuring appropriate levels of investor protection.
  3. Introducing an additional Liquidity Window Redemption Mechanism that will allow investors the possibility to exit an ELTIF investment earlier, subject to certain conditions.

The proposal was welcomed by EFAMA, stating that the easing of such restrictions and allowing retail investors to commit lower amounts to ELTIFs will increase the ELTIF’s contribution to the funding of the real economy. EFAMA considered that the lower restrictions on real asset holdings and higher market capitalisation thresholds were also welcome additions, as they will allow managers to include more companies as well as smaller but potentially valuable projects into the ELTIF. However, EFAMA notes that some parts of the proposal will require scrutiny, and believes that further clarifications are needed, in particular in respect of the proposed Liquidity Window Redemption Mechanism, and whether it will deliver on its intended objective as currently drafted.

13. European Commission publishes proposal for European consolidated data tape

On 25 November 2021, the European Commission announced the introduction of a consolidated data tape as part of the proposed amendments to MiFIR under the CMU package. The aim of the proposal is to remove the main obstacles to the creation of a consolidated tape, to enhance transparency, and to increase the competitiveness of EU markets in the global landscape.

Under the proposal, data contributors will be required to contribute their data to a consolidated tape provider (selected by ESMA) by way of harmonised data standards to ensure the usability and comparability of data. For the tape on shares, the consolidated tape would share its revenue with data contributors to compensate them for their loss of revenue. The Commission notes that an EU consolidated tape would provide investors with information on whether they obtained the best price for selling or buying securities, and could also improve competition between trading venues, by attracting orders to trading facilities with better prices and better liquidity, as well as contribute to the democratisation of trading in the EU and the increased participation of citizens in capital markets.

This proposal was welcomed by EFAMA, which has long called for the establishment of an affordable real-time consolidated tape to support best execution and liquidity risk management. EFAMA notes that it was especially pleased with the fact that:

  • the proposal supported multiple asset classes;
  • a single consolidator will emerge per asset class as a result of a competitive bid;
  • all trading venues and systemic internalisers (‘SIs’) will contribute data;
  • there will be voluntary consumption based on the quality of service; and
  • the viability of including pre-trade data on the tape will be examined soon after the post-trade tape is operational.

However, on the proposed market structure reforms under the proposal, EFAMA noted that it did not support broader changes to re-engineer a well-functioning market where SIs play an important role as liquidity providers to fund managers looking to execute large trades with little market impact.

14. European Commission announces proposal for European Single Access Point Regulation

On 25 November 2021, the European Commission published its proposal for a regulation establishing a European Single Access Point (‘ESAP’), providing centralised access to publicly available information relevant to financial services, capital markets and sustainability (with the relevant regulatory provisions listed in the Annex to the proposal). The ESAP will improve the existing situation whereby companies’ financial information is not very digitally useable, by giving digital access to companies’ financial and sustainability-related information, as well as information on investment products. The scope of the ESAP will need to be built in a proportionate and gradual manner from 2024 to 2026, entailing a transitional scaling-up of the collection and submission of the information on its platform. The proposal also envisages that any entity, in particular SMEs, will be able to file relevant information on a voluntary basis.

The ESAP proposals have three main components, namely:

1.    Determining how information is to be collected from private entities such as issuers, funds, auditors, banks etc. ESAP will build on existing channels, and depending on the type of information, entities will be required to file the information only once with a collection body, which can be an existing repository, which will then make the information fully available to the ESAP.

2.    Designing the necessary data structure, possibly building on cloud or other technologies; and

3.    Removing barriers to the use and re-use of data. Information will be available for free, including downloads, and not generally subject to conditions for use or re-use.

The Commission advises that the ESAP will benefit stakeholders and consumers by making companies more visible to investors, analysts and funds, regardless of their size or the size of the national market, and will open up funding opportunities, and ensure better allocation and lower cost of capital.

EFAMA has welcomed the proposal, stating that the ESAP would be a powerful tool for investors to assess the ESG performance of companies, which would greatly contribute to the integration of the EU’s capital market and save investors’ time and resources. EFAMA also welcomes the fact that the ESAP proposal allows for voluntary filings by non-listed companies, SMEs and non-EU companies.

15. European Commission confirms delay to application of SFDR RTS

On 25 November 2021, the European Commission issued a letter to the European Parliament and Council advising that due to the length and detail of the 13 regulatory technical standards under the SFDR, to be bundled in a single delegated act, it has postponed the date of application of the delegated act from 1 July 2022 until 1 January 2023. This is following a delay in the adoption of the RTS for Taxonomy-related disclosures for Article 8 and 9 SFDR products, in respect of which the final report was published on 22 October 2021.

16. ESMA continues to see risk of market corrections amid elevated valuations

On 26 November 2021, ESMA published its second risk dashboard for 2021 covering the third quarter of the year, highlighting that it assesses the risks in its overall remit, securities markets, and in asset management as still very high, noting that the market environment remains defined by very high uncertainty, continued elevated asset valuations with risk of price corrections and abrupt shifts in risk premia.

ESMA notes that EU financial markets continued to grow in Q3, but at a slower pace, with assets priced significantly above pre-crisis levels across all classes, reflecting growing investor risk-taking. While the macroeconomic outlook has brightened, uncertainty over the speed and resilience of the recovery persists. ESMA sees realistic scope for a reduction in risk levels within market segments if the current improvements in the economic environment and the comparatively low market volatilities prove resilient, which will depend on the ability of markets to withstand a reduction in public policy support on the monetary or fiscal side without material disruptions.

In respect of asset management specifically, global investment fund flows remained positive in Q3, linked to positive performance, and reflecting the trends of the underlying asset classes. However, asset quality is a concern for bond funds, which further increased their exposure to credit risk through lower quality portfolio holdings. MMFs experienced outflows, possibly linked to increased investor risk appetite.

Industry and other updates

17. EFAMA publishes latest statistics on funds

On 22 November 2021, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for September 2021. Net sales of UCITS and AIFs totalled €9bn (down from €53bn in August), with UCITS having net outflows of €3bn (compared to net inflows of €71.6bn in August), and net inflows for AIFs of €12.6bn (compared to net outflows of €19bn in August). Total net assets of UCITS and AIFs decreased by 1.2% during the period to €20.8tn.

Further, on 29 November, EFAMA published its latest quarterly statistical data release describing the trends in the European investment fund industry in Q3 2021. Net assets of UCITS and AIFs grew by 1.7% in the quarter to €20.8tn, attracting €200bn in net inflows, with net sales of equity funds slowing down in Q3, but remaining robust against the backdrop of more volatile stock markets. The report also notes net acquisitions of investment funds by European households of €117bn during H1 2021.

18. EFAMA welcomes European Parliament vote on PRIIPs and UCITS ‘quick fixes’

On 24 November 2021, EFAMA welcomed the previous day’s vote by the European Parliament formally adopting two ‘quick fixes’ for Packaged Retail Investments and Insurance-based Products (‘PRIIPs’) and UCITS, confirming that funds already producing a UCITS Key Investor Information Document (‘KIID’) will now have until 31 December 2022 to produce a PRIIPs Key Information Document (‘KID’), and also confirming that a UCITS KIID is no longer required as long as a PRIIPs KID is produced. 

19. IOSCO publishes final report on outsourcing principles

On 27 October 2021, the International Organisation of Securities Commissions (‘IOSCO’) published its updated outsourcing principles for regulated entities outsourcing tasks to service providers. The principles include a set of ‘fundamental precepts’ and seven principles for regulated entities to consider when outsourcing their activities. These principles are based on the earlier 2005 Outsourcing Principles for Market Intermediaries and the 2009 Outsourcing Principles for Markets, but their application is expanded to trading venues, market intermediaries, market participants acting on a proprietary basis, credit rating agencies, and may also be considered by financial market infrastructures.

The fundamental precepts refer to:

  • The scope of application of the principles;
  • The definition of ‘outsourcing’;
  • Responsibility for outsourcing;
  • Potential risks and challenges of outsourcing;
  • The assessment of materiality and criticality;
  • Outsourcing by affiliates;
  • Outsourcing on a cross-border basis;
  • Sub-outsourcing; and,
  • Concentration of outsourcing tasks;

The seven principles are as follows:

  1. Due diligence in the selection and monitoring of a service provider and the service provider's performance: A regulated entity should conduct suitable due diligence processes in selecting an appropriate service provider and in monitoring its ongoing performance.
  2. The contract with the service provider: A regulated entity should enter into a legally binding written contract with each service provider, the nature and detail of which should be appropriate to the materiality or criticality of the outsourced task to the business of the regulated entity.
  3. .Information security, business resilience, continuity and disaster recovery: A regulated entity should take appropriate steps to ensure both the regulated entity and any service provider establish procedures and controls to protect the regulated entity’s proprietary and client-related information and software and to ensure a continuity of service to the regulated entity, including a plan for disaster recovery with periodic testing of backup facilities
  4. Confidentiality issues: A regulated entity should take appropriate steps to ensure that service providers protect confidential information and data related to the regulated entity and its clients, from intentional or inadvertent unauthorised disclosure to third parties.
  5. Concentration of outsourcing arrangements: A regulated entity should be aware of the risks posed, and should manage them effectively, where it is dependent on a single service provider for material or critical outsourced tasks or where it is aware that one service provider provides material or critical outsourcing services to multiple regulated entities including itself.
  6. Access to data, premises, personnel and associated rights of inspection: A regulated entity should take appropriate steps to ensure that its regulator, its auditors, and itself are able to obtain promptly, upon request, information concerning outsourced tasks that is relevant to contractual compliance and/or regulatory oversight including, as necessary, access to the data, IT systems, premises and personnel of service providers relating to the outsourced tasks.
  7. Termination of outsourcing arrangements: A regulated entity should include written provisions relating to the termination of outsourced tasks in its contract with service providers and ensure that it maintains appropriate exit strategies.

20. IOSCO publishes final report on recommendations on sustainability-related practices, policies, procedures and disclosure in asset management

On 17 November 2021, IOSCO published its final report on recommendations on sustainability-related practices, policies, procedures and disclosure in asset management, following the consultation report published on 30 June 2021. The final report aims to improve sustainability-related practices, policies, procedures and disclosures in the asset management industry through five recommendations addressed to securities regulators and policymakers, which are aimed to provide a list of potential areas for consideration.

The five final recommendations are as follows:

  1. Asset Manager Practices, Policies, Procedures and Disclosure: Securities regulators and/or policymakers should consider setting regulatory and supervisory expectations for asset managers in respect of the development and implementation of practices, policies and procedures relating to material sustainability-related risks and opportunities, as well as related disclosures.
  2. Product Disclosure: Securities regulators and/or policymakers should consider clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand sustainability-related products and material sustainability-related risks for all products.
  3. Supervision and Enforcement: Securities regulators and/or policymakers should have supervisory tools to monitor and assess whether asset managers and sustainability-related products are in compliance with regulatory requirements, and should also have enforcement tools to address any breaches of such requirements.
  4. Terminology: Securities regulators and/or policymakers should consider encouraging industry participants to develop common sustainable finance-related terms and definitions, including relating to ESG approaches, to ensure consistency throughout the asset management industry.
  5. Financial and Investor Education: Securities regulators and/or policymakers should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability-related initiatives.

Contact us for more

For further information on the issues mentioned above, or any related issues, please contact Frank Gannon, Head of Asset Management

More in Asset Management