January 2022

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.

Central Bank of Ireland updates

1. Central Bank of Ireland publishes cross-industry guidance on operational resilience

In December 2021, the Central Bank of Ireland published cross-industry guidance on operational resilience, which applies to all regulated financial service providers (‘RFSP’), and which is introduced against the backdrop of the evolving operational resilience landscape at an international level. While the guidance does not purport to address all aspects of RFSPs’ legal and regulatory obligations relating to operational resilience, and should be read in conjunction with the relevant legislation regulations and other guidance and standards, its purpose is to:

  • communicate the Central Bank’s expectations with respect to the design and management of operational resilience;
  • emphasise board and senior management responsibilities when considering operational resilience as part of their risk management and investment decisions; and
  • require boards and senior management to take appropriate action to ensure that their firms’ operational resilience frameworks are well designed, are operating effectively, and are sufficiently robust.

The 15 guidelines are split across three “pillars” of operational resilience, namely: (1) “identify and prepare”; (2) “respond and adapt”; and (3) “recover and learn”, with the vast majority of the guidelines falling under the first pillar. The guidance revolves around certain core principles of operational resilience frameworks, which include:

  • board and senior management ownership of the Operational Resilience Framework;
  • identification of critical or important business services and all activities, people, processes, information, technologies and third parties involved in the delivery of these services;
  • the setting of impact tolerances for each of these identified services, and the testing of the firm’s ability to stay within those impact tolerances during a severe but plausible operational disruption scenario; and
  • continuous review of how the firm responded and adapted to disruptive or potentially disruptive events so that lessons learned can be incorporated into operational improvements to continually enhance the operational resilience of the firm.

The Central Bank’s expectation is that boards and senior management of RFSPs review the guidance and adopt appropriate measures to strengthen and improve operational resilience frameworks and the effective management of operational resilience. Firms should be able to demonstrate this within an “appropriate timeframe”, which will depend on a range of factors, including the nature, scale and complexity of a firm’s business, and its overall impact on customers and the wider economy. However, the Central Bank notes that it expects firms to actively and promptly address operational resilience vulnerabilities, and be in a position to evidence actions/plans to apply the guidance by December 2023 at the latest.

2. Central Bank of Ireland publishes cross-industry guidance on outsourcing

On 17 December 2021, the Central Bank of Ireland published cross-industry guidance on outsourcing, which is of relevance to all regulated financial services providers, and introduced to supplement (but not replace or override) existing sectoral legislation, regulations and guidelines on outsourcing, and setting out the Central Bank’s expectations of good practice for effective management of outsourcing risk. The Central Bank expects that all relevant firms make every effort to comply with the guidelines, although recognises that certain aspects may not be appropriate to all regulated firms due to their nature, scale and complexity. As such, it may not be appropriate for certain smaller, less complex regulated firms to adopt in full all measures set out in the guidance. However, such firms are expected to be able to explain, upon request, the reasons for proceeding as they have, and provide a supporting rationale for same.

The guidance addresses ten specific areas in relation to outsourcing, listed below:

  • Assessment of criticality or importance of activity/service to be outsourced: Firms are expected to determine, through a defined methodology, the criticality or importance to the regulated firm of the function, service or activity being outsourced. This assessment should include an assessment of the risk management measures that should be adopted to ensure resilience and continuity of operations. Appendix 2 of the guidance sets down definitions and criteria relating to “critical or important” having regard to sectoral regulations and guidelines, including the Fund Administration Outsourcing Guidance 2017, and the specific requirements that apply to fund depositaries and fund management companies under AIFMD and UCITS. The guidance also refers to the recent IOSCO Principles on Outsourcing 2021.
  • Intragroup arrangements: Firms are expected to ensure that unique risks associated with intragroup arrangements are identified and managed, inter alia, applying the same rigour when conducting intragroup outsource risk assessments as for third party outsourced service provider (‘OSP’) assessments.
  • Outsourcing and delegation: The Central Bank highlights that these activities are not considered to be different concepts, and that, inter alia, firms should treat delegated arrangements to the same onerous due diligence, oversight and monitoring as for other outsourcing arrangements;
  • Governance and the role of the board and senior management: The board and senior management remain responsible for all outsourced activities, including setting a strategy and policy for outsourcing, maintaining adequate records, and maintaining oversight of risk management and internal control functions where these have been outsourced. The outsourcing policy should consider certain elements at a minimum, and be reviewed and approved by the board at least annually.
  • Outsourcing risk assessment and management: The Central Bank expects that firms, when developing their outsourcing risk management framework and conducting outsourcing risk assessments, give adequate consideration to a range of areas including, inter alia: sub-outsourcing risk; sensitive risk data; data security; concentration risk; and off-shoring risk.
  • Due diligence: Appropriate and proportionate reviews should be conducted in respect of all prospective OSPs or intragroup providers prior to entering into any arrangements, with certain prescribed aspects specifically considered, such as insurance coverage and resilience measures.
  • Contractual arrangements and Service Level Agreements: These should underpin and support outsourcing arrangements, be resolution-resilient and subject to ongoing monitoring, and also contain, as a matter of good practice, a number of specific provisions, which are listed in the guidance. The contracts should also expressly allow for termination and transfer arrangements, as well as provide for access, information and audit rights.
  • Ongoing monitoring and challenge: Regulated firms should incorporate outsourcing assurance into their three lines of defence. This entails the putting in place of appropriate mechanisms to oversee, monitor and assess the appropriateness and performance of their outsourced arrangements, as well ensuring that assessment of the effective performance of the arrangements and controls forms part of the audit plan. Firms should also consider whether external third party review may also be necessary.
  • Disaster recovery and business continuity management (‘BCM’): Firms should consider the BCM implications of having outsourced services to an OSP, and consider the BCM arrangements that the OSP has in place, with close alignment of disaster recovery and BCM arrangements of regulated firms and OSPs, particularly where the OSP is involved in the delivery of critical or important functions. Firms should also understand exit costs, the arrangements to be initiated and the legal and operational risk implications in the event of the termination of outsourcing arrangements.
  • Provision of outsourcing information to the Central Bank of Ireland: The Central Bank expects to be informed, by way of notifications, of firms’ proposed “critical or important” outsourcing arrangements under relevant sectoral legislation or pursuant to certain guidelines, e.g. ESMA’s Guidelines on Outsourcing to Cloud Service Providers. In particular, the Central Bank expects firms to bring to its attention proposals to outsource any of their critical or important functions or services to offshore jurisdictions in sufficient time, and prior to the commencement of any outsourcing arrangement of critical or important functions or activities, to consider the risks, especially those relating to supervisibility. In this regard, the guidance provides a list of data items that should be provided to the Central Bank in respect of individual outsourcing arrangements. Furthermore, the Central Bank expects firms to establish and maintain an outsourcing register, containing relevant details in respect of each of its outsourcing arrangements.


3. Central Bank of Ireland publishes new AIFMD and UCIT Q&As

On 20 December 2021, the Central Bank of Ireland published the 44th edition of the AIFMD Q&As, which includes three new Q&As – IDs 1151, 1152 and 1153. ID 1151 sets out the Central Bank’s expectations in respect of an arrangement involving a non-discretionary investment advisor which provides services to a QIAIF.

The Central Bank expects, inter alia, that details to identify the investment advisor and the services provided should be comprehensively disclosed in the QIAIF’s prospectus and may include services relating to identification and origination of investment proposals, due diligence and other operational activities relating to the assets or proposed investments of the QIAIF.

Further, QIAIFs are required to disclose in their prospectuses how fees of each service provider are accrued and paid, and should also detail the role of the AIFM with respect to its ongoing and oversight and review of services provided by such non-discretionary investment advisors.

ID 1152 sets out the Central Bank’s expectation that multi-manager RIAIFs will comply with ESMA’s Q&A of July 2021 (Section XV, Question 7 of the ESMA AIFMD Q&As) on performance fees in multi-manager AIFs, and confirms that existing multi-manager RIAIFs must bring their performance fee methodologies into compliance by 1 January 2023, and have updated their prospectuses by that time.

ID 1153 addresses the circumstances of establishment of a new multi-manager RIAIF utilising a performance fee, and notes that those wishing to establish a new multi-manager RIAIF with a performance fee must do so in compliance with ESMAs Q&A of July 2021 (Section XV, Question 7) on performance fees in multi-manager AIFs.

On the same date, the Central Bank published the 36th edition of the UCITS Q&As, which includes two new Q&As – IDs 1105 and 1106. ID 1105 sets out the Central Bank’s expectations that multi-manager UCITS will comply with ESMA’s Q&A of July 2021 (Section XI, Question 5 of the ESMA UCITS Q&As) on performance fees in multi-manager UCITS. It confirms that existing multi-manager UCITS must bring their performance fee methodologies into compliance by 1 January 2023, and have updated their prospectuses by that time.

ID 1106 addresses the circumstances of establishment of a new multi-manager UCITS utilising a performance fee, and notes that those wishing to establish a new multi-manager UCITS with a performance fee must do so in compliance with ESMA’s Q&A of July 2021 (Section XI, Question 5) on performance fees in multi-manager UCITS.

4. EU Taxonomy Regulation technical screening criteria published in the Official Journal

On 9 December 2021, the delegated regulation establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, and for determining whether that economic activity causes no significant harm to any of the other environmental objectives, was published in the Official Journal of the European Union. The regulation supplements the Taxonomy Regulation, which aims to establish a framework to facilitate sustainable investment, and applies from 1 January 2022.

5. European Commission adopts strategy on supervisory data in EU financial services

On 15 December 2021, the European Commission adopted its strategy on supervisory data in EU financial services, building on the conclusions of the comprehensive fitness check of EU supervisory reporting requirements in financial sector legislation. The Commission’s long-term objective is to modernise EU supervisory reporting and put in place a system to deliver accurate, consistent and timely data to supervisory authorities, while minimising the aggregate reporting burden on stakeholders.

The reporting system comprises four main building blocks, the delivery of which will enable a more effective and efficient use of modern technologies, including RegTech and SupTech, namely:

  1. Ensuring consistent and standardised data, which will make it easier to use digital technologies and simplify data transmission, validation and analysis. Data specifications should also rely on clear and common terminology, standards, formats and rules for the use of unique identifiers.
  2. Facilitating data sharing and reuse, which will reduce the burden on reporting entities by avoiding duplicative data requests, as well as allow supervisors to overcome legal and technical barriers to using data held by other supervisors.
  3. Improving the design of reporting requirements, which should be based on, and further extend, current best practices in applying Better Regulation principles to supervisory reporting, both in the legislation and in the specification of technical standards. It should also ensure that these principles are applied consistently and systematically across reporting frameworks, from the development of the initial requirements to subsequent reviews.
  4. Developing joint governance arrangements, which will improve coordination and foster greater cooperation between different supervisory authorities and other relevant stakeholders, allowing them to share their expertise and exchange information.

Aside from the benefits that this would bring to supervisors, it is envisaged that streamlined reporting and the use of digital technologies would help companies reduce their compliance costs, and generate significant savings in the long term. As this is an ambitious, complex and long-term strategy, its implementation will be done via a gradual approach, building on existing tools, which will, inter alia, reduce implementation risks and related costs. The next step will be for the European Supervisory Authorities to conduct assessments for the further integration and improvement of consistency and standardisation within their respective sectors, as well as the establishment of data dictionaries, reviewing obstacles to data sharing, and formalising the necessary governance arrangements. 

6. EBA issues consultation paper on use of remote customer onboarding solutions

On 10 December 2021, the European Banking Authority (‘EBA’) issued a consultation paper setting out draft guidelines on the use of remote customer onboarding solutions. This sets out common EU standards, which will be applicable to all financial sector operators under the 4th Money Laundering Directive, on the development and implementation of sound, risk-sensitive initial customer due diligence (‘CDD’) processes in a remote customer onboarding context in order to comply with AML/CFT requirements. The guidelines set out the steps financial sector operators should follow when choosing remote customer onboarding tools and what they should do to satisfy themselves that the chosen tool is adequate and reliable on an ongoing basis, and to allow them to comply effectively with their initial CDD obligations. The areas covered by the draft guidelines include:

  • The creation and maintenance of policies and procedures relating to remote customer onboarding, including governance arrangements;
  • The carrying out of pre-implementation assessments of the remote customer onboarding solution;
  • Ongoing monitoring of the remote customer onboarding solution;
  • Acquisition of relevant information, including the identification of the customer and the nature of the business relationship;
  • Document authenticity and integrity checks;
  • The use of digital identifiers;
  • Reliance on third parties and outsourcing; and
  • ICT and security risk management.

The deadline for submissions is 10 March 2022.

7. ESMA publishes updated AIFMD and UCITS Q&As

On 17 December 2021, ESMA updated its AIFMD and UCITS Q&A documents. The updated AIFMD Q&A contains one new question (Section XI, Q.2) concerning whether managers of undertakings investing in crypto-assets were subject to the AIFMD. The answer notes that it is important to assess, on a case-by-case basis, whether the relevant undertaking meets the definition of an AIF, and further notes that while AIFs may in principle invest in any traditional or alternative assets as long as the AIFM can ensure compliance with the AIFMD, more specific investment and risk diversification requirements for AIFs investing in crypto-assets, as well as limitations regarding the target investors of such AIFs, may exist at national level.

In respect of the UCITS Q&A, three new questions have been published. Section 1, Q.5c on issuer concentration clarifies that if a UCITS holds more than six issues in transferable securities and money market instruments issued or guaranteed by a Member State, one or more of its local authorities, a third country or a public international body to which one or more Member States belong, all the issues should respect the 30% limit, i.e. even if the UCITS holds more than 6 issues.

Q5.d clarifies that where a UCITS has a hedged share class in a different currency, unrealised FX profits and losses should be counted towards the NAV of the hedged share class and accordingly be taken into account when calculating the counterparty risk limit of Article 52(1) of the UCITS Directive in respect of the NAV of the hedged share class.

Section IV, Q.8 clarifies that if a UCITS intends to market a new share class in a Member State where it has already been notified for marketing, the UCITS should give written notice to the competent authorities of both the UCITS home and host Member State, at least one month before the marketing of the new share class starts, in accordance with article 93(8) of the Directive.

8. ESMA publishes guidance on appropriateness and execution-only requirements under MiFID II

On 3 January, ESMA published its final report on guidelines on certain aspects of the MiFID II appropriateness and execution-only arrangements, which ESMA notes constitute an important element of investor protection in the provision of investment services other than investment advice or portfolio management. The guidelines, which will apply six months after the date of publication on ESMA’s website in all EU official languages, will apply to investment firms, credit institutions when providing non-advised services, and external AIFMs when providing the non-core service referred to in Article 6(4)(b)(iii) of the AIFMD.

The purpose of the guidelines is to enhance clarity and to foster convergence in the application of the appropriateness and execution-only requirements, the need for which was identified following the ESMA Common Supervisory Action conducted in 2019. The 13 guidelines traverse 4 key areas, namely:

  • The provision of information to clients about the purpose of the appropriateness assessment and execution-only;
  • Know-your-client and know-your-product, including the extent of information to be collected, ensuring reliability of client information, and the collection client information for legal entities or groups;
  • Matching clients with appropriate products, including arrangements to ensure a consistent appropriateness assessment, and ensuring the effectiveness of product warnings; and
  • Other related requirements, such as staff qualifications, record-keeping, the determination of situations where the appropriateness assessment is required, and monitoring arrangements and controls.

The publication of the translations of the guidelines will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the guidelines. 

Industry and other updates

9. EFAMA publishes latest statistics on funds

On 22 December 2021, EFAMA published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for October 2021. Net sales of UCITS and AIFs totalled €140bn (up from €9bn in September), with UCITS having net inflows of €110bn (compared to net outflows of €3bn in September), and net inflows for AIFs of €30bn (up from €13bn in September). Total net assets of UCITS and AIFs increased by 2.6% during the period to €21.4tn.

Further, on 14 December, EFAMA published its report on international statistics for Q3 2021, in which it was noted that the asset growth of worldwide net fund assets was limited in Q3 20201, but that solid net inflows into long-term funds continued, recording net inflows of €677bn, up slightly on the previous quarter. 

10. EFAMA publishes annual European asset management report

On 16 December EFAMA published its 13th annual asset management report, providing an overview of the European asset management industry. Among the key findings and observations identified include:

  • Total AUM in Europe grew to €28.4tn by end-2020, and continued to rise to an estimated €31.3tn by end-September 2021, with investment fund assets representing €15.4bn or 54% of total AUM at end-2020.
  • Asset managers have become key contributors to the transition to a sustainable economy through the incorporation of ESG factors in their processes, with asset managers in Europe applying an ESG investment approach to c. €11tn in assets by end-Q1 2021 (55% being managed in investment funds).
  • At end-2020 retail investors formed the largest clients of the industry, .with a market share of 28%, ahead of pension funds (26%), insurance companies (23%) and other institutional clients (21%). Domestic clients are by far the biggest clients of the European asset management industry, representing c. 69% of the share of total AUM in 2020.
  • At end-2020, bond assets accounted for 40% of investment portfolios managed by European asset managers, compared to 31% for equity assets, and 7% for money market and cash equivalents, with the remainder made up of other assets, such as infrastructure, hedge funds, structured products, and private equity

11. IOSCO publishes investment funds statistic report

On 4 January 2022, the International Organization of Securities Commissions (‘IOSCO’) published its investment funds statistics report, the first of its kind by IOSCO, which is underpinned by a broad data survey to which 50 IOSCO members (including Ireland) have contributed, representing 67% of total AUM of global investment funds. The scope of the survey forming the basis of the report includes all funds except money market funds, and the report analyses, in turn, relevant features of the hedge funds’ industry, the open-ended funds’ industry, and the closed-ended funds’ industry, including AUM, investment exposures, leverage, collateral, unencumbered cash and cleared trades, and liquidity.

The report notes that leverage across asset management remains relatively low, with hedge funds appearing to have, in aggregate, sufficient portfolio liquidity to meet potential investor redemptions during normal times. However, the report also notes that it is difficult to indicate whether this would remain the case under stressed conditions. Further, idiosyncratic fund-level liquidity mismatches cannot be ruled out without more granular data.

With respect to open-ended funds, the report notes that, compared to hedge funds, these are not highly leveraged, even though the industry is ten times larger by AUM, reflecting the generally-applicable regulatory requirements and limitations on some open-ended funds, preventing them from using leverage above certain limits. Future iterations of the report will consider further metrics of leverage as other data becomes available. With respect to closed-ended funds, the report notes that these hold large portions of their asset allocation in physical assets, and are not highly leveraged. However, this possibly masks the role of leverage as undertaken through private equity, and depending on the level of leverage in those instances, there may be further consideration to be given to its potential impact on the real economy in times of crisis. 

Contact us for more

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

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