April 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 issues industry letter to Fund Service Providers on effectively managing risks due to Russian invasion of Ukraine

On 7 March 2022, the Central Bank of Ireland issued a letter to Fund Service Providers (‘FSPs’), including fund management companies (‘FMCs’), fund administrators and depositaries, in relation to the ongoing Russian invasion of Ukraine, to be taken into account by FSPs.

The letter reminds FSPs that they must, at all times, remain in compliance with the new restrictive measures/sanctions imposed as a result of these events with respect to any impacted fund asset or fund investor. In particular, the Central Bank expects FSPs to take timely action, with heightened precautions, to ensure no breaches of the sanctions occur. In the event that an FSP identifies a relevant transaction or a proposed transaction, including subscription or redemption activity with a target of the sanctions, they must immediately freeze the account(s) and/or stop the transaction(s) and immediately report this to Central Bank along with other relevant information.

The letter also reminds FMCs that they are required to ensure that, for each fund under management, fair, appropriate and consistent pricing models and valuation procedures are applied to ensure the proper valuation of the assets of the fund. FMC must also be cognisant of the potential for impaired valuations and take all necessary steps to ensure that the valuation of fund assets is fair and proper and in accordance with fund valuation policies and rules.

With respect to liquidity, the Central Bank’s expectation is that FMCs, relevant PCF holders and other relevant responsible persons should, on an ongoing basis, assess the liquidity position of each fund under management to ensure that the liquidity of the investment portfolio remains in line with the fund’s redemption policy, and takes into account the potential redemption demands of investors, with particular attention to be given to effectively deploying an appropriate suite of liquidity management tools. The Central Bank also reminds depositaries of their fiduciary obligations in relation to funds to which they are appointed, who should ensure that their oversight of funds ensures these interests are safeguarded.

Given current market volatility, the Central Bank recognises that breaches of certain requirements relating to the portfolio composition of funds may occur. Where this is the case, these should be reported to the Central Bank in the normal course and may be subject to supervisory engagement. Where other matters of concern arise, or where potential risks appear likely to crystallise, FSPs are advised to engage in a timely manner with the Central Bank.

The letter must be brought to the attention of all FSP board members, the fund, as well as relevant PCF holders and other relevant responsible persons.

2. Central Bank of Ireland publishes latest Demographic Analysis Report on applications to senior roles in regulated firms

On 8 March 2022, the Central Bank of Ireland published its latest Demographic Analysis Report, analysing applications to hold certain senior roles within regulated firms that require the Central Bank’s prior approval under the Fitness & Probity Regime. Among the key developments noted were:

·       The level of slow progress made in improving gender diversity. Female representation in applications for PCF roles in 2021 stood at 31%, in comparison to 16% in 2012.

·       Improvements in the gender imbalance at board level across all sectors. Female representation for these positions increased by 6%, from 22% in 2020 to 28% in 2021, with the most significant increase seen in the asset management sector (31% female board representation in 2020 to 39% in 2021).

·       Male applicants continue to dominate revenue-generating roles (84%).

·       Existing regulated firms continued to show higher levels of gender diversity than new firms seeking authorisation, with applications associated with new firm authorisations continuing to show a material imbalance.

Commenting on the publication of the report, the Central Bank of Ireland’s Director General for Financial Conduct, Derville Rowland, noted that firms must accelerate progressing the issue of diversity at senior levels, noting the Central Bank’s view that a lack of diversity at senior management and board level was a leading indicator of heightened behaviour and culture risks.

3. Central Bank of Ireland Director General for Financial Conduct discusses the role of financial regulation in building resilience, anticipating risk, and protecting citizens

On 11 March 2022, the Central Bank of Ireland’s Director General for Financial Conduct, Derville Rowland, delivered a speech at an FSI Executive Board engagement which addressed, among other things, the importance of resilience in the financial system, driving fair outcomes for consumers and investors, as well as enhancements to the regulatory framework.

Noting that while the investment funds sector broadly demonstrated sufficient operational resilience throughout the COVID-19 pandemic, Ms Rowland stated that central bank intervention was required at a global level. This highlighted certain systemic vulnerabilities and gave rise to market integrity and financial stability concerns, and the current global market situation continued to be monitored by the Central Bank in that context. Ms Rowland also highlighted the need to develop and operationalise a complete macroprudential framework for investment funds, in respect of which the Central Bank would continue to play a leading role in working with international counterparts to this end.

With respect to consumers and investors, Ms Rowland noted the forthcoming publication of the Central Bank’s Consumer Protection Outlook Report 2022 (see below), highlighting five key cross-sectoral risks. This report, along with the securities markets risk outlook report, which highlighted risks across sustainable finance, governance, conflicts of interest, market dynamics, cyber security, data and financial innovation, and misconduct, clarify the Central Bank’s supervisory requirements and expectations of firms for the protection of consumers and investors.

Finally, with respect to enhancements to the regulatory framework, Ms Rowland referred to the AIFMD Review and the European Commission’s proposal, published in Q4 2021, noting that many of the proposed changes focus on enhancing the effectiveness of fund managers to discharge their obligations. As such, the Central Bank is supportive of these measures. Further, Ms Rowland noted that a number of elements of the proposal are aligned with the existing Irish regulatory framework and supervisory undertakings – including CP86 obligations and requirements for fund managers which originate loans. Ms Rowland noted that in certain areas, the proposals will require careful consideration to ensure the right balance is struck between mitigating potential risks while ensuring the framework can operate efficiently, and in the best interests of underlying investors (e.g. reporting requirements on delegation arrangements).

4. Central Bank of Ireland publishes latest Consumer Protection Outlook report

On 14 March 2022, the Central Bank of Ireland published its latest Consumer Protection Outlook report, detailing five risk areas that regulated financial services firms should take action on to avoid consumer harm, namely:

1.     Poor business practices and weak business processes, which disrupt good quality service that places the best interests of the consumer at the centre of the design and delivery of that service, and can lead to consumer harm.

2.     Ineffective disclosures to consumers, which will affect the consumer’s ability to make informed decisions and may result in consumer harm.

3.     The changing operational landscape, which firms must navigate in a manner that places the best interests of consumers at the heart of their commercial decision-making and avoids creating risks to consumers.

4.     Technology-driven risks to consumer protection; as new technologies are deployed, firms must ensure that they take sufficient care to mitigate the risks of harm to consumers that can arise from their use.

5.     The impact of shifting business models, and ensuring that changes to business models lead to a better service to consumers, managing the transition for consumers in a responsible, transparent and fair way.

The report also sets out key bodies of work that the Central Bank will undertake to deliver on its strategy with respect to the above five key cross-sectoral risks.

5. Central Bank of Ireland and IOSCO report on retail market conduct issues

On 21 March 2022, the International Organization of Securities Commission’s (‘IOSCO’) Retail Market Conduct Task Force (‘RMCTF’), co-chaired by the Central Bank of Ireland and the Australian Securities & Investments Commission, has published the Retail Market Conduct Task Force Report: Consultation Report, seeking feedback from stakeholders on issues relating to the development of a regulatory toolkit for jurisdictions to consider when addressing emerging retail market conduct issues in the current retail investment landscape.

The consultation report examines the reasons for, and the regulatory and market implications of, increasing gamification, self-directed trading and the influence of social media on retail investor behaviour. This is based on a survey conducted by IOSCO in 2021. Feedback is sought from a broad range of stakeholders, including investors, regulators, market participants, regulated entities, financial consumers, academics and other international bodies. To inform IOSCO’s work, the report includes 14 consultation questions relating to:

·       The evolving retail trading landscape;

·       Digitalisation, social media and retail trading;

·       The evolving frauds and scams landscape and key conduct issues;

·       Disclosure, product design, and product intervention;

·       Investor education; and

·       The regulatory toolkit.

The deadline for submissions is 23 May 2022.

ESA updates

6. European Commissioner speaks at ALFI European Asset Management Conference

In March 2022, the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, Mairead McGuiness, addressed the ALFI European Asset Management Conference. Ms McGuinness’s speech noted the need for the EU to accelerate work on the Capital Markets Union, noting the progress made by the Commission in November last year in putting forward four legislative proposals, including a review of the Alternative Investment Fund Managers Directive (‘AIFMD’) and a review of the European Long-Term Investment Funds Regulation (‘ELTIF’).

With respect to AIFMD, Ms McGuinness noted the need for targeted improvements, including on delegation, needed to improve transparency and trust among EU regulators. In this regard, Ms McGuinness noted that the proposal seeks to clarify the rules around delegation of certain functions by fund managers to third parties, strengthening the sharing of information and supervisory convergence among EU supervisors. Ms McGuinness also noted that the European Commission also sought to harmonise rules for managers of loan-originating funds across the EU, with the goal of supporting alternative sources of financing for the real economy, while fostering financial stability.

With respect to ELTIFs, Ms McGuinness advised that the Commission wished to improve the uptake of ELTIFs, making them more accessible for retail investors. In this regard, the minimum €10,000 investment and 10% maximum exposure threshold for retail investors, which are considered too burdensome and ineffective when applied together, are proposed to be removed. It is instead proposed to align safeguards with the suitability test found under MiFID II.

Ms McGuinness also noted that the Commission sought to increase the resilience of financial markets to liquidity shocks, paying close attention to money market funds. In this respect, the Commission will, during 2022, assess the functioning of the Money Market Funds Regulation, and consider how the market has evolved since its adoption, including the impact of market stress in 2020. A consultation will soon be launched to collect additional input from relevant stakeholders.

Finally, Ms McGuinness addressed the subjects of digital finance and sustainable finance, noting the recent legislative measures adopted in these areas, and the role played by each in unlocking the full potential of the Capital Markets Union.

7. ESAs issue joint supervisory statement on the application of the SFDR and Taxonomy Regulation

On 24 March 2022, the European Supervisory Authorities (‘ESAs’) issued a joint supervisory statement on the application of the Regulation on Sustainability-related Disclosures in the Financial Services Sector (‘SFDR’) and the Taxonomy Regulation (‘TR’), with the objective of achieving effective and consistent application of the SFDR, and to promote a level playing field and the protection of investors.

The statement notes that financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, while the application of the RTS is delayed to 1 January 2023 in order to provide these parties with sufficient time to gather the information necessary to adjust their practices to apply the specific requirements of the RTS, including the product-specific disclosures stemming from the TR. The statement notes that the delay in the application of the RTS has no impact on the application of the TR provisions. As such, the taxonomy-alignment related product disclosures apply in respect of the first two environmental objectives referred to in art. 9(a) and 9(b) TR from 1 January 2022, in accordance with art. 27(2)(a) TR. The delay also allows NCAs to prepare for the orderly and effective supervision of compliance by financial market participants and financial advisers with those requirements.

The statement sets out general guidance for the interim period, as well as supervisory expectations during this time, and specific guidance as a reminder of the application timeline of some specific provisions of the SFDR, the TR and the related RTS.


8. ESMA finds that actively managed funds fail to outperform benchmarks during market stress

On 28 March 2022, the European Securities and Markets Authority (‘ESMA’) published the findings of a study analysing the performance of actively managed equity UCITS relative to their prospectus and market benchmark indices between February and June 2020. This was a period characterised by a strong market downturn between February and March 2020, followed by a fast recovery of equity prices in April and a stabilisation at elevated levels in May and June. The COVID-19 crisis gave ESMA the opportunity to test the hypothesis that active equity UCITS outperform their benchmarks during stressed market conditions. In this regard, ESMA has concluded that, for the sample considered, actively managed funds, net of ongoing costs, did not consistently outperform their related benchmarks during this period.

More than half of the active UCITS analysed underperformed their benchmarks during the stressed period (between 19 February and 31 March) and more than 40% during the post-stress period (between 1 April and 30 June). Only funds belonging to the highest-rated class consistently outperformed the benchmarks. For the rest of the funds analysed, benchmark-adjusted performance hovered around zero or was clearly negative.

Among the other findings of the report were that higher net performance for funds was related to better fund risk rating, and that active fund performance deteriorated under stress and improved when the market stabilised. Further, in relation to risk factors, during the first wave of the pandemic, between 60% and 70% of active UCITS had negative abnormal returns. 

9. ESMA and NCAs find room for improvement in funds’ liquidity stress testing

On 30 March 2022, ESMA advised that it had carried out a supervisory engagement with investment funds, together with National Competent Authorities (‘NCAs’), focussing on liquidity risk in corporate debt and real estate funds. The results of the engagement showed that the funds included in the scope of the analysis did not pose any substantial risk to financial stability.

While ESMA noted that the overall degree of compliance is satisfactory, there was some room for improvement and continued monitoring, especially on liquidity stress testing and valuation of less liquid assets. Many NCAs reported that management companies were able to manage episodes of valuation uncertainty in March 2020 and that they have not identified any strong valuation issue for the funds in the scope of the exercise.

In 2022, ESMA will facilitate discussions on these topics among NCAs on the application of the liquidity stress testing guidelines in UCITS and AIFs, and is conducting a 2022 Common Supervisory Action on the valuation of less liquid assets in UCITS and open-ended AIFs.

10. ESMA responds to European Commission consultation on EMIR review

On 5 April 2022, ESMA issued a letter to the European Commission providing its high-level response to the consultation on a targeted review of EMIR with respect to the EU central clearing framework. ESMA outlines key considerations regarding the scope and implementation of the clearing obligation in order to better incentivise clearing and to increase further the attractiveness of EU cleared markets, leveraging various workstreams and analyses recently conducted by ESMA on the clearing obligation. ESMA also identifies a number of possible incentives for EU clearing participants to reduce their exposures to certain clearing services deemed of substantial systemic importance.

Separately, ESMA also makes a number of targeted proposals to streamline the functioning of the EU CCP supervisory system and to address certain duplicative and inefficient supervisory processes in order to ensure that the supervisory framework for EU CCPs remains agile and attractive for clearing participants.

11. ESMA publishes annual statistical report on Performance and Costs of EU Retail Investment Products

On 5 April 2022, ESMA published its fourth annual statistical report on the cost and performance of European Union (EU) retail investment products, reporting that UCITS with an environmental, social and governance (‘ESG’) strategy (including equity, bond and mixed funds) outperformed their non-ESG peers, and were also overall cheaper. The report examines the market between 2010-2020 and finds that, while costs show signs of reducing in certain jurisdictions, in most Member States as well as in the EU as a whole, there is limited progress in funds becoming more affordable. Retail investors also continue to pay higher fees than professional investors.

The report’s main findings include:

·       Gross performance in 2020 was low or negative and highly volatile due to the COVID-19 pandemic.

·       Costs remained a critical component when evaluating the ultimate benefits of an investment, and reduced only marginally over time, with total costs higher for retail investors than for institutional investors, on average, and costs for cross-border funds higher than those for domestic funds.

·       For UCITS, ESG equity, bond and mixed funds were overall cheaper than non-ESG peers, while their performance reflected the strong performance of specific sectors since the COVID-19 crisis. Within the ESG fund category, impact funds performed better than other ESG strategies and funds with sustainable investment as an objective performed better in net terms, including costs, than those promoting environmental or social characteristics, despite slightly higher costs.

·       15% of UCITS managers in the sample managed 90% of assets. Cross-border funds were, on average, larger than funds sold only in their home market and on average 60% of funds included in the sample were effectively sold cross-border.

·       Costs were significantly higher for active UCITS than for passive funds and ETFs, with ETF UCITS performance in line with that of other passive UCITS investing in similar assets.

·       In 2020, retail investors accounted for only 13% of the total NAV in the EU AIF market. The annualised monthly gross and net performance across the main retail AIFs fund types, significantly decreased compared with  2019.

·       Total costs were largely attributable to entry costs and varied substantially by country and by pay-off type, but did not depend on issuance size or underlying type.

Industry and other updates

12. EFAMA publishes latest statistics on funds

On 31 March 2022, the European Fund and Asset Management Association (‘EFAMA’) published its latest monthly Investment Fund Industry Fact Sheet, providing data for UCITS and AIFs for January 2022. Net sales of UCITS and AIFs gave rise to net outflows of €18bn (compared to net inflows of €102bn in December 2021), with UCITS having net outflows of €8bn (compared to net inflows of €65bn in December 2021), and net outflows for AIFs of €10bn (compared to net inflows of €37bn in December 2021). Total net assets of UCITS and AIFs decreased by 2.7% during the period to €21.36tn.

Further, on 22 March, EFAMA published its report on international statistics for Q4 2021, in which it was noted that net sales of worldwide investment funds exceeded €1tn in Q4 2021, attributable to solid net sales of long-term funds and a rebound in the demand for MMFs, which increased markedly during the quarter.

13. IOSCO publishes sustainable finance work plan

On 14 March 2022, IOSCO adopted a far-reaching 2022 work plan to develop sustainable finance. In a press release, IOSCO noted that it is planning a timely and thorough review of the soon-to-be-published IFRS International Sustainability Standards Board Exposure Drafts of proposed climate and general sustainability disclosure requirements, as well as the final standards, when they are produced. IOSCO stated that if it determines that the IFRS Sustainability Standards are fit for purpose, its decision would provide all member jurisdictions with the basis to decide how they might adopt, apply or be informed by the ISSB standards.

Further, IOSCO notes that it will also push forward work to develop assurance standards, and has identified independent assurance of the quality of corporate reporting of sustainability information as a key element of building trust in sustainability reporting. IOSCO has also committed to an in-depth review of carbon markets to identify the vulnerabilities in nascent voluntary carbon markets, as well as the transparency and integrity in the functioning of carbon markets from the perspective of financial regulation.

Finally, IOSCO will also step up its engagement with both national regulators and market participants to push for the implementation of its recommendations addressed to asset management and ESG ratings and data providers.

14. IOSCO seeks feedback on good practices concerning ETFs

In April 2022, IOSCO published its consultation report on good practices concerning exchange traded funds (‘ETFs’) and to supplement IOSCO’s 2013 Principles for the Regulation of ETFs. The report concludes that the 2013 ETF Principles remain relevant and appropriate, with no major gaps identified and no major regulatory issues reported by IOSCO members or industry survey respondents, and further, that the ETF structure has generally proved resilient during historical stress events. However, noting the differences among jurisdictions in the way that ETFs operate, the way they are regulated, and the markets in which they trade, IOSCO concluded that the 2013 Principles would benefit from being supplemented by a set of proposed good practices.

The 11 good practices set out in the report address product structuring (including means of facilitating effective arbitrage and range of assets and strategies for ETF offerings), disclosure, liquidity provision and volatility control mechanisms. These are designed to respond to the recent significant global ETF market growth, and the increasing number of new products with exposures to novel and less liquid asset classes and more complex investment strategies.

The deadline for submissions is 6 July 2022.

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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