May 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. Effective governance, culture, and agility in a changing environment

On 27 April 2022, the Central Bank of Ireland’s Director General for Financial Conduct, Derville Rowland, delivered a speech on the importance of effective governance, culture, and agility in a changing environment. Noting the need for regulators and regulated firms to prepare effectively for “predictable surprises”, Ms Rowland’s remarks focused on: (i) ensuring effective governance through accountability; (ii) the structural changes in the Irish retail banking sector; and (iii) sustainable finance, disclosure, and transparency.

With respect to ensuring effective governance and accountability, Ms Rowland referred to the Central Bank’s proposals for an Individual Accountability Framework, which included a Senior Executive Accountability Regime (‘SEAR’) the initial scope of which it is envisaged will include credit institutions, certain insurance undertakings, and investment firms. Subject to the legislative process, the Bill providing for these proposals can be expected to be enacted into law in the coming months.

With respect to sustainable finance, Central Bank expected firms to demonstrate clear ownership of climate risks affecting their firms, and to promote a culture that places emphasis on climate and other ESG risks. A further challenge for both the Central Bank and regulated firms was the need to ensure that sustainable financial products were defined in an accurate and transparent manner to foster among investors. Further, public disclosure by firms, as well as disclosures to clients and customers on sustainability risks and the impact of investment products are required to be clear, fair, and not misleading. Ms Rowland noted that the Central Bank was particularly mindful of this requirement in the asset management sector given the number of domiciled funds in Ireland. To this end, the Central Bank is currently carrying out a review of fund documentation in the sector with a view to identifying good and poor practices.

Ms Rowland also noted that the Central Bank was establishing a Climate Risk and Sustainable Finance Forum in order to bring stakeholders together, to share knowledge and best practice, and to build a shared approach to the understanding and management of the financial risks and opportunities posed by climate change. The first meeting of the Forum will take place on June 29 2022.

ESA updates

2. European Supervisory Agencies see recovery stalling

On 13 April, the European Supervisory Agencies (EBA, ESMA, EIOPA) issued their first joint risk assessment report for 2022, highlighting increasing vulnerabilities across the financial sector, as well as the rise of environmental and cyber risks. The report noted that while the EU economy had shown a strong recovery from the COVID-19 crisis, that recovery seemed to have been hindered by new waves and variants of the virus, as well as new concerns regarding inflation risk, rising commodity prices and geopolitical risks. In particular, the report notes that the invasion of Ukraine by Russia and its potential economic consequences were further affecting the recovery and the outlook for inflation.

The report went on to note that market resilience will critically depend on the ability of markets and financial institutions to deal with the Russian invasion of Ukraine and its consequences, and to withstand changes in public policy support on the monetary or fiscal side without material disruptions. Additional vulnerabilities and risks for the financial system have also built up over time, and the report also noted that financial markets remained vulnerable to changes in market sentiment, particularly if financial conditions were to tighten unexpectedly due to inflation pressures.

In light of the risks and uncertainties identified in the report, the ESAs have advised national competent authorities, financial institutions and market participants to take a number of policy actions, namely:

  1. Financial institutions should be prepared for further potential negative implications stemming from geopolitical tensions and should ensure compliance with the sanctions regimes put in place both at the EU and at global levels.
  2. Financial institutions and supervisors should prepare for a possible deterioration of asset quality in the financial sector.
  3. The impact of further increases in yields and sudden reversals in risk premia on financial institutions and investors should be closely monitored.
  4. Retail investors are of particular concern, and supervisors should monitor risks to retail investors, given that their participation in financial markets had increased substantially in recent years.
  5. Financial institutions should further incorporate ESG considerations into their business strategies and governance structures.
  6. Financial institutions should strengthen their cyber resilience and prepare for a potential increase in cyberattacks, having regard to the elevated level and frequency of cyber incidents.

In respect of the last recommended action, the report noted that COVID-19 had highlighted the important role played by technology in allowing the financial system to operate, which while bringing benefits, also expanded the potential scope and impact of cyber incidents. A successful attack on a major financial institution could have systemic consequences for the financial system; in the light of the Russian invasion of Ukraine, the EU faces an acute and elevated level of cyber risk.

3. European Supervisory Agencies publish joint annual report for 2021

On 19 April 2022, the Joint Committee of the European Supervisory Agencies (EBA, ESMA, EIOPA) published its 2021 annual report, which sets out its joint work completed over the year. The report noted that the main areas of cross-sectoral focus continued to be joint risk assessment, the enhancement of consumer protection, and the development of the regulatory and supervisory frameworks for sustainable finance and securitisation.

A significant workstream for the Joint Committee was the development of the regulatory and supervisory framework for sustainability‐related disclosures, which included the delivery of two sets of draft Regulatory Technical Standards under the Sustainable Finance Disclosure Regulation (‘SFDR’). The Joint Committee also stepped up its digital finance‐related work, including in the context of the European Commission’s Digital Finance Strategy, with extensive technical discussions on topics such as crypto‐assets and digital operational resilience. The ESAs have also been actively involved in the discussions on the legislative proposals for a regulation on markets in crypto‐assets (‘MiCA’), and the regulation on digital operational resilience for the financial sector (‘DORA’).

Consumer protection continued to be a key part of the Joint Committee’s work, and it received a Call for Advice from the European Commission on the review of the PRIIPs Regulation, to be delivered by end-April 2022. The Joint Committee also finalised its review of the application of the Joint ESAs’ Guidelines on complaints-handing, previously issued in 2014.

4. ESAs recommend changes to make PRIIPS KID more consumer-friendly

On 29 April 2022, the European Supervisory Agencies (EBA, ESMA, EIOPA) published their joint advice to the European Commission on the review of the PRIIPs Regulation, following the Call for Evidence launched by the ESAs on 20 October 2021.

The ESAs recommend significant changes to the PRIIPs Regulation, including:

Assessment of the effectiveness of sanctions

  • The ESAs recommend an amendment to the PRIIPs Regulation to clarify that the rules regarding the publication of sanctions apply to cases where an appeal was lodged and unsuccessful.
  • The ESAs also invite the Commission to consider whether the PRIIPs Regulation could be better organised by moving some of the articles, either internally or to a more appropriate EU legislative source.

Content, structure, accessibility and provision of the Key Information Document (‘KID’), including in view of the use of digital media

The ESAs recommend:

In respect of the content, structure and accessibility of the KID:

  1. that consumer testing be conducted in relation to the sequence and title of the different sections and the details of the contents of the KID, inter alia, to ensure that it is clear, succinct and comprehensible.
  2. that changes be made to the PRIIPs Regulation so that it is possible, if appropriate, to include a summary of the most essential information at the top of the KID in the form of a dashboard;
  3. that the PRIIP manufacturer be required to take into account the characteristics of  the type of retail investor to whom the PRIIP is intended to be marketed;
  4. that the PRIIPs KID be easy to access from the website of the PRIIP manufacturer.
    1. That the rules regarding the provision of the KID be consistent with the equivalent rules regarding other retail investor protection disclosures.
    2. That in order to ensure that the KID is adapted to digital media, changes should be made to the PRIIPs Regulation so that it is possible to include visual information, present information in a layered format and adapt the format and structure of the template for use on different devices, in particular smartphones.
    3. That it be possible for PRIIP manufacturers to provide a more personalised or tailored KID that complies with the relevant requirements in the PRIIPs Regulation and Delegated Regulation without needing to publish that KID first on its website.
    4. That the KID be required to be prepared in a machine-readable form.
    5. That information on the past performance of the PRIIP be included within the proposed European Single Access Point (‘ESAP’).

Scope of the PRIIPs Regulation

The ESAs recommend:

  • At this stage, and at least until a more differentiated approach between products is possible, that the scope of the PRIIPs Regulation not be extended to additional financial products.
  • That the exemption under art. 2(2)(d) in relation to securities be maintained, but to align it with the Prospectus Regulation.
  • That the exemptions under art. 2(2)(e) and (g) in relation to pension products be maintained at this stage.
  • That changes be made to the PRIIPs Regulation to specify more precisely which types of bonds fall within its scope.
  • To clarify the scope of application to non-financial services companies.
  • To develop and include within the PRIIPs Regulation a significantly longer non-exhaustive list of products that are in or out-of-scope.

The report also presents the ESAs’ views on other topics where it is considered that changes were required to be made to the PRIIPs Regulation, having regard to the analysis conducted by the ESAs since 2018, as well as stakeholder feedback. Such topics include:

  • Approaches to take into account different types of products, with the ESAs recommending certain types of changes to the PRIIPs Regulation, including adjustments to the empowerment in art. 8(5) for the ESAs to develop draft regulatory technical standards, to state that, where appropriate in order to provide fair, clear and not misleading information to retail investors, different approaches can be taken between different types of products;
  • Performance scenarios and past performance, including a recommendation to allow more flexibility on the nature of the information provided in the performance section of the KID;
  • PRIIPs offering a range of options for investment (multi-option products or ‘MOPs’), including recommended changes to the PRIIPs Regulation to allow certain approaches to be permitted;
  • Information in the KID on environmental or social objectives, including a recommendation that there be a new section in the KID to show prominently where a PRIIP has sustainable investment as its objective or promotes environmental or social characteristics.

5. European Commission launches targeted consultation on functioning of MMF Regulation

On 12 April 2022, the European Commission launched a targeted consultation, by way of a questionnaire, on the Money Market Fund Regulation (‘MMFR’). This is aimed to complement the information collected by other initiatives and work (including recent work by ESMA, ESRB/ECB, FSB) on the functioning of the existing rules on money market funds, in particular regarding the impact of the MMFR on the different economic aspects of MMFs and the role of MMFs in the EU economy.

Among the topics directed at MMF managers include:

  • The effectiveness of the MMFR in delivering its objectives in a range of areas;
  • The cost-efficiency of the MMFR;
  • The overall relevance of the MMFR framework;
  • The coherence of the MMFR; and,
  • The EU value-add of the MMFR, as compared with national frameworks.

The deadline for submissions is 13 May 2022.

Industry and other updates

6. EFAMA publishes latest statistics on funds

On 3 May 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 February 2022. Net sales of UCITS and AIFs gave rise to net outflows of €48bn (compared to net outflows of €18bn in January 2022), with UCITS having net outflows of €43bn (compared to net outflows of €8bn in January 2022), and net outflows for AIFs of €5bn (compared to net outflows of €10bn in January 2022). Total net assets of UCITS and AIFs decreased by 2.2% during the period to €20.88tn.

7. IOSCO consults on good practices regarding the operation of ETFs

On 3 May 2022, the International Organization of Securities Commissions (‘IOSCO’) published a consultation report with the purpose of proposing a set of good practices on the operation of exchange-traded funds (‘ETFs’) and to supplement IOSCO’s Final Report on Principles for the Regulation of Exchange Traded Funds (the ‘2013 ETF Principles’) published in 2013.

The report notes that since the publication of the 2013 ETF Principles, ETF markets globally have continued to evolve and have exhibited sustained growth in assets under management. To this end, the IOSCO Board conducted a review on a broad range of issues and developments relating to ETFs to identify any gaps in the 2013 ETF Principles.

Although the 2013 ETF Principles have been deemed to remain relevant and appropriate, with no major gaps or regulatory issues identified, differences were noted among jurisdictions in the way that ETFs operate, in the way they were regulated, and in the markets in which they trade.

It was thus determined that the 2013 ETF Principles would benefit from the introduction of a set of proposed good practices, drawing on reviews, as well as the work and experience of IOSCO. The report does not seek to replace the 2013 ETF Principles, nor does it comprise standards or recommendations, but rather sets out 11 proposed good practices or ‘measures’, focusing on the features of ETFs, divided into four groups, namely:

  • Effective product structuring (6 measures);
  • Disclosure (3 measures);
  • Liquidity provision (1 measure);
  • Volatility control mechanisms (1 measure).

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 Jorge Fernandez Revilla, Head of Asset Management

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