Central Bank of Ireland updates

Consumer Protection Outlook Report for 2023

In March 2023, the Central Bank of Ireland (‘CBI’) published its Consumer Protection Outlook Report for 2023 (PDF, 2.4 MB) outlining the key drivers of consumer risk for consumers of financial services in Ireland. In particular, the CBI identifies the following as primary drivers of risks across all regulated sectors, setting out specific expectations of regulated firms in identifying, mitigating and managing those risks:

  • Poor business practices and weak business processes;
  • Ineffective disclosures to consumers;
  • The challenging operational landscape;
  • Technology-driven risks to consumer protection; and
  • The impact of shifting business models.

The report also sets out the CBI’s risk outlook for 2023, noting that the key cross-sectoral risks and associated themes remain substantially unchanged, albeit that there were significant changes in the environment driving these risks. The report notes a range of economic changes since the publication of the 2022 report, including the war in Ukraine, energy-driven inflation, and the post-pandemic recovery and tightening labour market. These factors have elevated the changing operational landscape key risk driver, and in this regard, and recognising the impact of such significant changes on consumers, the CBI refers to the Dear CEO letter issued in November 2022 (PDF, 102 KB), setting out a series of specific expectations of firms in the areas of: affordability and sustainability; the provision of relevant, clear and timely information; effective operational capacity; and sales and product governance.

The report also refers to the risk of continuing financial innovation, as well as technology-driven risks, such as cyber-security and the potential for technological delivery to be a focus for frauds and scams. However, the CBI also noted instances of firms putting technology to good use to support consumer decision-making, e.g. in the area of online switching services.

With respect to shifting business models and poor business practices, the report notes that firms must ensure their due diligence on products takes account of all relevant factors, including risk-return profile, liquidity, costs and charges, and any ‘kick-out’ or ‘trigger’ features that may alter the nature of an investment product under certain conditions. The report also identifies, under the key risk driver of poor business practices and weak business processes, two distinct issues, namely: (1) the pursuit of strategies and practices that are unfair or problematic for the consumer, e.g. price walking in home and motor insurance; and (2) inadequate or ineffective internal processes and controls resulting in consumer detriment.

Central Bank of Ireland launches consultation on Individual Accountability Framework

On 13 March 2023, following the enactment of the Central Bank (Individual Accountability Framework) Act 2022 on 9 March, the CBI launched a public consultation (PDF, 499 KB) (CP153) on key aspects of the implementation of the Individual Accountability Framework (‘IAF’), including draft regulations (PDF, 908 KB) and guidance (PDF, 1711 KB). 

The IAF includes a number of key elements, including:

  • A Senior Executive Accountability Regime (‘SEAR’), which will require in-scope firms to set out clearly and fully where responsibility and decision-making lie within the firm’s senior management. 
  • Common Conduct Standards applicable to individuals in all regulated firms, such as acting with honesty and integrity, with due skill, care and diligence, and in the best interest of customers;
  • Additional Conduct Standards for senior executives related to running the part of the business for which they are responsible;
  • Enhancements to the current Fitness & Probity (‘F&P’) Regime, including clarifying firms’ obligations to proactively certify that individuals carrying out certain specified functions are fit and proper.
  • Amendments to the Administrative Sanctions Procedure to allow enforcement action to be taken directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.

The draft regulations and guidance seek to provide clarity in terms of the CBI’s expectations for the implementation of three aspects of the framework: (1) SEAR ; (2) the Conduct Standards; and (3) certain aspects of the enhancements to the F&P regime. The closing date for submissions is 13 June 2023.

Regulatory and supervisory priorities for 2023

On 15 March 2023, the CBI set out its regulatory and supervisory priorities for 2023 against the backdrop of a very challenging macro-financial environment, which is central to its regulatory focus. Among the CBI’s priorities include:

  • Continuing to remain vigilant in assessing and managing firms’ financial and operational resilience; 
  • Enhancing regulatory and supervisory approaches to mitigate risks from the changing financial system; 
  • Providing a clear, open and transparent authorisation process;
  • Progressing actions on the systemic risks generated by non-banks, in particular by advancing a macro-prudential framework for non-banks;
  • Consulting and engaging on the review of the Consumer Protection Code and the IAF;
  • Implementing new EU regulations on digital operational resilience (‘DORA’) and markets in crypto assets (‘MiCA’), as well as contributing to the review of the Payment Services Directive (‘PSD2’); 
  • Strengthening the resilience of the financial system to climate change risks and its ability to support the transition to a climate-neutral economy, along with implementing the EU’s Sustainable Finance Disclosures Regulation (‘SFDR’).

ESMA Guidelines on stress test scenarios under the MMF Regulation

On 24 March 2023, the CBI published a Notice of intention (PDF, 224 KB) in relation to the application of the European Securities and Markets Authority ('ESMA') Guidelines on stress test scenarios under the MMF Regulation (PDF, 650 KB), which were published in January 2023, and which apply from 27 March 2023. The Guidelines apply to competent authorities, money market funds (‘MMFs’) and managers of MMFs in relation to Article 28 of the MMF Regulation and establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs in accordance with that article.

The Notice of Intention notes that the CBI will, in due course, consult on the incorporation of a provision in the CBI UCITS Regulations and AIF Rulebook such that all managers of MMFs must adhere to the Guidelines. However, in the interim, the CBI advises that it expects full compliance with the Guidelines from 27 March 2023.

PRIIPs KID

On 24 March 2023, the CBI updated its guidance on filing and submission requirements for the PRIIPs Key Investor Document for UCITS. The amended guidance clarifies the process for filing PRIIPs KIDs for UCITS seeking authorisation from 1 January 2023 and for UCITS authorised prior to January 2023.

Common Supervisory Action on costs and fees

On 24 March 2023, the CBI published a letter setting out the findings from a Common Supervisory Action (‘CSA’) (PDF, 144 KB) undertaken in 2021 in relation to the costs and fees charged to UCITS as part of ESMA’s CSA to assess UCITS managers’ compliance with the relevant cost-related provisions in the UCITS framework. The letter notes that the CSA did not identify material undue costs being charged to UCITS; however, a number of deficiencies were demonstrated by fund management companies in setting the cost and fee structure for investment funds, which substantially increase the risk that investors will be subject to undue costs, and may negatively impact on investment returns.

Among the key findings identified were:

  • A lack of policies and procedures on costs and fees, with a significant majority of firms reviewed failing to demonstrate sufficient pricing governance structures in place;
  • Periodic reviews of costs and fees, with a majority of firms reviewed failing to evidence that regular reviews of their UCITS’ costs and fees structure had been conducted;
  • Design and oversight of fee structure – in the majority of cases where firms did not have documented pricing policies and processes in place, there was an over-reliance on assessments made by delegate investment managers for determining the pricing structure of the funds, with limited engagement in the process by some firms;
  • Efficient Portfolio Management (‘EPM’) – a significant majority of firms utilising EPM did not have formalised policies and procedures in place covering EPM activities, and for those that did, there was a general lack of sufficient detail;
  • Fixed Operating Expense (‘FOE’) models – a number of firms in the CSA sample utilise FOE models and confirmed that they retain any excess fees when the expenses of the UCITS are below the FOE model cap. However, in the majority of cases, the FOE was calibrated at such a high level that the firm would have, in almost all circumstances, been in receipt of additional income from the decision to implement an FOE.
  • Non-discretionary Investment Advisor Charge – there were a number of firms where the non-discretionary investment advisor was being paid a greater fee than the delegated investment manager.

The CBI letter advises that firms must have regard to their obligation to act in the best interests of investors and to treat investors fairly, supported by clearly documented policies and procedures with clear oversight and approval from senior management. Furthermore, the costs and fees charged and the methodology for calculating fees should be reviewed on at least an annual basis and documented. It should also assess, among other things, whether the costs and fees charged to investors remain appropriate taking into account the investment objective and strategy of the fund, the target and actual level of performance achieved as well as the role and responsibilities of service providers.

The letter directs the firms’ boards to consider the contents of the letter, in conjunction with the ESMA final report on the CSA published in May 2022, and to take appropriate action without delay. Further, the CBI requires that all firms managing both UCITS and AIFs conduct a gap analysis of the findings and expectations outlined in the letter and, where appropriate, to put a plan in place by end-Q3 2023 to address gaps identified.

38th and 39th editions of UCITS Q&As

On 24 March 2023, the CBI published the 38th edition of the CBI UCITS Q&A Document (PDF, 558 KB), featuring amendments to three Q&As (ID 1107, 1108 and 1109) concerning PRIIPs filing requirements. The amendment to ID 1107 clarifies that where a UCITS is required to produce a PRIIPs KID and is applying for authorisation of a new UCITS umbrella or sub-fund from 1 January 2023, the Responsible Person should submit the PRIIPs KID to the CBI.

This must be accompanied by a written declaration from the Responsible Person or legal adviser to the UCITS setting out that: (i) the KID complies with the PRIIPs Regulation; and (ii) the information in the KID does not conflict with the content of the prospectus.

The amendment to ID 1109 clarifies that a UCITS authorised prior to 1 January 2023 that has not submitted a PRIIPs KID as part of its authorisation is not required to submit a PRIIPs KID to the CBI at this time. However, the CBI intends to issue further guidance on the PRIIPs KID filing requirements for these UCITS in due course.

The 38th edition also features two new Q&As (ID 1110 and 1111) in relation to the filing requirements for  PRIIPs KIDs of  UCITS which intend to market to different types of investor. In particular, it is clarified that if a UCITS markets share classes within a fund or sub-fund to only professional investors, it may submit a UCITS KIID to the CBI for those share classes. Responsible Persons of a foreign-domiciled UCITS registered to market in Ireland that intends to market to retail investors in Ireland are also required to file a PRIIPs KID with the CBI.

On 4 April 2023, the CBI published the 39th edition of the CBI UCITS Q&A Document (PDF, 559 KB), which amends Q&A ID 1100 to reflect a change in terminology usage only, and reaffirms the CBI’s current position on a UCITS gaining exposure to digital assets.

Digital operational resilience in European financial services

On 28 March 2023, the CBI Director of Regulation, Policy and Risk, and Chair of the European Supervisory Agencies (‘ESAs’) Joint Sub-Committee on DORA Implementation, Gerry Cross, delivered a speech on the EU’s new Digital Operational Resilience Framework (‘DORA’) and its implementation. Mr Cross noted that DORA aims to mitigate technology and cyber risk by enhancing firms’ technology and cyber risk management and resilience, and creates a regulatory framework whereby all firms must ensure they can withstand, respond to and recover from ICT-related disruptions and threats, including cyber-attacks.

Mr Cross set out the governing principles of the Joint Sub-Committee’s approach, noting that a pragmatic approach will be essential to the implementation of the framework, including the adoption of a long-term and multi-year perspective. Mr Cross also stressed the importance of proportionality given the very wide range of firms that will fall within the scope of the framework, much of which is inherent and built into the Level 1 text. He also highlighted the need for engagement with stakeholders.

Having regard to the implementation of DORA, Mr Cross advised that there would be two packages of regulatory measures to be implemented by January 2024 and July 2024, respectively. The first package includes: the risk management framework; criteria for the classification of ICT-related incidents; the register of information on outsourcing; and rules on outsourcing policies. The second package includes the remainder of the regulatory products, such as: criteria for the classification of “major” IT incidents; reporting arrangements and requirements for such incidents; frameworks for threat-led penetration testing; and aspects of the oversight arrangements for Critical Third Party Providers.

Mr Cross advised that the outputs of the regulations fall generally under three headings:

  • Risk Management – inter alia requiring firms to have a good understanding of their ICT assets and how to protect them, to prevent incidents and detect unusual ICT system behaviour. Included in this is ICT resilience testing.
  • ICT Incident Management and Reporting – with DORA aiming to harmonise existing incident reporting requirements, and setting expectations for firms to record all ICT incidents and significant cyber threats.
  • Oversight of Critical Third Party Providers – while not falling directly within the regulatory framework, these entities will be subject to oversight.

Mr Cross advised that the DORA framework will come into effect on 17 January 2025.

Central Bank of Ireland publishes 47th edition of AIFMD Q&As

On 4 April 2023, the CBI published the 47th edition of the AIFMD Q&As, revising ID 1145, which considers if a RIAIF or a QIAIF can invest either directly or indirectly in crypto-assets. The revised Q&A does not change the CBI’s position in relation to RIAIFs. However, the CBI is increasing limits for indirect exposure to digital assets, depending on the liquidity provided by the QIAIF. Where a QIAIF is open-ended it can gain exposure to digital assets of up to 20% of NAV. Where a QIAIF is closed-ended or has limited liquidity it can gain exposure to digital assets of up to 50% of NAV. Specific requirements to avail of this are set out in the revised Q&A.

In light of the above, the CBI notes that it has updated the pre-submission process for QIAIFs proposing to invest indirectly in digital assets in excess of what is outlined in the AIFMD Q&A  ID 1145 or any direct investment in digital assets. 

ESA updates

ESMA publishes consultation paper on SFDR Delegated Regulation

On 12 April 2023, the European Supervisory Agencies published a joint consultation paper (PDF, 1.6MB) with amendments to the Delegated Regulation of the Sustainability Finance Disclosure Regulation. The purpose of the review is to broaden the disclosure framework and address some technical issues that have emerged since the SFDR was originally agreed, which concern sustainability indicators in relation to principal adverse impacts. The paper proposes amendments to the RTS on pre-contractual and periodic documents and on website product disclosures for financial products in order to include greenhouse gas emissions reduction targets.

In particular, the ESAs seek feedback on the following proposed changes:

  • Extending the list of social indicators for principal adverse impacts;
  • Refining the content of a number of the other indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation; and
  • Amendments regarding decarbonisation targets.

The ESAs also propose further technical revisions to the SFDR Delegated Regulation by:

  • Improving the disclosures on how sustainable investments “do not significantly harm” the environment and society;
  • Simplifying pre-contractual and periodic disclosure templates for financial products; and
  • Making other technical adjustments concerning, inter alia, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.

The deadline for submissions is 4 July 2023.

Industry and other updates

EFAMA publishes response to European Commission proposal on EMIR 3.0

On 14 March the European Funds and Asset Management Association (‘EFAMA’) published a position paper (PDF, 166KB) setting out its feedback on the European Commission’s proposal for the review of EMIR 3.0.

EFAMA advises that it shares the objectives of the review, which seeks to ensure financial stability in the EU, and the well-functioning of the existing central clearing framework. It also understands the objective of reducing excessive exposure to substantially systemic CCPs over time. However, EFAMA maintains that any regulatory measures should be proportionate to the regulatory rationale, and should not unduly harm market participants.

In this regard, EFAMA notes that the Commission’s proposal contains some welcome proposals, mainly relating to enhancing the regulatory processes that CCPs are subject to in bringing activities and services to market, improvements in CCP margin transparency, clarifications on transaction exemptions, and changes to the clearing threshold calculation.

However, EFAMA is opposed to any forced relocation policy in light of its view that this will have a negative impact from a cost perspective on end-investors. In particular, EFAMA has expressed its concerns with respect to:

  • The absence of hard figures and potential scenarios to test and quantify the impact of active accounts;
  • ESMA’s broad mandate to define active account thresholds, leaving potential impacts impossible to quantify at this point;
  • The absence of clear grandfathering for existing trades that have already been executed and submitted for clearing through a non-EU CCP;
  • Limited liquidity on existing EU CCPs and challenges in ensuring onboarding for clearing, as well as subsequent clearing, via these entities;
  • The underestimation of the cost of operationalising active accounts for buy-side firms.

EFAMA publishes latest statistics on funds

On 27 March 2023, EFAMA published its latest monthly Investment Fund Industry Fact Sheet (PDF, 394 KB), providing data for UCITS and AIFs for January 2023. Net sales of UCITS and AIFs gave rise to net inflows of €29bn (compared to net inflows of €23bn in December 2022), with UCITS having net inflows of €43bn (compared to net inflows of €16bn in December), and net outflows for AIFs of €14bn (compared to net inflows of €7bn in December). Total net assets of UCITS and AIFs increased by 2.8% during the period to €19.7tn.

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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