Asset Management Updates

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.

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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.

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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.

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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.

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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.

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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.

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