Asset Management Updates

On 18 April 2023, the Central Bank of Ireland’s (‘CBI’) Deputy Governor, Derville Rowland, delivered a speech on the CBI’s consultation on key aspects of its Individual Accountability Framework (‘IAF’). Ms Rowland advised that the purpose of the IAF is to promote sound governance throughout the regulated financial services sector, aligned with the key themes of the CBI’s strategy being: (i) safeguarding; (ii) future-focused; (iii) transforming; and (iv) open and engaged.

Ms Rowland advised that the Central Bank (Individual Accountability Framework) Act 2023 covers four key areas:

• A Senior Executive Accountability Regime (‘SEAR’), which ensures clearer accountability by imposing obligations on in-scope firms and senior individuals within them to set out clearly where responsibility and decision-making lie in their business;
• Conduct Standards for firms and the individuals working within them;
• Enhancements to the current Fitness & Probity (‘F&P’) Regime; and
• Enhancements to the Administrative Sanctions Procedure, including in respect of the CBI’s ability to take enforcement directly against individuals for breaches of their obligations.

The objective of the IAF is to achieve better outcomes for consumers and users of financial services and the ongoing functioning of the economy. In this regard, the CBI has considered the changing financial services landscape as well as international developments in the area of individual accountability, in particular the evidence of the effectiveness of similar regimes introduced in other jurisdictions.

SEAR will initially apply to a defined range of regulated firms, namely credit institutions (excluding credit unions), certain insurance undertakings and investment firms and incoming third-country branches of these firms. However, the CBI will have the power to roll out SEAR to other sectors in due course. In the meantime, the CBI’s view is that there is much in the spirit of the SEAR that firms not initially falling within scope should recognise as aligned with good quality governance.

For the Common Conduct Standards, these will impose a single set of readily understood, basic obligations on individuals carrying out Controlled Functions within firms, with additional standards for individuals carrying out PCF and CF1 roles. In addition to what is set out in legislation, the draft IAF Guidance sets out the CBI’s expectations in this regard, with some non-exhaustive examples of steps reasonable for individuals to take in certain circumstances to ensure they meet their obligations.

As regards the F&P Regime, the IAF will, among other things, strengthen the onus on firms and holding companies to proactively certify that individuals in controlled functions are fit and proper on an ongoing basis.

Ms Rowland advised that the CBI was keen to receive feedback on its Consultation Paper on the implementation of the IAF, following which the CBI intends to allow for a transitional period for firms and holding companies to implement the relevant changes introduced. This would see, among other things:

• Conduct Standards to apply from 31 December 2023; and
• Certification requirements under the F&P Regime to apply from 31 December 2023.

The closing date for submissions in respect of the consultation paper is 13 June 2023.

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In April 2023, the Department of Finance published its Terms of Reference for conducting an holistic review of the asset management and funds servicing sector (both regulated and unregulated) in Ireland. The output of this review is intended to inform and refresh the Government’s policy and legislative framework for the years ahead.

The review will take into account the following:

• The recent work of the Commission on Taxation and Welfare;
• The IMF Financial System Assessment of Ireland 2022;
• The  recently  updated  Government  strategy  for  the  international  financial  services sector;
• That  the  funds  sector,  and  the  International Financial Services  sector  more  widely, has  been  a  driver  of employment and economic activity across the country;
• The relationship and interlinkages with the EU’s Capital Markets Union policy;
• The evolving regulatory regime (including the regulatory toolkit) for the funds sector at EU level and more generally internationally;
• The fact that Ireland is now a very large international financial services centre and, in particular, a significant jurisdiction for funds;
• The fact that funds in Ireland are both regulated and unregulated; and
• The fact that Ireland’s international reputation as a well-regulated, predictable, transparent and ‘best-practice’ environment has been a key factor in the growth of the International Financial Services sector.

The  Department  of  Finance  will  undertake  this work by  means  of  a multi-disciplinary  team, comprising  its  own staff  and staff from other  relevant  state bodies,  including Revenue, the CBI and, where appropriate, experts from outside the State sector. The Review Team will also engage extensively with stakeholders and will seek external views, including through public consultation. The Review Team will present its draft report to the Minister by the summer of 2024.

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On 25 April 2023, the ESAs issued their Spring 2023 Joint Committee Report on risks and vulnerabilities in the EU financial system (PDF, 585 KB). While noting that EU financial markets remained broadly stable despite the challenging macro environment and recent market pressure in the banking sector, the ESAs called on national supervisors, financial institutions and market participants to remain vigilant in the face of mounting risks.

The report notes that the macroeconomic environment continued to deteriorate in H2 2022 in a context of high inflation, high commodity prices and tighter financial conditions, with the economic environment remaining uncertain, though a deep recession is no longer expected. High inflation is expected to generally decline in 2023, but will probably remain elevated for a longer period than initially projected. Financial asset prices have been volatile in H2 2022 and market liquidity has, at times, been strained, with sharp asset price movements triggering unexpectedly large margin calls for some market participants, notably non-financial corporations and non-bank financial institutions.

The report goes on to note that overall, high uncertainty and fragile market liquidity are limiting the resilience of the financial system against further external shocks, with political uncertainty still elevated at global and regional levels. Furthermore, cybersecurity remains another area to monitor and address, with a high number of sophisticated cyberattacks and the continuing Russian war in Ukraine. Finally, the report notes that the failures of a few medium-sized US banks in March 2023 brought market pressure on banks globally and general tension in other global financial markets.

Having regard to the above risks and uncertainties, the Joint Committee has advised the ESAs, national competent authorities, financial institutions, and market participants to take the following policy actions:

• Financial institutions and supervisors should remain prepared for a deterioration in asset quality in the financial sector.
• The broader impacts on financial institutions and market participants from increases in policy rates and sudden increases in risk premia should be closely monitored and accounted for in risk management, including liquidity risk management.
• Liquidity risks arising from investments in leveraged funds and the use of interest rate derivatives contracts should continue to be closely monitored.
• Financial institutions and supervisors should be aware of and closely monitor the impacts of inflation risk.
• Banks should pursue prudent capital distribution policies amid an uncertain medium-term outlook for profitability in order to ensure their long-term financial resilience.
• In order to maintain the resilience of the financial sector it is important to maintain a strong regulatory framework for financial institutions.
• Financial institutions are expected to put further efforts in climate-related risk management, and more broadly ESG risks management, as these risks are becoming increasingly a source of financial risk on their balance sheets.
• It is important that financial institutions have adequate skills and capacities to ensure ICT security, and provide adequate resources, including for ICT risk management.
• The sell-off in crypto assets illustrates again the need to regulate effectively the crypto-asset sector.

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On 14 April 2023, the European Funds and Asset Management Association (‘EFAMA’) published a joint industry letter (PDF, 239 KB) expressing its support for the European Parliament’s proposal relating to the establishment of an equities/ETFs consolidated tape. In particular, EFAMA has advised that the Equities/ETFs consolidated tape should:

• include ETF and Equities on a single tape;
• deliver data in as close to real-time as technically possible;
• provide both pre and post-trade transparency in the form of 5 layers of pre-trade data;
• be priced on a Reasonable Commercial Basis and be consumed on a voluntary basis; and,
• benefit from a robust governance framework.

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On 12 May 2023, the International Organization of Securities Commissions (‘IOSCO’) published its Final Report on Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds (PDF, 950 KB) (‘ETFs’) covering effective product structuring, disclosure, liquidity provision, and volatility control mechanisms.

The report notes that in 2013, IOSCO published its final report with Principles for the Regulation of Exchange Traded Funds, which set out to cover a wide range of topics, including disclosure, portfolio transparency, costs, risks, strategies, structuring issues on counterparties and conflicts of interest. However, since 2013, EFT markets have continued to evolve and show sustained growth in assets under management, through the launch of new products with exposures to less liquid and more novel asset classes and more complex investment strategies. In light of such developments, the IOSCO Board mandated the establishment of a dedicated workstream to review a broad range of issues and new developments relating to ETFs and to identify any gaps in the ETF Principles.

IOSCO has now concluded that the ETF Principles remain relevant and appropriate, with no major gaps identified, and no major regulatory issues reported by IOSCO members or industry. It also notes that the ETF structure has generally remained resilient during historical stress events, which have been idiosyncratic events or were precipitated by exogenous shocks to the sector. Further, no structural issues related to ETFs were identified that have had a bearing on financial stability.

However, IOSCO noted differences among jurisdictions in the way that ETFs operate, the way they are regulated, and the markets in which they trade. With these differences in mind, IOSCO has concluded that the ETF Principles would benefit from being supported by a set of good practices, in the form of 11 measures, as examples of how jurisdictions could implement the ETF Principles, in the areas of:

• Effective product structuring;
• Disclosure;
• Liquidity provision; and
• Volatility control mechanisms.

IOSCO encourages regulators, responsible entities and trading venues to review and adopt these good practices, where appropriate, within each jurisdiction’s regulatory framework.

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