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.
- CBI: Updated national provisions governing marketing requirements for AIFs
- CBI: Speech on the evolving crypto landscape and implementation of MiCA
- Revised RTS under ELTIF regulation
- 2022 CSA on valuation of UCITS/AIFs
- Risks from the provision of unregulated products and/or services
- Review of RTS on information required for authorisation and registration
Industry and other updates
- IOSCO: Report to enhance Special Purpose Acquisition Companies (SPAC) regulations
- IOSCO Final Report: Good practices relating to Principles for Regulation of ETFs
- IOSCO Consultation Report: policy recommendations for crypto and digital assets markets
- EFAMA: Joint Industry Statement on the EU Retail Investment Strategy
Central Bank of Ireland updates
CBI: Updated national provisions governing marketing requirements for AIFs
On 11 of May 2023, the Central Bank of Ireland (CBI) issued updated guidance on national provisions governing marketing requirements for Alternative Investment Funds (AIFs). Under the new guidance, AIFMs proposing to market non-EU AIFs to professional investors in Ireland are now only required to notify the Central Bank. Previously, approval of the CBI was required.
CBI: The evolving crypto landscape and implementation of MiCA
On 30 of May 2023, the CBI published a speech by the Director of Financial Regulation, Policy and Risk, Gerry Cross, delivered at the Blockchain Ireland conference on the current crypto landscape and the work being undertaken by the CBI and Department of Finance (DoF) as part of the European Union (EU) legislative process to finalise the Markets in Crypto Asset regulation (MiCA).
The speech begins with Mr Cross reiterating the CBI's strategy to be ‘open and engaged’ in responding to the rapidly changing innovations that are driving success in the financial sector. He references the current challenges facing many crypto exchanges due to poor governance and the lack of business sustainability that led to a ‘crypto winter’. He notes however, that the CBI remains positive towards the technological innovations underlying crypto and believes that if financial stability risks associated with crypto are addressed, the technology can have a positive effect to ordinary citizens and the wider economy.
In relation to the MiCA proposal, which was unanimously approved by the European Parliament (EP) in April 2023, the CBI has voiced concerns about the real risk of sub-optimal implementation of the regulation in all 27 jurisdictions of the EU after the transitional period ends. Crypto firms are looking at multiple jurisdictions across the EU to place themselves in the best position for the new regulatory regime. Therefore, it is important that the degree of rigour and emphasis with which the provisions of the regulation are applied are consistent across all the National Competent Authorities (NCAs). The MiCA regulation will become applicable to issuers of Asset Reference Tokens (ARTs) and issuers of E-Money Tokens (EMTs) ‘around July 2024’ and for Crypto Asset Services Providers (CASPs) and utility tokens at the beginning of 2025.
ESMA: Revised RTS under ELTIF regulation
On 23 of May 2023, the European Markets and Securities Authority (ESMA) published a consultation paper on the draft Regulatory Technical Standards (RTS) (PDF, 845 KB) under the revised European Long-Term Investment Funds (ELTIF) Regulation. The standards are derived from a targeted review of Regulation (EU) 2015/760 (ELTIF Regulation) adopted through a package of legislative proposals by the European Commission (EC) on the 25 of November 2021. The draft proposal included in the consultation paper focuses on five main areas as follows:
- Removal of certain demand side barriers for retail investors, specifically the €10,000 minimum investment threshold and the 10% maximum exposure cap.
- The ad-hoc suitability test and the “appropriate investment advice” requirement being removed and replaced by the Markets in Financial Instruments Directive 2014 (MiFID II) suitability test.
- Specific carve-outs regarding diversification and borrowing of cash requirements for “professionals only ELTIF”.
- Removal of certain restrictions for real assets and listed portfolio undertakings, inclusion of eligible securitisation, etc.
- Conditions for limited redemptions under the liquidity window mechanisms.
ESMA invites stakeholders to comment on the full version of the amendments and in particular the specific questions summarised at the end of the document. ESMA will consider all comments received by 24 of August 2023.
ESMA Report - 2022 CSA on valuation of UCITS/AIFs
On 24 of May 2023, ESMA published a report from the 2022 Common Supervisory Action (CSA) (PDF, 340 KB) with National Competent Authorities (NCAs) on the supervision of the asset valuation rules under the UCITS and AIFMD Directives. The aim of the CSA was to investigate the compliance of supervised entities with the organisational requirements with respect to asset valuation, as well as their adherence to valuation principles and methodologies under normal and stressed market conditions. The CSA’s main findings are summarised under these five followings topics:
- Appropriateness of valuation procedures and policies: NCAs found a satisfactory level of compliance by supervised entities but noted room for improvement on the documentation of valuation policies and procedures, appropriate allocation of tasks to responsible persons and greater clarity around the valuation model used.
- Valuation under stressed market conditions: Most NCAs found that the majority of managers performed stress tests to monitor liquidity of their portfolio periodically, although issues were spotted with supervised entities following valuation policies that did not distinguish between normal and stressed market conditions.
- Independence of the valuation function: NCAs again found that most entities performed well in this criterion, with main issues arising from (a) entities that did not contain an independent valuation function, particularly from the portfolio management function and (b) smaller managers’ over-reliance on third-party data providers for the pricing of less liquid assets.
- Early detection mechanisms for errors: Analysis mainly found a broad level of compliance, with main issues arising in those supervised entities who were not appropriately formalising remedial procedures for early detection of valuation errors and full investors compensation.
- Focus on Private Equity (PE) and Real Estate (RE) assets: NCAs identified issues in aligning the frequency of the NAV calculation, asset valuation and availability of up-to-date information available for all funds invested in less liquid assets, including PE and RE funds.
The continuing deterioration of the macroeconomic outlook and tightening financial conditions pose greater challenges in ensuring a fair valuation of assets, particularly under stressed market conditions. Building on the findings of this CSA exercise, ESMA will facilitate NCAs to discuss best ways of combatting the asset valuation deficiencies, especially in stressed market conditions, and will place more focus on PE assets and RE funds which might be more exposed to revaluation risk from their reliance on long-term models and illiquidity of their assets.
Provision of unregulated products and/or services by investment funds
On 25 of May 2023, ESMA published a statement on the risks of investment firms (PDF, 362 KB) providing products and services that fall outside the scope of financial services regulation in the EU, but are offered as investment alternatives to financial instruments (which are defined and regulated under MiFID II). Examples of products which are unregulated in some jurisdictions include crypto assets, real estate, gold, raw materials and certain non-transferable securities (such as non-transferable loan notes).
ESMA, along with National Competent Authorities (NCAs) is expressing concern that the rise of these unregulated products and/or services gives rise to both issues with investor protection and prudential risks. Risks identified relate to the potential for investors to be easily misled as to the level of protection they get, especially when non-regulated products or services are presented on the same webpage/catalogue as regulated ones. This may lead to reputational damage to the investment firm, the loss of clients and potential legal action or complaints if the investment firm has not provided clear information about the products on offer. To mitigate such risk, ESMA recommends that investment firms:
- Take all possible measures to present the clients with the regulatory status of the product or service they are receiving and disclose to clients when regulatory protections do not apply to the product or service provided.
- Use terminology that does not imply that the product or service is protected when such status would be misleading.
- Ensure that information provided by investment firm explicitly states when investor protections are lost/not applicable when investing in a product or service deemed to be outside of financial regulation, including compensation schemes, client assets protections, supervision by the NCAs and recourse to any national regulatory authorities.
- Ensure that the investment firm’s regulatory status (being authorised/regulated by NCA) is not used as a promotional tool when promoting products outside the scope of such protections.
ESMA recommends that investment firms take steps to consider the impact of unregulated activities and the risk they may pose to their business. Along with this, human resources should be dedicated to regularly review the design of their policies and procedures in the provision of their unregulated products or services.
Review of RTS on information required for authorisation and registration
On 30 of May 2023, ESMA released a final report on the amendments to the European Commission (EC) (PDF, 540 KB) Delegated Regulation supplementing the Benchmarks Regulation (BMR) 2018 regarding Regulatory Technical Standards (RTS) on information required for authorisation and registration applications by EU benchmark administrators. ESMA commenced consultations of these amendments in November of 2022, receiving one response for which a summary has been provided for in section three of the report. Based on the feedback it has received since consultations began, ESMA is not considering any further amendments to the RTS. The focus areas of the amendments are:
- Self-declaration: Applicants will now also be required to disclose if there are any adverse findings in civil proceedings in connection with the provision of financial services, misconduct or fraud.
- Annual Reports: Applicants will need to include individual and consolidated financial statements (where applicable) for the three financial years preceding the date of the submission of its application to the extent available.
- Organisational structure: Applicants will have to disclose details of certain employees ( e.g. number of employees, temporary or permanent contract, level of experience greater or less than five years, curriculum vitae).
- Conflicts of interest: Applicants will have to supply a document outlining how the provision of benchmarks is operationally separated form any part of the applicant’s business that may create an actual or potential conflict of interest.
All of the proposed amendments to the RTS are in Annex III of the report, with a consolidated and marked-up version being featured in Annex IV. These final amendments will be submitted to the EC which will then have three months to endorse the RTS.
Industry and other updates
IOSCO: Report to enhance Special Purpose Acquisition Companies (SPAC) regulations
On 11 of May 2023, the International Organization of Securities Commissions (IOSCO) published (PDF, 158 KB) a final report on Special Purpose Acquisition Companies (SPACs) (PDF, 1,273 KB) to help relevant members and national authorities to enhance their SPAC regulations. Special Purpose Acquisition Companies (SPACs) are described by ESMA as “publicly listed ‘blank check’ companies without operations that raise money through an Initial Public Offering (IPO), which is then used to finance a merger with, or acquisition of, a yet to be identified private operating company, thereby bringing it onto the public markets”. SPACs are currently a minor part of the primary markets. However, current market conditions have put pressure on closer monitoring of these markets and the strong growth of SPACs has raised concerns for many IOSCO members about investor protection and market integrity.
With a risk-based approach, the report notes that while SPACs pose similar risks to investors as traditional Initial Public Offerings (IPOs), the complexity and uncertainty inherent in SPAC structures poses several different risks. Disclosure obligations and gatekeeper functions vary also for these entities. The report concludes that while there is no ‘one-size-fits-all’ model for the regulation of SPACs and it is too early to assess what is the most effective approach, there are common approaches that members can take to review, develop, align or improve their SPAC frameworks. These approaches are set out in this detailed report.
Good practices relating to Principles for Regulation of ETFs
On 12 of May 2023, IOSCO published a final report (PDF, 950 KB) on good practices relating to the implementation of its Principles for the Regulation of Exchange Traded Funds (ETFs) (the ETF Principles). IOSCO explains that since it published 9 ETF Principles in 2013, ETF markets have evolved and shown sustained growth in assets under management. Additionally, the ETF industry has continued to change through the launch of new products with exposures to less liquid and more novel asset classes, making their products and investment strategies inherently more complex.
In the light of these developments, it established a dedicated framework to review a broad range of new issues relating to ETFs and to identify any gaps that may now be present in the ETF Principles. Following this review, IOSCO concluded that no major gaps or regulatory issues have been identified during the review of the ETF Principles and that they persist to be appropriate and relevant. IOSCO is of the view that the ETF structure has generally remained resilient during historical stress events and no structural issues related to ETFs have been identified that have had a bearing on financial stability.
An issue which IOSCO has identified is the major differences in how ETFs operate and are regulated between different jurisdictions. To counteract these differences, IOSCO has identified a set of 11 good practices that jurisdictions could implement in order to harmonise the markets for ETFs. Theses good practices are organised under the following four categories:
- Effective product structuring
- Liquidity provision
- Volatility control mechanisms
The good practices also focus on the distinctive features of ETFs, namely the trading of ETF shares in the secondary market and the associated arbitrage mechanism. IOSCO is encouraging regulators, responsible entities and trading venues to review and adopt the good practices, where appropriate, within each jurisdiction's regulatory framework.
Policy recommendations for crypto and digital assets markets
On 23 of May 2023, IOSCO published a consultation report (PDF, 730 KB) on policy recommendations for crypto and digital asset (CDA) markets. The purpose of the consultation is to enable IOSCO to finalise its policy recommendations to address market integrity and investor protection issues in the crypto-assets markets. IOSCO sets out 18 CDA policy recommendations developed in accordance with their crypto asset roadmap (PDF, 270 KB) from June 2022.
The CDA guidance is principles-based and outcome focused and aimed at crypto-asset service providers (CASPs). The six areas highlighted by the report are:
- Conflicts of interest arising from vertical integration of activities and functions.
- Market manipulation, insider trading and fraud.
- Cross-border risks and regulatory co-operation.
- Custody and client asset protection.
- Operational and technological risk.
- Retail access, suitability, and distribution.
They cover activities such as: offering, admission to trading, ongoing trading, settlement, market surveillance and custody usually performed by CASPs. The guidance also extends to secondary functions such as marketing and distribution of advised and non-advised sales to retail investors. The CDA recommendations emphasise the need for enhanced co-operation between jurisdictions and their regulatory body. (These recommendations do not cover decentralised finance (DeFi) which will be the subject of a separate consultation). This CDA consultation phase closes to responses on the 31 July 2023. IOSCO intends to finalise the CDA recommendations in early Q4 of 2023. While the recommendations are addressed to IOSCO members rather than directly to CASPs, IOSCO encourages all crypto market participants to carefully consider these recommendations.
EFAMA: Joint Industry Statement on the EU Retail Investment Strategy
On 6 of June 2023, the European Fund and Asset Management Association (EFAMA) published a joint industry letter responding to the European Commission (EC) reform based on the EU legislative framework for Retail Investment Strategy (RIS). The EC package uses an amending Directive to revise several rules in existing Directives, including MiFID II, IDD, UCITS, AIFMD and Solvency II. The letter highlights the industries support for the shift to ‘digital-by-default’ communications, streamlined disclosures and further promotion of financial literacy.
However, EFAMA and its members have also highlighted five areas of concern, as follows:
- Although the EC appears to have dropped its proposal to proceed with a total prohibition of commissions in the distribution of investment products and insurance-based investment products, there are still many prohibitions to the payments of commissions left in the RIS proposal.
- The proposed ‘best interest of the client’ test disproportionately focuses on costs and may lead to clients prioritising the cheapest product over products offering them greater value. This would be contrary to the client’s best interest.
- A significant increase in the number of new processes, policies, organisational requirements, technical disclosures and compliance obligations introduced by the RIS proposal deviates from the initial goal of reducing the information overload on clients and making access to financial services simpler.
- The proposed one-size-fits-all quantitative ‘value for money’ benchmarks disregard that value encompasses more than just costs and would go against the core goal of the investment process to offer tailored solutions to different clients’ needs.
- The proposed timeline of full compliance with and implementation of the new requirements is unfeasible from an industry view.
The EC feedback regarding the RIS proposal is open until the 11 August 2023, with the reform package’s entry into force on the 20th day following its publication in the Official Journal of the European Union. The new reform will apply 18 months after its entry into force.
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.