October 2023
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.
Contents
Central Bank of Ireland updates
Sustainable Finance
On the 27th of September 2023, the Central Bank of Ireland (‘CBI’) published a speech by Patricia Dunne, Director of Securities and Markets Supervision, on sustainable finance in practice for fund managers.
The speech reiterates the critical need for an ambitious sustainable finance agenda in all European Union (‘EU’) Member States (‘MS’), and this shift will continue to result in an increased client or investor demand for products which incorporate ESG criteria. Both at an EU and MS level, there will be increased requirements and focus on full implementation of EU Sustainable Financial Disclosure Regulation (‘SFDR’) and Taxonomy Regulation.
Fund managers in Ireland should prepare to address any reporting issues in a timely manner and the CBI will host a workshop with key stakeholders to explain its findings and present any domestic clarifications.
Regulatory Agenda
On the 29th of September 2023, James O’Sullivan, Head of Function, Fund & Firm Authorisations, Funds Supervision Division of the CBI, delivered a speech on the present regulatory agenda at the domestic and international level.
Mr O’Sullivan considered the importance of the continued work on the Capital Markets Union at the European Level to diversify sources of finance for companies and tackle the barriers to the flow of capital. On the domestic level, the speech highlighted the thematic review on Exchange Traded Funds (‘ETFs’) which commenced earlier this year.
The primary objective of this thematic review was to gain a better understanding of the roles played by Authorised Participants and Market Makers in the ETF ecosystem, in order to assess the functioning of the Irish ETF sector.
Mr O’Sullivan also highlighted the CBI’s ‘mini thematic reviews’ in 3 areas: (1) the role of non-discretionary investment advisors (2) conflicts of interest for third party management companies and (3) the use of fixed operating models by some investment funds.
Mr O’Sullivan also commented that mini-thematic reviews will likely be utilised more frequently by the CBI going forward.
Consumer and Investor Protection
On the 28th of September 2023, the CBI published a speech by Deville Rowland, Deputy Governor, Consumer and Investor Protection which was delivered at the Associate for Financial Markets in Europe (‘AFME’) 7th Annual European Compliance and Legal Conference. In this speech, Ms Rowland considered 4 key points centred on the theme of dynamic change in uncertain times. These points were as follows:
- A broad, deep and integrated mandate: Unlike in many EU counterparts where supervisory roles are separated into different agencies away from Central Banks, the CBI integrates available supervisory mandates to best approach the interconnectedness of the financial market, ensure resiliency and stability and best protect the interests of consumers.
- Culture, capital markets and investor protections: Ms Rowland stated that an effective culture is a core element of how organisations can position themselves to ensure good outcomes for consumers and positive contributions to wider society. Along with this, there is a need to enhance the capital markets union and continue the work of the European Commission’s Retail Investment Strategy.
- The Individual Accountability Framework (‘IAF’): The CBI is in the process of introducing the IAF which will also include a Senior Executive Accountability Regime (‘SEAR’), as well as conduct standards. Ms Rowland added that the Central Bank conducted a broad consultation and will soon publish the outcome.
- Integrity of the system: The speech concluded with a call to organisations to take real ownership of IAF and AML/CTF frameworks in order to maintain the integrity of our markets and break down the global criminal economy used for money laundering, illicit financial transfers and corruption.
EU updates
ESA/ESMA: 2024 Work Programmes
On the 4th of October, the Joint Committee of the European Supervisory Authorities (‘ESAs’), which includes the European Banking Authority (‘EBA’), European Insurance and Occupational Pensions Authority (‘EIOPA’) and European Securities and Markets Authority (‘ESMA’) published a work programme for 2024. Some of the main priorities for 2024 relate to:
- Sustainable finance: The ESAs will deliver their third annual report under SFDR on the quality of reporting of Principal Adverse Impacts (‘PAI’) of investment decisions on sustainability factors, along with continued monitoring of the application of SFDR to test if Q&As and level 3 tools are needed to guide National Competent Authorities (‘NCAs’) and market actors on the practical application of the rules. The ESAs will also assess the need for the introduction of new implementing technical standards under SFDR in order to combat greenwashing in marketing communications.
- Digital operational resilience: The ESAs will continue their focus on promoting supervisory convergence on DORA and will finalise its work on technical standards, report and guidelines in 2014. The ESAs also plan to work towards the implementation of European Systemic Risk Board cyber incident co-ordination framework recommendations. The ESAs also plan to work on the establishment of an EU-wide Oversight Framework for Critical Third-party Providers (‘CTPPs’). (Note: Alongside the ESA programme, the ESMA released its own work programme (PDF, 970KB) for the upcoming year. Main strategic priorities for ESMA include: Effective markets and financial stability, effective supervision, sustainable finance, retail investor protection, technological innovation, and effective use of data and IT.)
ESMA: ESG Names and Claims in EU funds
On the 2nd of October, ESMA released a trends, risks and vulnerabilities (‘TRV’) risk analysis report (PDF, 490KB) on ESG-related language used in names and claims by the EU funds industry. This report is an important part of ESMA’s key priority of countering greenwashing and expanding its monitoring of firms promoting sustainability. Using quantitative text analysis, ESMA leveraged a large dataset of EU funds between 2013 to 2023 that have managed €16 trillion worth of assets to analyse. Through its analysis, ESMA identified 3 main findings:
- There has been an increase in the inclusion of ESG terms (like ‘sustainable’) in the naming regime of funds, pointing to increased investor appetite for these types of funds. ESMA also pointed out a preference amongst funds for more general terms (e.g. ESG) rather than more specific terms (e.g. using the words ’Environmental’ or ‘Sustainable’ words).
- Funds which contained ESG terms in their names were more likely than other funds to provide more extensive ESG disclosures in their descriptions of their investment strategy and KID/KIID.
- Funds sold to retail investors were more likely to contain more extensive ESG language in their KIDs/KIIDs than those funds which were sold to institutional investors. However, it was also noted that this difference did not exist for the investment strategy or marketing material.
ESMA held a public webinar on the report and its findings on the 18th of October.
ESMA: CSA: MiFID II & Sustainability
On the 3rd of October, a press release published by ESMA announced that in 2024 a Common Supervisory Action (‘CSA’) will be launched along with NCAs to assess the progress made by intermediaries in the application of the key sustainability requirements under MiFID II.
The CSA aims to assess how firms ensure suitability of investments in terms of sustainability, categorise investment products with sustainability factors, collect individual client’s sustainability preferences and determine how sustainability goals are compatible with the target market assessment of the investment product.
ESMA: Clarification of Timeline for MiCA
On the 17th of October, ESMA released a statement (PDF, 201KB) clarifying the timeline for the Markets in Crypto-Assets Regulation (‘MiCA’) entry into force. MiCA requirements will not apply until December of 2024, meaning crypto assets service providers will have to observe current legislation in the jurisdiction that they operate in.
Once MiCA becomes applicable, ESMA reiterated that Member States (‘MS’) can allow entities already providing crypto asset services an 18-month period to operate without MiCA licence, also referred to as the ‘grandfathering clause’. Therefore, full rights and protections under MiCA might not be universal until as late as the 1st of July 2026.
The statement also includes guidance for NCAs, with ESMA offering support to NCAs to develop common principles and best practices on convergence needed for the incoming MiCA authorisation regime and supervisory actions required from them.
ESMA: Consultations
ESMA has published the follows consultation for the firms’ consideration:
- ESMA: Consultation: RTS/ITS under MiCA (PDF, 2MB)
- ESMA: Call for evidence: EU Central Securities Depositories Regulation
- ESMA: Consultation: CCPs under EMIR (PDF, 551KB)
International
ESRB: Risks in Corporate Debt and Real Estate Investment Funds
On the 4th of September, the European Systematic Risk Board (‘ESRB’) published an issues note (PDF, 750KB) discussing the enhancements that the EU regulatory framework for investment funds could bring to the prevention and mitigation of systematic risks. ESRB analysis included the following conclusions:
- The current regulatory framework does not put enough emphasis on structural vulnerabilities arising in investment funds that invest in assets that are illiquid or may become illiquid in times of stress.
- Steps should be taken to develop and enhance policy tools for investment funds in order to promote financial stability, and this should become an effective first line of defence in times of market turmoil.
- In the next phase of its ongoing work, the ESRB will be mindful of the findings of the AIFMD and UCITS Directive review process.
IOSCO: Leveraged Loans and Collateralized Loan Obligations
On the 14th of September, the International Organization of Securities Commissions (‘IOSCO’) published a consultation (PDF, 703KB) report with twelve good practices for firms in the leveraged loan and CLO markets. The report is organised along the following five main themes:
- Origination and refinancing of loans;
- Earnings Before Interest, Taxes, Depreciation, and Amortization (‘EBITDA’) and loan documentation transparency;
- Greater alignment of interest charged on loans at origination and what is available to end investors;
- Addressing interests of different market participants throughout the intermediation chain;
- And, ongoing disclosure of information.
Invesco welcomes input from all stakeholders as part of this consultation by 15 December 2023 with a view to eventually publishing a set of good practices for the leveraged loan and CLO industry.
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.
