January 2024
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:
- CP152 Feedback Statement
- Minimum Capital Report
- Evolving supervisory approach to the funds’
- Individual Accountability Framework – Final Guidance
- Navigating Market Abuse and Regulatory Surveillance
- MiFID II Costs and Charges ‘Dear CEO’ Letter
- Central Bank Fine – EMIR Reporting
- Cross Industry Guidance on Operational Resilience
EU updates:
- CoEU: Amendments to AIFMD and UCITS
- EBA: RTS/ITS/Guidelines – Crypto Assets
- ESMA: Speech – 3 Asset Management Themes
- ESA’s – Sustainable Finance - SFDR Level 2
International and Industry updates:
Central Bank of Ireland updates
CP152 Feedback Statement
On 27th November 2023, almost exactly one year after the draft rules were issued, the Central Bank of Ireland (‘Central Bank’) issued a feedback statement (PDF, 461 KB) to consultation paper CP152 on its proposed approach to the Own Funds Requirements (‘OFR’) for those fund Management Companies which are also authorised to provide MiFID services.
The Central Bank received responses targeting four specific areas including (1) questions on the calculation of the risk-to-client k-factor requirements; (2) transitional arrangements; (3) reporting; and (4) requirements to perform an assessment of internal capital. Existing relevant Management Companies authorised before the date of issue of the new OFR (27th November 2023) will have 6 months to comply with the new OFR i.e. 27th May 2024.
Minimum Capital Report
Following the above, on 27th November 2023, the Central Bank published a reporting guidance note (PDF, 1.2 MB) for Alternative Investment Fund Managers (‘AIFMs’) and Undertakings for Collective Investment in Transferable Securities (‘UCITS’) Management Companies on periodic Minimum Capital Requirements (‘MCR’). The MCR report must be submitted to the Central bank by firms which hold an AIFM or UCITS management Company authorisations, along with half yearly and annual audited accounts signed by senior staff. This guidance note and new report template will apply to existing Management Companies with the MiFID permissions from 27th May 2024.
Evolving supervisory approach to the funds’ sector
On 9th November 2023, the Central Bank published a speech by Patricia Dunne, Director of Securities and Markets Supervision, on the Central Bank’s evolving supervisory approach to the funds’ sector. Ms. Dunne explained that the supervisory approach of the Central Bank with regard to funds has evolved as follows:
- Greater emphasis on engagement with management companies on the risks that are generated by the funds that they are responsible for.
- Greater focus and use of thematics and sector analysis (including ESMA Common Supervisory Actions (‘CSA’s) as well as local initiatives ETFs, and the use of mini-thematic reviews in the areas of the role of non-discretionary investment advisors, conflicts of interest in management companies and funds using a fixed operating expense model).
- Greater focus on potential systematic risks from funds.
- Development of the Central Bank’s technical data and risk analysis capabilities.
Ms. Dunne also highlighted the following regulatory priorities for the Central Bank for 2024:
- Sustainable finance/ESG;
- Delegation; and
- European Long-Term Investment Funds (ELTIFs).
Individual Accountability Framework – Final Guidance
On 16th November 2023, following a 3-month consultation process, the Central Bank has published a Feedback Statement (PDF, 442 KB) and issued regulations (PDF, 1 MB) and final guidance (PDF, 1.5 MB) to firms on the Individual Accountability Framework (‘IAF’). The final guidance will provide clarity regarding expectations for the implementation of the three main aspects of the IAF, which are:
1. The Senior Executive Accountability Framework (‘SEAR’).
This will require those firms in-scope for this part to set out clearly and fully where responsibility and decision-making lie within the firm’s senior management.
2. The Enhanced Conduct Standards.
These are basic standards such as acting with honesty and integrity, with due skill, care and diligence, and in the best interest of customers, and will apply to individuals in all regulated firms. Senior executives will also have Additional Conduct Standards related to running the part of the business for which they are responsible; and
3. The Enhanced Fitness & Probity regime.
This will include clarifying firms’ obligations to proactively certify that individuals carrying out certain specified functions are fit and proper.
A note on the main changes made to the draft rules in the course of the consultation process is available at the following KPMG risk consulting page.
The Central Bank noted that it was pleased with the in-depth engagement with the consultation process with stakeholders in the industry. The enhancements to the Fitness & Probity Regime and Conduct Standards became applicable on 29th December 2023, while the SEAR Regulations will apply to in-scope firms (banks, insurance companies and certain MiFID firms engaging in higher risk activities) from 1st July 2023 and to Independent Non-Executive Directors at in-scope firms from 1st July 2025.
Navigating Market Abuse and Regulatory Surveillance
On 28th November 2023, the Central Bank published a speech by Patricia Dunne, Director of Securities and Markets Supervision at the Central Bank, titled "Navigating Market Abuse and Regulatory Surveillance". The speech touched upon five separate areas which included:
1. Central Bank’s Mission and Principles.
In order for the Central Bank mission of safeguarding monetary and financial stability, as well as the best interests of consumers and the wider economy, the market needs to adhere to five principles of; (a) high level of protection for investors and market participants; (b) transparency in all relevant product information; (c) strong governing of firms that uphold the highest ethical and governance standards; (d) a market that is trusted by those raising funds as well as those seeking to invest and (e) market resilience to be able to continue core operational functions in stressed market conditions.
2. Hybrid-working.
Ms Dunne notes that COVID-19 has altered how we work but there is still a continued need for firms to maintain full and accurate communication records in order to evidence the intention behind trading. This was a deficient area highlighted in the Central Bank’s October 2023 review, and the Central bank urges firms to review relevant policies and procedures, assess their electronic communication monitoring and ensure appropriate training for staff.
3. Enhanced Central Bank Trade Surveillance Capabilities.
Post-Brexit increase of securities markets activity has triggered an internal risk assessment of the Central Banks own trade surveillance capabilities. This has led to a new market surveillance tool being acquired by the Central Bank to increase it’s capability in its supervisory role.
4. STOR Submissions.
The Submission of Suspicious Transaction and Order reports (‘STORs’) has been a key supervisory initiative in recent times. The Central Bank urges firms to look at these submissions as their commitment to fair and transparent markets, and notes that firms should submit more STORs, in particularly buy-side firms.
5. International and domestic co-operation.
The Central Bank shares that internationally they are signatories to both the International Organization of Securities Commissions (‘IOSCO’) and the European Securities and Markets Authority (‘ESMA’) Multilateral Memorandum of Understanding concerning consultation, cooperation and the exchange of information. This demonstrates the Central Banks commitment to tackle market abuse across multiple jurisdictions, as well as their domestic co-operation with the Garda National Economic Crime Bureau to identify, investigate and tackle market abuse.
Ms Dunne concluded the speech by reiterating that the 2024 work planning will reflect the importance of the highlighted areas in the speech and she urges firms to reflect these areas in their own plans for the coming year.
MiFID II Costs and Charges ‘Dear CEO’ Letter
On 1st December 2023, the Central Bank published an industry letter (PDF, 144 KB) on a (‘CSA’) on Markets in Financial Instruments Directive (MiFID) II Costs and Charges requirements coordinated by the European Securities Authorities (‘ESAs’). The letter discusses the findings following the recent thematic review of MiFID firms’ costs and charges.
The findings included (1) a limited adoption of the ESMA format for aggregated cost disclosure statements by firms; (2) a lack of detail and granularity in itemised breakdowns; and (3) limited use of format prescribed in Annex II of MiFID II Delegated Regulation 2017/565 a lack of oversight/monitoring over the outsourcing of the issuing of cost disclosures to third party providers. The Central Bank requires these findings to be discussed by firms Boards and will require a completed gap analysis review and action plan to be discussed and approved by the Board of each MiFID firm by 31st March 2024.
EMIR Reporting
On 28th November 2023, the Central Bank reprimanded and fined the investment fund GlobalReach Multi-Strategy ICAV (‘ICAV’) €192,500 for breach of its reporting obligation under Article 9(1) of the European Markets Infrastructure Regulation (‘EMIR’) which requires details of any derivative contracts to be reported to a registered trade repository no later than the working day following the conclusion of the contract.
The ICAV had failed to report 200,640 trades between January 2018 and May 2020. The Central Bank commented that the appropriate fine of €275,000 had been reduced by 30% to €192,500 by way of settlement discount. The Central Bank pointed out that delegation to the fund management company and onward to the investment manager did not remove the legal and regulatory obligation on the ICAV itself to ensure that the reporting was carried out and that it had at all times appropriate oversight over the delegation of the service.
The fact that the ICAV was aware of the breach and did not voluntarily report it to the Central Bank was viewed as an aggravating factor. Since the time of these breaches, EMIR reporting is now also a regulatory responsibility of the fund management company. Firms delegating/carrying out EMIR reporting are reminded to consider the contents of the Dear CEO letter (PDF, 2.9 MB) of 20 February 2019.
Cross Industry Guidance on Operational Resilience
The Central Bank expects its cross-industry guidance (PDF, 995 KB) for enhanced operational resilience issued in 2021 to be fully considered by firms within the 2 year deadline communicated at the time and that firms should already be in a position with effect from 1 December 2023 to evidence actions and plans to apply the guidance.
EU updates
CoEU: Amendments to AIFMD and UCITS
On 6th November 2023, the Council of the European Union (‘CoEU’) issued a note (PDF, 716 KB) from the General Secretariat of the CoEU to the Permanent Representatives Committee (‘COREPER’) which sets out the agreed text of amendments that are being proposed for the Alternative Investment Fund Managers Directive (‘AIFMD’) and the Undertakings for Collective Investment in Transferable Securities (‘UCITS’) Directive. The amendments focus on five areas, which include:
- Liquidity risk management;
- Provision of depositary and custody services;
- Delegation arrangements;
- Supervisory Reporting; and
- Loan origination by alternative investment funds.
The legislative text is awaiting formal adoption through the EU legislative process by EU institutions.
EBA: RTS/ITS/Guidelines – Crypto Assets
On 8th November 2023, the European Banking Authority (‘EBA’) published consultation papers on guidelines, Regulatory Technical Standards (‘RTS’), and Implementing Technical Standards (‘ITS’) relating to the Markets in Crypto Assets Regulation (‘MiCAR’). The Guidelines, RTS and ITS seek further input from stakeholders on five broad themes, which include:
- Own funds requirements and stress testing;
- Recovery plans;
- Reporting;
- Liquidity requirements; and
- Supervisory colleges.
The consultation represents a third tranche of consultations relating to ITS, RTS and Guidelines under MiCAR that have been released by the EBA. The EBA is seeking comments for these papers by the 8th February 2024.
ESMA: Speech – 3 Asset Management Themes
On 24th November 2023, the European Securities and Markets Authority (‘ESMA’) published the transcript of a speech (PDF, 182 KB) given by ESMA Chair, Verena Ross, delivered at a European Fund and Asset Management Association (‘EFAMA’) forum. The speech followed three main themes, these included:
- Leverage and valuation risk; According to Ms. Ross, ESMA is actively monitoring leverage and valuation risk across the sector. This is one of the ways ESMA is working to preserve financial stability in the Non-Bank Financial Intermediation (‘NBFI’), with specific focus on the asset management sector.
- Environmental, Social and Governance (‘ESG’); The speech covers many aspects of the work that ESMA is engaged with. ESMA’s main efforts involve the upgrade of ESG disclosures, work on a sustainable finance factsheet to be published at the end of November 2023, and the creation of final guidelines on using ESG terms or sustainability-related terms in funds names and ESG ratings files.
- Shorter settlement cycle: Lastly, Ms. Ross invokes ESMA’s previous call for evidence eon shortening the settlement cycle for EU asset managers and its impact on asset managers working with both US and EU funds. This work will be aided by engagement from EFAMA.
ESA’s – Sustainable Finance - SFDR Level 2
On 4th of December 2023, the Joint Committee of the European Supervisory Authorities (‘ESAs’), published a final report (PDF, 2 MB) on draft Regulatory Technical Standards (‘RTS’) on the review of Principal Adverse Impacts (‘PAI’) of investment decisions on sustainability factors which are currently set out in Level 2 of the Sustainable Finance Disclosure Regulation (‘SFDR’). The proposed changes relate to a greater scope of work than was originally requested by the European Commission (‘EC’), including:
- Revision of provisions for products that offer Multi-Option Products (‘MOPs’);
- Enhanced disclosure requirements of how sustainable investments address the Do Not Significantly Harm (‘DNSH’) principle; and
- Simplification of templates provided in the Annexes to the SFDR.
The RTS will follow the standard EU legislative process within the next three months.
International and Industry
IOSCO: Report: Crypto and digital asset markets
On 16th November 2023, the International Organization of Securities Commissions (‘IOSCO’) published a final report (PDF, 696 KB) setting out 18 policy recommendations for crypto and digital asset markets. The policy recommendations have been developed under the stewardship of the ISOCO Board’s Fintech Task Force (‘FTF’). With these recommendations, IOSCO directs its findings at relevant national and international regulatory authorities, in order to obtain a greater consistency in the provision of crypto and digital asset services across IOSCO member jurisdictions. The 18 recommendations are spread across five key themes, which include:
- Conflicts of interest that can arise from vertical integration of activities and functions, including best practice on organisational governance and disclosures of role, capacity and any possible trading conflicts;
- Insider trading, fraud and market manipulation, including management of material non-public information and market abuse and surveillance;
- Custody and client asset protection, which covers segregation and handling of client’s monies and assets;
- Operational and technological current and emerging risks; and
- Multinational risk and regulatory co-operation, with important benchmarks for IOSCO members to co-operate, co-ordinate and respond to challenges in enforcement and supervision in multiple jurisdictions.
IOSCO: Supervisory Practices: Greenwashing
On 12th December 2023, IOSCO has released a final report (PDF, 1.3 MB) on practices that national supervisors should incorporate in order to address greenwashing. Through the report, IOSCO identifies the challenges which have hindered the full implementation of its policy recommendations published in November 2021 and call for action in November 2022. The report highlights two key focus areas that need to be addressed, including:
- The development of a globally recognised definition of greenwashing. Many jurisdictions and IOSCO members have developed their own guidance on the identification of greenwashing and the risk associated with it, but these may differ from jurisdictions to jurisdiction.
- There has been an acceleration of growth in the ESG ratings and data products market, however few jurisdictions have mandatory or voluntary policy frameworks in place for this sector.
IOSCO noted that fines have been applied to greenwashing cases and concludes that greenwashing risks will remain high, therefore supervisory authorities should remain diligent and ensure that the global sustainable finance markets continue improving the quality and reliability of data available to investors.
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.
