CENTRAL BANK GUIDANCE
Irish fund management companies must be in a position to demonstrate that they have revised relevant frameworks in order to meet the requirements of this guidance by December 2023 at the latest.
The guidelines are described in the Spring 2022 Horizon Tracker.
The Central Bank has introduced macroprudential measures for property funds (the "Framework"), which include limits on leverage and guidance on liquidity timeframes ("Guidance"). This follows a consultation issued at the end of 2021 ("CP145").
The Central Bank has decided to introduce macroprudential measures by way of:
- the imposition of a leverage limit pf 60% for property funds on the ratio of the fund's total debt to total assets. This applies to funds that invest 50% or more of their assets under management ("AUM") directly or indirectly in Irish property; and
- Central Bank guidance on liquidity timeframes for such funds. The Central Bank generally expects property funds to have a minimum liquidity timeframe of at least 12 months, taking into account the nature of the assets held.
The Framework provides that funds investing at least 80% of AUM in social housing will not be in scope of the leverage limit, subject to a number of criteria.
A five year implementation period will allow for the gradual and orderly adjustment of leverage in existing property funds. Existing funds will have 18 months to take appropriate actions in response to the Guidance. The Central Bank will now only authorise new funds if they meet the 60% leverage limit and it expects that property funds authorised after 24 November 2022 (the date of publication of the Guidance) will comply with the Guidance immediately.
For more information, see our briefing note Central Bank of Ireland Introduces Macroprudential Measures for Property Funds November 2022.
On 7 December 2022, the Central Bank of Ireland ("Central Bank") published a Dear Chair Letter providing feedback on a survey it had conducted in June 2022 in relation to fund management companies' governance, management and effectiveness. The Central Bank expects boards to consider the findings and expectations set out in the letter and to ensure that robust and appropriate governance arrangements are in place.
For more information, see our briefing note Continued Regulatory Focus on Governance and Substance December 2022.
On 1 April 2021, the Central Bank published guidance on Performance Fees of UCITS and Certain Types of Retail Investor AIFs (the “Central Bank Guidance”), which followed an initial consultation and partially implements the European Securities and Markets Authority ("ESMA") guidelines on performance fees published 5 November 2020.
The Central Bank is implementing the ESMA guidelines on a phased basis due to the need to: (a) consult on amending the domestic framework; (b) reflect the transitional periods provided under the ESMA guidelines; and (c) maintain a consistent approach for retail investor funds. There will be a further consultation on amending legislation to incorporate the ESMA guidelines into the CBI UCITS Regulations and the Alternative Investment Fun ("AIF") Rulebook, as the Central Bank considered that it was not possible to implement certain features of the ESMA guidelines with immediate effect from their date of application. The second Central Bank consultation had been expected to be published in 2022, but it is not now clear when the consultation will be published.
CENTRAL BANK CONSULTATIONS
The Central Bank has issued a consultation paper ("CP152") proposing changes to the own funds requirements for certain management companies to address a divergence between the requirements applicable to management companies authorised to provide discretionary portfolio management services and additional non-core services (known as the "MiFID Top-up") and portfolio managers authorised as investment firms under the MiFID regulations. Therefore, in the interest of maintaining a level playing field, the Central Bank is proposing to introduce bespoke own funds requirements for Management Companies using their top-up licences. The consultation closed on 23 February 2023.
For more information, see our briefing note CP152 – Proposed Changes to the Own Funds Requirements of Management Companies using a "MiFID Top-Up".
CENTRAL BANK THEMATIC REVIEWS
Thematic Review of SFDR Level 1 Compliance
The Central Bank has advised that it is conducting a thematic review of SFDR Level 1 compliance, which it expects to conclude in Q1 2023. The thematic review will primarily rely on in-house data that the Central Bank has already collected but may require the Central Bank to reach out to firms for certain clarifications. The Central Bank intends to issue its findings from the review in late Q1 / early Q2 2023.
Thematic Review of Exchange Traded Funds
The Central Bank will conduct a thematic review of exchange traded funds ("ETFs") during H1 2023. It intends to issue a questionnaire in Q1 2023 which will include both qualitative and quantitative questions and will focus on authorised participants ("APs") and market makers.
EU DRAFT LEGISLATION
Proposal for a Directive amending the AIFMD and the UCITS Directive
Procedure reference: COM(2021)721
Date published: 25 November 2021
On 25 November 2021, the Commission published a legislative proposal to amend the Alternative Investment Fund Managers Directive ("AIFMD") as part of the Capital Markets Union Legislative Package. The Commission has set out targeted proposals, which would amend both the Undertakings for Collective Investment in Transferable Securities ("UCITS") and AIFMD frameworks, including the introduction of minimum substance requirements where an EU fund management company delegates functions to a third country entity and an enhanced regulatory supervision framework for third country delegation arrangements. New rules addressing the use of liquidity management tools to ensure supervisory convergence across EU member states are also proposed. The Commission has also suggested increased reporting requirements for both UCITS and AIFs to facilitate monitoring systemic risk.
Latest stage: The European Parliament and the Council have now agreed on their respective positions on the proposals and trilogue negotiations are due to commence. Member states will have 24 months after entry into force of the amending directive to transpose the requirements into national law.
European Long Terms Investment Funds Regulation
Procedure reference: COM(2021)722
Date published: 25 November 2021
This proposed regulation contains targeted amendments to the ELTIF Regulation (Regulation (EU) 2015/760) reflecting the outcome of the Commission's review of the legislation. The aim of the proposals is to improve the attractiveness of the ELTIF framework for investment managers and investors and to increase the uptake of ELTIFs across the EU. To date, it has not been possible to establish ELTIFs in Ireland, but the Central Bank has indicated that it will consider how to accommodate ELTIFs within the Irish regulatory framework.
Latest stage: On 7 March 2023, the Council adopted the revised framework. It is expected that the new rules will apply nine months after their publication in the Official Journal of the EU.
On 17 May 2022, ESMA published a consultation on the information and templates to be provided and used by firms when they inform regulators of their cross-border marketing and management activities under the UCITS Directive and the AIFMD. The closing date for responses to the consultation was 9 September 2022. On 21 December 2022, ESMA published a final report specifying the information to be provided, and the templates to be used, to inform competent authorities of cross-border marketing and management of investment funds and the cross-border provision of services by fund managers. ESMA has submitted the RTS and ITS to the Commission for adoption within three months.
The Money Market Fund Regulation (EU Regulation 2017/1131 – "MMFR") requires the Commission to submit a report to the co-legislators assessing the adequacy of the MMFR from a prudential and economic point of view. On 12 April 2022, the Commission published its targeted consultation on the functioning of the MMFR. The consultation targets the relevant stakeholders and users of money market funds ("MMFs"), in particular the investors and managers of MMFs, seeking feedback on the impact of the MMFR on stakeholders, its different economic aspects and its role in the EU economy. This consultation will be informed by a comprehensive questionnaire that aims to complement the information collected by the other ESAs.
The deadline to respond to the questionnaire was 13 May 2022. The feedback will inform the Commission's report, which may propose changes to the MMFR. It is not clear as yet when the report will be published.
EU REGULATORY INITIATIVES
During 2022, ESMA conducted a common supervisory action ("CSA") focusing on the compliance of authorised managers of UCITS and open-ended AIFs with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets, is ongoing. The Central Bank issued a qualitative questionnaire requesting information and relevant supporting documents, together with an FAQ, to a sample of managers. In its Annual Work Programme for 2023, ESMA states that it will report on the outcome of the 2022 CSA on valuation of less liquid assets during 2023.
ESMA Common Supervisory Action on Costs and Fees
On 31 May 2022, ESMA reported on its CSA on costs and fees for investment funds, which was carried out during 2021. The Central Bank has confirmed that there will be a communication to industry in Q1 2023.