The Central Bank of Ireland (CBI) published its Securities Markets Risk Outlook Report for 2021. The report notes the changes that were introduced in 2020 e.g. new reporting obligations under the Money Market Fund Regulation (MMFR) and the Securities Financing Transactions Regulation (SFTR); Looking to 2021, the Central Bank has denoted areas of significance in terms of conduct risk that are applicable to the funds industry and where proactive steps are expected from firms to ensure they meet obligations.

The areas of conduct risk highlighted as priorities for 2021 are as follows:

• Dealing with the impact of external shocks. This includes shocks arising from COVID 19 and Brexit;
• Successfully managing the migration to greener securities markets; This is particularly pertinent in 2021 with the commencement of the Sustainable Financial Disclosures Regulation from March 10th. On 4 February 2021, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA, together the “ESAs”) delivered the final report to the European Commission, including the draft level 2 regulatory technical standards (“RTS”), on the content, methodologies and presentation of disclosures under SFDR. The European Commission is expected to endorse the RTS within 3 months of their publication and the ESAs have proposed in the draft RTS that the application date of the level 2 measures under the RTS should be 1 January 2022.
• Managing the increasing complexity in securities markets and the rules that govern them;
• Ensuring meaningful transparency for investors and other market participants, in particular on costs and fees;
• Understanding the risks and implications of the increased use of indices, as well as being transparent with the market on their use;
• Bolstering systems to identify, mitigate and manage misconduct risk, with a particular focus on the risk of market abuse;
• Ensuring governance arrangements are fit for purpose and properly resourced, including as businesses expand or change; and
• Improving the quality of the data firms use in their business and report to the Central Bank.

In addition to the above conduct risk priorities and commencement of SFDR, it is important to note a number of important regulatory changes which have been brought in or are due to be brought in.

Investment Limited Partnerships (Amendment) Act 2020

As previously advised the Investment Limited Partnerships (Amendment) Act 2020 (the “ILP Act“) was signed into law on 26 January 2021. The ILP Act has been long-awaited by the Irish funds industry. Going forward, it will enhance Ireland’s position as a principal domicile for private equity funds by expanding the product offering of Ireland’s investment funds sector, in particular by levelling the playing field with comparable offerings of other competitor jurisdictions.

While the ILP Act took effect from 1 February 2021. Certain provisions relating to beneficial ownership requirements for investment limited partnerships (“ILPs”) will apply at a later date of 1 March 2021.

At that stage, a six month period will commence within which ILPs established as at 1 March 2021 will be required to file their beneficial ownership information with the Central Bank To ensure inclusion on the Central Bank’s Register. Any ILPs established after the 1 March 2021 cut-off, must file this information within six months of setup.

ESMA’s Performance Fee Guidelines Applying from January 2021

ESMA’s guidelines on performance fees in UCITS and certain types of AIFs (the “ESMA Guidelines”) became effective from 5 January 2021.

In light of this development, the Central Bank issued a consultation (CP134) on 3 December 2020 in which it sought stakeholders’ views on the establishment of regulatory guidance regarding how it intends to incorporate the provisions of the ESMA Guidelines on performance fees into the Central Bank’s regulatory framework on performance fees, acknowledging there is currently some divergence between the ESMA Guidelines and the Central Bank requirements relating to performance fees.

The Central Bank noted in CP134 that the existing regime, which is outlined in the Central Bank UCITS Regulations 2019 and the AIF Rulebook, provides “strong protections for investors and continues in force notwithstanding the ESMA Guidelines, which will supplement the existing regime in certain respects”.

The consultation period for CP134 closed on 15 January 2021 and the Central Bank is expected to publish guidance on how the ESMA Guidelines will be incorporated into the regulatory framework.

Supervision of Costs and Fees of UCITS – ESMA launches a common supervisory action with NCAs

On 6 January 2021, ESMA announced that it is launching a common supervisory action (“CSA”) in 2021 with national competent authorities (“NCAs”), such as the Central Bank of Ireland (the “Central Bank”), on the supervision of costs and fees of UCITS. During this process, NCAs will share knowledge and experiences through ESMA to ensure supervisory convergence in how they supervise cost-related issues, with the ultimate goal being to enhance the protection of investors across the EU.

Following on from ESMA’s announcement, the Central Bank issued correspondence to industry in relation to the CSA. The correspondence from the Central Bank noted that as part of the CSA, NCAs will issue two questionnaires requesting both qualitative information and quantitative data from a significant proportion of the UCITS management companies established in their respective member states. NCAs will actively assess and analyse the information provided and, where needed, request further information and/or schedule direct engagements with the relevant UCITS management companies. It is likely that these questionnaires will need to be completed in March.

The CSA is aimed at assessing the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework, and the obligation of not charging investors with undue costs. As part of this process, the NCAs will be required to take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020.