Key Supervisory Developments for Asset Managers

These developments include the following:

Investment Fund Errors – the Central Bank intends to establish a clear regulatory framework for investment fund errors which will outline its expectations in terms of what should happen when an error occurs, for example what communication or disclosure should be undertaken and when it may be appropriate to pay compensation to affected parties. The Central Bank is currently drafting the relevant requirements and will consult on them in due course.

UCITS Performance Fees – notwithstanding the completion of its thematic review on UCITS performance fees, the Central Bank continues to view transparency and fees in the investment fund sector as a supervisory priority.

Fund Management Company Effectiveness – the Central Bank is currently scoping a review of how firms have implemented the package of Fund Management Company Effectiveness measures introduced under CP86. It will issue a questionnaire to fund management companies and self-managed investment companies in the coming weeks with a short turnaround for responses. Once the responses have been analysed, the Central Bank will follow up with desk-based reviews and onsite inspections for selected firms. The broad aim of this work will be to identify standards of industry compliance, to inform the Central Bank’s supervisory approach and to ensure that management companies have systems of governance in place to protect investors’ best interests.

MiFID II – Market Surveillance – the Central Bank will continue to proactively engage with existing firms as well as newly authorised firms on the accuracy and completeness of the data submitted.

MiFID II – Thematic Review on Investment Research – the Central Bank is currently undertaking a focused review across asset management and stockbroking firms to assess how investment firms are treating investment research under MiFID II and whether this treatment is in compliance with the relevant rules under MiFID II, in addition to the implications these rules are having on the sector. To date some of the key trends arising from this review are as follows:

• there has been limited use of the option to use a Research Payment Account (“RPA”) to charge clients for the cost of research used in the provision of an investment service;
• the cost of absorbing research costs has impacted both the asset management and stockbroking sectors, but appears to be slightly more costly on the asset management side;
• in the case of group companies, there appears to be a lack of consistency and understanding as to how the cost of research is absorbed in line with the requirements; and
• there has been very few issues noted to date in relation to the availability or quality of research within the Irish market, compared with reports from the UK market, however firms are placing limits on the number of providers with whom they engage.

Corporate Governance – the Central Bank has recently completed a thematic review to evaluate the approaches in use regarding two of the three lines of defence, namely compliance, risk and internal audit services. The thematic review focussed on firms across both the fund service providers' and MiFID sectors and one of its key findings was that not all boards and senior management were able to demonstrate that they are actively considering the control framework in operation in their firms. The Central Bank is envisaging issuing an industry letter in this regard over the coming months.

In addition to the developments outlined in the speech above, other areas of Central Bank focus include Brexit, fitness and probity, EMIR reporting and Sustainable Finance/ESG (Environmental, Social & Governance) Investing.

You may access the speech here. For further information on the Central Bank’s current priorities, see our briefing here.