Central Bank of Ireland publishes Markets Update for June 2022

On 23 June 2022, the Central Bank of Ireland (the Central Bank) published Issue 6 of its regular Markets Update, in which it sets out alerts of interest to Irish regulated firms and other market participants.

Of the various items covered in this Issue, we would highlight, in particular, the following five:

1. ESAs provide clarifications on key areas of the RTS under SFDR

Although the Level 1 text of the SFDR came into effect on 10 March 2021, Level 2 measures (RTS) under it are still pending. In addition, the draft RTS have given rise to a fair amount of interpretive difficulties.

As a consequence, on 2 June 2022, the European Supervisory Authorities (ESAs) published a document seeking to clarify certain aspects of the RTS so firms can properly interpret them.

The ESAs’ clarifications cover the following topics:

• Principal adverse impact (PAI) disclosure of investment decisions on sustainability factors
• Pre-contractual and periodic disclosures for Article 8/9 products
• Taxonomy-related disclosures
• Do No Significant Harm (DNSH) disclosures
• Disclosures for financial products with investment options

For more detail, see our summary of the ESAs’ clarifications here.

2. The ESAs publish the joint report on the withdrawal of authorisation for serious breaches of AML/CFT rules

On 1 June 2022, the ESAs jointly published a Report on the applicable laws and practices regarding withdrawal of licenses for serious breaches of the rules on anti-money laundering (AML) and countering the financing of terrorism (CFT).

The Report

• calls for all relevant EU sectoral laws to include a specific legal ground to revoke licences for serious breaches of AML/CFT rules
• calls for the inclusion of assessments by NCAs of the adequacy of the arrangements and processes to ensure AML/CFT compliance as a condition for granting authorisation or registration
• highlights the importance of integrating AML/CFT issues into prudential regulation and supervision (including the proposed Markets in Crypto-Assets Regulation currently under negotiation)
• clarifies the nature of the decision to revoke licenses as a last resort measure, subject to a discretionary and proportionality assessment
• sets out uniform criteria for the notion of serious breach of AML/CFT rules and
• provides a preliminary analysis of the interaction between serious breaches of AML/CFT rules and the crisis management and resolution frameworks.

3. ESMA reports on supervision of costs and fees in investment funds

As we have previously reported, In January 2021, ESMA launched a Common Supervisory Approach (CSA) to look into

• how far authorised firms comply with the relevant cost-related provisions in the UCITS framework and the obligation not to impose charge undue costs to investors; and
• whether firms which use Efficient Portfolio Management (EPM) techniques adhere to the requirements set out in the UCITS framework and in the relevant ESMA Guidelines.

On 31 May 2022, ESMA published a Final Report, in which it set out its findings from the CSA.

Key conclusions include:

• there is room for improvement (particularly for smaller ManCos) in how firms apply ESMA’s June 2020 supervisory briefing on the supervision of costs in UCITS and AIFs
• some questions arose as to compliance with delegation rules where portfolio managers were sometimes found to exercise significant influence or even decide the level of costs
• in some instances, ESMA found there was a lack of policies and procedures on EPMs and a lack of clear disclosure as required under ESMA’s Guidelines on ETFs and other UCITS issues
• there was a continuing and widespread use of fixed fee splits arrangements for securities lending – this gave rise to unfavourable results for retail investors and
• the Report stresses the importance of firms ensuring that investors are adequately compensated, both where they have been charged undue costs or fees, and where calculation errors led to financial detriment for investors.

For more detail, see our summary of ESMA’s Final Report here.

4. ESMA provides supervisors with guidance on the integration of sustainability risks and disclosures in the area of asset management

On 31 May 2022, ESMA published a Supervisory Briefing in the context of compliance with the range of disclosure obligations (pre-contractual, website, periodic disclosure in annual reports etc) under the SFDR and the taxonomy Regulation.

The aim of the Supervisory Briefing is to ensure that, as far as possible, NCAs take a common approach in their supervision of investment funds with sustainability features, and in combating greenwashing by investment funds.

The Briefing (which is non-binding) gives ESMA's views on the following areas:

A. Guidance for the supervision of fund documentation and marketing material

• Fund documentation and marketing material
• Verifying compliance with pre-contractual disclosures
• Verifying the consistency of information in fund documentation and marketing material
• Verifying compliance with website disclosure obligations
• Verifying compliance with periodic disclosure obligations

B. Integration of sustainability risks by AIFMs and UCITS managers

C. Regulatory interventions in case of breaches

For more detail, see our summary of the Supervisory Briefing here.

5. New Q&As available

On 20 May 2022, ESMA updated a number of its Q&A documents, including those on

• the application of the UCITS Directive and
• the application of the AIFMD.

Each of these updates concerned the same issues, namely clarification of the rules around

• the performance reference period for the benchmark model and
• the performance reference period for the hurdle rate model

For more detail, see our summary of the updates here.