Central Bank of Ireland publishes Markets Update for November 2022

A summary of the Central Bank of Ireland's November 2022 Markets Update for regulated firms and other market participants.

On 1 November 2022, the Central Bank of Ireland (the Central Bank) published Issue 9 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 four:

1. Speech by Darragh Rossi, Head of Funds Supervision Division - Funds Supervisory Strategy & Outlook

In a keynote speech to the annual conference of the Certified Institute of Fund Directors, held on 20 September 2022, Darragh Rossi, Head of the Central Bank’s Funds Supervision Division looked at the Central Bank’s supervisory strategy and outlook for the Irish funds sector.

The speech highlights a number of the key themes of the Central Bank’s current strategy – an “ambitious” evolution of the Bank’s supervisory approach, which became effective in January 2022

“Transforming”

The Central Bank’s aim is to transform into a “more agile, resilient, diverse and intelligence-led organisation” in the face of significant structural changes, driven by a number of factors, including Brexit, the growth in the influence of ESMA, and an increase in the obligations and requirements under an expanding number of regulatory initiatives.

This has led to both material changes in the level of resourcing required to effectively meet those requirements and to the emergence of new business models to meet those demands. By way of example, Mr Rossi notes that, while, in 2019, 214 of the 359 fund management companies (ManCos) authorised in Ireland were self-managed investment companies, today that number is 18 (and expected to decrease further).

The Central Bank’s intention, then, is to direct greater attention towards ManCos and, in this way, supervise the underlying funds more effectively Focusing on fund ManCos in this way allows the Central Bank “to follow the risk, both from an individual firm perspective, but also across the sector and helps to ensure engagements with supervised entities are as effective as possible”.

“Open & engaged”

Through the rest of 2022 and into 2023, the Central Bank will continue to progress initiatives that build trust and understanding through stronger engagement with stakeholders and peers” in order to create an effective and efficient authorisation process for investment funds and fund service providers.

The Central Bank will continue to prioritise funds with a retail focus – it has, for example, reinstated authorisations for most Qualified Investor AIFs (QIAIFs) on the basis of confirmations.

It will also continue to engage with stakeholders around further enhancements to its authorisation process, initially focussing on the authorisation process for UCITS and Retail Investor AIFs and later around the approach to QIAIFs.

“Future-focused”

Mr Rossi highlighted three key risks and areas of focus for the Funds Division over the next 12 to 18 months, each of which represents a significant challenge for market participants and for regulators.

The geo-political and economic environment

More, rather than less, uncertainty can be expected over the months and years, in a variety of forms such as geo-political shocks, the macro-economic outlook and structural and regulatory challenges due to the post Brexit landscape driving legislative and regulatory evolution

All - firms and regulators alike - must be prepared to respond to unfolding events at short notice with a high degree of resilience available to weather such shocks.

Sustainable finance

The Central Bank’s focus will include (a) fund and firm disclosures (b) the integration of sustainability risks within firms risk management frameworks and (c) portfolio level analysis to understand the changes which funds are undertaking as they adapt their investment policies and strategies.

The Central Bank will ‘shortly’ be publishing its expectations around fund disclosures as firms prepare to make the updates required by the SFDR Level 2 measures coming into effect in January 2023. It will also outline a supervisory roadmap, providing more detail of its planned areas of focus over the next 12 to 18 months.

Digitalisation

Although 2022 has highlighted potential vulnerabilities with digital assets such as Bitcoin, the asset class is increasingly intertwined with the traditional financial system and “is not going away”.

Regulators have increased the extensive sharing of information and exchanging of views on approaches to these digital assets.

The recent Irish Funds white paper on crypto assets is a good example of the forthcoming changes, in terms of both the assets in which funds invest but also how funds and fund service providers use technology in the provision of investment products.

2. IOSCO Survey on interaction between Index Providers and Asset Managers

On 19 October 2022, IOSCO launched a survey, directed at asset managers and index providers and examining the nature of their interaction.

The survey identifies a number of potential areas that require further study.
These include:

• the role of asset managers in relation to indices and index providers and the role and processes of index providers in the provision of indices
• the potential impact of administrative errors on investment funds and
• potential conflicts of interest that may exist at the index provider in relation to the fund.

The survey also seeks views from respondents regarding their governance and processes during ‘exceptional market events or shocks’, such as the COVID-19 pandemic and the Russian invasion of Ukraine.

The survey closes on 26 November 2022

3. ESMA Call for Evidence on the implementation of the revised Shareholders Rights Directive (SRD2)

On 11 October 2022, ESMA published a Call for Evidence on “Implementation of SRD2 provisions on proxy advisors and the investment chain”

The purpose of the Call for Evidence is to gather information on how appropriate market participants consider the scope and the effectiveness of the SRD2 provisions to be in respect of (a) the identification of shareholders, (b) the transmission of information and facilitation of the exercise of shareholder rights and (c) the transparency of proxy advisors.

The consultation period closes on 28 November 2022 and ESMA intends to submit its input to the European Commission by July 2023.

4. ESMA to work on ESG disclosures as a new union strategic supervisory priority

On 27 October 2022, ESMA amended its Union Strategic Supervisory Priorities (USSPs) to include ESG disclosures alongside market data quality.

The new priority of ESG disclosures replaces costs and performance for retail investment products and is part of the implementation of the ESMA Strategy 2023 - 2028, in which sustainable finance [plays a prominent part.

ESMA intends to “foster transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain such as issuers, investment managers or investment firms and, hence tackle greenwashing”.

ESMA also aims to increase scrutiny of ESG disclosures through effective and consistent supervision, and, along with the EU NCAs, to take active steps to protect investors and facilitate investments in a credible ESG market.