Asset Management & Investment Funds: Irish Practice Developments – February 2023

CBI filing process for updated SFDR pre-contractual disclosures

As anticipated in our January bulletin, revised SFDR Level 2 regulations have come into force. These include updated pre-contractual disclosure (PCD) and periodic reporting annexes which must be used by UCITS, RIAIFs and QIAIFs disclosing under Article 8 or Article 9 of the Sustainable Finance Disclosure Regulation (SFDR Level 1). The updated annexes include information for investors on investments in taxonomy-aligned fossil gas and nuclear economic activities.

The Central Bank of Ireland (CBI) has established a streamlined filing process for pre-contractual document updates based on the updated SFDR Level 2 requirements, under which both UCITS ManCos/ AIFMs (and the board of directors in the case of a self-managed UCITS or internally managed AIF) will be required to certify compliance with the requirements via an attestation. 

  • Timeframe for the streamlined process: Filings should be submitted as soon as possible and at the earliest available opportunity. The CBI will keep the submission of the revised documents under review. The streamline process will be time limited but the CBI has not indicated a specific deadline as yet.
  • Scope of  the streamlined filing process: The streamlined process is only available for updates related to the updated SFDR Level 2 regulations, other SFDR Level 1 or 2 requirements, updates to ensure consistency with the disclosures or other SFDR related updates that arise due to clarifications from European Commission, ESAs or CBI. Any other changes must comply with the usual CBI review process for the relevant Fund and should be submitted to allow sufficient time for CBI review.
  • Change of name: Where an SFDR related change of fund name is involved, the CBI will apply a version of the streamlined process.
  • Reclassification of a fund under the SFDR: The streamlined process cannot be used where a fund is changing its classification under SFDR.
  • Authorisation of a new fund / subfund: Any fund which was not authorised prior to 20 February 2023 will need to comply with the updated SFDR Level 2 provisions.
  • CBI review: The CBI will incorporate these updates in its review of a sample of the submissions received in respect of the recent SFDR Level 2 updates. CBI may require revisions to documentation to be made at a later date.

The CBI's key regulation and supervision priorities for 2023

CBI Governor, Gabriel Makhlouf set out the CBI's 2023 priorities for financial regulation in a letter to Minister for Finance, Michael McGrath. They were also detailed in a Dear CEO letter.

CBI Governor, Gabriel Makhlouf, noted a backdrop where global markets remain vulnerable to further shocks, in particular shocks to asset prices. There is potential for disruption in segments of the non-bank financial system, where leverage or liquidity mismatches are higher.

Priorities relevant to funds and fund managers are listed below.

  • Consulting and engaging on the operationalisation of the Individual Accountability Framework (IAF).
  • Continuing to progress actions on the systemic risks generated by non-banks.In particular advancing the development/operationalisation of a macro-prudential framework for non-banks, improvements to legislative frameworks and investor protections in the investment fund sector. CBI recently confirmed to IF that the macroprudential framework for property funds was the only such measure currently confirmed for investment funds.
  • Enhancing the governance, oversight and investor outcomes in the funds sector including the implementation of new ESG requirements and measures to mitigate greenwashing risks.
  • Strengthening the resilience of the financial system to climate change risks and its ability to support the transition to a climate-neutral economy, along with implementing SFDR.
  • Implementing new EU regulations on digital operational resilience (DORA) and markets in crypto assets (MICA). 
  • The implications of the UK's overseas funds regime (including the ongoing equivalence process) to ensure that Irish domiciled funds can continue to service UK investors.
  • Ensuring that the EU's anti-money laundering action plan, including the establishment of a single supervisory authority (the Anti-Money Laundering Authority or AMLA), results in a consistent and robust EU wide framework.
  • 2023 supervisory priorities include the assessment and management of risks to financial and operational resilience.
  • CBI regulation will continue to be outcomes- focused and follow six principles: forward looking, connected, proportionate, predictable, transparent and agile.

The CBI is currently carrying out two greenwashing-related reviews:

  • A spot-check review of SFDR Level 2 fast-track filings (similar to that carried out on Level 1 fast-track filings).
  • An internal thematic review focussing on the alignment of funds' SFDR classifications, investment strategies, and portfolio holdings.

The ESAs are also carrying out greenwashing-related reviews:

  • In response to the Commission's request for a report on the prevalence of greenwashing in the EU and the effectiveness of the EU supervisory framework to mitigate any risks identified. A progress report is due end-May 2023, with the final ESA report due by end-May 2024.
  • ESMA is expected to launch a greenwashing CSA for funds, this year.

Reform of the Limited Partnership Act 1907

The Government's Spring 2023 legislative programme notes that the heads of a bill is being prepared, namely the Miscellaneous Provisions (Transparency and Registration of Limited Partnerships and Business Names) Bill 2023.

The bill will reform the Limited Partnership Act 1907 and the Registration of Business Names Act 1963, strengthening Ireland’s regulatory framework and responding to concerns raised in relation to the transparency of limited partnerships (as distinct from investment limited partnerships).

CBI markets updates

The CBI published issue 1 of 2023 of its markets update, noting:

  • The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investment Firms Regulation 2023 (S.I. No. 10 of 2023) which incorporate amendments to the Central Bank Client Asset Requirements
  • The CBI published an updated version of the notice on the Implementation of Competent Authority Discretions in the IFD Regulations and the IFR.

The CBI published issue 2 of 2023 of its markets update, noting:

  • Process clarifications for UCITS and AIFs pre-contractual documentation updates in relation to the Commission Delegated Regulation (EU) 2023/363 (discussed above).
  • Extension of the deferred date of application for the clearing obligation and of the bilateral margin requirements for OTC derivative contracts that are not cleared by a central counterparty related to counterparties which are part of the same group.

AML/CFT/FS

Department of Justice Guidelines under section 37(12) of CJA 2010 issued, setting out a general definition of 'prominent public function'. This is important in the context of identifying politically exposed persons (PEPs).

A 'prominent public function,' in respect of such functions within the State, and where not otherwise specified, shall be an office or other employment in a public body in respect of which the remuneration is not less than the lowest remuneration in relation to the position of Deputy Secretary General in the Civil ​Service.

The guidelines then include a schedule setting out specific roles in the State. The schedule uses the word "including" in respect of the listed functions.

The CBI's 2023 Dear CEO letter on supervisory findings and expectations for payment and electronic money (e-money) firms included commentary on AML/CFT, including on distribution channels. It noted in the context of payment and electronic money (e-money) Firms:

  • Failure to regard distributors and agents as an extension of the firm and inappropriate oversight of CDD and other AML/CFT preventive measures carried out by agents or distributors on behalf of firms. For example, AML/CFT preventive measures need to be completed in line with the firms’ ML/TF risk assessment and AML/CFT policies and procedures.
  • Firms must exercise adequate oversight (including appropriate assessment) of the agents and distributors with a proper level of ongoing assurance conducted. The outcome of any testing carried out as part of the oversight of these arrangements should be included in management information prepared for the board and senior management.

For more information please contact a member of the Asset Management & Investment Funds team.

Date published: 28 February 2023