Asset Management & Investment Funds: Irish Practice Developments - July 2020

CBI expects full compliance on liquidity stress testing in UCITS and AIFs from 30 September 2020

The Central Bank of Ireland (CBI) published a notice of intention in relation to the application of the ESMA Guidelines on liquidity stress testing in UCITS and AIFs (the Guidelines). The CBI will consult on the incorporation of a requirement in the Central Bank UCITS Regulations and AIF Rulebook that UCITS Management Companies, AIFMs and depositaries adhere to the Guidelines. In the interim, the CBI expects full compliance with the Guidelines from 30 September 2020. Read our In Focus paper for more information on this topic. 

The CBI published the thirty-fourth edition of the Central Bank AIFMD Q&A which includes new Q&A's 1131 and 1132 in relation to liquidity stress testing in AIFs. The Q&A's clarify the CBI's expectations for liquidity stress testing (LST) in AIFs, particularly in relation to the Guidelines.

The CBI considers that:

  • LST should generally be performed at least quarterly
  • LST should be employed at all stages in an AIF's lifecycle, including at the design phase

The CBI published the twenty-ninth edition of the Central Bank UCITS Q&A which includes new Q&A's 1095, 1096 and 1097 in relation to LST in UCITS. The Q&As clarify the CBI's expectations for LST in UCITS, particularly in relation to the Guidelines.

The CBI's expects that:

  • LST should generally be carried out at least quarterly
  • LST should be employed at all stages in a UCITS lifecycle, including at the design phase
  • LST policy may be documented within the UCITS Risk Management Policy

Beneficial Ownership filings for ICAVs and Unit Trusts Christmas deadline

S. I. No 223 of 2020. European Union (Modifications of Statutory Instrument No. 110 of 2019) (Registration of Beneficial Ownership of Certain Financial Vehicles) Regulations 2020 (the Regulations) came into effect on 25 June 2020, as discussed in our newsalert.

The purpose of the Regulations is to provide for modifications of the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2019 (S.I. No.110 of 2019) (the Principal Regulations) in respect of ICAVs (whether UCITS or AIFs), Unit Trusts (whether UCITS or AIFs) and Credit Unions (which are not discussed here).

The Regulations are summarised below:

  • The CBI will maintain a Central Register of Beneficial Ownership of Irish Collective Asset-management Vehicles and Unit Trusts (the Central Register) as part of the CBI's ONR process.
  • Existing ICAVs and Unit Trusts have a six -month lead-in period to file their beneficial ownership information on the Central Register, ending on 25 December 2020.
  • New (from 25 June) ICAVs and Unit Trusts will also have a six month lead in time to file on the Central Register.
  • The Central Register will be hosted by the CBI.
  • The Regulations align the definition of beneficial ownership for Unit Trusts with the definition used for investment funds constituted as companies and ICAVs. The definition includes a 25% threshold as well as ultimate control. It includes any trustee or the settlor of the Unit Trust.
  • The Regulations exempt Unit Trusts from the obligation to file details of senior managing officials on the Central Register where it is not possible to identify a beneficial owner.
  • The Regulations provide that in the context of a Unit Trust, the obligations of the Unit Trust under the Principal Regulations must be discharged by the management company of the Unit Trust and the obligations of others, under the Principal Regulations, to the Unit Trust must be discharged by the person's doing (or not doing) the act concerned in relation to the management company of the Unit Trust.
  • The Regulations remove the obligation on ICAVs and Unit Trusts to verify the identity of beneficial owners using PPS numbers when filing beneficial ownership information on the Central Register. Instead, the presenter who makes the filing must give their own details and must complete a declaration that the information is complete and correct to the best of their knowledge. This makes good sense in the context of regulated entities who carry out customer due diligence on their investors.
  • Common Contractual Funds and Investment Limited Partnerships registered under the Investment Limited Partnerships Act, 1994 will be included on this Central Register in due course. 
  • The Regulations make provision for resourcing the CBI for the performance of these functions. It is intended to levy certain financial vehicles in Q1 2021 in respect of 2020 costs of the register. Details of the levy process will be communicated when available.
  • The Register will be made available to the public and certain listed bodies in accordance with the legislation in January 2021. The CBI will confirm when this access is available in due course.
  • Some further refinements are necessary in order to fully implement the provisions.  

 Both ICAVs and Unit Trusts were already obliged to:

  • take "all reasonable steps" to obtain and hold "adequate, accurate and current" information in respect of their beneficial owners
  • construct and maintain a beneficial ownership register and keep it up to date

The CBI launched a webpage and a CBI Beneficial Ownership Register FAQ on this topic.

Companies' Central Register of Beneficial Ownership – reporting discrepancies

​The Companies' Central Register of Beneficial Ownership (RBO)​ updated its FAQs to include the requirements and means for a competent authority/ relevant person or a designated person to report discrepancies. Form DN1 is used by a competent authority/ relevant person and Form DN2 is used by a designated person. These forms are to be e mailed (with specified information) to discrepancies@rbo.gov.ie.

Schrems II

The Court of Justice of the European Union delivered its eagerly awaited decision in Schrems II.

Schrems II calls into the question the ability of companies to lawfully transfer data from the EU to the US and other countries. The GDPR contains strict rules on transferring data from the EU to third countries, and this case deals with the compatibility of these rules with surveillance laws in other countries.

The headline outcome is set out below:

  • The Privacy Shield decision is invalid with immediate effect – this means that companies can no longer rely on a Privacy Shield certification when transferring personal data to the US.
  • Standard contractual clauses (SCCs) are valid – but their use is subject to certain pre-conditions and ongoing obligations.

You can read more about the detail and issues in this article.

CBI- MIFID II firms must enhance measures to protect consumers when selling complex investment products

The CBI published the findings of a Thematic Inspection of investment firms’ compliance with their legal requirements to determine whether a product is appropriate for their customers.

Firms are required to gather and assess information on the consumer’s knowledge and experience in order to determine whether the product is appropriate for them. If the product is not appropriate, they must issue a clear warning to the consumer.

The main findings of the inspection are set out below:

  • Several firms failed to provide evidence that they are paying sufficient attention to the application of the appropriateness requirements, instead placing undue reliance upon standardised questionnaires and 'box-ticking' to demonstrate compliance.
  • In many cases, firms’ practical application of the requirements was undermined by weak processes, systems, and controls; resulting in errors and assessments proceeding with incomplete information.
  • Many firms are relying on a blanket approach for gathering client information that fails to consider the significant differences in risk and complexity that occurs between investment products. Firms need to improve the quality of information collected.
  • In many cases, it was not clear how firms reached the appropriateness decision.
  • The review found evidence of inadequate and weak warnings issued where products were found to be inappropriate for clients, including the use of vague, ambiguous language. The appropriateness warning should not be viewed by firms as a disclaimer which overrides the legal obligations of firms to act in the best interests of the consumer.

The CBI is engaging directly with firms where issues have arisen. The CBI also sent a letter to all MiFID firms, detailing the findings of the inspection together with recommendations to enhance their compliance arrangements, where relevant.

Latest Irish Madoff ruling: Supreme Court orders High Court to determine relative liability of alleged wrongdoers

A recent Irish Madoff claim hinged on whether an Irish fund defrauded by Madoff could still sue its custodian for negligence after it had settled with Madoff. The Supreme Court ruled that the High Court was wrong to dismiss the claim in a preliminary ruling rather than resolving the issues at a full trial. The case will now go back to the High Court for trial. You can read more about the detail and issues in this article.

CBI QIAIF authorisation seminar

The CBI held a webinar with Irish funds industry representatives. The primary focus was the CBI authorisation and supervision approach for Qualifying Alternative Investment Funds (QIAIFs). This forms part of CBI's ongoing engagement with industry.

The main take away points were as follows:

  • CBI currently require pre-submissions for any QIAIF property fund, any loan-QIAIF or life settlement QIAIF or any other unusual QIAIF. Helpfully, the CBI gave details of the information which would be required in the pre-submissions
  • Leverage for QIAIFs should be realistic, relatable to the strategy of the QIAIF and board consideration of the rationale should be available on request
  • CBI is anxious to ensure the quality and clarity of investment policy disclosure.

Please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team for more detail on any of the topics raised.

CBI markets update 

The CBI published issue 7 2020 of its markets update.  It contains updates from CBI, the European Securities and Markets Authority (ESMA) and the International Organization of Securities Commissions (IOSCO). CBI updates include:

For more information in relation to any of these topics please speak with your usual contact on the A&L Goodbody Asset Management & Investment Funds team.

Date published: 31 July 2020