The Central Bank of Ireland (CBI) published its 2025 Regulatory & Supervisory Outlook Report (Outlook Report) setting out its view on risks and priorities across the financial sector and its consequent regulatory and supervisory priorities for the next two years.
An accompanying Dear CEO letter serves to highlight the significance of the Outlook Report’s content for boards and senior leadership teams, including those of funds and fund management companies (FMCs). This is to ensure they understand the CBI’s perspective on the risk landscape and supervisory expectations. Additionally, the CBI’s Dear CEO letter provides an overview of the recent changes to its supervisory model.
For the purposes of this update, we focus primarily on the key risks and supervisory priorities relevant to the funds sector.
Risk themes
The CBI’s supervisory priorities are shaped by a set of cross-cutting risk areas under three broad thematic headings reflecting different drivers of risk:
- Risks driven by the global macro and geopolitical environment e.g. interest rate and inflation risks, asset valuation and market risks, liquidity and leverage risks and credit and counterparty risks.
- Risks driven by how regulated entities are responding to today’s changing world e.g. consumer and investor detriment risk, operational risks and resilience, risk management practices and risk transfer, data, AI and modelling risks.
- Risks driven by longer term structural forces at play e.g. climate and environmental-related risks, financial crime risks and business model and strategic risks.
Section 2 of the Outlook Report contains the CBI’s assessment of these risks applied to multiple sectors using the risk ratings described in Appendix C.
Supervisory priorities
The CBI’s risk-based supervisory priorities for 2025/26 aim to ensure that regulated entities:
- have proactive risk management and consumer-centric leadership
- are resilient to the challenging macro environment
- address operating framework deficiencies
- manage change effectively
- address climate change and net zero transition
Key takeaways for the funds sector
The globally significant scale and nature of Ireland’s funds sector mean that fund liquidity, leverage and financial system-wide interconnectedness are “evergreen” risks. Consequently, funds are subject to both macro-prudential policy and supervisory interventions by the CBI. External environment dynamics and risks can heighten volatility across asset classes, leading to sharp revaluations and marked changes in investor preferences. Sustainable finance remains a major focus, including in financing the transition to a net zero economy. The Sustainable Finance Disclosure Regulation (SFDR) and ESMA’s fund naming guidelines seek to minimise greenwashing misrepresentation. The Draghi report underscores the critical role of the funds sector in bridging the EU’s economic and innovation performance gap.
Key risks and focus areas for the funds sector
- Liquidity and leverage risks – the CBI highlights the interlinked risks of leverage and liquidity, which may be exposed in the current uncertain and volatile geopolitical and macroeconomic environment. Highly leveraged funds with large holdings of illiquid assets can pose concentration risks, adversely affecting the stability and integrity of the wider financial system in times of stress, especially when robust liquidity risk management practices are not in place. The CBI has introduced macro-prudential measures, involving maximum leverage limits and minimum liquidity requirements for cohorts of such funds (real estate funds and liability-driven investment (LDI) funds). The CBI has commenced a review into the liquidity management tools (LMTs) used by FMCs to assess their adequacy, indicating further engagement with FMCs where vulnerabilities are found.
- Asset valuation and market risks – the CBI emphasises that external environment dynamics and risks can lead to heightened volatility across asset classes and pose asset revaluation risk. It also highlights the importance of accurate and timely valuation of real estate assets, which are vulnerable to market conditions and may impact funds exposed to these assets. The CBI expects that funds and FMCs should closely consider the findings of ESMA’s CSA on asset valuation and ensure they meet supervisory expectations.
- Operational risks and resilience – the CBI notes that increased digitalisation and interconnectedness in the funds industry heighten the potential impact of cyberattacks and operational disruptions. It stresses the need for ongoing vigilance, enhancement of barriers, stress testing, and refreshing of contingency and recovery plans. FMC governance, especially regarding delegated and outsourced functions will remain a focus. Additionally, AML control deficiencies will continue to be a focus, and firms will be subject to ongoing scrutiny and assessment of the robustness of AML controls.
- Climate and other environmental-related risks – the CBI highlights that differing interpretations of regulatory requirements and ESG data shortcomings increase greenwashing risks. It notes the slight decline in Article 9 fund authorisations and the emergence of “greenhushing” internationally. The CBI will continue monitoring compliance with the SFDR and investigate suspected instances of greenwashing. It expects full compliance with ESMA’s guidelines on funds using ESG or sustainability-related terms in their names.
- Data, AI and modelling risks - inaccurate and/or incomplete fund returns submitted to the CBI raise questions about data governance procedures and effectiveness. Incorrect data submitted will lead to increased supervisory attention and the escalating use of the CBI’s toolkit. The CBI identifies that increasing use of AI tools for portfolio management techniques could potentially have regulatory and investor protection consequences if not governed properly, emphasising that human oversight will remain crucial.
- Strategic risks and adapting to structural change – the CBI stresses the need for funds and fund service providers (FSPs) to assess risks, unique features, transparency and suitability when investing in alternative assets like crypto assets, private debt and collateralised loan obligations (CLOs). The CBI will continue engaging with industry on establishing funds that offer exposure to instruments previously considered higher risk. It also highlights the funds sector’s critical role in bridging the EU’s economic and innovation performance gap through retail investor participation in financial markets, as noted in the Draghi report.
Key supervisory activities 2025/26
Working with the relevant European and global regulatory bodies such as ESMA and IOSCO, the CBI’s priority activities for the funds sector include:
- Risk-based review of applications regarding funds and FSPs.
- Sectoral and thematic assessments, including the completion of the ESMA Common Supervisory Action on compliance and internal audit functions.
- Continuing the focus on delegation and outsourcing arrangements in FMCs.
- Focusing on FSPs’ implementation of the requirements of DORA.
- Continuing to enhance and use fund data and risk models to deliver a data-led, agile and risk-based approach to the effective and efficient oversight of the sector.
In addition, Appendix A of the Outlook Report outlines other key EU and domestic regulatory activities. These include the CBI’s ongoing work to implement the Department of Finance’s Funds Review 2030 report recommendations and other funds related initiatives.
The Outlook Report also includes three spotlight papers. Spotlight 1 explores consumer risks in more detail, spotlight 2 provides an up-to-date supervisory perspective on AI and spotlight 3 considers geopolitical risks.
See our Financial Regulation related publication for further information on the CBI’s regulatory priorities and industry wide supervisory priorities as set out in the Outlook Report.
If you have any queries in relation to the issues raised in this insight, please get in touch with your usual contact or any member of A&L Goodbody’s Asset Management and Investment Funds team.
Date published: 12 March 2025
