Third Quarter Highlights
In this quarter's edition of the legal and regulatory report, we highlight a number of key outputs as follows:
Irish Funds communicated a very significant and welcome development to member firms during August concerning progress with the Central Bank of Ireland (the "Central Bank") on implementation of the European long-term investment fund ("ELTIF") 2.0 product in the Irish regulatory regime (outlined at section 2.2 of the report). The Irish ELTIF will be a standalone product and therefore, it will not need to be separately authorised as a retail investor alternative investment fund ("RIAIF") or as a qualifying investor alternative investment fund ("QIAIF"). Accordingly, the existing range of investment fund structures, including the ICAV and ILP, will be available to establish ELTIFs.
Political agreement has been reached during July between the Council of Europe and the European Parliament on a provisional text of the directive amending AIFMD and the UCITS Directive, (commonly referred to as "AIFMD II") (outlined at section 1.1).
The transition of functions from the ONR to the Central Bank's Portal was completed with the disabling of the ONR functionality from 18 September 2023 (section 2.15). The Central Bank published a revised version of its outsourcing register template which should be completed and submitted by in-scope fund management companies during Q4 2023 (section 2.3).
Industry bodies have submitted detailed responses to the Department of Finance wide-ranging consultation on its review of the funds sector which closed during the period (section 3.3).
The FCA announced that, in the coming months, it will be contacting fund operators with respect to "landing slots" for UCITS exiting the UK's temporary marketing permissions regime (section 3.8). The Financial Stability Board ("FSB") and IOSCO launched their respective consultations on liquidity risk and its management in open-ended funds (sections 3.9(e) and 3.11(a) of the report). The consultative work of the FSB continues apace as it probes the build-up of debt and systemic risk outside traditional banks. For its part, the Central Bank published its discussion paper (outlined at section 2.1) to advance the debate on the development and operationalisation of a macroprudential framework for the investment funds sector.
On sustainability matters, the Central Bank has engaged with certain management companies selected for participation in the common supervisory action ("CSA") questionnaire on sustainability-related disclosures and the integration of sustainability risks (section 3.12(f)). The focuses of the questionnaire will be of interest to all fund management companies ("FMCs") seeking to ensure alignment with regulatory expectations. The Central Bank communicated to industry in its recent speech (section 3.12(b)) a number of practical, live, disclosure issues arising from a spot-check review of investment fund submissions under Sustainable Finance Disclosure Regulation ("SFDR").
The European Commission's paper on the implementation of the SFDR (section 3.12(a)) consults on two potential product categorisation systems due to persistent concerns that the current market use of SFDR as a labelling scheme leads to risks of greenwashing. Some of the Commission's proposals on labelling, if adopted, would see the SFDR move to more closely mirror the UK's forthcoming Sustainability Disclosure Requirements regime. This consultation signals a crossroads for Article eight and nine funds and whether those Articles can be reformed or will disappear altogether from SFDR.
The launch of the TNFD framework at Climate Week NYC sees nature considerations and biodiversity loss ascend the global sustainable finance agenda (section 3.12(d)). Furthermore, as international bodies continue their work to develop corporate sustainability reporting standards, the Commission has adopted its first set of EU sustainability reporting standards ("ESRS") (section 3.12(g)).
1. UCITS and AIFMD Developments
1.1 Political agreement reached on directive amending AIFMD and the UCITS Directive (This is a further update to section 3.5(h) of the quarterly report covering the fourth quarter of 2022)
On 20 July 2023, the Council of the European Union (the "Council") announced that a provisional agreement has been reached with the EU Parliament on a proposed directive amending the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD") and the UCITS Directive (2009/65/EC) relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds (referred to as "AIFMD II").
The proposal is aimed at enhancing the integration of asset management markets in the EU and modernising the framework for key regulatory aspects. Under the provisional agreement, negotiators have agreed to enhance the availability of liquidity management tools, with new requirements for managers to provide for the activation of these instruments. The press release outlines how these measures will help ensure that fund managers are well equipped to deal with significant outflows in times of financial turbulence.
In addition, the press release details that agreement has been reached on the following:
- enhancing the availability of liquidity management tools, with new requirements for managers to provide for the activation of these instruments;
- enhancing the rules for delegation by investment managers to third parties to enable them to better access the best resources from market specialists, subject to reinforced supervision and preserving market integrity;
- an EU framework for funds originating loans;
- new measures to identify undue costs that could be charged to funds and passed on to their investors and rules to prevent potentially misleading names; and
- data sharing and co-operation between authorities.
The European Commission (the "Commission") has published a press release welcoming the political agreement, describing it as another important step towards delivering on the capital markets union.
Next steps
The political agreement reached is provisional and is subject to the approval of the Council and Parliament before the formal adoption procedure. Accordingly, the agreed revised text of the legislative proposal has not yet been published, pending technical trialogue meetings The EU Parliament has indicated it has scheduled its plenary session from 5 to 8 February 2024 to consider AIFMD II.
Following publication of the final legal text in the official journal of the EU (the "OJ") member states and the Commission will then transpose the revised directive into national law and detailed technical rules implementing the legislation will be finalised.
2. Central Bank Updates
2.1 Macroprudential framework discussion paper (This is a further update to section 3.1 of the quarterly report covering the second quarter of 2023)
On 18 July 2023, the Central Bank published a discussion paper with the aim of advancing the debate on a potential approach to the development and operationalisation of a macroprudential framework for the investment funds sector. The discussion paper aims to inform and aid the ongoing international regulatory debate on macroprudential policy for the funds sector. The Central Bank is inviting feedback from stakeholders on a number of issues raised in the discussion paper to inform further analysis and policy work in this area.
The discussion paper sets out a number of reasons for the need for a macroprudential framework including the fact that the global non-bank financial intermediaries sector, and particularly the investment fund component of it, has grown significantly since the global financial crisis. The discussion paper highlights two main underlying potential sources of vulnerabilities for investment funds as being liquidity mismatches and high levels of leverage.
Whilst the paper is careful not to propose specific policy measures at this juncture, it does outline a number of high-level objectives and principles to be considered when developing such a framework, as well as posing key questions throughout for consideration by stakeholders. Feedback to the paper can be provided via a survey until 15 November 2023. The Central Bank will consider the feedback received and intends to publish a feedback statement in 2024.
Walkers have published an advisory entitled 'Central Bank discussion paper on a macroprudential policy for investment funds' outlining the key points of interest contained in the paper.
2.2 Progress on implementation of the Irish ELTIF 2.0 offering (This is a further update to section 4.6(a) of the quarterly report covering the second quarter of 2023)
On 16 August 2023, Irish Funds confirmed in a communication to member firms that following constructive engagement with the Central Bank on the implementation and application of an Irish ELTIF offering, the Central Bank has developed a standalone ELTIF chapter for inclusion in its AIF Rulebook reflecting the specific requirements for ELTIFs as a regulated AIF and will launch a consultation shortly.
The revised European Long-Term Investment Funds Regulation (EU) 2023/606 (the "2023 Regulation") will apply across the European Union from 10 January 2024. The asset management industry in Ireland has been focused on maximising the opportunities presented by the enhancements to the ELTIF framework contained in the 2023 Regulation and to ensure that Ireland will have an ELTIF 2.0 offering from 10 January 2024 when the 2023 Regulation comes into effect.
Irish Funds has confirmed that the Central Bank proposes to create a standalone ELTIF chapter of the AIF Rulebook which will set out rules for Irish ELTIFs which complement the requirements contained in the 2023 Regulation. The Irish ELTIF will be a standalone product and therefore, it will not need to be separately authorised as a RIAIF or a QIAIF. Accordingly the existing range of investment fund structures, including the ICAV and ILP, would be available to establish ELTIFs as a standalone category of regulated AIF.
It is understood that the Central Bank intends to consult on the amendments to the AIF Rulebook reflecting the specific requirements for ELTIFs as a regulated AIF which will facilitate the authorisation of ELTIFs under the 2023 Regulation as soon as possible.
Walkers have published an update on this significant announcement.
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