Our Regulatory Philosophy and Priorities in Funds - Colm Kincaid, Director of Securities and Markets Supervision

Remarks to the Asset Management Distribution Roundtable, Dublin

Good morning, it is a pleasure to speak at today’s Roundtable event, to share with you some perspectives on the Central Bank of Ireland's work on funds in the context of our Strategic Plan 2019-2021 and our supervisory priorities flowing from that Plan. I will also say a few words on how we are contributing to the advancement of EU regulation of funds, and how that EU framework is supporting the development of a market in funds that serves the best interests of investors and the market as a whole.

Our Strategic Plan

In our Strategic Plan 2019-2021 (Central Bank, 2019), the Central Bank of Ireland has identified five over-arching priority themes, and I propose to frame my remarks this morning under the headings of these themes.

The themes are:

• Brexit;
• Strengthening Resilience;
• Strengthening Consumer (including Investor) Protection;
• Enhancing Organisational Capability; and
• Engaging and Influencing.

Brexit

At the Central Bank of Ireland, we have been working on our analysis and actions in the face of Brexit since before the 2016 referendum. We did this because we recognised from the outset the significant potential for Brexit (or even the prospect of Brexit) to pose risks to our economy and the provision of financial services, be that funds or other sectors. As Deputy Governor Ed Sibley (Sibley, 2019) outlined recently, based on the work undertaken by the Central Bank and other public bodies here and across the EU, we are satisfied that the Irish financial system as a whole is sufficiently resilient to withstand a hard Brexit.

On 16 August, for example, we communicated to Irish funds who are affected by the loss of the Fund Management Company passport for UK managers, highlighting the new Central Bank of Ireland deadlines which apply to funds seeking to move their management to authorised EU27 entities in the event of a no-deal Brexit. I am glad to say that we have received timely submissions and I want to thank those firms for adhering to the timelines we set out.

It is also imperative that funds’ ongoing liquidity management continues to be sufficiently sensitive to market developments surrounding Brexit as they unfold, and that the necessary resources, systems and governance processes are in place as we head into this critical period running up to the Brexit date at the end of this month. In August, we also wrote to funds in Ireland to reiterate this message and we continue ourselves to monitor this topic closely.

Finally, our work to mitigate the risks of Brexit to the continued functioning of EU financial markets has included applying significant Central Bank resources to the assessment of applications from firms seeking to relocate business conducted from the UK to an EU 27 location. From the outset, we have been clear in the timelines that apply to such applications, the level of challenge we apply in order to be satisfied that applicants meet the minimum requirements for authorisation and that we will not authorise a firm where we have not been satisfied that these requirements have been met. Firms that have been authorised need to ensure that they transition their business to their new authorised firm smoothly, if they have not already done so, and that they adhere to the conditions based on which they were authorised.

As we sit here today just days away from the scheduled Brexit date, I will finish on the topic of Brexit with a message we have given to industry participants previously (Kincaid, 2018): The issues arising for firms from Brexit are clear and can be identified by the firms affected. The expectation of both the Central Bank and investors will be that firms have dedicated the necessary time and planning to these issues.

Strengthening Resilience

Turning to the wider topic of Strengthening Resilience, we continue our systematic impact-based supervisory engagement with supervised entities under our PRISM model. We are also looking in more detail at system-wide topics such as liquidity management and the use of leverage in funds. Given Ireland’s prominent role as a funds domicile, both the Central Bank of Ireland and Ireland’s funds industry need to be to the forefront of the thinking and international discussion on how to further strengthen funds’ resilience and mitigate the risks arising from the very particular circumstances of today’s financial markets.

The enhanced liquidity reporting which we introduced in January of this year as part of our Brexit preparations represents a part of that. This has provided us with an authoritative benchmark of normal daily redemption activity, including in the run in to the previous Brexit dates, as well as insights into the dynamics of this activity at both a fund, fund cohort and system level that we did not have before. We are now folding this information and daily reporting discipline into our day-to-day supervision of the sector and I expect we will look to build further on this reporting mechanism in the future.

As we build out additional reporting obligations for firms, we also of course have to have an eye to ensuring we do so as efficiently and effectively as possible; as well as how to share our insights so that firms can learn from them in order to further enhance their resilience.

Strengthening Consumer (including Investor) Protection

As I have said on previous occasions, the key principle underlying our work is ‘trust’. This question of trust is especially to the fore in our strategic commitment to strengthen our approach to conduct supervision, setting our expectations, and challenging the firms and markets that we supervise.

In the field of wholesale securities markets for example, we commenced this with a letter to relevant firms in March setting out our expectations. We are currently in the process of completing a range of thematic, targeted and full risk assessments using our new ‘wholesale conduct’ supervisory methodology (Central Bank, 2019).

Our work on closet indexing represents a case in point in the field of funds. Following the announcement of the results of our review in July of this year, we are now in the process of engaging with the funds identified on a case-by-case basis by reference to our individual findings on those firms. This includes requiring communication to investors where we consider that the documentation we have reviewed does not properly explain to the investor how the fund is being managed. This is necessary so that investors in Irish UCITS can trust that the service they are receiving for the fee they are paying has been explained to them properly.  

We have also committed in our Strategic Plan to focusing on the culture of firms and individual accountability of the people who run the firms we regulate. While the matter of culture now runs through all our supervisory engagements, it is worth mentioning a few words in this context on our review of CP86.

We are now advanced in the work of our CP86 review, with questionnaires issued to over 300 in scope UCITS management companies, AIFMS, self-managed UCITS and self-managed AIFs. These have now been reviewed and we expect to commence onsite inspections in November, continuing on into Q1 2020. We aim to complete this body of work in H1 2020, with communication to industry to follow in the second half of next year. The output of this review will be central to our continuous evolution of best practice and both understanding and mitigating the risks arising from topics as broad ranging as outsourcing, culture and of course the correct calibration of resources to be fit for the purpose of each individual firm’s scale and business model.

One of the most important enhancements to investor protection in the field of funds, in my view, was the introduction of a short Key Information Investor Document (KIID) for investors in UCITS. We will continue therefore to place a primacy on clarity for investors in this KIID, as well of course as clarity in the prospectus documentation itself. You will see this focus on the prospectus and KIID coming through in our recent reviews of performance fees and on the topic of closet indexing. You will also see it in our increasingly risk-based approach to how we review applications for fund authorisation, with the responsibility throughout being on firms to ensure that these documents provide retail investors with sufficient information in respect of the investment product and its risks, allowing them to make an informed investment decision.

We welcomed the decision to extend the exemption for UCITS under the PRIIPs Regulation to 31 December 2021. This extension will allow time for a comprehensive review of the PRIIPs Delegated Regulation. We are supportive of this review and we appreciate the concerns expressed regarding the need for the PRIIPs Key Information Document (KID) to achieve its overarching objectives of promoting greater investor protection. The aim of the review is to allow the appropriate application of the PRIIPs KID by UCITS and to address the main issues which have been identified since the implementation of the PRIIPs Regulation.

Clarity and transparency is of course in the eye of the investor. We have been a strong advocate throughout the PRIIPs process of the need for adequate consumer testing to ensure KIDs achieve their aim.

Enhancing Organisational Capability

As well as looking to the systems, controls and resources of the firms we regulate, we also have to look of course to our own capabilities to continue to deliver our mandate as the nature, scale and complexity of that mandate grows. This growth is taking place in both the scale and complexity of the legislation we have to supervise – in my own area of securities and markets supervision alone, we have five new legislative mandates to implement before January 2021 – and the firms and activities we have to supervise. There is also a growth in the expectations of stakeholders and our peers as a regulator in a jurisdiction that is ever more prominent in international securities markets, including funds.

As well as developing the skills of our people, and our understanding of the markets we are supervising, we also need to continue to invest in the gathering and analysis of data. In the field of securities markets supervision, this means using technology given the scale of the data we are required to look at in order to do our job. To take EMIR alone, we receive and process over 5 million trade reports per day, with the notional amount reported at over €7 trillion for Irish counterparties, the largest portion of that reporting coming from funds. Moreover, our recent thematic review on the topic of closet indexing represented the largest data driven review of our funds sector to date, comprising approximately 143 million individual data tests as well as the detailed review of over 900 documents on foot of that data analysis and follow up engagement with the individual funds identified for further engagement.

Part of enhancing our capability means of course keeping up to speed with developments and innovations in the markets we are supervising, including through the work of the Central Bank of Ireland’s Innovation Hub (Central Bank, 2018). We launched the Innovation Hub in April 2018. It provides a direct point of contact with innovative firms. To date, the Innovation Hub has facilitated direct engagements with a broad mix of firms, both early stage start-ups outside the regulatory perimeter and more established, regulated firms. These engagements generate insights into the innovative activity planned and underway in financial services. For example, in the funds sector, we have seen a large amount of activity around risk management focused RegTech solutions. We also see deployment in the funds sector of blockchain and AI applications. The Innovation Hub will be issuing a report on our 2019 findings next year with more detail.  

Engaging and Influencing

As a Central Bank within the eurosystem with a financial stability, prudential and conduct mandate across a wide range of domestic and international financial services, it will come as no surprise that we place huge importance on engaging and listening to the public we serve and our wider stakeholders. We also spend a lot of our time engaging at domestic and international level to provide the benefit of our views to the development of the regulatory framework, with a view to influencing outcomes so that they serve the best interests of investors and the market as a whole.

To describe our work under this heading would merit an entire speech in itself, so this morning I will just flag two items in order to give you a flavour of this aspect of our work. One is on ETFs and the other on greater convergence in the supervision of EU securities markets. I would also like to share some of our thinking with you on the emerging topic of sustainability in financial services.

ETFs

From the earliest stages of our work on ETFs, we have sought to ensure that this fund type and any risks that may be associated with them are understood. We are very supportive therefore of the work of IOSCO to understand the various regulatory approaches and the dynamics of the sector towards fostering an effective ETF market that serves the best interests of investors and the market as a whole. This includes revisiting IOSCO’s 2013 principles (IOSCO 2013), which we consider timely given the growth in the scale and complexity in the sector. The structure of this work – looking at product-facing, investor-related issues on the one hand, and market-facing trading issues on the other, as well as the inter-relationship of the two – is a good illustration of the ‘twin view’ we have when looking at the regulation of funds more generally, while all the time keeping the interests of the end-investor to the forefront of our thinking.

Supervisory Convergence

Working together with our ESMA colleagues and fellow NCAs, there is now a concerted momentum to put in place more structured and targeted mechanisms to raise supervisory standards and drive EU supervisory convergence. We consider this work essential to the delivery of our mandate in a context where we are seeing a more fragmented, interconnected European securities market emerge, with a corresponding need for greater cooperation amongst EU national competent authorities in order to avoid regulatory arbitrage. As with all our work of course, we have to do this with finite resources and prioritise where supervisory convergence is most important. This will include at least where issues arise concerning the provision of services across a number of EU jurisdictions and where investor protection concerns manifest.

Finally, as well as encouraging you to continue to engage with us and relevant public consultations, I would also remind firms of the ESMA Q&A tool (ESMA), which allows interested stakeholders to submit questions directly for ESMA’s consideration. This is an excellent resource and we encourage you to take advantage of this direct line to ESMA. The Q&As will continue to be updated with the aim of promoting common supervisory approaches and practices.

Sustainable finance

Before concluding, I want to also highlight the topic of sustainable finance, where we have recently seen (amongst other developments) the publication of technical advice to the European Commission on the integration of sustainability risks and factors, into MiFID II, AIFMD and UCITS Directive (ESMA 2019). At the Central Bank, in recognition of the importance of this topic for all our future, we have established a dedicated working group both to keep track of developments in this field and to help develop our own policy perspectives. We have joined the Network for Greening the Financial System (Banque de France 2018), setup in order to help strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system in managing climate-related risks. We are also actively involved in IOSCO’s Sustainable Finance Network (IOSCO 2019) and, most recently, the UN-led Sustainable Insurance Forum (Sustainable Insurance Forum 2019).

Concluding Remarks

To conclude, the Central Bank of Ireland serves the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy. Our regulatory philosophy underpinning this mission is quite simply to serve the public good, and in our Strategic Plan we have set out what we are focusing on during 2019 to 2021 to do so.

I hope therefore that by positioning my remarks this morning on our work on funds within the themes of our wider Strategic Plan, it helps you understand where we are coming from and what we are trying to achieve. In the spirit of engagement and listening set out in our Strategic Plan, as we go forward we will remain open to your feedback and suggestions for how things can be improved for investors and other users of financial services.

I thank you for your attention and, once again, thank the organisers of today’s event for the opportunity to speak to you.  

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With thanks to Alice Ryan, Bernie Mooney, James O’Sullivan, Stuart Alexander, Denise Delaney and Jim Moran for their assistance in preparing these remarks.

Central Bank of Ireland 2018. Strategic Plan 2019-2021

Sibley, Ed 2019. "Insurance Ireland - PwC CEO Survey Report Breakfast Briefing - Deputy Governor Ed Sibley" Address at the Insurance Ireland – PwC CEO Survey Report Breakfast Briefing on 27 September 2019

Kincaid, Colm 2018. “The Supervision of Conduct in the Funds Market” Speech delivered to the Asset Management and Investment Funds Group Seminar hosted by A&L Goodbody on 24 October 2018

Central Bank of Ireland 2019. “Wholesale Market Conduct Risk - Industry Communication” 11 March 2019.

Central Bank of Ireland 2018. “Innovation Hub”

IOSCO 2013 “Principles for the Regulation of Exchange Traded Funds Final Report”

ESMA. “Questions and Answers”

ESMA 2019. “ESMA submits technical advice on Sustainable Finance to the European Commission” 3 May 2019.

Banque de France 2018. “Network for Greening the Financial System - About Us”

IOSCO 2019. “IOSCO creates Sustainable Finance Network, releases statement on ESG disclosure” 18 January 2019