Asset Management and Investment Funds

CENTRAL BANK “DEAR CHAIR” LETTER ON THE SUPERVISION OF COSTS AND FEES APPLICABLE TO UCITS AND AIFS

In March 2023, the Central Bank of Ireland (the “Central Bank”) issued a “Dear Chair” letter to Irish fund management companies which set out the main findings of the review of costs and fees to Irish UCITS funds by the Central Bank of Ireland (the “2021 CBI Review”), its supervisory expectations in this area and the key actions to be undertaken by Irish fund management companies (the “CBI Dear Chair Letter”).

While the scope of the 2021 CBI Review did not include a review of alternative investment funds (“AIFs”), the Central Bank indicated that the findings arising from the 2021 CBI Review should also be considered by alternative investment fund managers (“AIFMs”) with respect to cost and fees charged to Irish AIFs. Scrutiny of fund costs and fees continues and further action may be required in 2024 to address concerns.

On 17 May 2023, ESMA published an Opinion on undue costs of UCITS and AIFs (the “ESMA Opinion”). The ESMA Opinion makes a number of suggestions to the European Commission on possible clarifications of the legislative provisions under the UCITS Directive and AIFMD to prevent undue costs being charged to funds. These suggestions were incorporated into the legislative proposal on the Retail Investment Strategy which the European Commission adopted on 24 May 2023. This is currently being considered by the European Parliament and Council and it is hoped that agreement can be reached before the European Parliament elections in May 2024.

For further detail on the CBI Dear Chair Letter, please see here.

OPERATIONAL RESILIENCE

In December 2021, the Central Bank published its cross-industry guidance on operational resilience (the “Guidance”) for regulated financial service providers (RFSPs).

The Guidance is designed to help advance the Central Bank’s strategic commitment of strengthening the resilience of the financial system. Boards and senior management of RFSPs (which includes Irish funds and fund management companies) were required to review the Guidance and adopt appropriate measures to strengthen and improve their operational resilience frameworks and their effective management of operational resilience. RFSPs were required to be in a position to evidence actions/plans to apply the Guidance by 1 December 2023. In 2024, RFSPs will be expected to put in place an operational resilience policy or equivalent measures to address the requirements of the Guidance.

Operational resilience is the ability of a firm, and the financial services sector as a whole, to identify and prepare for, respond and adapt to, and recover and learn from, operational disruption. In effect, an operationally resilient firm should be able to recover its critical or important business services from significant unplanned disruption (such as cyber-attacks, insider threats, natural disasters and systems failures) while minimising its impact and protecting its customers and the integrity of the financial system.

The Guidance identifies a number of factors that are contributing to the increasing importance of operational resilience. One factor is that firms are becoming increasingly dependent on technology and the pace of technological change is continuing to accelerate. Another factor is the increasingly complex outsourcing structures utilised by many firms to operate their businesses. The Central Bank notes that these and other factors have led to a rise in operational incidents affecting firms and contributed to the heightened importance of firms implementing and maintaining a robust operational resilience framework.

For further detail on the Guidance, please see here.

IMPLICATIONS OF CHANGES TO US SETTLEMENT REGIME FOR IRISH FUNDS

The US Securities and Exchange Commission announced that from 28 May 2024 the United States will move from a T+2 to a T+1 settlement cycle for settling trades in securities in an attempt to reduce credit, market and liquidity risks arising from unsettled securities trades. The move will have wider practical implications for those trading in US securities, including Irish funds with global or US exposure.

For further detail on the implications for EU funds including greater numbers of overnight settlements and the need to update trading and settlement procedures in their prospectuses, please see here.