Cross Industry Guidance on Operational Resilience - CBI consultation

The Central Bank of Ireland (CBI) issued proposed Cross Industry Guidance on Operational Resilience ​(Guidance) in a consultation (CP140) which closes on 9 July 2021.

Context. The Guidance is issuing in the context of the CBI's strategic commitment to strengthening resilience in the financial system. The CBI recognises the challenges faced by regulated financial services providers (RFSPs) from disruptive events (such as technology failures, cyber incidents, the COVID-19 pandemic and natural disasters) which affect the delivery of critical or important business services. The CBI conducted an operational resilience maturity assessment across a sample of RFSPs in Q4 2020. The responses indicated a need to build on existing business continuity management frameworks and to take an end-to-end business services approach to the operational resilience of critical or important business services

Scope. The CBI proposes to apply this Guidance to all RFSPs, including UCITS/ AIFs/ ManCos/ AIFMs regulated by CBI.

Proportionate application. The Guidance is designed to be flexible and can be applied by RFSPs in a proportionate manner based on the nature, scale and complexity of the business.

Three pillars. The Guidelines are built around three pillars of operational resilience, namely:

  • Identify and Prepare. (Guidelines 1-10: governance, operational resilience - strategy and testing)
  • Respond and Adapt. (Guidelines 11-13: business continuity management, incident management and crisis communication plan)
  • Recover and Learn. (Guidelines 14, 15: learnings from a disruption event and continuous improvement)

Implementation. When finalised, CBI expects the boards and senior management of RFSPs to adopt appropriate measures to strengthen and improve their operational resilience frameworks and their effective management of operational resilience. RFSPs will be expected to apply the Guidelines within an appropriate timeframe. The CBI considers that an 'appropriate timeframe' will depend on a range of factors including nature, scale and complexity of the RFSP's business and the RFSP's overall impact on customers and the wider economy. CBI expects RFSPs to be actively and promptly addressing operational resilience vulnerabilities and to be in a position to evidence actions/plans to apply the Guidance at the latest within two years of its being issued.

As reported in our March Asset Management and Investment Funds update, the CBI's consultation, CP 138, on Cross-Industry Guidance on Outsourcing closes on 26 July 2021. The CBI expects that guidance to be finalised and implemented in 2021.

CBI Guidance on Performance Fees of UCITS and certain types of Retail Investor AIFs

The CBI published Guidance on Performance Fees of UCITS and certain types of Retail Investor AIFs. It also published the Feedback Statement to CP 134 on the topic.

The date of application for the CBI guidance is set out below:

  • in-scope funds which are established, or which amend or introduce a performance fee, on or after 5 January 2021 must comply with the CBI guidance from the date of establishment, amendment or introduction
  • in-scope funds with existing performance fees as at 5 January 2021 must comply with the CBI guidance from the beginning of the accounting period beginning on or after 5 July 2021. Because the CBI guidance applies at fund level, new classes within an existing in-scope fund may avail of this transition period. By way of example, such a fund with an accounting period ending on:
    • 31 July 2021, must comply from 1 August 2021
    • 30 September 2021, must comply from 1 October 2021
    • 31 December 2021 must comply from 1 January 2022

The CBI notes that, in principle, it aims to fully implement ESMA guidelines. In the case of performance fees, the CBI's existing requirements for performance fees (which were incorporated into the CBI UCITS Regulations (Regulations 40 and 74), pre-dated the ESMA guidelines on performance fees and certain types of AIFs (discussed here). This, as well as a desire to retain a consistent approach to retail investor protection, resulted in the CBI Guidance on Performance Fees of UCITS and certain types of Retail Investor AIFs. The CBI will consider those aspects of the ESMA guidelines, not currently provided for due to the legislative constraints, in future revisions of the CBI UCITS Regulations and of the AIF Rulebook. Such aspects that are not yet provided for in the CBI requirements were outlined in CP 134 and include:

  • more frequent crystallisation than annually
  • a performance reference period shorter than the life of the fund
  • fulcrum fees
  • verification of the calculation of the performance fee by an entity other than the depositary

CBI updates Q&A on AIFMD

The CBI published its AIFMD Q&A Thirty-Eighth Edition. It contains new Q&As as follows:

  • A new Q&A 1141 which relates to raising capital from investors by way of a shareholder/ unitholder loan. In summary, the Q&A states that

The AIF Rulebook does not envisage or specifically permit arrangements which involve loans between an authorised AIF and its members (investors). Such arrangements would not appear to be consistent with the objective of collective investment on behalf of an authorised AIF’s members (investors). The CBI may revisit this matter during future public consultations related to the CBI's AIF Rulebook (and its conversion into regulations).

  • A new Q&A 1142 which relates to whether an authorised AIF can enter into transactions with its investors. In summary, the Q&A states that:

Except where expressly set out in relevant legislation, there appears to be no particular prohibition in the legislation or the AIF Rulebook to prevent an authorised AIF from entering into transactions with investors. However, the AIF Rulebook does not envisage that such transactions would take place. Q&A 1142 sets out the CBI's expectations in this regard. The CBI notes that it may revisit this matter during future public consultations.

CBI markets update

The CBI published issue 5 of 2021 of its markets updates. It contains updates from the CBI and ESMA which include:

  • The Central Bank publishes the Feedback Statement to Consultation Paper 134 “Central Bank performance fee guidance for UCITS and certain types of retail AIFs"
  • The Central Bank has also published Guidance on Performance Fees of UCITS and certain types of Retail Investor AIFs.​
  • Central Bank publishes the Thirty-Eighth Edition of the Central Bank AIFMD Q&A
  • Thematic Review of IOSCO Liquidity Risk Management Recommendations and IOSCO-FSB Analysis of Open-Ended Fund Liquidity during the Market Stresses of 2020
  • Conduct, culture and trust – priorities for 2021 - Speech by the Director General, Financial Conduct to the BPFI Membership Forum

European Union (Sustainability-related Disclosures in the Financial Services Sector) Regulations 2021

The European Union (Sustainability-related Disclosures in the Financial Services Sector) Regulations 2021, SI 146 of 2021,​appoints the CBI as competent authority to exercise supervisory and investigatory powers pursuant to Article 14 of the Sustainable Finance Disclosures Regulation (SFDR). Moreover, Ireland exercises the option under Art 17 of SFDR of applying SFDR to:

  • insurance intermediaries who provide insurance advice with regard to insurance-based investment products
  • MiFID investment firms

SFDR will apply to such entities from 10 March 2022.

AML: Legislation and Regulation

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021 has been commenced. The revised obligations on designated persons (DPs) were discussed here.

The European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2021 (S.I. No. 194 of 2021) came into force on 24 April 2021. Unit Trusts whose beneficial ownership information is filed with the CBI's Central Register of Beneficial Ownership are not in scope of these regulations. The European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2019 (S.I. No. 16 of 2019) are revoked. This is helpful in that Unit Trusts are no longer subject to the conflicting requirements of S.I. 16 of 2019 and the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2019 (S.I. No. 110 of 2019) (modified by the European Union (Modifications of Statutory Instrument No. 110 of 2019) (Registration of Beneficial Ownership of Certain Financial Vehicles Regulations 2020) (S.I. No. 233 of 2020).