1. AIFMD DEVELOPMENTS
1.1 AIFs' exposures to commercial real estate
On 18 February 2022, ESMA published its latest update relating to AIFs' exposures to commercial real estate. This update contains data as of 31 December 2020.
1.2 Fourth Annual Statistical Report on AIFs
On 3 February 2022, ESMA published its fourth annual statistical report on AIFs which states that the main risk faced by the sector relates to a mismatch between the potential liquidity of the assets and the redemption timeframe offered to investors. The main findings relating to the size of the market and various asset classes – fund of funds, real estate and private equity are detailed in the press release accompanying the report.
2. UCITS DEVELOPMENTS
2.1 Amendments to the UCITS Regulations
The Covered Bonds Directive is being transposed into Irish law by way of theEuropean Union (Covered Bonds) Regulations 2021 which comes into effect on 8 July 2022. These regulations principally amend the Asset Covered Securities Act 2001 but also amend Regulation 70(3) of the UCITS Regulations which from 8 July 2022 will state that a UCITS may invest up to 25 per cent of its assets in bonds (i) that were issued before 8 July 2022 and met the requirements set out in this subparagraph as it applied on the date of their issue; or (ii) which come within the definition of "covered bond" in point (1) of Article 3 of the Covered Bond Directive. In addition, from 8 July 2022 Regulation 70(3)(c) will be deleted.
Article 3(1) of the Covered Bond Directive states that a covered bond means a debt obligation that is issued by a credit institution in accordance with the provisions of national law transposing the mandatory requirements of the Directive and that is secured by cover assets to which covered bond investors have direct recourse as preferred creditors.
Regulation 70(3) of the UCITS Regulations currently states:
"(a) Notwithstanding paragraphs (1) (a) and (2), a UCITS may invest up to 25% of its assets in bonds that are issued by a credit institution which has its registered office in a Member State and is subject by law to special public supervision designed to protect bond-holders. In particular, sums deriving from the issue of those bonds shall be invested, in accordance with the law, in assets which, during the whole period of validity of the bonds, are capable of covering claims attaching to the bonds and which, in the event of failure of the issuer, will be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
(b) When a UCITS invests more than 5% of its assets in the bonds referred to in subparagraph (a) and issued by one issuer, the total value of those investments shall not exceed 80% of the value of the assets of the UCITS.
(c) The Bank shall send to ESMA and to the Commission a list of categories of issuers authorised, in accordance with the laws and supervisory arrangements referred to in subparagraph (a) that are in force in the State, to issue bonds complying with the requirements of that subparagraph. A notice specifying the status of the guarantees offered shall be attached to those lists."
3. CENTRAL BANK UPDATES
3.1 Central Bank's Consumer Protection Outlook Report
On 14 March 2022, the Central Bank published its latest Consumer Protection Outlook Report. The report highlights five risk areas financial firms should take action on to avoid consumer harm:
- poor business practices and weak business processes;
- ineffective disclosures to consumers;
- the changing operational landscape;
- technology-driven risks to consumer protection; and
- the impact of shifting business models.
The report also sets out the Central Bank's expectations for regulated financial service providers in terms of each of these risks.
Poor business practices and weak business processes
- Put in place robust product governance and oversight arrangements covering the design, sale and delivery of the product;
- Design and bring products to market in a responsible way with features, charges and risks that meet the needs of the individual consumers identified for the product;
- Comply with the legislative requirements to assess the suitability of their products and services to each individual consumer;
- Be clear on the reasons why a product or service is being offered to a consumer and why it is suitable for that consumer;
- Monitor products over time to ensure the product is performing as intended and remains suitable for the target market;
- When errors or operational incidents occur, ensure that consumers are treated fairly and put back in the position they would have been in had the error or incident not occurred;
- Ensure proper resources are deployed to deliver a high quality service; and
- Place the best interests of consumers at the heart of their commercial decisions and how they provide services to consumers.
Ineffective disclosures to consumers
- Provide clear information in a timely manner to consumers, disclosing the key information upfront (i.e. risks and benefits, fees and costs);
- Support consumers in making fully informed decisions by ensuring that information is provided in a way that it can be easily understood;
- Ensure that statements of suitability and other disclosures provided to consumers are fully compliant with legislative requirements;
- Disclose exclusions to financial products in an effective manner at the outset to support consumers in making good decisions;
- Ensure disclosure is as clear on digital media as with more traditional communications channels; and
- Avoid greenwashing by producing disclosure documents that are clear, not misleading and fully compliant with the most recent legislative disclosure requirements.
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