Contributing Firms:
Investment Funds 2021:What happens after a black swan and unprecedented stimulus?
In this first Edition of the ‘Finance Dublin Funds Monitor’ we ask a Roundtable of leading thought leaders in the investment funds and asset management industry to provide their insights on a year that has been like no other, and certainly so in terms of the stimulus provided by Central Banks around the world to combat the disruption of Covid-19.
The Roundtable Contributors include: Cillian Bredin, Partner in the Asset Management and Investment Funds Team of Dillon Eustace; Meliosa O'Caoimh, Northern Trust's Country Head, in Ireland; Ross McCann, Head of Fund Services at Alter Domus, Ireland; Niamh Ryan, Partner, Simmons & Simmons; Donncha Morrissey, Head of Ireland’s Branch, Sparkasse Bank Malta plc. and David Dillon, Director, Bridge Consulting.

ESG: the coming story

Now that ESG is moving into a more mature phase of development, what granular challenges are the most significant, for example, finding real value in ESG opportunities, overcoming ‘greenwashing’ dangers, and delivering perceived value across platforms to meet investor expectations?
Donncha Morrissey, Head of Ireland’s Branch, Sparkasse Bank Malta plc: 2021 really bring us to a new phase in the ESG landscape with the Sustainable Finance Disclosure Regulation (‘SFDR’), which was agreed last year being phased in from March 10 2021. This new phase brings with it mandatory environmental social governance (ESG) disclosure obligations for asset managers directly and its products offered.
Donncha Morrissey
Donncha Morrissey

One of the challenges the financial community face in advance of March 2021 is that the level 2 text is not yet published, nor will they be prior to that date. Normally the implementing rules will give adequate detail to direct the industry in what exactly shall be required or disclosed in this instance. While these detailed implementing rules will not be in place in time, market participants will still need to comply with principle-based requirements.

As such, impacted Firms and their products will need to have some disclosures in place by 10 March. For our fund clients directly this will primarily be in relation to the funds they promote as reflected in the offering documents, however such fund promoters will also be required to have certain disclosures on their websites, including approach and considerations of sustainability risks vis a vis the investment activities of that firm. On a practical level the nature of those disclosures will be made on a ‘best efforts’ basis but may then require subsequent updating following the publishing of the level 2 text.

The real benefit of the SFDR beginning to come into effect is its wide reaching remit, if the product is being marketed into an EEA member state or a non EEA entity is managing the EEA product then that entity is impacted. Regardless of whether your product is considered ‘green’ / ‘ESG’ or not, the fact is all entities need to demonstrate consideration of sustainability and the disclosure requirements – this will embed itself in the organisational planning and thought process and become part of the day to day and fundamental for all business’ involved in the management of assets and promotion of financial services products.

Niamh Ryan, Partner, Simmons & Simmons: In a European context, we are moving to an interesting phase of development with ESG as the various compliance deadlines set out in the European regulations approach, with the Sustainable Finance Disclosure Regulation (SFDR) the most imminent, in March next year. For firms in scope, the challenge is firstly how to comply with the regulatory requirements but also to consider how that firm wants to position itself with respect to ESG. Therefore the task is not just a legal and compliance one but for some firms, it requires real strategic management thinking and discussion.
Niamh Ryan
Niamh Ryan

Interestingly I think in some cases the task is greater for those firms which were already quite progressed with their own ESG initiatives and policies than those which were not, as they now having to analyse whether what they already do as a firm fits with the requirements in the SFDR and other regulations.

The delay with the SFDR Regulatory Technical Standards is a further challenge as once they are finalised, firms will need to undertake a further project to comply with those. As well as the regulatory and compliance burden there is then the aim of delivering a return and meeting investor expectations which is definitely a challenge as it always is, but in the context of ESG I think it is particularly challenging as not all markets are as advanced as others and not all investors require the same thing when it comes to looking for ESG and sustainable investment.

As to whether ESG is in a mature phase of development, I don’t believe we are there just yet mainly because the focus has been on the environmental sustainability elements and there isn’t as much detail in respect of the social and governance elements. For example, the Framework Regulation which is designed to determine whether a particular economic activity is environmentally sustainable and to try to prevent “greenwashing” is focused on climate change and the environment but we don’t yet have the same level of detail on the social and governance criteria.

There have been some calls in the market for a taxonomy on social and governance matters to be developed and in the future it will be really interesting to see if the adoption of the various regulations actually contributes to real change and improvement with regard to all elements of ESG.

Cillian Bredin, Partner in the Asset Management and Investment Funds Team, Dillon Eustace: A key challenge for asset managers as they begin preparations to comply with the new ESG framework and categorise their funds as ‘Article 8’ or ‘Article 9’ funds under Regulation (EU) 2019/2088 (the “Disclosure Regulation”) is “greenwashing”. Recital (11) of Regulation (EU) 2020/852 (the “Taxonomy Regulation”) describes greenwashing as “the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met”.

The ESG framework introduces for the first time, harmonised disclosure obligations for funds which market themselves as ESG funds, and there is a clear benefit to such a standardised approach with the stated objective being the combatting of greenwashing. However, as the more detailed disclosures set out in the Draft RTS, known as “Level 2 measures”, will not have come into effect prior to the initial required updates to fund documentation, there is a risk that funds will be classified incorrectly by asset managers, resulting in the overselling of ESG characteristics of such funds.

This is a consideration to be borne in mind by asset managers as they look to implement the more principle based “Level 1 measures” by 10 March 2021.

Products outlook 2021

Reviewing the main product classifications, where do you see the most attractive areas post Covid in 2021 – reviewing classifications such as ETFs, MMFs, Closed End funds (e.g. Investment Trusts); Cryptocurrency v real assets, e.g. gold? What investment ‘styles’ will win in the coming years – e.g. value based, ESG, ETFs? Investment platforms in less liquid assets, e.g. Real Estate, Private Equity.

Donncha Morrissey, Head of Ireland’s Branch, Sparkasse Bank Malta plc: Socially responsible investing priorities shall persist and in 2021 become more transparent and more successful due to the mainstream nature of the SFDR. There is no doubt the ETF products continue to become more sophisticated and innovative; through 2020 we saw more traditional mutual fund promoters enter the ETF arena. More shall follow and with the innovation within the ETF sector we are a long way from a tipping point and the uprise shall continue.
David Dillon
David Dillon

The Covid-19 shock is still at the forefront of conscience, which see being translated into more risk diversification in the products currently being planned for 2021. This may be purely a hedge to manage the downside risk of the primary objective of the fund, this has been a repeated question of late with the general hedge being against real assets.

David Dillon, Director, Bridge Consulting: It is just a personal view but having observed Asset Managers over a number of decades, when it comes to active management old style value investing has stood the test of time. Other trends come and go although I believe that passive investing is here to stay. ESG obviously is high on everybody’s agenda and by that, I mean not just investors but, politicians, policy makers and regulators which means it is likely to be a major factor in product design for the foreseeable future.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: From a closed-end fund perspective, we see significant further growth in debt and private equity sectors. Globally, as governments start to withdraw financial support to businesses through 2021 and economies open up, many businesses and sectors will require capital to get back up and running and to move forward. I would anticipate significant demand for private equity and private debt to fund this alongside traditional bank lending, with the advantages of speed and flexibility in supporting SMEs. Debt managers will have an increasingly key role to play in helping support business and economic growth. We also expect to see a significant increase in M&A activity after an understandably quiet year with PE funds heavily involved.

Fintech’s story in 2021

Where do you see fintech impacting most importantly in the following areas: Fund administration, Custody, and Custodial services provided by Custodians, Fund promotion – The impact of tech in investment choice: Will ‘tech’ be as ‘hot’, or ’hotter’ than ever as an investment in 2021? - The impact of tech in the search for superior investment performance.

Meliosa O’Caoimh, Northern Trust’s Country Head, Ireland: Technology offers significant opportunities to digitalise global custody and fund administration services such as transfer agency and fund accounting. The opportunity is not just to move processes online, but to leverage technology to significantly improve business practices and reimagine these functions for the digital age.
Meliosa O'Caoimh
Meliosa O'Caoimh

Improving the quality, speed and governance of investment data will be key to this digital transformation. By offering more high-quality data quicker, asset servicers will be able to drive enhanced operational efficiencies and help asset managers create new digital experiences, both for themselves and their investors. This means, for example, enabling asset managers to interact with their investors flexibly and coherently, and to be able to see all their investments in a single place.

At Northern Trust we are enacting this through Matrix, our enhanced technology platform that has been built to digitalise our asset servicing business. It is currently being rolled out across our European transfer agency services, to be followed by fund accounting, investment operations outsourcing and global custody services.

As a global fund administration centre of excellence for Northern Trust and key location from which transfer agency services are provided, Ireland is at the forefront of how we are digitally transforming our business.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: Given its commonly bespoke nature, the Private Asset Funds space has generally seen less automation than hedge/UCITS funds over the years but this is changing. There are huge opportunities for firms who invest in smart technology. As artificial intelligence becomes more powerful, advanced, and sophisticated, we are seeing increasing opportunities for automation and in our industry there is now significant investment being put into this area.

As smart technology becomes more accessible, we’re seeing automation also moving up the complexity chain from the high volume/routine activities such as payments, to more complex tasks. There is no doubt though that human interaction and relationships remain the most critical part of the business, and will not change. And the benefits are not just in process efficiency. Advanced technology is hugely contributing to the effective management of risk, compliance and governance. In addition to higher regulatory reporting demands, there is increasing scrutiny on managers and service providers from both investors and regulators. We’ve also noted an increase in the automation of compliance functions through the use of software integrated with business systems and processes. I see technology investment becoming an increasingly key determinant for managers to outsource to service providers with the scale to operate best in class models.

Regulation’s big year ahead

Ireland. How do you see the Irish regulatory/legal landscape resuming in 2021, as deferrals and delays because of Covid-19 are addressed. The ILP regime; SEAR legislation.?

Niamh Ryan, Partner, Simmons & Simmons: I expect to see the Central Bank prioritise those initiatives which have been on the domestic agenda for quite some time. We have seen good progress now with updates to the Investment Limited Partnership regime ( the ILP) and the proposed changes to the AIF Rulebook for closed ended funds, all of which have been welcomed by industry and puts Ireland in a good position to be able to compete with other jurisdictions for private funds. The changes proposed to the AIF Rulebook are particularly important as the intention is to permit closed ended funds to include those terms which are standard for private funds.
Ross McCann
Ross McCann

Managers and investors in the private fund space expect these terms to be in their funds and accordingly the move to permit Irish closed ended funds to include them is a great development. The other change which has been hugely welcome is the removal of the requirement for the general partner of an ILP to be authorised by the Central Bank and this also reflects how limited partnerships are structured in other jurisdictions. I would also expect to see quite a bit of progress on the CBI’s Senior Executive Accountability Regime (SEAR ) in 2021. We have yet to see any real detail on what the requirements will be or the timing but expect to see a lot more on that in the next year or two and I would expect it is on the list of the CBI’s priorities. Following the completion of the CBI’s themed inspection on fund management companies and SMICs, I also expect to see more guidance on how fund management companies and more specifically SMICs are expected to comply with the CBI’s expectations on substance.

The CBI has also said it will do a further inspection in 2022 so it is very much a live and important issue for the CBI. There are a lot of SMICs in Ireland so 2021 will be a busy year for those funds needing to make some fundamental changes to their structure as well as for some of the older fund management companies.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: The updates to the ILP regime and related updates to the Central Bank’s AIF Rulebook have been a key development. Their advancement is most welcome and is also essential for the private assets industry to see the concept of Specialised Depositaries (or so-called “Depositaries for Assets Other than Financial Instruments”) being facilitated by the Central Bank. There is significant demand from the global market for Ireland to offer a credible alternative in Europe’s private assets industry and all of this provides the right ecosystem for the market to thrive.

We expect to see SEAR given greater focus by all parties in 2021 and indeed initial focus will be on addressing the Central Bank’s latest “Dear CEO” letter on Fitness and Probity of 17 November, a follow-up to its April 2019 letter, namely around firms’ processes for initial and ongoing Fitness and Probity due diligence of PCF and CF individuals. The regulator’s focus is on ensuring individuals are appropriately accountable, and for the funds sector this also means fund service providers by extension in most cases.

Also of immediate focus for Authorised Fund Management Companies is the “Dear CEO” letter on CP86, issued on 20 October, whereby they must carry out an assessment of their operational, resourcing and governance arrangements by the end of Q1 2021. On a practical level, perhaps the most important aspect for many will be the requirement to have a minimum of three suitably qualified full time employees. Many managers have invested significantly in setting up in Ireland and elsewhere in the wake of the Brexit vote and whilst the Central Bank has been increasingly focused on Day 1 minimum resourcing required, this will challenge some managers on further investing in an in-house versus an outsourced AIFM model.

EU/ Global

The Basel Committee on Banking Supervision and IOSCO have recommended that regulators delay the 5th and 6th phases of the Global IM Rules (Initial Margin) for un-cleared derivatives transactions to Sept. 2021 and 2022, respectively. It has been described “as the biggest regulatory event since the Markets in Financial Instruments Directive 2 in 2018”. How do you assess it, and will it have the perceived benefits in enhancing liquidity that regulators are hoping for?
Cillian Bredin
Cillian Bredin

Cillian Bredin, Partner in the Asset Management and Investment Funds Team, Dillon Eustace: The regulatory outlook for Ireland for 2021 is positive. The Investment Limited Partnership (“ILP”) Bill is expected to be passed in the coming months and will be a welcome legal development in 2021, enabling Ireland’s alternative funds industry to continue its rapid growth. The Bill is intended to enhance the structural features of partnerships available under the current legislation to better align with partnership structures in competing jurisdictions and to make technical amendments reflecting the legal developments since the legislation’s original enactment. Concurrently, the regulatory regime for closed-ended Irish funds is being adapted to reflect these legislative changes by way of the Central Banks of Ireland’s Consultation Paper 134(CP134) and its issuance of a revised version of its Q&A on AIFMD, in which it confirms that the general partner of a partnership will not require a separate regulatory authorisation. These developments aim to ensure the Irish ILP structure will become the vehicle of choice in Europe for private equity, private debt, real estate investing strategies and venture capital strategies.

An additional legislative development is the Senior Executive Accountability Regime (“SEAR”) which is likely to be implemented in 2021. SEAR falls under the broader Individual Accountability Framework proposed by the Central Bank of Ireland in July 2018 and will be applied initially to a sub-set of regulated entities, including investment firms, where certain “prescribed responsibilities” set out by the Central Bank are assigned to individuals performing “Senior Executive Functions”, including board members, executives reporting directly to the board and heads of critical business areas. Once the proposals are introduced, they will result in more exposure for senior management in regulated entities and as such, senior managers should ensure that they are receiving adequate support from their firm to discharge the functions assigned to them.

Brexit, Ireland, and the EU after Jan 1st

The Irish Regulator. How confident are you that the Irish Regulator and their colleagues at the ECB can fill the void left by the departing UK In the area of assuring investors and pension funds that the quality of regulation will be maintained after Brexit?

Donncha Morrissey, Head of Ireland’s Branch, Sparkasse Bank Malta plc: 0To assure investors equivalence decisions need to be taken, that recognition (or not!) will dictate the confidence the EU and UK have re transparency and robust protections investors can expect on an ongoing basis.
It is not just about getting that equivalence designation in late 2020 or early 2021, but one that is substantive and robust enough to remain and not be revoked or reversed in the future.

It is what will determine the success of retaining and ensure going forward, a successful relationship in the financial industry between the UK and the EU. Benefits both the EU and UK investment community not have a huge divergence between the regulations. We can hopefully expect agreement shortly between the financial regulators to which the meat can be added.
Meliosa O'Caoimh
Meliosa O'Caoimh

What the investor community and the financial service providers want is to ensure that there is financial stability and equivalence should be the ultimate objective which will be gained through a meeting of minds.

Meliosa O’Caoimh, Northern Trust’s Country Head, Ireland: Ireland is successful because it is a global funds hub and part of an investment ecosystem – an attractive fund domicile for global funds as well as an international fund distribution location. Key reasons for this include its robust regulatory regime, multi-skilled workforce and unique status as an English first-language location within the EU, with extensive financial and cultural ties to the US. These areas of strength will continue to help position the Irish funds industry for future growth.

We believe Ireland will continue to provide a competitive, flexible environment for asset managers – who come here from all over the world to do business – along with the robust, high-quality levels of oversight and protection expected by investors. However, it is critical that our regulator continues to adapt to the changing financial landscape and that doing business in Ireland is not perceived as being more difficult compared to other jurisdictions.

We also expect that the Irish regulator and ECB will work together with their UK counterparts to ensure that the historic positive, constructive and mutually beneficial relationship continues over the long-term.

David Dillon, Director, Bridge Consulting: I believe the UK made a very healthy contribution to the unending debate and development of financial regulation in Europe. I do not feel that standards might necessarily drop but the departure of the UK with diversity of views is healthy in arriving at a balanced set of rules. There is little doubt that the views of quite a number of civil law jurisdictions in relation to financial regulation can be somewhat inflexible when it comes to facilitating innovation in financial products. Ireland and Luxembourg I fear lost an important supporter in this respect. If by quality is meant a higher bar, I do not believe this will be an issue but could well be a factor in adapting regulation to facilitate new developments.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: No matter what the final Brexit outcome, there is no doubt the FCA’s departure as a regulator within the EU leaves a large void of knowledge and experience in certain sectors such as insurance. Both sides have a vested interest in a smooth transition and to retain as much equivalence as possible. It’s also unsurprising to see ESMA becoming more prominent in terms of visibility in its oversight role of local regulators as well as driving regulator and regulatory convergence within the EU. It is clearly important for ESMA to project itself in a strong and authoritative manner through this period of change. Arguably it can achieve better traction around the harmonisation of the different regulators in the FCA’s absence which actually provides an opportunity to improve regulatory quality across the EU over time.

In the investment fund sector, ESMA’s challenge is to effectively retain and leverage the expertise of its most experienced regulators - including CBI and CSSF - and bring consistency of best practice and knowledge across the board. Another of the biggest challenges, especially if UK regulatory policy does begin to diverge, will be having the agility to react quickly and as one. The success of the harmonisation project is critical to this and will better enable regulatory evolution.

In Ireland, since the financial crisis in particular, the CBI has built a strong international reputation that underpins Ireland’s attractiveness as a domicile for regulated funds, particularly to institutional investors. The Irish Funds sector is rightly regarded as stable, with the highest standards of regulation and governance, and with a highly proactive regulator. Investors should be confident around regulatory quality in this regard.

McGuinness’s mandate

Mairead McGuinness, new EU Commissioner for Financial Services Portfolio has a new blank canvas for EU FS in the wake of the UK’s exit. In the funds and Capital markets areas what principal opportunities do you see her agenda as addressing the potential mismatches between EU, UK and Ireland in 2021-22?

Ross McCann, Head of Fund Services, Alter Domus, Ireland: Whilst a blank canvas has its benefits, of primary importance will be retaining and building on new relationships between the EU and UK authorities. It is in the interest of all parties to stay close, maintain as much as possible of the status quo, and foster a spirit of collaboration and therefore effective structures must be in place to do so at all levels. This will go some way to minimise both the number and impact of mismatches. The future progress of capital markets integration depends on this and the UK is a critical part of that.

As mentioned above it will also be important to oversee a smooth harmonisation of the EU’s regulators under ESMA, creating an efficient, effective, and agile body whilst retaining the confidence of investors at all times.

David Dillon, Director, Bridge Consulting: It is too early to say how much of an impact the new Commissioner will have, but it is timely that Irish interests will have a safety valve when it comes to looking for an outlet for some of their frustrations. In the past it has been difficulty to get people in Europe to understand some of the issues faced by our Industry, not to mention effective change.

Brexit’s impact

What do you think the impact of the UK leaving the EU will be on the financial services sector in Ireland and the rest of the EU.?
Niamh Ryan
Niamh Ryan

Niamh Ryan, Partner, Simmons & Simmons: All regulators will acknowledge the UK and the FCA have been major contributors to and in some cases major drivers of European regulation over the years and therefore the UK leaving is a big loss but the EU regulatory process will not change as a result the UK being out of it . All European regulators are very focused on investor protection and transparency and I expect this to continue . I don’t believe there is a concern from investors on the quality of regulation post Brexit but the real difficulty has been in the uncertainty it has brought both for investors and financial services firms operating in or with the EU given the length of time the negotiations have been going on without a clear outcome. ESMA’s role is absolutely key now in the context of EU regulation but that’s not to say it wouldn’t have been anyway without Brexit given there is a stated aim of more convergence across the EU in capital markets and the removal of the ability for regulatory arbitrage.

I would consider that Ireland and the Central Bank will feel the impact of the UK leaving more than other member states as we were naturally aligned in our thinking and approach to certain issues and also Ireland and the UK obviously are so closely linked from our history to economy to geography. That puts Ireland in an awkward position as we try to remain aligned and friendly with our neighbour as well as respecting our position within the EU. There is also the question as to what future role the UK will play in European asset management more generally. Clearly the discussions and outcomes on equivalence will have impact on this and that remains to be seen but if and how the UK develops its own regulatory regime and how it may compete with the EU will be interesting to see.

Review of 2020

What in your view were the most significant developments in the asset management/investment funds landscape in 2020?

Meliosa O’Caoimh, Northern Trust’s Country Head, Ireland: The COVID-19 pandemic was a significant test for our industry’s resiliency, especially during when market turbulence was at its peak during March and April 2020. As an industry, we were able to validate the robustness of our infrastructure and processes through unpreceded operational strain. However, the changes the pandemic has ushered in, such as widespread remote working, will be transformational.

We have also seen exponentially more use of technology to facilitate many manual-based tasks such as investor reporting. This will fundamentally change how investors choose to communicate and be serviced going forward. While these were already-existing trends, asset managers and the funds industry will need to continuously and rapidly evolve to keep up with the expectations of our clients.

In addition, the financial strain of the pandemic has given fresh urgency to the need for organisations to review their operating models to drive operational efficiencies across their business and help reduce unnecessary costs.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: Covid-19, a public health crisis first and foremost, has been the most significant event of the year, impacting all areas of life and permanently altering the way many of us live and work. Notwithstanding people’s personal circumstances, operationally the asset management and investment fund sector has proved highly resilient in the face of this crisis and has benefited from technology already available in order to largely continue business as usual.
Ross McCann
Ross McCann

Proving that working from home can successfully play a part in the way we work has undoubtedly accelerated change in the way a large section of society works and lives. The downstream impacts of this are starting to become apparent. Many firms are now reviewing real estate requirements, geographic hiring practices, as well as many related HR policies around remote working and employee welfare. This is of particular significance to regulated firms which will need to demonstrate that new policies still meet regulatory requirements and expectations. Firms have also had to become ever more vigilant around cyber security amidst an increasing number of instances of attacks as well as their sophistication on weaknesses in firm’s work from home models.

On an asset level the impacts have been wide ranging. Infrastructure assets involving travel have been severely impacted, although as restrictions are lifted these tend to recover relatively quickly. Retail businesses with a strong online platform have had a distinct advantage and we have seen an acceleration in innovation and businesses either moving online for the first time or increasing their presence. Unfortunately many businesses, for example in hospitality related trade, will not survive whilst the longer term impacts on commercial real estate are unclear as living and working patterns evolve post-Covid.

In the Covid environment we have seen some fund managers hold back on investments and new fund launches, certainly in Q2 with an increase in activity thereafter. Other managers, particularly in the debt and credit sectors, have actually accelerated fund launches as they recognise demand is rising.

Economically, governments are borrowing at record levels to fund their health services and financial supports related to Covid. These supports have undoubtedly reduced the financial impact on businesses and individuals, enabling survival in many cases. The timing of withdrawal of support as restrictions lift in 2021 will determine the viability of many businesses to continue. Governments will be highly mindful that despite the inflation outlook remaining at historic lows, they have significantly different balance sheets to manage which will impact fiscal policy for the years ahead.

Brexit has been overshadowed for most of 2020 but has not gone away. Amazingly without any agreement in early December, we still cannot know fully what the real impacts will be and this remains a large unknown for 2021.

What’s in store for 2021

What in your view could be the most decisive developments in the asset management/ investment funds landscape by the end of 2021?

Meliosa O’Caoimh, Northern Trust’s Country Head, Ireland: The impact of the COVID-19 pandemic has been transformational in propelling our industry to urgently embrace new ways of working. By the end of 2021 we expect the trends it has driven to have accelerated even further. These includes the further digitalisation of asset management.

As a result, we can expect processes in fund administration that have been developed through the pandemic to continue in perpetuity – for example, the widespread use of electronic rather than postal methods for routine investor communications. This shift will be decisive. It will drive the need for intuitive ‘on-demand’ investor experiences, including for real-time data and tools to help users make sense of it.

Ross McCann, Head of Fund Services, Alter Domus, Ireland: 2021 promises to be one of the most significant years for Irish funds in a long time. From an Irish perspective, the enhanced Investment Limited Partnership legislation coupled with related CBI Rule Book updates will greatly increase Ireland’s attractiveness as a domicile to managers in the private funds sector. This has been a number of years in the making and the industry has been working hard to advance the project which will offer managers the product they need, provide diversification of Ireland’s fund industry generally, and create high quality jobs throughout the country. Ireland can become a gateway to European fundraising for managers in 2021, particularly in the wake of Brexit. The private funds sector will also see the first authorisations of Depositaries with specialist scope for private assets combining with specialised administrators and ManCos, as service providers seek to offer efficient one-stop-shop solutions to clients.

CP86-related substance requirements and the increasing regulatory burden will see accelerated M&A consolidation within the ManCo market in 2021 as smaller managers weigh the benefits of outsourcing to third party operators rather than incur additional expense and risk. On the other side of the coin, service providers—often with private equity backing—see opportunity in entering the market and acquiring or increasing market share.

Cillian Bredin, Partner in the Asset Management and Investment Funds Team, Dillon Eustace: The European Commission’s review of the Alternative Investment Fund Directive (“AIFMD”) is likely to result in significant legal developments next year, with draft amending legislation expected to issue in Q4 2021. The initial report published by the Commission raised issues with the AIFMD framework, indicating that further action could be required to ensure the framework is fit for purpose. ESMA’s subsequent letter to the Commission highlighted 19 areas where improvements could be made to the framework. A key issue raised by ESMA relates to the current legislative provisions governing delegation and ESMA recommended that both the AIFMD and UCITS legislative frameworks are revised following the United Kingdom’s decision to withdraw from the European Union.

Noting the current practice of AIFMS and UCITS management companies delegating collective portfolio management functions to third parties and the likely increase of such delegation arrangements to non-EU entities in light of Brexit, ESMA’s letter highlights the operational and supervisory risks of such delegation arrangements, and suggests updates to the legislative frameworks regarding the maximum extent of delegation. The Commission launched a consultation relating to its review and the closing date for submission of responses is 29 January 2021, following which the Commission will work to issue draft amending legislation. Developments in this area will be watched closely over the coming months, particularly as ESMA’s recommendations may, if implemented, have significant implications not only for AIFMD but also the UCITS framework.

The search for certainty in a crypto world

Donncha Morrissey, Head of Ireland’s Branch, Sparkasse Bank Malta plc: One watch item over 2021 and subsequent years is the developments from a legislative perspective in respect of markets in crypto-assets. Signaling the intention as an area of focus and organizing a structured and considered regulatory framework, the European Commission published a Digital Finance package in September 2020. The package consists of two components with Regulations on Market in Crypto Assets (“MICA”) and Regulation for a Pilot Pilot-Regime for DLT based market infrastructures.
Donncha Morrissey
Donncha Morrissey

Unsurprisingly the objectives are common with other financial market legislative frameworks i.e mitigate potential risks in respect of investor money, AML and cybercrime and in particular to have a uniform approach and to get to a point to provide legal certainty regarding such assets.

The MICA has recognised different types of crypto-asset issuance and specific considerations of each, while also cross refers to another subject being posed by the European Commission bring to the fore the question of the definition of ‘financial instruments’ and seeks to ensure the inclusion in such definition financial instruments based on DLT.

Under the current draft both issuers and Crypto-asset service providers will be required to have a registered office in a Member State, and the latter will need to be authorised as a crypto-asset service provider by the competent authority of the Member State where its registered office is located. In the long term it is anticipated that a central register will be maintained by ESMA for all authorised crypto-asset service providers.

The MICA is very detailed and comprehensive and while there is a bit to work through and to get the requisite harmonization and clarity of thought; it is clear there is recognition that these ‘new’ assets are here to stay and that regulators and legislators now have a path to follow in embracing such assets while maintaining the robust legal security to ultimately protect investors. The framework is now being shaped, it may take a few years to calibrate but the picture is now somewhat clearer of how crypto-assets may sit under European regulations.

The asset servicing industry in the pandemic

How was the asset servicing industry affected by the pandemic in 2020?

Meliosa O’Caoimh, Northern Trust’s Country Head, Ireland: As our clients’ asset servicer, our role is integral to their operations and businesses. Our reputation depends on our reliability and resilience, and these come to the fore in difficult environments such as 2020, when business resiliency plans have been put to the test.
Meliosa O'Caoimh
Meliosa O'Caoimh

Our focus has been on supporting clients through these challenges – helping them progress their business plans and communicate with their investors. When the impact of the pandemic struck our industry in March and April, we had to quickly adapt to ensure key services such as valuing funds and settling transactions continued to be delivered against a backdrop of significant volatility and substantial increases in transaction volumes.

Whilst asset servicers already had established work from home, business resiliency centre and pass-the-book practices, the pivot to nearly all staff working from home in a very short space of time was unprecedented. One of the main challenges today is to continue to work to make necessary adjustments to our working arrangements in the virtual environment and ensure that everyone is and feels supported.

This situation is not without its challenges, but it is driving our teams to collaborate more closely than ever before, and we expect to emerge from current conditions stronger.


ESRB’s continued focus on liquidity and how it will impact asset classes
Cillian Bredin
Cillian Bredin

Cillian Bredin, Partner in the Asset Management and Investment Funds Team, Dillon Eustace: The supervisory focus on robust liquidity risk management has unsurprisingly intensified this year since the onset of Covid-19, with market conditions creating significant liquidity concerns for fund managers and regulators. This has further been reflected in a set of recommendations issued by the ESRB this year relating to liquidity of investment funds and requesting ESMA to assess the ability of corporate bond funds and real estate investment funds to react appropriately to potential future adverse shocks. The recommendations note that these types of funds in particular require enhanced scrutiny from a financial stability perspective during the Covid-19 crisis. In response to the ESRB recommendations, ESMA, in coordination with EU competent authorities published a questionnaire to management companies of corporate bond funds and real estate investment funds, the results of which form the basis of ESMA’s recently published report.

While the ESMA report focuses on corporate bond funds and real estate investment funds, the recommendations outlined will have broader application to all categories of investment funds, regardless of their asset class or investment strategy. Irish management companies of corporate bond funds and real estate investment funds can expect increased scrutiny from the Central Bank over the coming months, however, all management companies should be aware of developments in this area and assess their existing liquidity management measures in light of the ongoing enhanced scrutiny of national competent authorities.

Europe and the world’s funds centres

There might be an impression that the interests of all European jurisdictions in financial centres are aligned. Do you have a view?
David Dillon
David Dillon

David Dillon, Director, Bridge Consulting: It is not hard to understand that all countries are anxious to promote their own offerings and make their location attractive to prospective participants. The US and the UK are prime examples. The UK would like to position itself as the principal market for settlement of a number of different instruments and the primary centre for foreign exchange and bond trading. The struggle for supremacy between the big Centres is constant and ongoing. In these efforts, the regulators have played a part. The Bank of England and the various Exchanges are very cognisant of the need to make their jurisdictions an attractive one to do business in. The same can be said of Singapore, Hong Kong and others. The paramount importance of effective and appropriate regulation cannot be over emphasised but how that is achieved is worth discussion. A one-size fits all does not necessarily auger well in the long term. The model, which has served Luxembourg and Dublin well, is possibly being eroded by pressure from Europe.

The UK was very supportive of the delegation model but without the support of the UK, there is a danger that the interests of centres such as Paris and Frankfurt might take precedence. Superimposing a model from big financial centres does not necessarily improve or solve regulatory infrastructure in domiciles such as Luxembourg and Dublin. In short, it is not entirely clear that regulators from other jurisdictions who have significant influence in policy European wide fully appreciate the models used in what might be described as product production countries and especially the effectiveness and robustness of these models. At a certain point a number of years ago, the regulators in Ireland indicated that they had no role in promoting Ireland as a jurisdiction for financial services. Bearing in mind the approach of many other international regulatory bodies it might be worth revisiting the possibility not for regulators in Ireland to compromise any standards but perhaps to take account of and be cognisant of the needs of an industry which is always under pressure to meet new demands from its clients.