Central Bank of Ireland publishes Markets Update No 7 of 2023

On 18 July 2023, the Central Bank of Ireland (the Central Bank) published Issue No 7 2023 of its regular Markets Update, in which it sets out alerts of interest to Irish regulated firms and other market participants.

For our summaries of the previous issues, please see the right-hand column of this page.

We have identified the following items as being of particular interest:

Central Bank publication

Central Bank Discussion Paper on a macroprudential framework for investment funds

On 18 July 2023, the Central Bank published a discussion paper, DP11, “An approach to macroprudential policy for investment funds”. The consultation period closes on 15 November 2023.

Given the Central Bank's concern that the collective actions of investment funds "have the potential to generate systemic risk" to the financial system, the DP starts a conversation with stakeholders on how a comprehensive macroprudential perspective for regulating the funds sector could be achieved.

It also considers what the objectives of such a framework would be, what key principles might underpin its design and what tools could be used to achieve these macroprudential objectives.

For our summary of the DP, see here.

ESMA publications

ESMA report concludes that NCAs have strengthened supervision of the MiFID compliance function

On 13 July 2023, ESMA published a follow-up report (the Report) to its 2017 peer review on certain aspects of the compliance function under MiFID I.

The Report provides an update on actions taken by the NCAs to address issues identified in the 2017 peer review on ESMA’s Guidelines on certain aspects of the MiFID compliance function requirements. (The Guidelines have since been updated - the current version can be found here.)

The peer review identified five NCAs (Cyprus, Greece, Iceland, Netherlands and Slovenia) which needed to improve their practices when supervising certain aspects of the compliance function. The Report notes that all five have since made progress in addressing points of partial or insufficient compliance, strengthening supervisory practices, undertaking investigations and thematic reviews, introducing sample checks, and / or taking enforcement actions.

ESMA Statement highlights risks arising from securities lending to retail investors

On 12 July 2023, ESMA published a Public Statement on the risks to retail clients arising out of securities lending (the Statement).

The Statement sets out the applicable requirements under MiFID II and

• highlights ESMA's investor protection concerns related to securities lending
• outlines the obligations of firms engaging in this practice; and
• makes clear ESMA's expectations for firms' compliance with the relevant MiFID II requirements.

In particular, ESMA notes that

• revenues from securities lending should directly accrue to the retail client (net of a normal compensation for the firm's services) and
• express prior consent from retail clients should not be sought by way of the firm's general terms and conditions.

For our summary of the Statement, see here.

ESMA publishes a first consultation paper on Level 2 measures under MiCA

On 12 July 2023, ESMA published the first (of three) consultation package on Level 2 measures under the Markets in Crypto-Assets Regulation (MiCA). The consultation period closes on 20 September 2023.

The aim of the consultation paper is to collect views, comments and opinions on the appropriate implementation of MiCA, in particular in relation to

• the content, forms and templates for notification by certain financial entities
• the content, forms and templates for the application for authorisation of Crypto Assets Service Providers (CASPs)
• the complaint-handling procedure
• the identification, prevention, management and disclosure of conflicts of interest by CASPs and
• the assessment of intended acquisition of qualifying holdings requirements.

ESMA expects to submit its draft technical standards to the European Commission for endorsement by no later than 30 June 2024.

It also intends to consult further on MiCA measures in October 2023 and Q1 2024.

For more on crypto issues generally, see our Crypto View publication here.

ESMA publishes Final Report on revised technical standards for passporting under MiFID

On 11 July 2023, ESMA published a Final Report on its review of the technical standards for passporting under Article 34 of MiFID II, (which requires ESMA to develop draft RTS and ITS

• specifying what information should be notified by firms wishing to provide cross-border services without establishing a branch and
• establishing standard forms, templates and procedures for transmitting such information.

ESMA’s proposals include targeted amendments to the existing RTS and ITS, adding new information requirements to the list of details investment firms have to provide at the passporting stage.

The proposed amendments to the information that firms would be required to provide at the passporting stage include

• the marketing means the firm will use in host Member States
• details of the languages for which the firm has the necessary arrangements to deal with complaints from clients from each Member State in which it provides services
• a summary of the firm’s internal organisation in relation to its cross-border activities.

The draft RTS and ITS have been submitted to the European Commission, which will now decide whether or not to adopt them as a formal legislative proposal

ESMA’s Public Statement on expected sustainability disclosures in prospectuses

On 11 July 2023, ESMA issued a Public Statement (the Statement), which sets out ESMA’s expectations on how firms should comply with the specific disclosure requirements of the Prospectus Regulation (PR) on sustainability-related matters in equity and non-equity prospectuses.

The aim of the Statement is to help ensure that the approach taken by NCAs is coordinated when it comes to the scrutiny of sustainability-related disclosure in prospectuses while providing issuers and their advisors with an understanding of the disclosure that NCAs will expect them to include in their prospectuses.

The Statement emphasises the importance of an issuer’s non-financial reporting under the Non-Financial Reporting Directive and the future sustainability reporting under the Corporate Sustainability Reporting Directive, especially given that such disclosure may be material under the PR and included in an issuer’s prospectus.

In respect of non-equity securities which as advertised as taking into account a specific ESG component or pursuing ESG objectives, ESMA clarifies the disclosure required in relation to ‘use of proceeds’ bonds and ‘sustainability-linked’ bonds.

Results of ESMA’s CSA on disclosure of costs and charges under MiFID II

On 6 July 2023, the European Securities and Markets Authority (ESMA), published a Statement on its 2022 Common Supervisory Action (CSA) and associated ‘Mystery shopping’ exercise.

The CSA focused on firms’ compliance with the ex-post costs and charges information to be provided to retail clients under MiFID II’s disclosure requirements.

The mystery shopping exercise, on the other hand, concentrated on what ex-ante costs and charges information was actually given to retail clients and how understandable and useful this was.

Although the CSA exercise showed an ‘adequate level of compliance’ with most elements of the MiFID II requirements, this varied across Member States and a number of shortcomings were identified, including

• costs not always being shown as a percentage
• variation in cost allocation between service and product costs
• differing practices (and sometimes lack of disclosure) on inducements
• implicit costs not always being shown
• wide differences in the format and content of ex-post disclosures.

From the mystery shopping exercise, ESMA has concluded that in only around half of the cases, proper MiFID II ex-ante information about costs and charges was provided, in a durable medium. In the other cases, the information was incomplete or only provided orally.

When providing investment advice, firms did not always adequately disclose whether or not their investment advice was independent and were not always forthcoming with respect to the disclosure of inducements.

In light of these results, ESMA will now focus on the development of a limited number of new Q&As and on working towards a possible standardised EU format for the provision of information about costs and charges to clients.

ESMA’s CSA on disclosures and sustainability risks in the investment fund sector

On 6 July 2023, ESMA launched a Common Supervisory Action (CSA) with NCAs on sustainability-related disclosures and the integration of sustainability risks.
The aim of the CSA is to

• assess how asset managers are complying with the Taxonomy Regulation, the SFDR and applicable Level 2 measures and
• foster convergence in how the NCAs supervise sustainability related disclosure.

For our summary of the CSA, see here

ESMA publishes second overview of national rules governing fund marketing

On 3 July 2023, ESMA submitted its second Report on national rules governing the marketing of investment funds under the Cross-border Distribution of Funds Regulation (the Regulation) to the European Commission, Council of the EU and European Parliament.

The Report’s key findings are that

• the introduction of the Cross-border Distribution of Funds Directive and ESMA Guidelines on funds’ marketing communications under the Regulation have led to a greater level of harmonisation in areas where national divergences existed (as identified in ESMA’s first Report (June 2021).
• only a limited number of NCAs carried out any ex-ante verifications of marketing communications, while an increasing number of NCAs reported carrying out ex-post verifications.

ESMA will produce a third Report in two years’ time.