Irish Quarterly Legal And Regulatory Report: Asset Management And Investment Funds January - March 2025

1. AIFMD & UCITS DEVELOPMENTS

1.1 Common supervisory action ("CSA") on compliance and internal audit functions of fund management companies

On 14 February 2025, ESMA published a press release announcing the launch of a CSA with NCAs on the compliance and internal audit ("IA") functions of alternative investment fund managers ("AIFMs") and UCITS management companies across the EU.

The CSA aims to assess the extent to which FMCs have established effective compliance and internal audit functions with adequate staffing, authority, knowledge and expertise to perform their duties under the AIFMD and UCITS frameworks.

The compliance and IA functions are designed to ensure that the internal control mechanisms to monitor, identify, measure and mitigate any possible risks of non-compliance with the applicable rules are in place. As a result, ESMA explains that ensuring entities have robust internal controls is crucial to avoid investor detriment and preserve financial stability.

The CSA work will be carried out using a common assessment framework developed by ESMA. The framework will set out the scope, methodology, supervisory expectations and timeline on how to carry out a comprehensive CSA in a convergent way. During 2025, NCAs will share knowledge and experiences through ESMA to foster convergence in how they supervise the compliance of FMCs with the relevant rules in the area.

Following ESMA's announcement, the Central Bank commenced its review of Irish FMCs' compliance and IA functions with questionnaires issuing to selected entities. The questionnaire is formulated under eight headings as follows:

Compliance function

• Compliance policy & procedures.
• Assignment of compliance responsibilities and delegation.
• Conditions enabling the compliance function.
• Compliance reporting to senior management.
• Compliance monitoring plans.

Internal Audit function

• Conditions enabling the IA function, responsibilities, and delegation.
• IA reporting to senior management.
• IA plans.

The Central Bank's CSA questionnaire involves the collation and submission by selected firms of specified supporting documents (including written policies and procedures, as well as copies of relevant reporting) that will enable an assessment by the Central Bank of the compliance and IA functions.

The CSA questionnaire addresses that firms should be able to demonstrate where appropriate, how considerations of proportionality are taken into account by the firm in the implementation of measures for both functions in view of the nature, scale and complexity of the business and the nature and range of activities and services undertaken in the course of the business.

ESMA's CSA will be conducted throughout 2025 culminating in a final report with the publication of findings from the CSA exercise during 2026.

1.2 AIFMD Q&A (50^th Edition)

On 7 March 2025, the Central Bank published its updated AIFMD Q&A (50th edition). The 50^th edition contains three new Q&As are as follows.

• Q&A ID 1160 purports to clarify the application of the prohibition on QIAIFs acting as guarantors for third parties. It confirms that guarantees are permissible under the rule in Chapter 2 Part 1 Section 1 (i)(7) of the AIF Rulebook in respect of investments and/or intermediate vehicles for such investments in which the QIAIF has a direct or indirect economic interest, subject to a number of safeguards and investor disclosures. These include that the entry into such guarantee arrangements is deemed to be in the best interests of investors and is clearly disclosed to investors.

In addition, the Central Bank also published two Q&As in respect of loan-originating QIAIFs ("L-QIAIFs").

• Q&A ID 1161 confirms for the purposes of the L-QIAIF restriction on lending to financial institutions, that the definition of "financial institution" in the AIF Rulebook is aligned with that defined in EU Directive 2009/138/EC (Solvency II), as transposed in Part 1 Paragraph 3 of the EU (Insurance and Reinsurance) Regulations 2015.
• Q&A ID 1162 clarifies that while the L-QIAIF restriction on lending to persons intending to invest in equities or other traded investments of commodities applies where the borrower intends to use the proceeds to facilitate a trading or speculative investment strategy, it does not prevent lending to a borrower with the intention of acquiring a controlling interest in a target company.

Walkers' Asset Management & Investment Funds and Financial Capital Markets groups have published an advisory on the implications of Q&A ID 1160 entitled 'Fund Finance: Central Bank of Ireland relaxes regulatory prohibition on provision of third-party guarantees by QIAIFs'.

1.3 ESMA Q&As on AIFMD

On 10 January 2025, ESMA released a number of new and updated Q&As including on the Alternative Investment Fund Managers Directive ("AIFMD").

The new Q&As clarify existing practices for AIFMs under the following provisions:

• ID2229 clarifies that AIFMs cannot delegate the portfolio or risk management function to non-supervised undertakings established outside of the EU [points (c) and (d) of Article 20(1) AIFMD].
• ID2230 clarifies that AIFMs are not permitted to hold client money. An AIFM may be authorised to provide safekeeping services in relation to shares or units of collective investment undertakings but does not permit AIFMs to safekeep clients' money. The Q&A notes that the position will not change as a result of the extension of the scope of ancillary services under Article 6(4)(b) of Directive 2024/927/EU ("AIFMD II").

1.4 ESMA updates on deliverables

On 6 March 2025, ESMA published a letter to the Commission (dated 3 March 2025) where it communicates its intention to postpone and deprioritise a number of its 2025/26 deliverables, citing the coincidence of a large number of reviewed legislative files with the need to prepare for implementation of new responsibilities and the lack of accompanying additional resources.

Please note the following proposed postponements

On 13 March 2025, ESMA also published an overview list of planned consultations for 2025, which include:

• Integrated reporting obligations under AIFMD/UCITS (AIFMD II) review (Q2 2025)
• Sustainable Finance: RTS on Green Bond Regulation and RTS on ESG Rating Providers (Q2 2025); and
• EMIR 3.0 Level 2 RTS (various, including on revised clearing thresholds measures) (Q2-Q4 2025).

ESMA notes that in identifying those high priority and de-prioritised deliverables it has taken into account the Commission's political priorities on SIU, competitiveness and burden reduction. The resources freed up from these postponements and de-prioritisations will be diverted towards delivering on the highest priority workstreams for ESMA, amongst which are the implementation of EMIR 3.0, MiFID/MiFIR Review, the T+1 project and AIFMD II.

2. CENTRAL BANK UPDATES

2.1 Regulatory & Supervisory Outlook 2025

On 28 February 2025, the Central Bank published its Regulatory and Supervisory Outlook 2025 ("RSO"), its second annual report setting out the Central Bank's view on the key trends and risks facing the financial sector, along with the regulatory and supervisory priorities for the next two years in the context of those risks. The RSO was accompanied by a press release and an overview of the Central Bank's latest approach to supervision.

The scope of the RSO extends to internationally active regulated entities and the interests of their consumers and investors and the RSO is not limited to those segments of the financial sector associated with the domestic economy. The Central Bank have noted that the RSO is "set against the backdrop of an increasingly fast-moving, interconnected and uncertain world, which is being shaped by a complex interplay of geopolitical, economic, technological and environmental forces". The Report compliments the Central Bank's publications with a macroeconomic or financial stability perspective. The RSO also exhibits specific Spotlight chapters exploring areas of particular concern, such as consumer protection, artificial intelligence ("AI") and the rise in macro-economic and geopolitical risks.

The Central Bank also published a letter from the Governor of the Central Bank to the Minister for Finance and accompanying press release entitled 'Building economic resilience is key for Ireland' setting out the Central Bank's key "financial regulation priorities for 2025.

The Governor outlines how the financial sector has an important role to play in supporting the broader economy through global transitions, adding that "both domestic and EU policy efforts should be enhanced to translate savings into investment and create a more vibrant funding environment for infrastructure and innovation". The Governor also emphasised the SIU must deliver if Europe is to regain its competitive edge, and if we are to find ways to unlock the €11.5 trillion held by Europeans in deposits and cash and channel it to drive European innovation, while maintaining our resilience in the face of future potential shocks. The headline sectoral risks and trends in the RSO for the funds sector have been updated from the inaugural 2024 report, with further detail set out in the following table.

Supervisory activities

The Central Bank's key supervisory activities for 2025/26 will include:

• Risk-based review of applications regarding funds and FSPs.
• Sectoral and thematic assessments, including the completion of the ESMA CSA on compliance and IA functions.
• Continuing the focus on delegation and outsourcing arrangements in FMCs.
• Focusing on FSPs' implementation of the requirements of DORA.
• Continuing to enhance and use fund data and risk models to deliver a data-led, agile and risk-based approach to the effective and efficient oversight of the sector.

Appendix A of the RSO details a number of key EU and domestic regulatory initiatives of relevance to the sector including:

• EU AI Act: The first provisions of the AI Act came into force on 2 February 2025; in relation to AI literacy and prohibition of certain AI practices. The other obligations under the AI Act will be phased in over a period of 36 months with the key obligations in place within 24 months of entry into force of the AI Act.
• Individual Accountability Framework ("IAF") implementation: During 2025, the Central Bank will continue to implement the IAF in a proportionate and predictable manner.
• Fund Sector 2030 Review ("2030 Review"): the Central Bank is now working to implement 16 of the 42 recommendations of the 2030 Review which relate to the work of the Central Bank.
• Tokenisation: The Central Bank intends to publish a discussion paper on the potential application of tokenisation within investment funds.
• Transposition of AIFMD II: The Central Bank's Funds Policy Team is currently transposing the new rules into the domestic framework, which will require extensive updating.
• The Commission proposals in the areas of the Retail Investment Strategy ("RIS") and the omnibus package on regulatory simplification are also referenced.

Arising from the RSO and the Governor's letter, the Central Bank published a cross-sectoral Dear CEO letter to draw attention to the Central Bank's key regulation and supervision priorities for 2025 (the "Letter").

The Letter outlines the six overarching supervisory priorities which frame the more detailed supervisory strategies for each of the financial sectors which are consistent with those published last year.

On the macro-environment, the Letter outlines the fragile market sentiment amid the current geopolitical and economic situation and notes a further escalation in any of the areas of concern or other such developments could trigger a cascade of adverse economic, financial market, supply chain and operational impacts.

The Letter also outlines at a high-level its key regulatory initiatives contained in Governor Makhlouf's own letter to the Minister:

• Finalisation of the revised Consumer Protection Code to ensure consumers are protected in a more digitalised financial services sector.
• Implementation of the Markets in Crypto Assets Regulation ("MiCA"), including engaging with firms seeking authorisation and work to raise awareness of the risks related to crypto for consumers.
• Ensuring firms have effective governance underpinned by strong ethical culture and robust systems of delivery. This will include continuing to embed the IAF for in-scope firms (including the extension of the Senior Executive Accountability Regime ("SEAR") to (independent) non-executive directors) and supporting external stakeholders through ongoing engagement; and
• Enhancing operational resilience, including cyber-related resilience, across the financial sector, through the effective implementation of DORA.

The Letter also addresses the Central Bank's intention to work closely with the Department of Finance on the recommendations from the 2030 Review and progressing proposals related to the SIU. It will also be proactively engaging, domestically and internationally, with the regulatory simplification agenda. Notably, the Letter points out that in any drive to simplify, it will call out the risks should the legitimate aims of simplifying frameworks go too far and will ensure not to compromise on delivering the stability, resilience and protections that consumers and the wider economy needs.

These recent publications from the Central Bank provide a helpful overview for boards and officers of funds, FSPs and other market participants as they navigate the regulatory year ahead. Funds and FSPs may wish to align with the Central Bank's expectations by ensuring that the risks and supervisory priorities outlined in the Letter and the RSO respectively are monitored and addressed in the firm's horizon planning, risk assessment and risk mitigation programmes.

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