“Covid-19 demonstrates the need for a macroprudential framework for investment funds” - Derville Rowland, Director General, Financial Conduct

• Fund sector must remain resilient, fair, and sustainably serve the economy.
• Covid-19 demonstrates the need to operationalise a macroprudential framework for investment funds.
• Fund management companies must take action to implement findings from Central Bank assessment of their liquidity risk management systems and controls.

The Central Bank's Director General, Financial Conduct, Derville Rowland spoke at the Irish Funds Annual Global Funds Conference today (19 May 2021) where she provided an overview of some of the economic challenges posed by the Covid-19 pandemic, and required areas of improvement in the funds sector.

The Director General said while the Central Bank is keen to see the funds sector “fulfil its potential as a means of investment and funding in the European and Irish economies,” it must remain resilient, fair, and sustainably serve the needs of the economy.

On the impact of the Covid-19 pandemic, the Director General spoke about the significant turbulence that emerged in the financial markets impacting the funds sector.

Ms Rowland said that although greater negative impacts on the economy were averted as a result of the significant interventions of central banks worldwide, parts of the fund sector “did not play a role in absorbing shocks but rather in transmitting and amplifying the stress.” In this context, Ms Rowland said money market funds and liquidity management practices in the funds sector are currently under consideration.

Ms Rowland said the Covid-19 experience has demonstrated the need to develop and operationalise a macroprudential framework for investment funds, saying: “The absence of such a macroprudential framework for investment funds remains, in our view, a key omission in the European regulatory toolkit.  Considering the events last year, the scale of the sector in Ireland, and the continued uncertainty we face, developing a comprehensive macroprudential framework for the non-bank sector remains an important priority for the Central Bank.”

The Director General added the Central Bank has written to CEOs of firms following a review on UCITS (PDF 141.39KB) (Undertakings for Collective Investment in Transferable Securities) liquidity risk management. The review was carried out by the Central Bank as part of a Common Supervisory Action (CSA) with the European Securities and Markets Authority and other EU/EEA National Competent Authorities. The purpose of the CSA was to assess EU/EEA UCITS managers’ compliance with their liquidity risk management obligations by simultaneously conducting supervisory activities throughout the EU/EEA. The Central Bank’s findings aligned with those of other EU and EEA national competent authorities and showed that there remains scope for improvement in liquidity management practices. The Central Bank’s letter details the actions now required of Irish UCITS managers on foot of the CSA findings, including that all UCITS managers critically review their liquidity risk management frameworks to take the required actions to address any of the findings of the CSA.

On the issue of diversity in firms, Ms Rowland said good governance, oversight and risk management rely on diversity at senior management and board level.

 “The ability to achieve a good balance in terms of a firm’s diversity rests with the board. Firms must embrace diversity, not for the label it could attract, but for the significant and tangible benefits that differences of all types bring. Different life experiences and perspectives will organically combat groupthink and unconscious bias. As diversity is so interconnected with risk, resilience and financial performance, it will continue to be a priority for the Central Bank.”

The Director General specifically addressed the risks from environmental issues and climate change. Ms Rowland referenced new sustainability regulations, saying: “If properly implemented the new rules will discourage greenwashing and protect consumers in this dynamic and fast-evolving market. The outcome will represent the direction of capital towards more sustainable investments for the benefits of all.”

Notes to Editors

Derville Rowland’s speech at the Irish Funds Annual Global Funds Conference

Dear CEO Letter - 2020 Common Supervisory Action on UCITS Liquidity Risk Management – 18 May 2021. (PDF 141.39KB) 

ESMA Public Statement – Results of the 2020 CSA on UCITS liquidity risk management.