Remarks by Patricia Dunne, Director of Securities and Markets Supervision at Irish Funds Annual UK Symposium

Good morning everyone and thank you to Irish Funds for the invitation to speak to you here today at the 11^th Annual Irish Funds UK Symposium.

It is clear that Ireland has built a strong reputation as a fund domicile, becoming the third largest global jurisdiction and serving the needs of investors across Europe and internationally. From a growth perspective, total AUM in Ireland currently exceeds €4.7 trillion, this is up from €1 trillion 10 year years ago – the number of funds authorised stands at over 8,500, up from 5,000 over the same period. Today, Ireland is home to approximately 200 firms operating within the funds sector, directly employing 20,000 people. This continued growth, both in terms of scale and range of activities and products, is supported by an effective and high quality regulatory and supervisory framework, which ensures that the sector is financially resilient and delivers positive outcomes for investors.

To achieve this, we maintain an open and engaged dialogue with stakeholders in the funds sector as well as other international regulatory authorities and National Competent Authorities (NCAs). Indeed, recently the Central Bank has been working closely with both the UK FCA and peer regulators across the EU to ensure that the commencement of the UK’s Overseas Fund Regime (OFR) operates smoothly, and that funds and their managers are aware of their obligations.

We will discuss some important topics at the panel later but in my remarks today, I want to cover three elements of the current regulatory agenda:

• the evolution of the ETF sector,
• the growth of more complex products, and finally
• the changes the Central Bank has made to our supervisory approach for the sector, in particular our increasing use of data and technology.

ETFs

Ireland has become the jurisdiction of choice for ETF providers in Europe - with about 70% of the EU’s total ETF assets being authorised and supervised by the Central Bank of Ireland. AUM in Irish ETFs has grown to around €1.4 trillion this year, across a variety of strategies and mandates. Ireland’s importance as an ETF domicile has been complimented by high levels of expertise in ETF servicing as well as governmental and industry support. 

From an authorisations perspective, we see a steady flow of ETFs with a mix of strategies from fixed income to emerging markets, to ETFs focussed on delivering climate transition exposures. While passively managed ETFs remain the dominant product, the rise in active ETFs warrants specific mention. As investors seek differentiated outcomes, alpha seeking strategies, or to gain specific exposures, ETF providers continue to adapt their product offerings to serve investor needs. The changing operating environment for ETFs naturally gives rise to a degree of introspection within the Central Bank.

There are particular requirements in place relating to portfolio transparency for ETFs domiciled in Ireland, with our national rules mandating the publication of daily portfolio holdings. For active ETFs, we’re aware this gives rise to certain concerns in relation to the protection of proprietary information and further active ETF innovation. This is one of the issues considered in IOSCO’s ETF Good Practices and more recently, by the Department of Finance in the recently published Funds Sector 2030 Report. As Deputy Governor Rowland signalled last month, the Central Bank remains open to engaging with industry on this issue.

Another area where we have received extensive industry feedback is in relation to the naming convention for UCITS ETFs and specifically whether the requirement to apply the “UCITS ETF” identifier is at a sub fund or share class level.  Having taken the matter under consideration and engaged extensively at a European level, we have worked to converge our approach with other fund domiciles, including the publication earlier this month of an updated UCITS Q&A. This means that the “UCITS ETF” identifier will now be available at the level of the sub-fund or the share class. This should reduce the potential for investor confusion where, for example a fund contains a mix of listed and unlisted share classes.

As part of our ongoing supervisory work in the ETF space, and in line with the recent IMF FSAP recommendations, we have undertaken a thematic review looking at the oversight that fund management companies perform on key players within the ETF eco-system. In particular, we looked in detail at the main authorised participants (“APs”) and contracted market makers used by Irish authorised ETFs in the secondary market, and the level of due diligence and monitoring carried out by management companies. While the review highlighted a number of good practices, we also identified a number of areas where improvements are required. These included due diligence, risk monitoring and stress testing performed by management companies, and the quality of board reporting. The review found that at a sectoral level, the Irish ETF ecosystem is functioning effectively; however, we did note potential reliance and concentration on a small number of APs and contracted market makers. We are currently finalising our recommendations and will be issuing an industry communication by the end of this month.

Growth of more complex products

Looking across the sector more generally, we have seen a growth in new and more complex products and strategies being brought to the market. Where the Irish funds sector was traditionally made up of highly liquid, daily dealing UCITS, we have seen a significant rise in the scale of private markets and investors growing appetite for alternative strategies. As the sector continues to evolve, it’s essential that our regulatory approach keep abreast with the pace of change.  

Strong growth in global private markets in recent years is notable, and of significant relevance in that context is the development of the European Long Term Investment Fund (ELTIF) regime. As you will know, prior to the so-called ELTIF 2.0 there were no Irish authorised ELTIFs as the legal framework was overly complex. To address this, the amended ELTIF Regulation earlier this year was complimented by a review of our national framework, leading us to publish a new ELTIF chapter in the Central Bank’s AIF Rulebook covering supervisory, disclosure and general operational requirements. Since implementation of these changes, we have authorised 7 ELTIFs, all of which to date have been closed ended and targeted to professional investors. With the entry into force of Level 2 measures in October, we have also had engagement with a number of prospective applicants on open-ended ELTIFs, as well as retail Investor ELTIFs.

Of course, in speaking about complex products and private assets, it would be remiss of me not to mention the entry into force of the revised AIFMD framework. While the revised AIFMD encompasses targeted changes as opposed to a complete overhaul of the regime, the agreement reached will increase investor protection and support a more consistent approach across the EU on many elements. Among these, the harmonised regime for loan origination and implementation of the ESRB recommendations on liquidity management are particularly welcome. In an Irish context, the revised Directive has knock on effects on some of our domestic requirements, such as our AIF Rulebook and the Central Bank UCITS Regulations, which will require amendments. The Central Bank is working with the Department of Finance on implementation in order to update the regulatory framework to support transposition of the revised Directives.

Of course, these follow other changes, which we have introduced in recent years to support the needs of private equity investors. These include the introduction of a framework for Depositaries of Assets Other than Financial Instruments (DAOFI), which provides a more proportionate depositary regime for real assets; we also provided regulatory and technical support to our Department of Finance in amending the Investment Limited Partnership Act (ILP Act) to make it a more usable structure for private equity vehicles. These changes were widely welcomed and I think have contributed to an appropriate framework that supports the growing market for private assets.

Changes to our approach

Finally, I’d like to take the opportunity to provide an overview of how our approach to supervision of this sector has changed significantly over the last few years. The growth in size and complexity of the sector requires a regulatory environment, which is effective, adaptable and targeted at the right areas and relevant risks. This aligns with, and is at the heart of, the Central Bank’s overarching strategy, which had four interconnected themes (future-focused, open and engaged, transforming and safeguarding).

At an organisational level, we recently took the opportunity to review our progress in implementing our strategy covering the period 2022-26.   As Governor Makhlouf recently outlined, against the evolving and changing global economic backdrop and the economic growth here in Ireland, we have concluded that the strategic direction we set in September 2021 continues to be appropriate. We have recently published a refreshed strategy, which confirms our commitment to the four themes but has been updated and extended to focus on some of the actions we will take to achieve our aims over the coming three years (2025-27).

In the context of the funds sector, we have brought the entire funds supervision eco-system together into one division.  This has helped us to place increased emphasis, through our engagement with management companies, on the underlying products. Underpinning this structural change was the introduction of the data led funds risk model which has enabled us to look at relevant funds at an individual, cohort or sectoral level (so be that Property, MMF, ETF etc.) and their associated management companies. Many in industry will have noticed there are now more frequent targeted supervisory engagement, both at the firm and product level.

In conjunction with this, we are making greater use of sectoral and thematic supervision. These twin approaches allow the Central Bank to follow the risk, both from the management company perspective, and across the sector as a whole. Thematic engagement can be an effective way for supervisors to build out our knowledge of particular themes and well as observing industry practices and trends.

In driving out the continued evolution of our supervisory approach, we have been focused on leveraging the wealth of data the Central Bank has access to and deploying a data-led, risk based supervisory approach. A key objective of this approach is to build out our data and analytics capabilities. This has seen us develop a new comprehensive daily investment fund return, which will give us sight of all investor subscription and redemption activity and AUM changes on a trade date basis. We are also using our various datasets and analytical tools to assess compliance with various legislative requirements and some of you may see engagement from us in this regard in the weeks ahead.

One such area is in relation to the upcoming implementation of the ESMA Guidelines on Funds’ Names Using ESG or Sustainability-Related Terms. We have been a vocal supporter of the introduction of naming conventions and believe that having clear rules in place is a key element in the ESG/sustainability journey from a product perspective. The guidelines will apply from today for new UCITS and AIFs, and from May 2025 for pre-existing UCITS and AIFs.  With this in mind, we have developed proprietary tools to support supervisors in assessing fund names against the portfolio composition and prospectus disclosures in the context of the ESG characteristics of a fund’s portfolio.

In terms of the Guidelines themselves, the Central Bank has adopted a pragmatic approach to facilitating orderly implementation of the Guidelines, including establishing a streamlined filing process for funds seeking to amend their name or to make minor changes to disclosures in fund documents. We will perform a sample review of the submissions made via this streamlined process on an ex-post basis, and this may necessitate further amendments to fund documentation, should we identify any shortcomings.

The next phase of our data building strategy will cover liquidity management tools. Communications have already issued to industry on this new return and we will continue to engage as we develop this further. The transformation in our fund supervisory mandate means that data will guide our resource allocation covering not only prudential supervision and investor protection but also conduct and money laundering risks. This really places a premium on the quality of the data that you send us. Where this is lacking, you will hear from us more often.

This focus on data and technology also extends to our gatekeeping role where we are continuously seeking to drive process improvements, while also highlighting potential risks. To put into context the scale of the authorisation process, we are seeing approximately 800 new funds authorised a year and up to 10,000 post authorisation amendments. With this in mind, we are working to enhance our authorisation process through introducing more automation and improved workflow processes. We will continue to explore further enhancements to our gatekeeper process, which will also aid with streamlining external stakeholder engagements in relation to gatekeeping matters.

So, let me conclude there. I’ve spoken about the importance of the ETF sector to Ireland, of the growth and development in the private assets space, and of how our regulatory approach has evolved with them, and must continue to do so, in order to support innovation, focused supervisory outcomes, and ultimately ensure investors are protected. As we look to 2025, as a regulator that prides ourselves on being open and transparent, we welcome and encourage ongoing engagement with industry to ensure our approach remains optimal to deliver these outcomes.

Thank you for your time.