Global Trustee and Fiduciary Services Bite-Sized Issue 5 2024

Global Trustee and Fiduciary Services Bite-Sized | Issue 5 | 2024 12 QUICK LINKS CYBERSECURITY DIVERSITY DORA ELTIF EMIR FINTECH FSB IOSCO SUSTAINABLE FINANCE/ESG UCITS ASIA EUROPE NETHERLANDS NORTH AMERICA UNITED KINGDOM Key observations by the SFC/HKMA • Many intermediaries would assign risk rating to investment products as part of PDD for matching with client’s risk tolerance level, either calculated using their internal risk scoring mechanisms or based on the nature of underlying investments. The regulators noted that some intermediaries had overlooked certain key features and risk factors in their PDD assessment methodologies which could directly or indirectly impact the risk return profiles and growth prospect of the investment products. • These intermediaries could run the risk of making inappropriate recommendations to clients if the risk return profiles of the products were not adequately assessed and accurately reflected in the product risk ratings used for the suitability assessment. • Structured products were the most prevalent type of non-exchange traded investment products sold by intermediaries. Among the structured products, accumulators and decumulators were the most popular products sold. Accumulators and decumulators are derivative products associated with significant investment risks. • Clients would not be able to understand the characteristics of accumulators and decumulators should the intermediaries merely hand over the product literature to the client, ask the client to read them, or read them to the client without any explanation. Intermediaries are reminded to exercise due skill, care and diligence in selecting investment products for different risk categories of clients and arrive at an assessment of the products taking into account information that is appropriate and reasonably available for a fair and balanced assessment. The SFC/HKMA also wished to remind all intermediaries of their obligations to, among other things: i. Give due consideration to all the relevant circumstances specific to a client when assessing the suitability of a product to the client; and ii. Disclose all relevant transaction related information, and ensure that information provided and any representations made are accurate and not misleading. The observations from the concurrent thematic review on licensed corporations are set out in Annex 1 and those on registered institutions in Annex 2. Link to SFC/HKMA Circular here Link to Annex 1 here Link to Annex 2 here EUROPE ESMA Agrees with Investment Restrictions on GBP LDI Funds in Ireland and Luxemburg On 29 April 2024, the European Securities and Markets Authority (ESMA) issued its advice to the Central Bank of Ireland (CBI) and the Commission de Surveillance du Secteur Financier (CSSF) on investment restrictions for GBP Liability-Driven Investment (LDI) funds to ensure their resilience. The advice follows the notification from the CBI and the CCSF of their intention to impose an investment restriction on Alternative Investment Fund Managers (AIFMs) established in Ireland and Luxembourg and managing GBP-denominated AIFs pursuing a LDI funding strategy. The measure consists in requiring GBP LDI funds to be able to resist a rise in GBP yields of at least 300 basis points (so called “yield buffer”). ESMA’s says that its analysis concludes that the conditions for taking actions under the Alternative Investment Fund Managers Directive (AIFMD) are met and the measures proposed by the CBI and the CSSF are justified and should contribute to improving the resilience EU GBP LDI. ESMA also encourages both regulators to monitor the evolution of the GBP LDI funds and to assess the necessity to recalibrate the yield buffer. The measure applies from 29 April 2024. GBP LDI funds established on or after this date must comply with the measure immediately while existing GBP LDI funds have a three-month transitional period to comply. ESMA states that the measure is not limited in duration. Link to ESMA Advice to CBI here Link to ESMA Advice to CSSF here