Central Bank of Ireland issues report on fund management valuation

Central Bank issued a letter (7 pages/200KB) following  its review of asset valuation carried out as part of the European Securities and Markets Authority’s (ESMA) common supervisory action (CSA) - the EU’s financial markets regulator and supervisor. The Central Bank investigated whether the Irish fund management companies (firms) comply with asset valuation regulations under the UCITS and AIFMD regimes and adhere to asset valuation principles and methodologies to provide a true and fair representation of their financial position, as well as evaluated how firms’ valuation procedures working during the Covid-19 pandemic.

Dublin-based investment funds expert Conor Durkin of Pinsent Masons said that, following the investigation, “many fund managers will be required to revise their asset valuation review procedures with a structured governance framework that identifies all functions involved in periodic reviews, sets out the different roles and responsibilities of individuals involved in periodic reviews and clarifies the oversight by the control function”.

This requirement comes as the Central Bank found that several fund managers were unable to demonstrate that periodic reviews of their valuation procedures were carried out or could not demonstrate that clear governance processes were adopted for the conduct of periodic reviews. It’s interesting to note that the Central Bank advised that its findings related to the “majority of Firms” that were subject to its review and for this cohort the Central Bank found that firms held limited records of their periodic reviews. In some cases, the evidence that was provided was not considered by the Central Bank to be sufficient, for example board minutes, leading to possible deficiencies in valuation methodologies or models being utilised and resulting in incorrect valuations of assets being produced. Overall, the Central Bank said that asset valuation policies and procedures were “poor quality” across firms.

To remedy this, firms should put in place documented, comprehensive and entity specific asset valuation policies and procedures. Policies must clearly outline the operational roles and responsibilities for all parties involved in the asset valuation process. It means firms need to take measures to set out clear ownership of policies, procedures and review process, with these procedures subject to review by senior management. ESMA requires these reviews to be carried out at least annually or when appropriate to ensure they remain fit for purpose, and to be carried out by a fund manager or person with knowledge and experience; as well as following the approved methods and models to apply consistency to all funds within the business.

Additionally, the Central Bank found that some firms did not have formal valuation error procedures and the letter sets out requirements to put in place a formalised and comprehensive errors procedure to ensure remedial action when needed, with these procedures also required to reviewed at least annually and updated when appropriate to each specific firm.

Asset valuation framework reviews are required to be carried out under the guidance, ensuring that measures are fit for purpose and adhere to all relevant legislative requirements. The Central Bank states that these reviews should be completed in the first six months of 2024.

The Central Bank can trigger enforcement powers over firms in situations of non-compliance with any requirements raised in the recently published letter.