Key Risks

Areas of focus

Key CBI Expectations

External risk environment

The Report addresses the impacts of developments such as COVID-19, the Russia/Ukraine war, and rising energy prices. It calls out the risks associated with highly leveraged funds and less liquid funds operating under these conditions and the importance of effective liquidity management practices.

• Robust and regularly updated stress testing;
• Use of appropriate liquidity management tools;
• Verification of valuations of assets affected by rising interest rates and sanctions; and
• Effective systems and controls to comply with financial sanctions regulations.

Sustainable investing

There is continued focus on sustainability in the funds sector. Compliance with the Sustainable Finance Disclosure Regulation (SFDR) is essential so that investors can trust in funds labelled as sustainable. The CBI signals the importance of maintaining high standards regarding funds’ sustainability credentials.

• Compliance with regulatory sustainability disclosure obligations; and
• Robust policies and procedures to ensure products marketed as ‘green’ and ‘sustainable’ meet the requisite criteria.

Delegation and outsourcing

Delegation and outsourcing is now a standalone key risk with a dedicated sub-section for the funds sector. The CBI re-states that it does not differentiate between delegation and outsourcing, which represent ‘an area of particular focus’ with a ‘credible threat of enforcement’. The CBI identifies the growth in the use of third party fund management companies as another area of continued focus.

• Firms to have regard to Central Bank Cross Industry Guidance on Outsourcing and requirements under the Market Abuse Regulation (MAR) and the Markets in Financial Instruments Directive (MiFID); and
• Oversight and continuous monitoring of digital processes outsourced to third parties.

Digital innovation

There is a continued focus on the risk to investors posed by technological innovation. Having previously outlined that it is ‘highly unlikely’ to approve proposals for UCITS or Retail Investor Alternative Investment Funds (RIAIFs) investing in crypto assets, the CBI states that its position remains under review to be informed by developments at EU level.

• Firms to note the requirements of the upcoming Markets in Crypto Assets Regulation (MiCA);
• Awareness of the CBI’s current position on the suitability of crypto assets for retail investors; and
• Appropriate risk frameworks tailored to the risks arising from new technologies.

Cybersecurity

The CBI highlights the continued risk of cybersecurity breaches and identifies the Digital Operational Resilience Act (DORA) as an important milestone in strengthening cyber resilience.

• Firms to note relevant CBI cross-industry guidance; and
• Adequate tools, governance and risk management frameworks.

Data Quality

The CBI notes continued data quality issues in certain areas, and calls for comprehensive, precise, and consistent data submissions in line with reporting obligations under regulations such as the Alternative Investment Fund Managers Directive (AIFMD), the European Markets Infrastructure Regulation (EMIR) and the Securities Financing Transactions Regulation (SFTR) which are vital to the CBI fulfilling its supervisory and gatekeeper responsibilities.

• Accurate and timely data submissions;
• Appropriate reporting oversight from Board level down; and
• Effective escalation channels and timely engagement with the CBI where data reporting issues arise.

Market integrity

The CBI sets out its expectations regarding firms’ market surveillance, reporting and governance arrangements to address the risk of market abuse.

• Robust frameworks supporting the identification, assessment and timely reporting of suspected market abuse in a rapidly changing environment.

Market Conduct Risk Management

The CBI observes continued deficiencies in firms’ frameworks to address market conduct risk. It identifies hybrid-working as a new area of focus.

• Robust market conduct risk management frameworks; and
• Management and mitigation of emerging risks in a rapidly changing environment.