Insights Blog

On 14 December 2023, the Central Bank of Ireland (the “Central Bank“) published the findings of its 2022 review of asset valuation as part of the European Securities and Markets Authority’s (“ESMA“) Common Supervisory Action (“CSA“). The purpose of this CSA was to assess a sample of Irish fund management companies (“Firms“) for compliance with the UCITS/AIFMD Regulations on asset valuation and adherence to valuation methodologies and principles under both normal and stressed market conditions.

The letter, which was sent to Firms today, highlights the main findings of this work, sets out the Central Bank’s expectations and identifies the key actions to be taken by all Firms to mitigate the issues identified. Firms should consider the contents of the letter in conjunction with ESMA’s report on the 2022 CSA on valuation, which was published on 24 May 2023.

The key findings, observations and actions which should be considered by Firms relate to:

  • Use of group asset valuation policies and procedures
  • Lack of formal asset valuation error procedures
  • Poor quality of asset valuation policies and procedures
  • Limited evidence of periodic reviews

The letter also contains the Central Bank’s observations in relation to the extent to which Firms performed liquidity stress testing and scenario analysis and the extent of clear allocation of operational tasks and responsibilities in Firms’ asset valuation function.

The required actions set out in the letter include that all Firms should have documented, comprehensive and entity-specific asset valuation policies and procedures which clearly outline the operational roles and responsibilities for all parties involved in the asset valuation process. Firms should ensure that there is clear ownership for asset valuation policies, procedures, and the review process, which are adhered to and embedded in the Firm’s asset valuation process.

Further, the Central Bank expects that asset valuation policies and procedures are subject to review by senior management at least annually, or where required throughout the year, to ensure they remain fit for purpose. Reviews should be performed by persons with appropriate knowledge and experience and the approved valuation methodologies and models should be applied consistently across all funds under management for each Firm.

Finally, all Firms are required to have a formalised and comprehensive errors procedure in place to ensure remedial action is implemented when valuation errors or incorrect calculations of the NAV occur. These procedures should also be reviewed at least annually and updated where required.

Firms are required to conduct a review of their asset valuation frameworks to ensure they continue to be fit for purpose and adhere to all relevant legislative requirements including the expectations and observations set out in the letter. This review should be completed by 30 June 2024.