The governor of the Central Bank, Gabriel Makhlouf, has told the global funds industry, which has based portfolios holding more than €4 trillion of assets in the Republic, that it is only a matter of time before it faces strict resilience rules, similar to other areas of finance.
The warning, made at the annual Irish Funds’ annual global funds conference in Dublin on Tuesday, came as the Central Bank prepared to finalise so-called macroprudential rules for the property funds element of the funds sector.
It put a proposal to limit borrowing by Irish-domiciled property funds to 50 per cent of total assets out to consultation last November, under efforts to lower the risk of such funds running into trouble, with implications for the wider economy.
Irish-based property funds held about €23 billion of domestic real-estate assets as of late last year and accounted for about 40 per cent of all investable commercial real estate in the State. The final property fund rules will be announced “over the coming months”, Mr Makhlouf said on Tuesday.
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“Overall, it would be true to say that the macroprudential perspective — for market-based finance — remains underdeveloped, especially when compared with other parts of the financial system. It will take some time for the policy framework for funds to develop and mature and for the industry to adjust,” Mr Makhlouf said.
“But do not confuse time taken for development with the possibility that it won’t happen: it will; a macroprudential framework for funds is only a question of time.”
Ireland is the second-largest base for investment funds in Europe, behind Luxembourg.
Mr Makhlouf said that a rush by investors to pull money out of Irish-domiciled money market funds at the height of the Covid-19 shock in March 2020 as well as lessons learned from the global financial crisis in 2008 “reinforce the case for the development and operationalisation of a macroprudential framework for investment funds”.
The focus of regulation of investment funds has, until now, has largely been on “conduct-of-business-based rules”, rather than a regime that looks at funds’ role in upholding resilience of the wider financial system. Macroprudential regulation “focuses explicitly on the interaction between finance and the macro economy, seeking to avoid adverse feedback loops between the two”, he said.
The international banking system has been subject to the deepest macroprudential overhaul since the financial crash, including stricter capital and liquidity rules and, in the case of the Republic, strict mortgage-lending rules. The EU insurance sector has gone through reforms to reduce the risk of insolvencies.
Mr Makhlouf said progress had been made internationally on boosting the resilience of the funds sector since the financial crash, including EU regulation on money market funds and alternative investment fund managers, but he said the Central Bank of Ireland was seeking to be “at the forefront of efforts” to further develop the macroprudential framework around funds.
“Our strategy for this is based on two elements: first, examining the links between and risks from the fund sector to the domestic economy; and second, given Ireland’s role as a global hub for investment funds, participating in the global debate, seeking to advance the thinking on the development of the framework,” he said.
Mr Makhlouf said the Central Bank was “closely monitoring” how Irish-domiciled funds were living up to the new requirements under the EU’s sustainable finance disclosures regulation and taxonomy regulation as funds increasingly marketed their green credentials.
“The market for investment products with environmental, social and governance characteristics continues to attract significant investor demand. In the funds sector this demand is being met through the launching of new investment funds or the ‘converting’ of existing funds to take into account such characteristics,” he said.
“The popularity of these products, the incentive for them to be marketed as ‘greener’ than they may be in practice and the early stage of the disclosure regime in this area all give rise to significant potential for greenwashing and for misleading disclosures to investors.”
