Industry Letter – 2022 ESMA Common Supervisory Action on Asset Valuation

The Central Bank of Ireland conducted a review of Asset Valuation as part of the ESMA’s CSA in 2022. The purpose of the review was to assess whether Irish Fund Management Companies comply with the UCITS and AIFM Directives/Regulations with respect to asset valuation, adhere to valuation principles and methodologies, and evaluate the effectiveness of their policies and procedures during the COVID-19 pandemic. The review primarily consisted of a qualitative assessment, including a questionnaire, desk-based review, virtual inspection calls, and on-site inspections. A sample of 30 firms was selected for the review, and the overall level of compliance with the relevant legislation was found to be good, although a significant minority of firms were found to be non-compliant.
The review identified several key findings and observations. Some firms were found to rely on group valuation policies with limited or no reference to their Irish operations, potentially leading to inaccuracies in the valuation process at the Irish entity. Additionally, some firms lacked formal asset valuation error procedures, which could result in the unfair treatment of investors in the event of valuation errors or incorrect NAV calculations. A minority of firms were found to have poor quality asset valuation policies and procedures, lacking the necessary level of detail to cover the valuation process. Furthermore, the majority of firms could not demonstrate evidence of periodic reviews of their asset valuation policies and procedures, potentially leading to deficiencies in valuation methodologies or models being utilized.
In terms of observations, the review highlighted the importance of incorporating the results of liquidity stress testing and scenario analysis into liquidity management frameworks and using them to inform decision making and risk management. It also emphasized the need for clear segregation of roles and independence within the asset valuation function to avoid conflicts of interest.
The Central Bank outlined specific actions required of all firms based on the findings and observations. These include the need for documented, comprehensive, and entity-specific asset valuation policies and procedures, formalized and comprehensive error procedures, and a review of asset valuation frameworks to ensure compliance with legislative requirements. Firms are required to conduct this review by the end of Q2 2024, and non-compliance may result in future supervisory engagement or enforcement actions by the Central Bank.
The Central Bank emphasized that the findings from this review will inform future policy development and enhancements to the current regulatory framework for the supervision of asset valuations. Firms were instructed to bring the contents of the letter to the attention of the Board for consideration and to take appropriate action without delay. Any queries regarding the content of the letter were directed to a specified email address.