Enhancing Asset Valuation Practices: Key Insights from the 2022 Common Supervisory Action

The CSA aimed to assess the compliance of Irish Fund Management Companies with UCITS and AIFM Directives/Regulations, adherence to valuation principles, and the effectiveness of policies and procedures during the COVID-19 pandemic. The qualitative assessment involved a sample of 30 firms, with various review methods such as questionnaires, desk-based reviews, virtual inspections, and on-site inspections.

The majority of firms demonstrated good compliance with relevant legislation and supervisory expectations. However, a significant minority faced challenges in meeting the Central Bank's expectations and legislative requirements, leading to the issuance of Risk Mitigation Programmes.

Below we set out the key findings and observations:

• Group Asset Valuation Policies: Some firms relied on group valuation policies without adequately addressing local regulatory nuances, potentially resulting in inaccurate asset valuations at the Irish entity.
• Asset Valuation Error Procedures: Identified firms lacked formal asset valuation error procedures, which could lead to unfair treatment of investors in case of valuation errors or NAV miscalculations.
• Quality of Asset Valuation Policies: A minority of firms had poor-quality asset valuation policies that lacked the necessary detail, posing risks to the valuation process.
• Limited Evidence of Periodic Reviews: The majority of firms lacked evidence of periodic reviews of their asset valuation policies and procedures, increasing the risk of incorrect valuations.
• Liquidity Stress Testing: All firms confirmed performing liquidity stress testing, but the article emphasizes the importance of incorporating results into liquidity management frameworks.
• Independence of Asset Valuation Function: Some firms lacked clear segregation of roles and independence within the asset valuation function, potentially leading to conflicts of interest.

To address these findings and observations the CBI has highlighted the below actions:

• Documented Valuation Policies: All firms should have comprehensive, entity-specific asset valuation policies outlining operational roles and responsibilities.
• Annual Review of Policies: Asset valuation policies should undergo senior management review at least annually to ensure ongoing suitability and adherence to approved methodologies.
• Formalized Errors Procedures: Firms must establish comprehensive error procedures, subject to annual review, to address valuation errors or NAV miscalculations.

While the majority of firms displayed good compliance, the findings underscore the importance of ongoing evaluation and improvement of asset valuation control frameworks. Firms are encouraged to proactively address identified issues to mitigate risks and ensure the fair representation of financial positions. All firms are required to conduct a review of their asset valuation frameworks by the end of Q2 2024 to ensure continued compliance.