On 28 February 2025, the Central Bank published its 2025 Regulatory & Supervisory Outlook Report (the “Report”). The Report outlines the Central Bank’s perspective on the key trends and risks that are shaping the financial sector, and its consequent regulatory and supervisory priorities for the next two years.

The Central Bank expects key decision-makers in regulated entities, such as funds and fund management companies, to incorporate the content of the Report and other communications such as “Dear CEO” letters into their ongoing work and decision-making.

Key Risks

The Central Bank’s supervisory priorities are shaped by a set of cross-cutting risk areas under three broad themes which reflect different drivers of risk:

1. Risks that are predominantly driven by the macroeconomic and geopolitical environment e.g., asset valuation and market risks, liquidity and leverage risks.
2. Risks that are predominantly driven by the way regulated entities operate and respond to the evolution of their marketplace and today’s changing world e.g., operational risks and resilience, risk management practices and risk transfer.
3. Risks that are driven by longer term structural forces at play e.g., climate and other environmental-related risks, financial crime risks.

It is worth noting that in the Report, the risk level associated with operational matters and resilience is assessed as severe, being higher than last year and expected to increase over the next two years. This reflects firms’ increasing reliance on third parties which the Central Bank believes exposes new vulnerabilities, together with the growing incidence and sophistication of cyberattacks. Financial crime risk is assessed as between significant and severe and covers insider dealing, money laundering, sanctions breaches and fraud.

Supervisory Priorities

The Central Bank’s supervisory priorities for 2025/26 include:

• Ensuring regulated firms meet their obligations to consumers and investors.
• Seeking assurance that regulated firms’ risk management capabilities and practices are robust.
• Enhancing operational resilience, including cyber-related resilience, across the financial sector.
• Continuing to embed the Individual Accountability Framework.
• Preparing for the EU Artificial Intelligence (“AI“) Act and continued engagement on the use of AI in financial services.
• Taking an increasingly holistic approach in connection with financial crime and market integrity.
• Implementing changes to Fitness and Probity processes, embedding the recommendations of the Fitness and Probity Review conducted in 2024.
• Continuing to deploy appropriate enforcement mechanisms to address serious breaches of regulatory requirements and misconduct by firms and individuals.
• Continuing to work with the wider financial sector to address climate and environmental-related challenges.

These overarching priorities frame the more detailed supervisory strategies for the different financial sectors.

The Report also contains an overview of the major developments and trends in the global macro environment that are drivers of both opportunities and risks within the financial system.

Funds Sector

The globally significant scale and nature of the funds sector in Ireland means that fund liquidity, leverage and financial system-wide interconnectedness are “evergreen” risks. The dynamics and risks in the external environment have the potential to create heightened volatility across asset classes, revaluations and changes in investor preferences, with potential knock-on consequences for fund investors and fund service providers. There continues to be a significant focus on sustainable finance, including the role of the sector in financing the transition to a net zero economy.

Funds Sector Key Risks

The Report includes an assessment of the following key risks along the drivers and outlook for the next two years:

• Liquidity and leverage risks
• Asset valuation and market risks
• Operational risks and resilience
• Climate and other environmental-related risks
• Data, AI and modelling risks
• Strategic risks and adapting to structural change

According to the Report, fund management company governance continues to be a key area of focus for the Central Bank, in particular risks associated with delegation and outsourcing. The Central Bank is concerned with AML control deficiencies and firms will be subject to ongoing scrutiny and assessment of the robustness of their controls. On the reporting side, the Report highlights that data quality deficiencies continue to persist, particularly with AIFMD data and Fund Profile Returns and that the submission of incorrect data will lead to increased supervisory attention.

Funds Sector Key Supervisory Activities for 2025/26

Building on the risks identified, these activities will include:

• Risk-based review of applications for funds and fund service providers, including management companies (“FSPs“).
• Sectoral and thematic assessments, including the completion of the recent ESMA Common Supervisory Action on compliance and internal audit functions (see more here).
• Continuing the focus on delegation and outsourcing arrangements in management companies.
• Focusing on FSPs’ implementation of the Digital Operational Resilience Act (“DORA“).
• Continuing to enhance and use fund data and risk models to deliver a data-led, agile, and risk-based approach to oversight.

Our Financial Regulation and Insurance groups will also be sharing their sector-specific insights on the Report shortly.

For further details on the Report or the Central Bank’s priorities, please contact your usual Arthur Cox contact.