As evidenced across the European investment funds industry, improving fund governance is seen as a key pillar underpinning investor protection. As part of this trend, in November 2015, the Irish regulator, the Central Bank of Ireland (CBI), issued a paper providing feedback and guidance on its consultation paper CP86 aimed at improving the effectiveness of Irish fund boards and management companies. This has resulted in significant changes as to how funds in Ireland are to be governed in the future.
The new rules apply to UCITS and non-UCITS Self-Managed Investment Companies (SMICs) as well as third party UCITS Management Companies (Mancos) and independent Alternative Investment Fund Managers (AIFMs). They cover three areas; delegate oversight, organisational effectiveness and directors’ time commitments.
In December 2016, the Central Bank of Ireland (CBI) published its final guidelines on CP86 - Fund Management Company Effectiveness – Managerial Functions, Operational Issues and Procedural Matters. Management companies, whether self-managed or not (SMICs and non-SMICs), have to comply by 30 June 2018. Any new management companies or self-managed funds which launch, however, will have to immediately comply. It should be noted that some of the requirements are already in effect.
Many Irish fund management companies operate models which make extensive use of outsourcing. With that in mind, the CBI guidance recognises the importance of exercising sufficient control over service providers through close oversight of delegated tasks on a day-to-day basis.
The new guidelines state that a fund management company may delegate, in whole or in part, certain tasks which form part of the fund management company’s management functions however, ultimate responsibility for those management functions themselves cannot be delegated; delegation is permitted but responsibility is retained. The rules regarding delegate oversight are effective immediately.
The CBI has focussed on tightening up the operational effectiveness of fund management companies that are subject to the regimes set out in European UCITS and AIFM Regulations, which include detailed organisational and operational rules. Work on preparing additional draft guidance in this area is on-going and the CBI anticipates publishing a public consultation document by the end of Q1 2016.
Under the new guidance one of the independent directors of a fund management company will be required to undertake an organisational effectiveness role (this individual must not be responsible for any of the prescribed managerial functions). Existing management companies and self-managed investment companies must update their business plans/ programmes of activity to reflect this new organisational effectiveness role six months after the completion of the consultation process. In practice, this means that management companies will need to have decided how they plan to address these new requirements by early Q3 2016.
The CBI is seeking to ensure fund board directors have adequate time to carry out their duties. As a result it expects them to consider carefully their time commitments to each and every sub-fund and to set aside sufficient time consistent with the nature of the sub-fund to ensure they meet their obligations. The fund management company’s board minutes must accurately reflect how they are complying with the Central Bank guidance on directors’ time commitments.
The CBI has stated that any authorised management companies and investment funds with directors that trigger the directors’ time commitment risk indicator, as specified in the Guidance Paper, will be first in line for inclusion in regulatory thematic reviews.
These new provisions significantly increase the risk and time requirement for boards and their directors. As a consequence of this more stringent governance regime, boards are now required to adopt comprehensive risk management frameworks outlining their risk appetite, policies and procedures for both fund and operational risk. The board must also approve the proposed investment approach of the fund. The designated person for risk must be different to the person responsible for investments.
The CBI will, in future, require specific board reporting on how the new rules are being implemented. For example, in the case of delegate oversight it has stated that fund management companies’ reports should not consist solely of the transmission of reports received from its delegates but also include commentary from the fund management company as to how it has performed its role.
Directors have more responsibility. The independent director who undertakes the organisational effectiveness role will be on alert for all organisational issues and be responsible, not only for escalation to the board, but also to act as a change leader championing proposals to improve effectiveness and ensuring that agreed actions are implemented. Any director carrying out managerial or ‘designated persons’ role for the fund board must, in future, be able to demonstrate they have the required experience to fulfil that role and will be considered to have an executive role.
The CBI has stated the following:
This approach relies on a distinction between director and managerial roles, rather than between executive and non-executive roles. Where a director does choose to take on a managerial function role, he or she is consenting to becoming involved in the fund management company on a day-to-day basis.
There is some evidence in the market that many directors are now refusing to take on new directorships where they have to carry out designated persons’ roles as they do not wish to become executive directors.
Directors declared total time allocation must include all professional commitments including other directorships and employments held. The CBI expects directors to consider carefully their time commitments to each and every sub-fund and to set aside sufficient time consistent with the nature of work required in each case so they can meet their obligations. This could delay the approval of new sub-fund launches for existing umbrellas if it believes insufficient resources are available.
For boards and directors concerned with these new duties and responsibilities, using a third party management company or independent AIFM (for alternative funds) provides an ideal solution.
The Manco or AIFM takes on the designated person role on behalf of the fund for each of the management functions (with the exception of ‘Decision Making’), removing the requirement for fund directors to act as designated persons and be involved in the day-to-day running of the fund. The Manco/AIFM undertakes active management of delegates to ensure the requirements are met.
The Manco/AIFM’s CBI approved Business Plan / Programme of Activity will cover a fund’s requirements. As a result funds do not need to maintain their own individual business plans. Ongoing monitoring and reporting (including regulatory reporting) is the responsibility of the independent Manco/AIFM.
We expect that directors will be able to submit fewer hours per sub-fund with a Manco than under the SMIC structure.
Changing an existing SMIC umbrella fund structure to a Manco structure is a fairly straight-forward process.
First the fund directors terminate the existing administration, investment management and distribution agreements. They then appoint an independent Manco as manager. Finally the manager along with directors re-enter into administration, investment management and distribution agreements where the manager has main oversight of delegates, subject to the control of the directors.
When appointing an independent Manco it is crucial that the fund directors ensure the firm providing the service is competent to act in this capacity. It must have suitable and skilled personnel, comprehensive policies and procedures and ongoing maintenance of a robust risk and governance environment matching that expected by the CBI. It must also have the financial strength to cover its continuing financial obligations including regulatory capital costs.
The provider should also be able to demonstrate it has a scalable solution and the requisite systems in place for processing and reporting (including regulatory reporting).
Link Fund Manager Solutions (Ireland) Limited is authorised by the CBI and is part of Link Asset Services, with a strong balance sheet. Link Asset Services has been providing services to funds in Ireland since 2006 and is one of Europe’s largest independent providers of management company solutions. This unique insight into the funds industry, allows us to help and assist on regulatory and industry change. Leveraging our expertise, combined with significant investment in systems and reporting capabilities we have a market leading Manco/AIFM solution that provides an innovative proposition for investment managers at a reasonable cost.
Date: 19 Jan 2016
[updated 10 April 2017]
This material is for general information only and is not intended to provide specific advice.