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 selfmanaged funds which launch, however, will have to immediately comply. It should be noted that some of the requirements are already in effect.
Please see our previous paper CP86 - the end of the SMIC? for background on the CBI’s previous feedback and guidance on CP86 aimed at improving the effectiveness of Irish fund boards and management companies.
The consultation paper and draft guidance, brings additional burdens which will result in challenges for SMICs and their directors. The following points in particular are worth highlighting from the paper.
“Fund Management Companies are guided to have directors that are very actively engaged in controlling the fund management company and overseeing delegates.” Central Bank of Ireland
In relation to investment management oversight, directors should review and approve a detailed investment approach for each subfund and carry out regular on-site visits. In relation to distribution, directors of management companies should review and approve a specific distribution strategy for each sub-fund, review regular distribution reports and have access to marketing material.
In relation to investment management oversight, directors should review and approve a detailed investment approach for each subfund and carry out regular on-site visits. In relation to distribution, directors of management companies should review and approve a specific distribution strategy for each sub-fund, review regular distribution reports and have access to marketing material. Again from the CBI:
“It is a significant undertaking for directors to carry out all the tasks set out in the Central Bank’s delegate oversight guidance.”
The paper makes it clear that it does not expect directors to be involved in managing a fund management company on a day-today basis. This role falls on the designated persons. The CBI states, rather ominously, that if a fund management company delegated tasks to third parties and did not have designated persons in place, it
“could be one which had delegated to the extent that it might be a letterbox entity within the meaning of the relevant legislation.”
Based on these new onerous requirements is our opinion that the directors of self-managed companies will require assistance in order to meet the increased operational burden of CP86.
The paper states that fund management companies should maintain a dedicated and monitored email address for all investment funds under management. It states that the inbox should be monitored “constantly (i.e. daily)”. This is going be a challenging for directors of self-managed investment companies who will be reluctant to set-up, monitor and maintain a separate email address. This requirement is to be implemented prior to 30 June 2017.
Another tricky requirement, particularly for non-Irish domiciled management groups is that of document retention. Fund management companies will be required to keep all of their records in a way that makes them immediately retrievable in or from Ireland. When the Central Bank meets representatives of a fund management company in Ireland and asks them to produce a record of the fund management company (such as board minutes, policies and procedures, letters of engagement, contracts with delegates, reports to designated persons), they should be able to produce this record immediately. In this regard, the fund management company will be required to adopt a detailed document retention policy.
The applicable requirements will be determined by the CBI’s “PRISM” approach to categorising fund management companies as follows:
A fund management company with a PRISM impact rating of Medium Low or higher will be required to have at least:
A fund management company with a PRISM impact rating of Low will be required to have at least:
A fund management company will be required to satisfy the CBI of the appropriateness of any arrangements involving designated persons in different locations and demonstrate that the designated persons can co-ordinate their roles effectively.
At present the CBI requires only that two Irish resident directors be on the board of each fund management company. The new rules will put non-EEA firms at a distinct disadvantage as they will have less flexibility to source directors and designated persons from their home jurisdiction.
Investment management groups that are primarily located outside of the EEA, for example the US, and potentially UK managers post Brexit, may face difficulties in finding suitable persons to act as directors, particularly given the more onerous fund directors time commitments provisions under CP86. There is already evidence in the market that many directors are now refusing to take on new directorships where they have to carry out designated persons’ roles.
For boards and directors concerned about these issues and the new duties and responsibilities of CP86 more generally, using a third party management company or independent AIFM (for alternative funds) may prove a practical solution.
The Manco / 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.
Changing an existing SMIC 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 demonstrateit has a scalable solution and the requisite systems in place for processing and reporting (including regulatory reporting).
Link Fund Manager Solutions (Ireland) Limited Limited is authorised by the CBI and is part of Link Asset Services, 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.
This material is for general information only and is not intended to provide specific advice.