Ensuring Effective Governance of Fund Management Companies: Central Bank Update

Two is still the magic number for Irish resident directors and fund management companies1 (“FMCs”), at least for the foreseeable future. However, the Central Bank of Ireland (“Central Bank”) intends to make a number of changes impacting on FMCs’ governance arrangements including streamlining managerial functions for managers of both UCITS and Alternative Investment Funds (“AIFs”) and requiring a FMC’s board to document the rationale for its composition.

These changes are outlined in a document, Fund Management Company Boards, (“Document”) which the Central Bank published on 12 June 2015 and which comprises:

  • a feedback statement to its consultation paper on Fund Management Company Effectiveness – Delegate Oversight (“CP86”), which was published on 19 September 2014 (“Feedback Statement”);
  • a consultation on proposed guidance on delegate oversight by FMCs (“Guidance on Delegate Oversight”);
  • guidance on FMCs’ organisational effectiveness (“Guidance on Organisational Effectiveness”); and
  • guidance on directors’ time commitments, (“Guidance on Directors’ Time Commitments”).

Overview of CP86

In CP86 the Central Bank consulted on a number of proposed initiatives impacting on FMCs’ governance arrangements. These initiatives were designed to underpin substantive control by FMCs, acting on behalf of investment funds, over their delegates’ activities.

Specifically, the Central Bank sought feedback as to whether it should publish a delegate oversight good practice document along the lines of a report prepared by the Committee on Collective Investment Governance (”CCIG Report”), which was annexed to CP86. It also solicited responses regarding its proposals to:

  • streamline designated managerial functions and introduce a new organisational effectiveness oversight function;
  • relax the existing requirements for FMCs to have at least two Irish resident directors and define how to determine Irish residence; and
  • require boards to document the rationale for board composition as part of the authorisation process.

The Central Bank’s Feedback

According to the Feedback Statement, by and large the Central Bank intends to adopt (or has adopted) all of the initiatives outlined in CP86, with the exception of its proposal to relax the requirement for FMCs to have two Irish resident directors. However, the Central Bank has altered the details of a number of those initiatives, in light of the responses received to its consultation.

CCIG Report (Draft Guidance on Delegate Oversight)

Most respondents believed that the CCIG Report would be helpful as guidance. Accordingly, the Central Bank has reworked that Report as draft Guidance on Delegate Oversight, which it has also published for consultation.

The main objective of the draft Guidance on Delegate Oversight is to ensure that where a board delegates its task it does so in a way that ensures that it retains and exercises overall control of the relevant company’s management. That Guidance includes a number of general principles, as well as specific sections dealing with: investment management; distribution; risk management; operation and administration; support and resourcing; and boards of externally-managed investment companies. The consultation closes on 24 July 2015.

Designated Managerial Functions

The Central Bank is streamlining the existing managerial functions for both UCITS management companies and AIF Managers (“AIFMs”) into six separate functions, although the relevant functions differ in a number of respects from those initially outlined in CP86. In particular, the risk management function has been divided into fund risk management and operational risk management. While a designated person may perform more than one managerial function, the same person must not perform managerial functions in relation to risk management and investment management.

According to the Feedback Statement, organisational effectiveness is no longer classified as a managerial function but as a task which must be performed by an independent director. That Statement also contains guidance on the organisational effectiveness role and specifies that the person responsible for that role should not perform any of the six managerial functions.

The Central Bank will require existing FMCs to update their business plans/programmes of activity so as to reflect the revised managerial functions and the organisational effectiveness role by 30 June 2016.


The Central Bank has decided to retain the requirement for two Irish resident directors, largely because of their important role if an investment fund or FMC becomes distressed. The Central Bank will be monitoring the need for this requirement.

The Central Bank is proceeding with its proposal to set the benchmark for residence as presence in Ireland for 110 working days per year.

Rationale for Board Composition

Each FMC will be required to document in its business plan/programme of activity how, as a whole, the board’s composition provides it with sufficient expertise to conduct the tasks expected of the directors.

New Guidance

As mentioned, the Document contains two new Guidance Documents which deal with organisational effectiveness and directors’ time commitments, respectively.

According to the Guidance on Organisational Effectiveness, the objective of the organisational effectiveness role is to ensure that FMCs do not continue to adhere to agreed organisational arrangements when these are no longer appropriate. That Guidance also explains the contents of that role in more detail, including by setting out some non-exhaustive matters which the role covers.

The Guidance on Directors’ Time Commitments emphasises the importance of directors having sufficient time to discharge their duties effectively. Directors and boards should agree a minimum time allocation and set sufficient time aside for dealing with ad hoc issues. In addition, a separate time commitment should be allocated for each designated person role and a separate letter of appointment should issue regarding that role, including a written contract setting out the job specifications, the time expectations and the fee arrangements.

The Central Bank will treat high levels of directorships combined with high aggregate levels of annual professional time commitments as a risk indicator for additional supervisory attention. The Central Bank is initially setting out that risk indicator in terms of a joint test of having:

  • more than 20 directorships; and
  • an aggregate professional time commitment in excess of 2000 hours.

Significantly, a corporate Qualifying Investor AIF which triggers the risk indicators will not be eligible for the 24 hour authorisation time-frame.

Next Steps

Some of the changes outlined in the Document have already been implemented. Specifically, on 12 June 2015, the Central Bank amended its AIF Handbook to include a definition of “Irish resident” as being any person who is present in Ireland for the whole of 110 working days per year. It is also amending its authorisation process for FMCs to require the submission of each designated person’s letter of appointment, and the rationale for board composition to be included in the business plan/programme of activity.

The Central Bank will amend the AIF Handbook so as to include requirements regarding the streamlining of managerial functions, in conjunction with the publication of the Central Bank’s FMCs’ guidance (see below). Both the definition of residence and the provisions regarding managerial functions will also be included in the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (UCITS) Regulations 2015, once published.

The Central Bank is developing its guidance for FMCs in order to set out its views on a number of issues including how FMCs can comply and demonstrate compliance with their regulatory obligations. Some of this guidance has been issued as part of the Document, namely the draft Delegate Oversight Guidance, the Guidance on Organisational Effectiveness, and the Guidance on Directors’ Time Commitments. Later in 2015, the Central Bank will issue the “Managerial Functions” and “Operational” sections of the FMCs’ guidance for public consultation and these sections will be finalised before the end of 2015.


FMCs should consider whether their existing arrangements comply with the Central Bank’s new Guidance on organisational effectiveness and directors’ time commitments. In addition, any Qualifying Investor AIF seeking authorisation from the Central Bank should take note that if it proposes a director who falls within the Central Bank’s new risk indicators, this will preclude it from opting for the 24 hour authorisation time-frame.

FMCs should also note that, according to the Feedback Statement, the Central Bank will require existing FMCs to update their business plans/programmes of activity to reflect the revised managerial functions and the organisational effectiveness role by 30 June 2016.

On a final point, it is noteworthy that the Document was published as part of a Markets Update, which also includes (unrelated) changes to the Central Bank’s Q&A on the AIFM Directive (AIFMD) and the UCITS Q&A.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.