knowledge | 9 June 2016 |
Updates for Fund Managers: Fund Management Company Governance
Fund Management Companies (“FMCs”) take note! The Central Bank of Ireland has issued its third consultation paper on improving fund management company effectiveness (the “Consultation Paper”).
Importantly, the Central Bank is proposing to change the previous requirement that designated persons who are not directors must be located in Ireland so as to enable an FMC to engage designated persons outside of Ireland, subject to certain conditions being met.
It also appears that an FMC authorised before 1 November 2015 will have over a year before being required to comply with the Central Bank’s revised managerial functions and organisational effectiveness requirements, as the Central Bank is proposing a one year transitional period for FMCs to comply with the new rules and guidance, following the end of the consultation process.
The Consultation Paper
By way of background, since early 2014, the Central Bank has been examining ways of enhancing FMCs’ effectiveness with a view to improving the protection of investors. In September 2014 it published Consultation Paper 86, a ‘Consultation on Fund Management Company Effectiveness – Delegate Oversight’ (“CP 86”) in which it proposed making a number of changes impacting on FMCs. This was followed, in June 2015, by a feedback statement on CP 86, the publication of guidance on organisational effectiveness and directors’ time commitments, and draft guidance on delegate oversight. In November 2015, the Central Bank published its final guidance on delegate oversight. For further background information, see our related briefing here.
One of the key changes arising from the Central Bank’s work on FMCs’ effectiveness is the reduction in the number of ‘designated persons’ roles’ to six specific managerial functions, from 15 for Alternative Investment Fund Managers (“AIFMs”) and 9 for UCITS Managers. The six specific managerial functions are: regulatory compliance, fund risk management, operational risk management, investment management, capital and financial management and distribution. FMCs are also required to have one director who carries out an organisational effectiveness role.
The revised functions/role already apply to FMCs authorised on or from 1 November 2015. While initially the Central Bank indicated that existing FMCs (eg those authorised before 1 November 2015) would be expected to update their business plans/programmes of activity to reflect the revised managerial functions and the organisational effectiveness role by 30 June 2016, it subsequently revised this deadline (see our related briefing here). As mentioned, the deadline for compliance has now been pushed out to at least Q3 2017.
The Consultation Paper reviews the Central Bank’s already completed work in relation to Governance and sets out its proposed approach regarding “Compliance” and “Supervisibility”. It also sets out the draft text of further chapters of the Central Bank’s Guidance for Fund Management Companies, dealing with Managerial Functions (Part IV), Operational Issues (Part V) and Procedural Matters (Part VI).
Governance relates to the way in which an FMC’s directors should perform their role and guide the company. As mentioned, the Central Bank has published related guidance on delegate oversight, organisational effectiveness and directors’ time commitments (“Guidance”). Part 1 of the Consultation Paper summarises that Guidance.
The Consultation Paper reminds FMCs authorised from 1 November 2015 that they should be already applying the Guidance in relation to the organisational effectiveness role. The purpose of this role is to ensure that the FMC continues to be organised and resourced in an appropriate manner on an on-going basis. The person performing the role is expected to keep the effectiveness of the FMC’s organisational arrangements under ongoing review and to organise periodic board effectiveness evaluations. At a minimum this should result in an annual review of organisational effectiveness. Consequently, any person carrying out the organisational effectiveness role for an FMC authorised on or after 1 November 2015 should ensure that the annual review takes place within the 12 month period following authorisation.
Compliance / Managerial Functions
Designated persons must carry out their managerial functions in a manner which ensures that the FMC complies with its regulatory obligations and can demonstrate its compliance.
The draft Managerial Functions Guidance sets out the Central Bank’s expectations of designated persons as well as the detailed measures FMCs should employ to ensure compliance. In particular:
- a designated person must have the necessary experience and time to carry out his or her role and must be sufficiently senior to engage with the Central Bank in the context of its supervisory engagement process;
- an FMC must ensure that each designated person monitors and oversees the strategies and approaches approved by the board that correspond to his or her managerial functions;
- reporting should be sufficiently frequent and should include summary information on each sub-fund;
- an FMC should specify in its contractual arrangements the tasks to be performed by each of its service providers;
- an FMC should only rely on the policies and procedures of its delegates or groups where it has verified that this is appropriate – the FMC should document both the verification process and how it will be kept under review; and
- an FMC should assign each of its regulatory obligations to an identifiable managerial function – Annexes I and II of Part IV of the Consultation Paper set out the regulatory obligations applicable under the AIFM and UCITS Regulations, respectively and indicate how they could be allocated to each managerial function.
Supervisibility / Operational Issues
Supervisibility focuses on an FMC’s capacity to carry out the Central Bank’s engagement model without undue constraint and the ability to react in a crisis. In order to maintain effective oversight of an FMC, the Central Bank requires access to its people and records and must have a clear channel of communication with the FMC. In this regard, the Central Bank is proposing a number of rules and guidance on operational issues.
The Central Bank is proposing to require an FMC with a PRISM impact rating of Medium Low or above to have at least two Irish resident directors and one designated person based in Ireland (or three Irish resident directors), and an FMC with a PRISM impact rating of Low to have at least two Irish resident directors.
Both types of FMCs must have at least two thirds of each of its directors and designated persons in the EEA. As mentioned, this is a significant departure from the previous requirement that any designated person who is not a director of the FMC must be located in Ireland.
FMCs will also be required to keep all their records in such a way that they can be immediately retrieved in or from Ireland. This means that an FMC will need to maintain a clearly defined and understandable records retention schedule outlining where the documents are stored and other relevant information. Part V of the Consultation Paper sets out the Central Bank’s minimum expectations with regard to the retention, maintenance, security, privacy, preservation and accessibility of all relevant documents and records.
The Central Bank also intends to issue guidance requiring each FMC to maintain a designated email address that is monitored at least daily. This is to ensure that an FMC complies with an information request in the time specified by the Central Bank.
The draft Procedural Matters Guidance deals with the application process for authorisation of an FMC and the information that the Central Bank will require where an FMC proposes using its management company passport. In particular, the draft Guidance amends existing Central Bank guidance for UCITS management companies, ‘Organisation of UCITS management companies’ to cover AIFMs.
The consultation closes on 25 August 2016 and the Central Bank envisages providing a transitional period of one year following the completion of the consultation process for FMCs to comply with the new rules and guidance. Following on from the Central Bank’s early communication mentioned above, this means that FMCs authorised before 1 November 2015 have at least until Q3 2017 to comply with the revised managerial functions and new organisational effectiveness requirements.
FMCs authorised from 1 November 2015 are already subject to the revised managerial functions and organisational effectiveness requirement, as well as the completed related Guidance. Presumably, however, they will also benefit from the same transitional period in respect of the implementation of the finalised Guidance on Managerial Functions, Operational Issues and Procedural Matters, although this is not entirely clear.
You may access the Consultation Paper here.
This briefing is 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.