Brexit, UCITS and CP86

The Central Bank of Ireland has published regulations amending its UCITS Regulations 2015. Coming a few weeks after ESMA’s publication of its opinion to support supervisory convergence in investment management in the context of Brexit (“Opinion”), the amending regulations suggest that the Central Bank’s approach under its recently adopted Fund Management Company Guidance (“CP86 Guidance”) reflects that set out in the Opinion.

Opinion on Supervisory Convergence in Investment Management

Efforts to attract Brexit relocations have prompted certain commentators to warn against a race to the bottom on the part of some member state regulators. On 6 June 2017 ESMA published a cross-sectoral opinion intended to promote supervisory convergence in the context of Brexit. See our related briefing here. On 13 July 2017, ESMA published three subsequent opinions setting out sector-specific principles applicable to investment firms, investment management and secondary markets.  Each of the opinions assumes that the UK will become a third country after its withdrawal from the EU.

ESMA’s Opinion addresses regulatory and supervisory risks in the area of investment management, in particular in to relation to the following aspects: authorisation; governance and internal control; delegation; and effective supervision.

Several of the issues which ESMA deals with in its Opinion were previously considered by the Central Bank in the context of its work resulting in the publication of its CP86 Guidance in December 2016, which now governs the authorisation and ongoing supervision of Irish UCITS management companies, self-managed UCITS, alternative investment fund managers and internally managed alternative investment funds (collectively, “Fund Management Company” or “FMC”). That guidance is divided into six parts, dealing with delegate oversight, organisational effectiveness, directors’ time commitments, managerial functions, operational issues and procedural matters. See our related briefing here.

There is a strong consistency between the approach taken by ESMA in its Opinion and that taken by the Central Bank in its CP86 Guidance regarding the issues of governance and internal control, and delegation. Specifically, both emphasise the need for strong governance, including ensuring that responsibilities are clearly allocated, scrutinising directors’ time commitments and ensuring the effectiveness of internal control mechanisms. They also underline the need for an FMC to exercise due diligence when appointing a delegate and to put in place adequate oversight arrangements on an on-going basis.

Both the Opinion and the CP86 Guidance also stress the importance of an FMC retaining substance and avoiding becoming a letter box entity. In this context, ESMA’s Opinion requires national competent authorities (“NCAs”) to apply additional scrutiny to situations where relocating entities do not dedicate at least 3 locally based full-time equivalent staff (“FTEs”) to the performance of the portfolio management and/or risk management functions and/or monitoring of delegates. For its part, the CP86 Guidance requires an FMC to have a minimum of 2 directors resident in the State. In addition, the FMC must have at least half of its directors, as well as half of its managerial functions, performed by at least two designated persons resident in the EEA, or such other country as determined by the Central Bank.

The Amending Regulations

The Central Bank's UCITS Regulations 20151 set out the Central Bank’s core requirements for UCITS, supplementing the UCITS Regulations2, which transpose the UCITS Directive 2009/65 into Irish law.

The Amending Regulations3 (here) amend the UCITS Regulations 2015 in a number of respects, including by introducing new requirements on the residency of directors and on record-keeping, which reflect the Central Bank’s CP86 Guidance.   


To a large extent the Central Bank’s CP86 regime relating to the authorisation and on-going supervision of FMCs, pre-empted ESMA’s approach in its Opinion, a view which is confirmed by the fact that the Central Bank has given legislative effect to the residency requirements set out in CP86. It is not expected, therefore, that the CP86 regime would need substantial amendment in order to comply with ESMA’s Opinion.

It is clear from ESMA’s Opinion that when calculating whether an FMC has 3 locally-based FTEs, an NCA should take account of time commitments both at Senior Management and at staff level in order to meet this requirement.  Moreover, ESMA’s Opinion merely requires NCAs to apply additional scrutiny to situations where relocating entities do not have at least 3 locally-based FTEs, as opposed to requiring relocating entities to have 3 locally-based FTEs.  This leaves NCA’s with some level of flexibility when considering residency requirements in the case of low risk managers. 

  1. Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015
  2. European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011
  3. Central Bank(Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2017

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.