Mr Gareth Murphy, Director of Markets Supervision of the Central Bank of Ireland recently offered key insights into aspects of the Central Bank’s work of relevance to the funds industry. In his address to the 4th Annual Funds Congress, Mr. Murphy highlighted the following initiatives:
The Central Bank is reviewing the operation of fund management companies and, in particular, their oversight of delegates. As part of its review, the Central Bank published a consultation paper (CP86) in October 2014 and conducted a number of interviews with fund management companies.
The Central Bank adopted a “4Cs” approach to this review:
- Conflict management
Consideration was also given to the nature, scale and complexity as measured in terms of:
- Assets under management
- The number of umbrella structures and sub-funds
- The number of servicing relationships
Although the Central Bank has not yet provided a detailed report of the feedback it has received, Mr. Murphy indicated that organisational arrangements could be further strengthened in some of the larger fund management companies.
UCITS V remuneration guidelines
ESMA is due to issue guidelines on remuneration under UCITS V later this year. Mr Murphy noted that the AIFMD remuneration guidelines will be the general starting point for the UCITS V guidelines and confirmed that the Central Bank will aim to minimise, where possible, the differences between both sets of remuneration guidelines.
Third-country passport under AIFMD
ESMA is required to provide an opinion on the working of the internal AIFM passport and advice on the extension of that passport to third countries later this year.
The advice will cover the following broad areas:
- Non-EU AIFM compliance with the transparency requirements of AIFMD
- Cooperation arrangements for the monitoring of systemic risk
- Investor protection issues
- Impediments to effective EU supervision
- Issues related to market disruption and distortion of competition
The Central Bank expects that ESMA will limit its advices to technical regulatory issues which are strictly within its remit and competence and will refrain from addressing some of the more difficult issues which made the political negotiations on AIFMD very challenging in 2010.
Mr. Murphy noted that the third countries which are party to the MOUs co-ordinated by ESMA in 2013 clearly differ from one another and that ESMA's advice is likely to reflect these differences.
Money Market Funds regulations
Mr. Murphy stated that the fundamental reason why reforms in this area are needed is to minimise the systemic risk that arises from investor runs which can lead to either: (a) an inefficient interruption in financing for corporates and financial institutions (especially banks); or (b) the need for sponsor support which has the capacity to undermine the sponsor or to draw central banks into providing indirect liquidity support.
He expressed the view that the only way to disabuse shareholders of the idea that sponsors will support VNAV or CNAV MMFs is to prohibit sponsor support outright and noted that, in this regard, the current proposals do not go far enough.
Capital Markets Union
The Commission published a Green Paper earlier this year on the most effective approach to creating a single market for capital in the European Union.
Mr. Murphy believes that the Capital Markets Union (or CMU for short) is a significant opportunity for the funds industry to support policy-makers in creating the environment for a more effective flow of finance to the European real economy.
He highlighted the section of the Green Paper that discusses how variations in insolvency law and tax treatments across jurisdictions can lead to a fragmented market. He pointed out that a less fragmented capital market in Europe would offer the possibility of a more level playing-field and a consistent set of rules for investor protection and market integrity. This, he noted, would alleviate some of the compliance issues for the funds industry by avoiding costly duplication.
The Central Bank also added that encouraging more equity-based finance of the European real economy will result in more resilience and greater financial stability in the face of potential shocks in the future.
Mr Murphy concluded his speech by adding that the funds industry in the coming years is likely to be influenced by the liberalisation of the Chinese capital account and the greater use of technology in financial services and that both of these factors will be material drivers of the global asset management industry.