The Central Bank published a document for Fund Management Company Boards including:
- a Feedback Statement on CP86 (Part I),
- Consultation on Delegate Oversight Guidance (Part II),
- Publication of Guidance on Organisational Effectiveness (Part III),
- Publication of Guidance on Directors time commitments (Part IV),
- Next steps (Part V).
This will impact the operations of the boards and management of Irish fund management companies. While it is titled Fund Management Company Boards, that term also includes self-managed UCITS and internally managed AIFs which are AIFMs.
Part IV deals with director time commitments and requires, amongst other things, that separate time commitments be identified for the chairperson and designated function roles and that a separate letter of appointment is required in respect of the designated function roles. It goes on to detail a number of undesirable consequences for companies the boards of which include individuals with more than 20 directorships and significant professional time commitments. Part V notes an immediate change to the management company authorisation process which will require the rationale for the board composition to be included as part of the application. While divergence from the new guidance will not be a regulatory breach, the Central Bank will refer to this guidance when forming a view as to whether a fund management company has complied with its regulatory obligations. Existing fund management companies will need to update business plans or programmes of activity (as the case may be) by 30 June 2016.
Feedback Statement on CP86;
- Clarification of the role of designated person; the Central Bank has clarified that it does not require directors to perform managerial functions. It will issue guidance that designated persons should receive separate letters of appointment from fund management companies. Where a director is also appointed as a designated person, he/she should receive two separate letters of appointment.
- Streamlining of managerial functions; The Central Bank will streamline the existing managerial functions to six: investment management, fund risk management, operational risk management, distribution, regulatory compliance and capital and financial management. The role and function of each Designated Person will be proposed in a future consultation. Conflicts of interest will be included in the organisational effectiveness role; complaints handling will be separated into complaints concerning distribution, which will fall within the distribution managerial function, and all other complaints, which will fall within the regulatory compliance managerial function. Internal audit will be included in the organisational effectiveness role. Risk management will be separated into two separate managerial functions, namely fund risk management and operational risk management. These separate managerial functions may, but do not need to be, conducted by a single person. However, the same person may not perform managerial functions in relation to risk management and investment management. The Central Bank will not classify the organisational effectiveness role as one of the managerial functions. Instead, it is a task which must be undertaken by an independent director with oversight by the board. The independent director with responsibility for the organisational effectiveness role should not perform any of the six managerial functions.
- Irish resident director requirement; the Central Bank will retain the requirement for two Irish resident directors and has defined Irish residence as presence in Ireland for 110 working days per year (this is based on half a working year excluding vacation and public holidays). This requirement is in place for AIFMs and will also be introduced in Central Bank UCITS Regulations which are intended to replace the UCITS Notices and which are due to be published shortly.
- Requirement to document rationale for Board composition; The Central Bank believes that documenting the rationale for the board composition is good practice which will instil the discipline of considering board composition in a systematic way. The Central Bank is implementing this proposal and is expecting that this matter be included in a fund management company’s business plan/programme of operations.
Consultation on Delegate Oversight Guidance,
- The draft Central Bank Guidance on Delegate Oversight is detailed (at 17 pages) and reflects the matters covered in the Committee on Collective Investment Governance (CCIG) report which was part of CP86. As the CCIG report was consulted on in CP86, the consultation period is shortened and will close on 24 July 2015.
Guidance on Organisational Effectiveness
The Central Bank sets out Guidance on the Organisational Effectiveness role which sets out examples of the types of matters which the independent director undertaking the organisational effectiveness role will be involved in:
- Monitoring the adequacy of a fund management company’s internal resources to its day-to-day managerial roles.
- Reviewing the organisational structure of the fund management company and considering whether it remains fit for purpose.
- Considering the conflicts of interest affecting the fund management company and its investment funds under management and initiating action, such as escalation to the board, where these are having or are likely in the near future to have an adverse impact.
- Reviewing the board composition and reporting on this to the board.
- Organising periodic board effectiveness evaluations and overseeing how well the decisions taken by the fund management company and the arrangements for the supervision of delegates are working in the interests of investors.
Guidance on directors’ time commitments
The Central Bank currently considers that a reasonable number of working hours available for each individual is approximately 2000 per year. This is based on a 9 hour day and 230 working days per annum. This ‘total’ time allocation should be considered by individuals when taking on new directorship roles and should include all professional commitments including other directorships and employments held. The Central Bank intends to treat high levels of directorships combined with high aggregate levels of annual professional time commitments as a risk indicator. The Central Bank believes that a reasonable number of directorships is 20 (all directorships of any nature are included in this figure). The Central Bank intends to engage directly with individuals with these high levels of directorships combined with high aggregate levels of time commitments. In the rare case of the proposed appointment of directors who already hold in excess of the defined number of directorships and the defined number of annual hours representing aggregate professional time commitments, the Central Bank will:
- Request a letter from each board which will set out the proposed time commitment for that director in accordance with the Irish Funds voluntary Corporate Governance Code.
- Withdraw from corporate Qualifying Investor AIF which proposes such a director, the option of the 24 hour authorisation time-frame. In each such case the Central Bank will be considering additional enquiries which will not be capable of being completed within that timeframe.
Previously authorised investment funds which continue to have individual directors who hold more than the defined numbers of directorships and aggregate hours representing annual professional time commitments after 1st January 2016 will be given priority consideration for inclusion in Central Bank thematic reviews where board effectiveness is being tested in any respect.
- The authorisation process for fund management companies now requires:
- A copy of each designated person’s letter of appointment to be submitted.
- The rationale for the board composition to be included in the business plan/programme of operations.
- The Central Bank will amend its AIF Rulebook and include in its forthcoming Central Bank UCITS Regulations as follows:
- The number of managerial functions will be reduced to six, namely investment management, fund risk management, operational risk management, distribution, regulatory compliance and capital and financial management.
- The organisational effectiveness role must be performed by an independent director which must be an independent chair or an independent board member.
- The same person must not perform managerial functions in relation to risk management and investment management.
- The independent director with responsibility for the organisational effectiveness role must not perform any of the six managerial functions.
- The Central Bank intends to develop further guidance to cover:
- Managerial functions guidance (the tasks involved for each function, time involved, rate of payment etc.), on-going control guidance (how designated persons should oversee their regulatory obligations),
- Operational guidance (policies and procedures and record-keeping), and
- Procedures (authorisation process and fund management company passport).