On 14 December 2015, the Central Bank published its programme of themed reviews and inspections for investment firms, funds and market participants for 2016. The following matters are of particular relevance to funds and fund service providers:
ADHERENCE TO AIFM PROGRAMME OF ACTIVITIES
The Central Bank has indicated that it will carry out a review of the adherence of alternative investment fund managers to their programmes of activities. We expect that the Central Bank would focus, for example, on confirming that the designated persons in fact perform the functions allocated to them and that the oversight of, and reporting from, delegate service providers are consistent with the programme of activities.
ANALYSIS OF THE PRODUCTION COSTS OF INVESTMENT FUNDS
The Central Bank will seek to analyse the production costs of investment funds. It is anticipated that this will involve a review of funds’ total expense ratios, focusing on funds with particularly high TERs.
ELIGIBILITY OF FINANCIAL INDICES FOR UCITS
The Central Bank proposes to review the use of financial indices as eligible investments for UCITS investment funds.
DIRECTOR TIME COMMITMENTS
The Central Bank will continue to focus on director time commitments to ensure fund directors have sufficient time available to dedicate to their roles. This was also an area of focus for the Central Bank in its consultation paper CP86.
SHARE CLASS HEDGING ARRANGEMENTS
The Central Bank intends to review hedging arrangements at share class level for investment funds.
INFORMATION TECHNOLOGY RISK
Following on from its focus on cyber security in 2015, the Central Bank proposes to review the resilience of investment firms’ and fund service providers’ IT systems.
REVIEW OF RISK FUNCTION
Following on from its 2015 themed reviews in this area, the Central Bank has indicated that it will continue to focus on the risk culture within firms including governance arrangements, risk ownership and responsibility.
The Central Bank expects to review service level agreements and operational arrangements with outsourcing providers for fund managers and fund service providers. While this is primarily a matter for administrators and other fund service providers, the board of directors of a fund or management company may wish to raise this matter with the relevant fund service providers as part of its general review of such service providers.
The Central Bank proposes to examine the information provided to clients on an on-going basis by funds and fund service providers.
MARKET INTEGRITY AND COMPLIANCE WITH MARKET ABUSE REGULATIONS
The Central Bank wishes to review the practices of investment firms and fund service providers when dealing with insider information to ensure compliance with the Market Abuse (Directive 2003/6/EC) Regulations 2005.
COMMENTARY BY THE CENTRAL BANK
The Central Bank has noted that an underlying theme for many of these areas is the need to strengthen firms’ culture of regulatory compliance. While the Central Bank has recently carried out reviews in relation to certain of these matters, including director time commitments, risk management and cyber security, the Central Bank has added a number of new areas of focus for 2016. The Central Bank has also stated that it intends to increase its inspection activities for entities deemed to be low impact under its Probability Risk and Impact SysteM (“PRISM”) and to further develop data analytics to sharpen the focus of its supervisory resources.
Following these themed inspections in 2016, the Central Bank proposes to communicate its assessment of the issues which have emerged and has indicated that it may take remedial action where it deems there to be unacceptable breaches or where the regulatory risks are unacceptable.
ACTIONS FOR BOARDS OF FUNDS AND FUND SERVICE PROVIDERS
Funds and fund service providers should take the opportunity to assess their readiness for a themed inspection in the areas highlighted for review in 2016.