The Central Bank of Ireland (“Central Bank”) has published further guidance (“Guidance”) for fund management companies following its consultation issued in June of this year, together with a feedback statement ("Feedback Statement") setting out the Central Bank’s views on the responses received to the consultation. The publication of the Guidance is part of the Central Bank’s review of fund management company effectiveness, which was commenced in September 2014 with the publication of the first of three consultations on this topic (“CP86”).

Two sets of Central Bank guidance have now emerged from the process, the first of which was published in November 2015 addressing delegate oversight, the organisational effectiveness role and directors’ time commitments. The latest Guidance covers managerial functions, operational issues and procedural matters. The Central Bank has also published details of new rules for fund management companies on an effective supervision requirement and on the retrievability of records, which are summarised in the Central Bank’s Feedback Statement. Together, the Guidance and Feedback Statement represent the Central Bank's final position on CP86.

The Guidance applies to UCITS management companies, authorised alternative investment fund managers (“AIFMs”), self-managed UCITS and internally managed alternative investment funds (“AIFs”) that are authorised AIFMs (collectively referred to throughout this update as "fund management companies").

Designated Persons

In a welcome development, the Guidance has confirmed that fund management companies may appoint as a “Designated Person” an individual outside Ireland, who is not a director of the fund management company, to discharge any of the six streamlined managerial functions. The six managerial functions are as follows:

  1. fund risk management;
  2. operational risk management;
  3. investment management;
  4. regulatory compliance;
  5. capital and financial management; and
  6. distribution.

This development will open up the possibility of senior executives within the risk management, investment management, compliance, distribution and similar functions of fund promoters taking up the position of Designated Person. The Guidance sets out in detail the Central Bank's expectations of how a Designated Person should carry out their role.

The Location Rule

The Central Bank has also confirmed the introduction of a new location rule regarding the location of directors and Designated Persons of the fund management company. Based on the Central Bank's Probability Risk and Impact System (“PRISM”), a fund management company which has a PRISM impact rating of “Low” (which is expected to apply to all self-managed UCITS and AIFs and the majority of UCITS management companies and AIFs) will be required to have:

  • at least two Irish resident directors;
  • at least 50% of its directors resident in the European Economic Area (“EEA”); and
  • at least two Designated Persons resident in the EEA.

There will be no requirement to have an Irish Designated Person. Half of the management functions (ie, three out of six) must be carried out by at least two designated persons resident in the EEA and there are no prescribed functions that must be carried out in the EEA. Significantly, this means that fund management companies have discretion to determine which managerial functions to perform outside the EEA.

A fund management company with a PRISM rating of “Medium Low” or above will be required to have:

  • either;

o three Irish resident directors; or o two Irish resident directors and one Irish resident Designated Person; and

  • identical requirements as regards the residency of Designated Persons and the carrying out of management functions to those that apply to Low impact firms, as listed above.

Transitional Period

Existing fund management companies will have until 1 July 2018 to comply with the new requirements, while new fund management companies will have to comply by 1 July 2017. For existing managers, there will be some work to be completed in revising business plans and / or programmes of activities and the 18 month period should allow this process to be completed in a measured way.

Comment

It is evident from the Feedback Statement and the final Guidance that the Central Bank carefully considered the detailed submissions made by the Irish funds industry association, Irish Funds, and various other industry participants, including Matheson. In particular, we welcome the Central Bank’s decision to replace its proposal to require two-thirds of directors and Designated Persons of Low impact fund management companies to be resident in the EEA, with the new 50% requirement.

In addition, the Feedback Statement seeks to provide a degree of comfort to fund management companies with directors and Designated Persons located in the UK, as they plan for the post-Brexit regulatory environment. While the Central Bank is understandably unable to be definitive about whether UK resident individuals will meet the test for effective supervision until after the final terms of the UK’s exit from the European Union are known, the Feedback Statement includes a lengthy list of criteria taken into account by the Central Bank in determining its ability to exert effective supervisory influence over a fund management company and its management. We believe those criteria should apply to UK resident individuals regardless of the final terms of Brexit.

While the final Guidance will require some fund management companies to restructure their board composition and the responsibilities allocated to their existing Designated Persons, Ireland will continue to provide workable solutions to non-EEA investment managers looking to establish European AIFs and UCITS.

The detailed Guidance published by the Central Bank, together with the guidance published in November 2015, represents a useful body of guiding principles for fund management companies in ensuring that they are complying with their regulatory obligations.

The Central Bank Guidance and Feedback Statement may be accessed here: Guidance and Feedback Statement.