The Central Bank (Supervision and Enforcement) Act 2013 (Section 48 (1)) (Investment Firms) Regulations 2017 (the "Regulations") consolidate into one location the requirements that the Central Bank imposes on certain investment firms. Following the trend of other Central Bank requirements in recent years, the new provisions are incorporated into a statutory instrument supplemented by separate Guidance and Q&As to assist firms in complying with the requirements. Breach of the Regulations may bring relevant firms within the Central Bank's administrative sanctions regime.
The Regulations follow upon the Central Bank's Consultation on Central Bank Investment Firms Regulations (CP 97), its Consultation on Risk Assessment and Capital Planning for Fund Administrators (CP100) and the issuance on 7 March 2017 of a "Dear CEO" letter to fund administrators on outsourcing.
The Regulations apply to all MiFID investment firms, most investment business firms authorised under the Investment Intermediaries Act, 1995 ("IIA") including fund administrators (notable exceptions are fund custodians authorised under the IIA). The Regulations are additional to requirements imposed on MiFID firms pursuant to the 2007 MiFID Regulations and to relevant investment firms under the IIA. Different parts of the Regulations apply to different firms depending on whether they are MiFID firms, fund administrators or other IIA firms which are not fund administrators. Parts 4 and 5 of the Regulations are confined to fund administrators and deal in particular with outsourcing and own fund and capital adequacy requirements that were previously set out in annexes to the AIF Rulebook.
Most of the more general provisions set out in Part 2 of the Regulations reflect existing requirements imposed on MiFID firms (pursuant to Supplementary Supervisory Requirements) and IIA firms (pursuant to a Prudential Handbook). The most notable changes are:
- A firm must consult with the Central Bank before introducing material changes to its operating model;
- A firm must notify the Bank as soon as it becomes aware of:
- any legal proceedings by or against the firm (the previous requirement related to significant proceedings); or
- the initiation of any criminal prosecution against the firm or, in respect of prosecutions relating to AML/CTF or certain crimes relating to dishonesty, against any officer or employee of the firm;
- The two Irish resident directors requirement for fund administrators has been amended to 2 directors present in the State for the whole of 100 working days in a year. This is similar to the position for the Irish resident directors of fund management companies introduced as part of the CP86 governance project.
Detailed provisions relating to outsourcing by fund administrators are set out in the Regulations, Guidance, and Q&A which are summarised below.
Outsourcing by fund administrators
Fund administrators may not outsource any of the following activities:
Core management functions
Under the Guidance, the Central Bank provides that a fund administrator must continue to exercise adequate and effective control and decision making. The Central Bank further outlines that core management functions, inter alia, the risk strategy, the risk policy, and the risk bearing capacity of the fund administrator must not be outsourced.
A fund administrator shall at all times retain responsibility to its clients and the Central Bank.
The Central Bank also outlined in its Guidance that outsourcing must not impair the orderliness of the conduct of the fund administrators business or of the services provided and the fund administrator must have sufficiently detailed knowledge of the processes and resources of its outsourcing service provider to enable it to take any remedial action as required.
Maintenance of shareholder registers
Fund administrators must maintain control of shareholder registers for each investment fund and must be in a position to reproduce the full register at any time.
Check and release of the final NAV of funds
Regulation 19 of the Regulations sets out the limited circumstances whereby a fund administrator may be permitted by the Central Bank to outsource the check and the release of the NAV. Generally, however administrators may not outsource the check and release of an investment fund's final NAV.
Therefore, a fund administrator must ensure that a member of its senior management completes, signs and dates a review of the check and release of the final NAV of each investment fund prior to releasing the final NAV.
Documentary evidence of the check of final NAV must also be retained by the fund administrator for at least 6 years.
Prior notification to the Central Bank of outsourcing arrangements
Any proposed outsourcing arrangements by a fund administrator must be notified in advance to the Central Bank by using the Central Bank's outsourcing proposal notification template. Notification is not required where additional investment funds are being added to an existing outsourcing arrangement, which the Central Bank has not previously objected to except for instances relating to the outsourcing of the release of the final NAV.
The following information is required as part of the notification to the Central Bank
- the administration services to be outsourced
- the identity of the impacted investment funds
- the name of the outsourcing service provider
- whether the outsourcing service provider is part of the fund administrator's group
- the outsourcing provider's regulatory status
- the location where the outsourced administration services will be carried out
- confirmation from senior management that certain other requirements under Regulation 19 to 24 of the Regulations have been complied with
- the timeframe within which the proposed outsourcing arrangement is to be ratified.
Timeframe of notification process
The Central Bank shall notify the fund administrator whether the Central Bank objects to the proposed outsourcing within one month from the date of receipt of the notification.
Under the Regulations, all outsourcing arrangements must be based on a legally binding contract or service level agreement and an assessment of the outsourcing provider's ability to meet performance requirements in both quantitative and qualitative terms. Regulation 23 of the Regulations sets out exactly what must be covered in the outsourcing contract.
Under the Regulations, a fund administrator must prepare and maintain a written policy on its approach to outsourcing, to include contingency plans and exit strategies.
Ongoing Due Diligence
The Central Bank outlines in both the Regulations and its Q&A that periodic visits by the fund administrator to the premises of the outsourcing provider and the frequency of such visits should be determined by the fund administrator having regard to the nature, scale and complexity of the outsourced activities.
Annual Outsourcing Return
A new requirement is that an outsourcing return must be submitted by the fund administrator to the Central Bank annually and a template is provided by the Central Bank.
The outsourcing return must contain the following information:
- all outsourcing arrangements entered into by the fund administrator
- the location of the outsourcing service provider
- the date from which the fund administrator was permitted to enter into the outsourcing arrangement (under the Regulations)
- the names of all investment funds in the event that the fund administrator has outsourced the release of the final NAV as permitted by the Central Bank.
It is important to note that the obligations of fund administrators under the Regulations and the Guidance apply to both Irish and non-Irish administered funds and also apply equally to intra group outsourcing arrangements.