The Central Bank commenced an industry wide review in 2019 to assess compliance with its requirements and CP86 Guidance regarding the organisation of Fund Management Companies (FMCs) (the “Framework”). Following the completion of that review in 2020, the Central Bank published an industry letter setting out the main findings of the review and actions to be taken. The Central Bank carried out a follow-up survey in June 2022 to assess how the governance, structure and resources available to FMCs had evolved as a result of the actions taken on foot of the Central Bank’s Dear Chair Letter of October 2020. The Central Bank has now published the results of the survey in a Dear Chair letter.
A Changing Landscape
The survey results show that the sector has changed materially in terms of scale, structure and complexity over the last three years.
- There has been a significant decrease in the number of FMCs operating in Ireland since the Central Bank’s initial review in 2019. In 2019 there were 358 FMCs conducting business in Ireland. The result of the most recent survey from June 2022 indicates that this number has reduced to 148 FMCs, despite a very significant increase in assets under management (AUM). The decrease in FMCs has, for the most part, been made up of Self-Managed Investment Companies (SMICs). This has largely been a result of a number of restructurings, predominantly a shift away from SMICs to third-party FMCs and to a lesser extent, redomiciliations, liquidations and consolidations.
- The decline in SMICs has resulted in significant growth in third-party FMCs, with AUM for this cohort in the region of €540bn. The Central Bank notes that it is essential that these firms have the capacity to take on this additional business and expects to see increased resources and expertise as the business grows in nature, scale and complexity.
- There has been a significant increase in FMCs who are providing MiFID services, namely individual portfolio management (IPM), as an additional revenue stream. In 2019, Irish FMCs had in the region of €19bn in assets under management for IPM services. This figure has now grown to €432bn. Having recognised this trend, the Central Bank is now targeting FMCs with MiFID top-ups in recent supervisory work. The Central Bank also reminds these firms of the need to ensure that their regulatory compliance frameworks, systems and controls comply with the additional MiFID conduct of business obligations that apply to MiFID top-up services.
Corporate Governance and Resourcing
In terms of corporate governance and resourcing, while the survey results indicate progress with FMCs has been made, the Central Bank also highlights areas requiring further improvement:
Chief Executive Officer (CEO): The Central’s Bank’s recent survey evidenced a significant uplift in the number of FMCs with a dedicated CEO. The responses indicate that 67% of FMCs have a dedicated CEO, an increase of 50% from their 2019 survey. The Central Bank views the increase in dedicated CEO appointments positively and attributes this to its improved engagement with FMCs. The Central Bank has also emphasized that it expects that all but the smallest fund management companies have an appointed CEO.
Director Time Commitments: The results indicate that directors are committing almost twice as much time to their duties as was the case in 2019. The Central Bank has welcomed the increased time commitments from directors and has stressed that directors need to ensure that their overall time commitment is sustainable. The Central Bank will continue to monitor this and if the number of directorships is deemed to be excessive, this will be challenged by the Central Bank.
Designated Persons & Support Staff: The Central Bank has welcomed a significant increase in full-time employees or equivalent to full-time employees in FMCs since 2019. There has been on average a threefold increase from 3.2 in 2019 to 10 FTEs in 2022. The top ten FMCs according to AUM, have increased the resourcing of Managerial Functions by around 200%. The average headcount in firms operating within the Medium-High/Medium-Low PRISM Impact category is approximately 23 FTE. The Central Bank has also emphasized the need for resourcing of FMCs to be continuously monitored and should increase in line with the nature, scale and complexity of the business.
Independent Non-Executive Director (INED) Tenure: There has been a decrease of 7 percentage points in INEDs with a tenure of greater than ten years, from 25% in 2019 to 18% in 2022. While the Central Bank have indicated this is a move in the right direction, there are still a significant number of directors who continue to be classified as independent but have been in situ for 10 years or more. The Central Bank expects that tenure and independence continue to be considered as part of the Organisational Effectiveness Director’s (“OED’s”) review of Board composition and forms part of related reporting to the Board.
Board Diversity: It is noteworthy that a significant gender imbalance remains at the board level in FMCs. The most recent survey indicates there has only been a marginal increase in the number of directorships held by women from 16% in 2019 to 20% in 2022. The Central Bank has indicated that diversity and due consideration of factors such as skills, age, gender, culture and ethnicity should continue to form part of the ongoing internal governance reviews of FMCs.
Patricia Dunne, the Central Bank’s Director of Securities and Markets Supervision has acknowledged there have been significant changes to the governance, management and effectiveness of FMCs since 2019 and “a lot of work has been done to date”, however, “collectively we have a lot more to do.” FMCs will continue to be challenged and will need to ensure they are operating within the Framework. The Framework makes it clear that an FMC can only operate effectively when it has an appropriate level of resources, and this will continue to be challenging as operations increase in size. The Central Bank expects its follow-up industry survey to be discussed at Board level and that any areas requiring improvement that directly relate to a firm are given adequate consideration to ensure robust and appropriate governance arrangements are in place.