On 11 August 2014 the Central Bank published a guidance note for AIFMs and UCITS management companies (each a Firm) on minimum capital requirements reporting which outlines that a Minimum Capital Requirements Report must be submitted along with the half yearly and annual audited accounts at the applicable reporting intervals. The Report must be signed by a director or a senior manager of the Firm.
The Guidance can be viewed by clicking here. It includes a copy of and commentary on each section of the Report. Some key points are set out below:
Sections applicable to all Firms
Section 1 – Initial Capital plus Additional Amount
- The Initial Capital Requirement (ICR) is €125,000.
- When the net asset value of the CIS under management exceeds €250,000,000, a Firm must provide an additional amount of capital equal to 0.02% of the excess (Additional Amount).
- A Firm need not provide up to 50% of the Additional Amount if it benefits from a guarantee, the form of which is approved by the Central Bank, of the same amount given by a credit institution or insurance undertaking.
- The total of the ICR and the Additional Amount required to be held by a Firm is not required to exceed €10,000,000.
Section 2 – Expenditure Requirement
- The Expenditure Requirement is calculated as one quarter of a Firm’s total expenditure taken from the most recent annual accounts but the Central Bank reserves the right to increase this amount should it be deemed not to reasonably reflect the current position of the Firm.
- A list of items which may be deducted from the expenditure figure is included in the Guidance and any deductions should be either clearly identified in the most recent audited annual accounts or be supported with a confirmation letter from the auditors.
Section 4 – Minimum Capital Requirement (MCR)
A Firm’s MCR is the higher of:
- the ICR plus the Additional Amount (if required); and
- the Expenditure Requirement;
plus, for AIFMs only, an additional amount to cover potential liability risks arising from professional negligence (see further below).
Section 5 - Own Funds
- A Firm is required to have Own Funds at least equal to its MCR, based on the half yearly accounts or the annual audited accounts, whichever is most recent.
- The Guidance sets out how Own Funds are calculated and specifies the conditions that apply in respect of Eligible Capital Contributions and Subordinated Loan Capital.
Section 6 – Eligible Assets
- The MCR must be invested in liquid assets or assets readily convertible to cash in the short term and must not include speculative positions.
- A Firm is required to hold the higher of the Expenditure Requirement or the ICR in the form of Eligible Assets and the method for calculating Eligible Assets (including a list of ineligible assets) is included in the Guidance.
- Eligible Assets must be:
- Easily accessible
- Free from any liens or charges
- Maintained outside the Firm’s group
- Held in an account separate to the account(s) used by a Firm for the day-to-day running of its business
- Investments by a Firm in CIS promoted by other group companies of the Firm or to which other group companies provide services will not rank as Eligible Assets.
- Firms must be able to demonstrate on-going compliance with the capital adequacy requirements and must notify the Central Bank immediately of material changes to their financial position which would impact on compliance with these requirements and take any necessary steps to rectify their position.
Section 7 – Previous Guarantee Agreed with Central Bank
Firms must disclose any Additional Amount covered by a guarantee previously agreed with the Central Bank.
Section 9 – Compliance Test
Only sections 9.3 – 9.5 of this section apply to all Firms. These require details of where Eligible Assets are held and confirmation of compliance with:
- The requirement to hold the higher of the Expenditure Requirement or the ICR in Eligible Assets (per Section 6 above)
- Capital adequacy requirements throughout the period under review
Section 10 – Qualifying Subordinated Capital
The Guidance sets out the additional conditions which apply to the use of redeemable Subordinated Loan Capital.
Sections applicable only to AIFMs
Section 3 – Professional Liability Risks
- For the AIFs that it manages, the AIFM must have Additional Own Funds which are appropriate to cover potential liability risks arising from professional negligence. The Additional Own Funds should be at least equal to 0.01% of the value of the portfolio of AIFs under management or at least equal to an amount covered by a prior agreement with the Central Bank, which will not be less that 0.008% of the value of the portfolio of AIFs under management.
- If the AIFM does not have Additional Own Funds set aside to cover Professional Liability Risk, it is required to hold Professional Indemnity Insurance against liability arising from professional negligence which is appropriate to the risks covered.
Section 8 – Professional Indemnity Insurance and Section 9 - Compliance Test
AIFMs are required under Section 8 to disclose if they hold Professional Indemnity Insurance and, depending on the answer to this, to indicate if they were in compliance with the requirements in relation to Professional Indemnity Insurance throughout the period.