The Central Bank of Ireland is continuing its emphasis on governance, compliance and effective supervision. Some highlights include:
Central Bank’s programme of themed inspections for 2016
The Central Bank’s programme of themed inspections for 2016 highlighted the major role to be played by governance, regulatory compliance and risk in the investment funds industry. In particular, there was a continued focus on director time commitments and the risk culture within investment firms, following the Central Bank’s themed inspections in 2015.
Director time commitment
In terms of director time commitments, the Central Bank confirmed that where a director has aggregate time commitments in excess of 2,000 hours, including commitments to at least 20 fund boards, such a director would be considered to be at high risk of being unable to fulfil its role to the appropriate standard. The Central Bank highlighted that ultimate responsibility rests with the board to ensure each director is dedicating sufficient time to their individual role.
In its letter to investment firms, fund service providers and stockbrokers on 5 December 2016, the Central Bank confirmed there was a divergence in the quality and effectiveness of risk frameworks, and notable inconsistencies existed in the approach to (i) identifying, (ii) documenting, (iii) quantifying, (iv) mitigating and (v) communicating risks within firms.
The letter provides certain questions which a firm should take into account when carrying out a self-assessment of its own risk framework and culture. The Central Bank stated that failure to observe these questions will be taken into account should the Central Bank exercise its regulatory and enforcements powers.
Following its inspection of the management of conflicts of interest in investment firms, the Central Bank issued its feedback on 25 February 2016. Investment firms are obliged to establish and maintain an effective organisational model to actively monitor, on a day-to-day basis, conflicts of interest to ensure that the best interests of clients are protected.
Firms should be at all times evaluating their own conflicts of interest, how they are evolving and how they are best managed and mitigated. There is an onus on the boards of firms to instil a strong compliance culture to ensure conflicts of interest are avoided.
On 19 December 2016, the Central Bank issued its guidance for fund management companies (“FMCs”) following the conclusion of its consultation paper process (‘CP86’) (the “Guidance”). In a recent article, we highlighted the items addressed in the Central Bank’s Feedback Statement on CP86.
The Guidance is designed to ensure compliance by FMCs with their regulatory obligations and to allow the Central Bank to carry out effective supervision without undue constraint. The Guidance contains the following sections:
- Part 1: Delegate Oversight - ultimate responsibility rests with the board
- Part 2: Organisational Effectiveness - to be performed by an independent director
- Part 3: Director Time Commitments - non-adherence can lead to significant governance risk
- Part 4: Managerial Functions - there are now six managerial functions for both UCITS and AIFs
- Part 5: Operational Issues - record retention and maintenance of a dedicated email address
- Part 6: Procedural Matters - in particular, information to be included in a business plan for a UCITS
FMCs are required to comply with the Guidance by 1 July 2018. While the Guidance operates on a ‘comply or explain’ basis, it is advisable that FMCs align themselves to the requirements, as the Central Bank will consider the Guidance when forming a view as to whether an FMC is compliant with its regulatory obligations.
What’s on the horizon for 2017?
2017 will continue to focus on governance and compliance. The Central Bank sees this as a tool to carry out effective supervision, with a view to ensuring overall protection for investors.
With Brexit also on the horizon, we believe this year will be yet another busy time for the investment funds industry. Ireland’s infrastructure can facilitate further close co-operation with Britain and we will continue to enable UK-based asset managers to manage and distribute EU UCITS and AIF products. However, the real key to the success of the investment funds industry in the wake of Brexit, will be the role of the Central Bank in terms of its preparedness for a potential increase in licensing applications, which it has confirmed it is ready for.