The Central Bank of Ireland has published Consultation Paper 86 on Fund Management Company Effectiveness – Delegate Oversight. It contains a number of proposals which aim to increase fund management company control over the activities of delegate service providers, acting on their behalf, in relation to investment funds.
The proposals focus on two main areas. First, the authorisation process, in which fund management company boards and internal arrangements are reviewed to ensure they are of sufficient quality. Second, the processes and procedures in place for overseeing both administration and investment of money invested with investment funds on a daily basis.
We remind you that there is still an opportunity to have your say on the proposals contained in the Consultation Paper (CP 86) as the consultation period closes on 12 December 2014.
There are four areas open for consultation:
Central Bank Fund Management Company Delegate Oversight Guidance
The Central Bank believes that there is a wide variation in the quality of the oversight of the activities of delegates. In response, the Central Bank decided to issue guidance on what constitutes good practice for oversight by fund management companies.
Good practice guidance can be found in Appendix 1 of CP86. The good practice guidance allows the boards of fund management companies to consider which tasks should be the responsibility of the board and how to implement good practice in the monitoring of tasks that are delegated to third parties. The Central Bank is considering whether to publish the guidance as standalone Central Bank Guidance.
Streamlining Designated Managerial Functions
At present, the Central Bank requires UCITS management companies to identify the designated persons responsible for nine separate managerial functions, while alternative investment fund managers (AIFMs) must identify designated persons for sixteen such functions.
As there is an overlap with these tasks, it is proposed to consolidate them into six managerial functions which will apply to UCITS management companies and AIFMs.
These are the six functions:
- Risk Management
- Investment Management
- Regulatory Compliance
- Capital and Financial Management
- Organisational Effectiveness
The Central Bank has highlighted that there are two differences to the current functions. The first involves expansion of the current complaints handling function to a general oversight of distribution function. The second difference is the introduction of a task of organisational oversight effectiveness, which the Central Bank indicates would be useful function for the chairperson of the board of a fund management company.
CP86 also states that the same individual should not be designated with responsibility for both investment and risk management.
If these changes are implemented, they would become requirements following a transitional period.
Requirement for Irish Resident Directors
Current Central Bank rules require fund management companies to have at least two directors resident in Ireland. The Central Bank sees this as problematic: residence is not defined, resulting in a lack of clarity; and this requirement can restrict the range of individuals with the requisite skills available to act as directors.
CP86 proposes to relax the requirement for two Irish resident directors by amending residency requirements from what they are now, to two directors who are in the country for not less than 110 working days per year.
It is also proposed that fund management companies can substitute one of the directors for an individual who is competent in one of the six tasks mentioned above, is available to engage with the Central Bank on request within any twenty-four hour working day period, is able to attend meetings at reasonable notice and is unconnected to the depositary or a service provider.
The time spent in Ireland is to be measured in a simple and transparent manner with the directors required to be in Ireland for the whole of 110 working days per year.
Rationale for Board Composition
The Central Bank is proposing to introduce a new rule requiring fund management companies to document how the composition of its board has sufficient expertise to conduct its tasks. The designated person for organisational effectiveness will be required to monitor the effectiveness of the board and individual directors on an ongoing basis.
Any changes to the composition of the board of a fund management company should be notified to Central Bank in the usual manner, with the Central Bank having the option to intervene if it has any concerns.
The Central Bank believes there is an assumption that it has an implied preference for the appointment of lawyers to management company boards. It seeks to clarify, in CP86, that where a fund management company has engaged a solicitor there is no requirement by the Central Bank for the board to also have a member with legal expertise.
Where any lawyer is to be appointed to a board that person should be assessed in the same manner as any other individuals being considered. The Central Bank has noted its eagerness to establish a level playing field between potential board appointees.
Questions for Consideration
The Central Bank has asked interested stakeholders to provide responses on fund management governance as a whole and on six questions that are included in CP86, which is available on the Central Bank website here. Responses must be submitted by 12 December 2014.