Central Bank of Ireland (CB) deputy governor, Matthew Elderfield, addressed the Irish Funds Industry Association (IFIA) today. The address was given in the context of a growing Irish funds industry with total assets under administration in Ireland having passed the €2 trillion mark, assets under management of €1.2 trillion and over 1.3 m investors in Irish regulated funds or funds supported by Irish fund administrators. Mr Elderfield highlighted a variety of interesting CB initiatives and priorities. “Our concern is one of investor protection along a number of dimensions: ensuring that the investment that is available has an appropriate risk profile for the type of customer involved; ensuring adequate disclosure to investors so they can make an informed choice about risk; addressing operational risks related to valuation or protection of assets, and reducing the risk of fraud and other financial crime problems.” The CB is particularly focussed on the current changes to the funds universe and what scope there is to re-engineer the current regulatory framework. The address highlights a number of useful new initiatives in the funds arena and displays an encouraging understanding of the industry’s issues and challenges.

Domestic Developments

The Central Bank will be looking, in particular, at

  • a systematic rethink of Ireland’s non-UCITS  framework (reflecting the imminent implementation of AIFMD) with a rigorous reassessment to see whether domestic requirements need to be retained,
  • the establishment of a new category of fund based purely on the minimum standards of the AIFMD,
  • a rigorous reassessment of the non-UCITS qualifying investor (QIF) regime (and, in particular, to what extent the QIF regime should be adjusted to reflect the AIFMD),
  • a review of the promoter regime for non-UCITS Funds (CB plans to consult on proposals to remove the current promoter regime at least for QIFs,
  • a review of  the success and take-up of the IFIA corporate governance code, and
  • a move towards the receipt of information in electronic format and automated workflow processes to improve efficiency (this will reflect the introduction of online reporting for individual funds).

European Developments

Mr Elderfield presented an interesting analysis of EU developments. Some of the more noteworthy comments are set out below.

  • As regards the finalisation of AIFMD Level  II requirements by the EU Commission;  “A lot of disappointment has been expressed that some of the issues that were heavily debated in ESMA - and where we believe sensible proposals  were reached - have been revisited and changed. I can understand that sense of frustration.  For example, we think it's important to recognise that the business model of the funds industry involves a significant degree of delegation and outsourcing of activity. We hope that the final Level  II text being developed by the Commission reflects the very reasonable concerns that have been expressed by stakeholders and regulators in this area.”
  • In terms of UCITS V and particularly the appropriate liability regime for custody, Mr Elderfield’s view is that “it should be accepted that there will be alignment of the liability regime in UCITS V with the standards in AIFMD. Given the substantial obligations which depositories will be asked to comply with under AIFMD, we believe that UCITS V should mirror these requirements, no more, no less. Also, the CB will seek to ensure that Ireland’s rigorous but streamlined approach to the licensing and supervision of depositories is reflected in UCITS V”.
  • On UCITS VI, the CB’s initial thinking is that “it would be inappropriate to restrict the current set of eligible assets or to impose general restrictions on OTC derivative instruments. However, the current “no look through rule” does deserve further examination in relation to particular areas such as indices, where we have seen the eligible asset restrictions arguably being circumvented.  ESMA has already done some good work in its recent guidelines on the use of indices, but there may be more that can be done. We can also expect the output from the debate on shadow banking and systemic risk in the money market funds industry to feature heavily in UCITS VI”.
  • In the context of  Shadow Banking, Mr Elderfield’s comments focussed on the level of systemic risk posed by particular parts of the funds industry, namely money market funds, pointing out that the industry in Ireland must be prepared for change. The CB’s view is that a mandatory switch from constant net asset value to variable net asset value does not adequately address the fundamental problem of whether an investor run on a money market fund may take place  and notes that  substantial reform can be achieved through a range of measures such as capital buffers, dilution levies for exiting investors and tighter liquidity measures. Future reform of the MMF industry should ensure that any insurance that this ‘recourse to sponsor’ provides is properly charged to MMF investors. In this regard, Mr Elderfield pointed out that one of the other IOSCO recommendations is likely to be the mandatory requirement of gates as a redemption tool, which the CB views as sensible. Where support from a sponsor is implicit it should be made explicit, though it is worth acknowledging that this may have implications for the capital requirements of the sponsor.

Government support

The Government is acutely aware that regulatory developments in Europe pose both opportunities and challenges for the industry, Taoiseach Enda Kenny told the IFIA conference. He confirmed that the Government would continue working closely with all stakeholders to ensure the best representation for Ireland in European negotiations. “We remain committed to ensuring that the legal, regulatory and tax environment in which the funds industry operates is supportive of Ireland’s hard earned reputation as a centre of excellence in both the traditional and alternative segments,” he added.