With 13 investment funds registered with the Qatar Central Bank already in existence in Qatar, and more and more new funds, both conventional and Shari’a compliant, being set up and registered here, the investment funds sector has been growing in the Qatari market since 2005.
Investment funds established in Qatar are generally considered to be safe investment vehicles for both Qatari nationals and other Qatar residents to secure a better return than that available for fixed deposits.
Given the growing number of investment funds in the country, the fact that banks often act as founders or fund managers of investment funds in Qatar has gone largely under the radar. Bank act in these capacities either directly or through one of their affiliates and often own a significant stake in those funds.
The Qatar Central Bank has moved to limit any conflict of interest and banking risks arising from banks holding a major stake in investment funds as a bank’s investment and has instructed locally licenced banks, acting as founders or fund managers of investment funds, not to hold more than 10% of the units in such funds.
The Qatar Central Bank elaborated on the concerns giving rise to the instruction in a circular issued in February 2016. In the circular, the Qatar Central Bank described how a bank that owns a significant stake in a mutual fund would have a ‘material’ interest in that fund which would require the consolidation of the financial statements of these funds with the financial statements of the bank.
The Qatar Central Bank has also mentioned in the same circular that significant ownership in an investment fund by the founder or fund manager is inconsistent with the provisions of the Investment Funds Law No. 25 of 2002 and its Executive Regulations and have restricted ownership to no more than 10%.
The Investment Funds Law prohibits founders and fund managers of investment funds from having any interest in or gaining any profit or advantage from managing or supervising the fund activities, save for fees and commissions set out in the fund’s Articles of Association. Moreover, a fund manager is prohibited under the Investment Funds Law from investing in a fund in excess of the permitted share set out in the Articles of Association or as otherwise determined by the Qatar Central Bank.
Despite this, until now, there has been no formal restriction on the ownership percentage of a founder or fund manager of a fund in Qatar. There has, however, been an absolute restriction for custodians or investment agents of a fund to invest in the fund, for conflict of interest reasons
Now, the Qatar Central Bank’s view seems to be that conflict of interest is also a concern where fund managers or founders are owners of a major stake in a fund and therefore, fund management and investments may be driven by the interest of the manager or the founder.
The Qatar Central Bank’s recent restrictions also seem to have risk management concerns on top of conflict of interest concerns. In particular there seems to be a worry that bank investments in funds are mixed with investments they make on behalf of third party investors recorded off balance sheet item in the bank’s financial statements.
The Central Bank requested banks acting as founders or fund managers and owning more than 10% in investment funds, to adjust their holdings within the year 2016.