The Central Bank proposes introducing a risk assessment and capital planning requirement for Fund Administrators authorised under the Investment Intermediaries Act, 1995 to reflect improvements in capital planning in recent years throughout the financial services sector. It is proposed that this requirement be introduced by way of additional regulations to be inserted into Part 5 of the proposed Central Bank Investment Firm Regulations (Proposed Regulations). It is also proposed to issue guidance on the Proposed Regulations (Proposed Guidance). The text of the Proposed Regulations and the Proposed Guidance are attached to the Consultation Paper.
By introducing the new requirements by way of regulations combined with guidance, the Central Bank aims to facilitate the practice of capital planning in a manner that is proportionate to the business. The Proposed Regulations set out what must be done by all, while the Proposed Guidance sets out what may be appropriate for many firms while recognising that it is not describing what must be done by all. For some firms it will be sufficient to be able to explain why they decided not to do some of what is suggested in the Proposed Guidance. As is the current practice with respect to regulatory guidelines within the funds sector, the intention is that a Fund Administrator should either comply with all sections of the Proposed Guidance or be able to explain why a particular section is not applicable for that Fund Administrator and what alternative steps it is taking to ensure compliance with the relevant regulation.
The proposed new requirements would broadly align the capital planning requirements applicable to Fund Administrators to those already applying to MiFID investment firms in Ireland under the Capital Requirements Directive2 (CRDIV) and Capital Requirements Regulation3 (CRR). In this regard, CRDIV is transposed into Irish Law via the European Union (Capital Requirements) Regulations, 2014 (S.I. No. 158 of 2014) and those Regulations set out various requirements in relation to the proactive continuous assessment of risk and the level of capital to be held to meet such risks. In summary, CRDIV requirements include a requirement to:
- carry out an internal capital adequacy assessment process;
- assess, in that context, a number of specifically identified risks to the institution; and
- set aside capital to meet those risks based on the capital adequacy assessment undertaken.
The Central Bank considers that it is appropriate that an equivalent requirement should be applied to Fund Administrators. The Central Bank has tailored the requirement, including the list of sources of risk, to reflect the specific nature of the business of Fund Administrators and its supervisory focus for these firms. The policy intention is to build on work completed to date by Central Bank supervisors as part of their bilateral engagement with Fund Administrators to ensure that comprehensive risk assessment and capital planning is undertaken by Fund Administrators on a continuous basis. The Central Bank has had a good response to this initiative which underpins a more forward-looking and risk-focused approach to capital. The Central Bank recognises this is an important piece of prudential regulation and wishes to put on a formal legislative basis a requirement to engage in comprehensive risk assessments and capital planning. The change reflects the identification in Central Bank supervisory work of a need to ensure that those concerned in the direction and management of Fund Administrators take ownership in relation to the assessment of all of the risks in their business and ensure that their firm holds appropriate capital reserves relative to those risks.
On the 4th November 2015, the Central Bank published CP97 Consultation on Central Bank Investment Firm Regulations 20151("CP97"). CP97 highlighted the Central Bank's intention to publish an Investment Firms rulebook in the form of Central Bank regulations under the Central Bank (Supervision and Enforcement) Act 2013 (referred to in CP97 as the proposed Central Bank Investment Firm Regulations). It was noted that the proposed Central Bank Investment Firm Regulations would consolidate into one document all of the conditions and requirements which the Central Bank currently imposes on investment firms. In addition, CP97 outlined certain proposed policy changes in the areas of capital and outsourcing requirements applicable to Fund Administrators. CP97 further noted that the Central Bank was examining the option of applying a capital planning requirement to certain non-MiFID firms and that the Central Bank's intention was to consult on this issue before the end of the year. The Central Bank now wishes to consult on that issue through CP100.