This briefing is to update you regarding the practical implications of the new Fitness and Probity Standards (the “Standards”) introduced by the Central Bank of Ireland (the “Central Bank”), for the operations of corporate investment funds and fund management companies (“Fund Companies”). This note reflects the revised Guidance on the Standards which was published by the Central Bank on 23 November 2011. For ease of reference, click here to view the Guidance Note.
For a basic understanding of the Standards and the new fitness and probity regime generally, please see our briefing: “Financial Services: New Fitness and Probity Requirements for many Functions” which was issued in September 2011. For ease of reference, click here to view the September 2011 briefing.
Pre-Approved Controlled Functions (“PCFs”)
The Standards will be introduced on a phased basis from 1 December 2011. The initial steps to be taken by each Fund Company, in chronological order, are as follows
Identify its PCFs in situ on 1 December 2011.
Provide the Central Bank by 31 December 2011 with a list of all PCFs (eg directors) in its organisation;
Carry out an internal due diligence process to confirm compliance by persons holding those PCFs with the Standards.
Request each person holding a PCF to sign a written confirmation that he/she will comply with the Standards.
Provide the Central Bank by 31 March 2012 with confirmation that, following Step 3, it is satisfied that each person occupying a PCF is compliant with the Standards and that it has obtained written agreement from each such person to abide by the Standards – this written confirmation may be signed by any Director of the Fund Company.
We set out below some further practical guidance on these steps and clarification of some important changes from the guidance initially published by the Central Bank in September 2011:
Identification of PCFs – Step 1
In respect of Fund Companies which operate on a delegation model basis, the only PCF positions will be each Director of the Fund Company. The Irish Funds Industry Association has successfully lobbied, with our involvement, to achieve amendments to the regime which was initially proposed. The Standards will not now apply in circumstances where services are provided to a Fund Company, on an outsourced basis, by a regulated entity (eg a regulated fund administrator, custodian or investment manager). Furthermore, the position of Company Secretary has also been removed as a PCF.
Internal Due Diligence Exercise – Step 3
As outlined in Step 2 on the previous page, the due diligence timeline has been extended – it does not now have to be completed until 31 March 2011. It will be for each Fund Company to determine the level of due diligence required for its purposes before it is in a position to confirm to the Central Bank that it is satisfied that the relevant PCF meets the Standards. One approach that might be adopted is as follows - a Fund Company would require the following from each of the Directors:
- to confirm in writing that his/her biographical details set out in the most recent Prospectus of the relevant Fund are accurate;
- to respond in writing to the queries set out in Section 5.1 – 5.21 of the new Individual Questionnaire: for ease of reference, click here to view Questionnaire;
- to confirm in writing whether he/she has any other directorships; and
- to confirm that he/she is capable of conducting the function of nonexecutive director of the company and has adequate time to perform that function having regard to other directorships/responsibilities that he/ she may have.
Clearly, any non-standard responses or disclosures by a Director would necessitate further engagement by the Fund Company with the relevant individual to determine whether he/she is compliant with the Standards. The key question will be whether any matter disclosed would adversely affect the Director’s ability to perform its function to a material degree.
The Fund Company should also independently carry out the following steps:
- check the website of the Central Bank and any other relevant regulatory authority to determine whether the Director has been subject to regulatory actions;
- check the website of the Companies Registration Office to determine whether any restrictions or disqualification orders have been made in respect of the Director;
- check publicly available sources to determine whether a judgement debt has been registered against the person in Ireland. Where the Director has lived outside of Ireland for more than 6 months in the past 5 years, the Fund Company should ask him/her to provide an equivalent check from a publicly available source in that jurisdiction.
Written Confirmation from the PCF – Step 4
In relation to the written confirmation of compliance with the Standards that must be provided by each Director, this should follow the form set out in appendix 2 of the Central Bank’s Guidance Note. Click here to view.