1 | ARTHUR COX
Group Briefing
December 2016
ASSET MANAGEMENT &
INVESTMENT FUNDS
Central Bank of Ireland
Publishes Outcome of Third
Consultation on Fund
Management Company
Effectiveness (CP86)
INTRODUCTION
The Central Bank has published: (i)
its feedback statement on its third
consultation on fund management
company effectiveness; (ii) details
of new rules on the location of
directors and designated persons and
recordkeeping; and (iii) the final three
chapters of its guidance dealing with
managerial functions, operational
issues and procedural matters. The
rules and guidance are directed at “fund
management companies” in Ireland
that are authorised by the Central Bank,
namely:
Area (or “EEA”). The Central Bank
has recalibrated this requirement to
permit more involvement by persons
located outside the EEA by reducing
the minimum threshold of directors
and designated persons of a fund
management company located in the
EEA from “at least two thirds” to “at
least half”.
»» half of its directors resident in the
EEA; and
Under the Central Bank’s new rule, a
fund management company with a
PRISM impact rating of Low1 will be
required to have at least:
Impact of the new thresholds
»» UCITS management companies;
»» half of its directors resident in the
EEA; and
»» self-managed UCITS investment
companies;
»» AIFMs; and
»» internally-managed AIFs.
NEW RULE ON LOCATION OF
DIRECTORS AND DESIGNATED
PERSONS
The Central Bank’s third consultation
proposed a new “effective supervision
requirement” under which at least
two thirds of the directors and two
thirds of the designated persons of a
fund management company must be
located in the European Economic
»» two Irish resident directors;
»» half of its managerial functions
performed by at least two designated
persons resident in the EEA (which
can include two directors resident in
the EEA).
A fund management company with a
PRISM impact rating of Medium Low or
Higher will be required to have at least:
»» three Irish resident directors or at least
two Irish resident directors and one
designated person based in Ireland;
1 Based on the current practice of the Central Bank,
unless the Central Bank has indicated that a fund
management company has a Medium Low or higher
PRISM rating, a fund management company should
assume it has a low PRISM rating.
This document contains a general summary of developments and is not a complete or definitive statement of
the law. Specific legal advice should be obtained where appropriate.
»» half of its managerial functions
performed by at least two designated
persons resident in the EEA (which
can include two directors resident in
the EEA).
While lowering the two thirds
requirement to at least half is welcome,
the new rules may still represent
a challenge for some investment
management groups that are primarily
located outside of the EEA (e.g., the US
and Asia). Currently two Irish resident
directors must be on the board of each
fund management company. The new
rules will require a change of composition
for boards that have three or more nonEEA directors without an equal number
of directors based in the EEA.
In terms of the performance of the six
managerial functions, the lowering of
the requirement from two thirds to at
least half of the managerial functions
being performed in the EEA means
that the two risk managerial functions
(operational risk management and fund
risk management) and the investment
management function can be performed
by designated persons within the
2 | ARTHUR COX
ASSET MANAGEMENT &
INVESTMENT FUNDS
CENTRAL BANK OF IRELAND PUBLISHES OUTCOME
OF THIRD CONSULTATION ON FUND MANAGEMENT
COMPANY EFFECTIVENESS (CP86)
investment manager (regardless of
where they are located). This leaves the
remaining three managerial functions to
be performed by directors or designated
persons in the EEA. These three
managerial functions are distribution,
capital and financial management and
regulatory compliance.
Brexit
On the issue of the proposed exit of the
UK from the EU, the Central Bank noted
that it was impossible for it to predict the
terms of the UK’s exit and subsequent
arrangements. However, it suggested
that the factors relevant to determining
whether there is effective supervision
listed in the feedback statement should
allow interested parties to assess the likely
impact, if any, of different forms of Brexit
on the application of the Central Bank’s
rules. This uncertainty regarding the
application of the Central Bank’s rules
and the impact of Brexit may present
difficulties for UK investment managers.
It would appear likely that the issue will
be revisited by the Central Bank once the
UK’s future relationship with the EU is
clearer and, based on previous comments
from the Central Bank, there is an
expectation that the UK will continue to
be able to meet the Central Bank’s criteria
for effective supervision so designated
persons in the UK post-Brexit should
still be able to satisfy the Central Bank’s
location requirement.
Central Bank analysis
The Central Bank’s feedback statement
includes the results of its impact
analysis of the new requirements under
CP86. Regarding the director location
requirement, the Central Bank concluded
that making the necessary changes to
achieve compliance with this requirement
would not require a great deal of additional
expenditure for fund management
companies. However, the Central Bank
acknowledged that some directors who
are employees of the promoter and
based outside the EEA may need to be
replaced by directors who are located in
the EEA and who are not employed by the
promoter. The Central Bank noted that
no existing fund management company
that does not currently comply with the
new rules would need to change more
than two directors to comply with the
new rules. In terms of the impact of the
effective supervision requirement on the
designated person roles, the Central Bank
balanced the ability to fill designated
person roles with experienced members
of the promoter’s staff who will very often
be located outside Ireland and/or the
EEA against the need to ensure that fund
management companies are organised in a
way that ensures they are supervisable by
the Central Bank. Clearly the Central Bank
did not accept the argument that physical
proximity to Ireland does not necessarily
result in more effective supervision.
The Central Bank advised that the
recalibration of the effective supervision
requirement had come about as a
result of an effort to find the correct
balance of expertise with location and
supervisability. The Central Bank did not
find arguments concerning increased
costs or detriment to Ireland’s competitive
position submitted by respondents to the
third consultation convincing, but was
swayed to a certain extent by arguments
concerning expertise and the need to
facilitate organisational models which
draw appropriately on the expertise of the
promoter. The Central Bank stated that
applying such expertise to the operation
of a fund management company should
help to ensure that it is run in the best
interests of investors and in a way that
achieves the best outcomes for investors.
NEW RULE AND GUIDANCE ON
RECORDKEEPING
The Central Bank has introduced a new
rule on the retrievability of records
which requires a fund management
company to keep all of its records in
a way that makes them immediately
retrievable in or from Ireland.
The Central Bank has clarified that in
the context of these rules, “immediately”
means documentation requested before
1pm (Irish time) should be provided to
the Central Bank on the same day and
documentation requested after 1pm
(Irish time) should be provided to the
Central Bank before 12 noon on the
following business day.
The Central Bank has also amended the
draft operational issues guidance to clarify
its expectations as regards the minimum
requirements for record retention,
archiving and retrievability of a fund
management company’s documents. The
guidance clarifies that an annual audit of
the company’s record retention policies
may be undertaken by an external party
or internally, for example, by the internal
audit function of the company.
GUIDANCE ON MANAGERIAL
FUNCTIONS
The final guidance on managerial
functions, operational issues
and procedural matters is largely
unchanged from the draft guidance
on these issues included in the third
consultation. The main changes to the
draft managerial functions guidance
included in the third consultation can
be summarised as follows:
»» Co-location of designated persons: in
light of the refinement of the new
rule on the location of directors and
designated persons (outlined above),
the proposal that a fund management
company’s designated persons must
work in the same location has been
removed. This is a welcome change as
it enables managerial functions to be
performed by individuals within the
fund management company’s group
who are based in different locations.
It also facilitates the appointment of
external service providers to perform
certain managerial functions while
other managerial functions may be
retained internally within the fund
management company’s group.
»» Dual appointment as director and
designated person: the guidance
now includes a specific reference
to the ability of an individual to
be appointed as both a director
and a designated person of a fund
management company.
»» Seniority of designated persons: the
guidance has been amended to remove
an assumption that a designated
person must always occupy a more
senior role than the delegate being
overseen. However, this is included
ASSET MANAGEMENT &
INVESTMENT FUNDS
3 | ARTHUR COX
CENTRAL BANK OF IRELAND PUBLISHES OUTCOME
OF THIRD CONSULTATION ON FUND MANAGEMENT
COMPANY EFFECTIVENESS (CP86)
as an example of what may be an
inappropriate appointment depending
on the circumstances.
»» Contractual arrangements between
fund management companies and
service providers: the Central Bank
has clarified that the delegation by
a fund management company of
its regulatory functions should be
documented in written contractual
arrangements in a manner
determined by the fund management
company. The final guidance suggests
that a general obligation to perform
the contract “in accordance with
applicable law and regulation” is
not sufficient to address the Central
Bank’s expectations. The clarification
provided by the Central Bank would
not appear, however, to rule out the
documentation of any consequential
amendments to contracts in place
between fund management companies
and their service providers by means
of ancillary service level agreements,
letters of understanding or similar
arrangements, rather than by
the amendment of the contracts
themselves.
»» Role of designated persons in relation
to policies and procedures: the Central
Bank has clarified its expectations
regarding the respective roles of
designated persons and the board
of directors of a fund management
company in the design of the various
policies and procedures (“P&Ps”)
that the fund management company
is required to have in place under
applicable law and regulation. It is
ultimately the board’s responsibility
to ensure that the fund management
company has designed appropriate
P&Ps, structures and limits and these
are subject to the approval of the board.
The guidance states that designated
persons should advise on the design
process and assist with the creation of
the P&Ps, structures and limits.
arthurcox.com
NEXT STEPS AND TRANSITIONAL
ARRANGEMENTS
Fund management company guidance
The Central Bank published the first
three chapters of its fund management
company guidance dealing with
delegate oversight, organisational
effectiveness and directors’ time
commitments in November 2015. These
are now included in the final guidance
without noteworthy amendment.
The Central Bank has confirmed that
divergence from the guidance will not
be a regulatory breach but the Central
Bank will have reference to the guidance
when forming a view as to whether
a fund management company has
complied with its regulatory obligations.
KEY CONTACTS
If you have any queries on this briefing,
please do not hesitate to contact a
member of our team:
KEVIN MURPHY
PARTNER
+353 1 618 0515
[email protected]
Transitional arrangements for new rules
The Central Bank has advised that existing
fund management companies must
comply with the new rules (relating
to the streamlining of the managerial
functions to six managerial functions,
the organisational effectiveness role,
the location of directors and designated
persons and recordkeeping) introduced
by CP86 by 1 July 2018. This extension of
the time for existing fund management
companies to comply with the new rules
from the one-year transitional period
previously proposed to an 18-month
period is useful in that it affords some
extra time for them to consider how best
to implement the new rules. However, any
application for authorisation from a new
fund management company submitted
on or after 1 July 2017 will need to comply
with the new rules immediately. The new
rules will be included in the Central Bank
UCITS Regulations and in the Central
Bank AIF Regulations in due course.
SARAH CUNNIFF
PARTNER
+353 1 618 0508
[email protected]
DARA HARRINGTON
PARTNER
+353 1 618 0559
[email protected]
ADRIAN MULRYAN
PARTNER
+44 207 832 0201
[email protected]
Dublin
+353 1 618 0000
[email protected]
London
+44 207 832 0200
[email protected]
Belfast
+44 28 9023 0007
[email protected]
New York
+1 212 782 3294
[email protected]
Silicon Valley
+1 650 943 2330
[email protected]