On 20 October 2020, the Central Bank of Ireland ("Central Bank") issued a Dear Chair letter outlining its findings following a thematic review assessing how fund management companies ("FMCs") have implemented the Central Bank's requirements and related guidance on the organisation of FMCs. The Central Bank has identified a number of areas where compliance with the requirements and guidance needs to be further assessed by FMC boards, particularly in relation to resourcing of FMCs that were authorised before the new FMC framework was introduced (in 2017 for firms seeking new authorisation and mid-2018 for existing firms).
The Central Bank requires all FMCs, whether or not they receive a specific risk mitigation programme from the Central Bank, to critically assess their day to day operational, resourcing and governance arrangements against all relevant rules and guidance, taking into account the findings of the Central Bank's review. The Central Bank states that the FMC's analysis should be completed and an action plan discussed and approved by the board by end Q1 2021.
Background
Following a detailed consultation process, the Central Bank's Guidance for Fund Management Companies was published in December 2016 and related changes were made to the Central Bank rules applicable to the effective governance, management and organisation of FMCs. These rules and the guidance form the Central Bank's FMC framework, which detail the standards that apply across a range of aspects of fund management company activities including: organisational effectiveness, the performance of managerial functions, delegate oversight, resourcing, etc. As noted above, the new FMC framework applied to FMCs seeking new authorisation in 2017 and to existing FMCs in mid-2018.
When it published its FMC guidance, the Central Bank indicated that it would conduct a thematic inspection of the implementation of the guidance and rules shortly after the introduction of the new framework. This thematic inspection was conducted over the latter half of 2019 and in early 2020, consisting of three phases comprised of an industry questionnaire, a desk-based review and culminating with onsite reviews. The review covered all 358 active FMCs and included 30 onsite engagement meetings held between December 2019 and March 2020.
The Key Findings
The Dear Chair letter was accompanied by a three-page document setting out the high level findings of the thematic review. The findings and expectations set out in the letter and the accompanying document are set out in the table below.
Overall Findings |
|
Resourcing |
Findings
Expectations
|
Designated Persons |
Findings
Expectations
|
Delegate Oversight |
Findings
Expectations
|
Risk Management Framework |
Findings In many cases, there is an over-reliance on group frameworks. Expectations
|
Board Approval of New Funds |
The Central Bank is critical of situations where board approval of the investment fund / strategy is obtained just prior to launch. The Central Bank expects evidence of robust discussion and challenge by the board in relation to proposed new fund strategies / structures and their attendant risks. The board should be involved early in the process eg, when first formulating the investment strategy or prior to the submission of a fund application to the Central Bank. |
Organisational Effectiveness Director |
Findings
Expectations
|
Governance and Culture |
Findings
Expectations
|
Next Steps
The Central Bank has commenced supervisory engagement with FMCs where specific concerns have been identified. This will result in risk mitigation programmes for "many firms", according to the Central Bank. It also states that findings from the review will inform its consideration of policy development and potential future enhancements to the existing regulatory framework.
Whether or not FMCs receive a risk mitigation programme from the Central Bank, all firms must carry out an assessment and put in place an implementation plan, which must be discussed and approved by the board by the end of Q1 2021. The Central Bank's letter states that this assessment and implementation plan should at a minimum consider the following:
- the time commitment, skills and expertise of available resources;
- the FMC's retained and delegated tasks, including how ongoing independent challenge of all delegates can be ensured;
- the tasks required by the framework, including those that must be completed on a fund by fund basis;
- how resources and operational capacity will need to increase to take account of any increase in the nature, scale and complexity of the funds under management since authorisation or the last time the FMC critically assessed its operations; and
- how resources and operational capacity will need to increase to deal with a market and / or operational crisis.
The Central Bank has also indicated that it plans to conduct a further industry wide review of these matters in 2022 to assess FMC's actions on foot of the findings set out in the Dear Chair letter.
Comment
The Central Bank's conclusion that, when applied correctly by FMCs, the rules and guidance provide a framework of robust governance, management and oversight arrangements is welcome. While the review may inform future policy developments and future enhancements of the FMC framework, the review findings would suggest that the framework is robust and credible and not in need of substantial change. It is also positive that there was a high level of compliance among the significant number of recently authorised FMCs (many of which were Brexit-related applications).
It is noteworthy that, in some respects, the Central Bank's expectations as outlined in the letter go beyond the current FMC guidance, such as the Central Bank's focus on board diversity (which has, however, been addressed in several Central Bank speeches), the requirement for all but the smallest FMCs to have a CEO and scrutiny of the independence of INEDs with a tenure of longer than five years. Further clarification from the Central Bank regarding the reference in the Dear Chair letter to Designated Persons being "locally based" and how this aligns with the Central Bank's "location rule", which requires that half of managerial functions must be performed by at least two persons resident in the EEA, would be welcome to assist FMCs in assessing their governance arrangements.
The Central Bank's particular focus on resourcing and the requirement to have three FTEs will have to be carefully considered by self-managed and internally managed funds, which may have to consider measures including increasing the time commitments of designated persons, hiring fulltime or part-time, establishing an Irish management company or appointing an external management company in order to meet the Central Bank's expectations on resourcing and governance.
All FMCs, but particularly those authorised before the introduction of the FMC regime, should take steps immediately to carry out the necessary assessment and put in place the board-approved action plan by end Q1 2021. While the Central Bank has indicated that it will conduct a further industry wide review of implementation in 2022, it is likely that FMCs will see the Central Bank's expectations as set out in the Dear Chair letter being applied in advance of that review in the context of any new Designated Person or other pre-approval controlled function appointments and in any meetings with the Central Bank as part of their regular PRISM engagement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.