This article was previously published in Ireland's The Sunday Independent

Although Chile does not generally impinge on the Irish consciousness, in early September Chile was uppermost in the thoughts of the Irish funds industry. This is because the Chilean Pensions Regulator, the CCR, delisted UCITS funds domiciled in Ireland as approved investments for Chilean pension funds.

UCITS are investment funds that can be sold to institutions and retail investors throughout Europe under European single market rules and, increasingly, beyond Europe in countries like Hong Kong, Taiwan and Chile. They are attractive investment products because they are highly regulated with their assets protected by independent custody arrangements. Most of the investment in UCITS is made by pension funds and insurance companies across the globe and these are highly regulated.

While a number of international banks have pulled out of Dublin's International Financial Services Centre (IFSC), the funds business—which is serviced by fund administrators, custodians, lawyers and accountants both in the IFSC as well as in towns and cities across the country such as Cork, Waterford, Wexford, Limerick and Kilkenny—continues to go from strength to strength. The value of assets in funds domiciled in Ireland grew by more than 29% in 2010 and now stands at €987bn.

UCITS are a significant Irish export product (with Irish UCITS representing 13% of established UCITS) and Chile is an important market. It emerged from the Pinochet years as one of the most prosperous and well-run economies in South America—an attractive market for fund managers. By recognising and allowing investment by Chilean pension funds in UCITS, the CCR opened up a market for Irish-domiciled UCITS that was valued at over €6 billion in assets under management. However, Chile is also in a region that has suffered from sovereign default and its rules for investments by pension funds means that the credit risk of the country where the fund is domiciled must also be taken into account.

By recognising and allowing investment by Chilean pension funds in UCITS, the CCR opened up a market for Irish-domiciled UCITS that was valued at over €6 billion in assets under management.

During 2010 and culminating in the EU/IMF bailout, Ireland underwent a series of credit rating downgrades that triggered a breach of the Chilean rules for pension fund investment. The Irish funds industry, with the assistance of the Irish Government and the regional Irish Ambassador in Latin America, lobbied hard to prevent Irish funds from being delisted as approved investments. They highlighted the international nature of UCITS and their governance by a European legislative framework with independent custody arrangements. Explanations were also given on the protection of property rights under the Irish constitution and the fact that while funds might be domiciled in Ireland, the assets of these funds were mostly domiciled outside Ireland—so that the risk of an Irish Government raiding Chilean pension fund assets was minimal or non-existent. Following this engagement, the CCR agreed not to automatically disapprove Irish funds, but instead put Irish funds on a "watch list" subject to ongoing review.

However, Moody's assigning Ireland a Junk Bond Status for Irish sovereign debt proved a tipping point for the Chilean authorities, who took the decision to delist Irish funds.

The Irish funds industry, with the assistance of the current President of IFSC Ireland and former Taoiseach (Prime Minister) John Bruton, will be spending a lot of time in Chile over the coming weeks and months, seeking changes to the Chilean rules and giving Chilean pension funds the positive message about the safety of Irish UCITS. They will look to be supported in their endeavours by the EU and global regulatory bodies who recognise that the safeguards within the UCITS structure mean that there can be no real risk of expropriation by government action.

This Chilean action is significant for the Irish funds industry and for the asset managers whose funds are affected. While there are concerns about how this will impact upon the competitiveness of Ireland as a fund domicile, most observers consider that Ireland's Chilean difficulty is a temporary blip.

In addition to retail investment funds such as UCITS, Ireland is a major centre for the administration of hedge funds and other alternative fund structures, many of which are also domiciled in Ireland. There is significant European legislation coming down the track on the regulation of alternative investment fund managers, which may lead many of these funds to relocate from offshore jurisdictions such as Cayman to the EU, and Ireland is poised to be a major beneficiary from this increased regulation.

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