On 31 March 2015, the Central Bank published new regulations and guidance relating to both the client assets regime and the investor monies regime. These regulations and guidance stem from the Central Bank's consultation process last year, CP 71 (Client Assets Regulations and Guidance) and a series of meetings between the Irish Funds Industry Association (IFIA) and the Central Bank, following which it was decided that new regimes should be put in place to deal with the safeguarding of investor monies.
The Investor Money Regulations1 apply to entities such as fund administrators, custodians and management companies of both UCITS and AIFs. The Client Asset Regulations2 apply to investment firms such as stockbrokers. The purpose of this briefing is to focus on the Investor Money Regulations. The Central Bank also issued guidance to accompany the Investor Money Regulations which provides a useful explanation on how the Investor Money Regulations should be applied.
Regulations is to strengthen the safeguards around investor monies by requiring that fund service providers put in place systems and controls which will give added protection to investors whose monies are held by them.
SCOPE OF THE REGULATIONS
The Investor Money Regulations apply to 'investor monies'. The definition of investor monies identifies monies to which an investor is beneficially entitled, received from or on behalf of an investor or held by the fund service provider on behalf of an investor and includes monies held by a nominee of the fund service provider. Where investor monies are mixed with monies that are not investor monies, the Investor Money Regulations apply to that part of the monies that are investor monies.
In order for the Investor Money Regulations to apply, the investor monies must be held by a fund service provider, which means being lodged into a collection account in a bank held in the name of the fund service provider (or nominee) and the fund service provider has the capacity to effect transactions on that collection account.
A collection account is an account opened with a bank by a fund service provider to hold money from an investor pending delivery to an investment fund (subscriptions) or to hold money from an investment fund pending delivery to an investor (redemptions).
The date of commencement of the Investor Money Regulations is 1 July 2016. Investment funds and their investment managers will need to be satisfied that the fund service providers with which they deal have the necessary structures and procedures in place to meet the requirements of the Investor Money Regulations.
There are a number of core principles on which the new investor monies regime is based.
The fund service provider must ensure that investor monies are held separately from the fund service provider's own assets, i.e., held in a designated collection account separate from monies forming part of the fund service provider's business. Guidance on how a fund service provider should hold investor money is provided in the Investor Money Regulations.
A fund service provider must put in place an Investor Money Management Plan, which, among other things, sets out the procedures it will follow on matters relating to anti-money laundering and dealing with mixed remittances. The Investor Money Management Plan must be produced within three months of the date of commencement of the Investor Money Regulations, i.e., 1 July 2016.
2. Designation and Registration
Investor monies must be clearly identified in the fund service provider's internal records and in the records of the bank with which the collection account is held as being separate from the fund service provider's own assets. A bank at which investor monies may be held can be a bank authorised in the EEA, Switzerland, Canada, Japan, United States, Jersey, Guernsey, the Isle of Man, Australia or New Zealand.
The words 'collection account' must be stated in the account name. In advance of opening a collection account with the bank, the fund service provider must put in place an agreement referred to as an Investor Money Facilities Letter with the bank. The terms of this letter are set out in the Investor Money Regulations and must state, among other things, that the parties acknowledge that money in the collection account is held by the fund service provider in trust for the relevant investors and that the bank shall hold and record the money in the collection account separate from the fund service provider's own money and the money belonging to the bank.
The fund service provider must keep accurate books and records to enable it at any time and without delay to provide an accurate record of the investor monies held by it for each investor and the total amount in the collection account. The fund service provider must conduct daily and monthly reconciliations between its internal records and the external records of any third party holding investor monies. A fund service provider should keep records of all reconciliations performed, the information upon which the reconciliations are based, the person or reconciliation computer system that carried out such reconciliations and the person who reviewed such reconciliations.
4. Daily Calculation
The rules on daily calculations set out in the Investor Money Regulations are prescriptive. A daily calculation must be carried out by the fund service provider to ensure that the balance in the collection account is equal to the amount it should be holding on behalf of investors. If there is a shortfall, this must be met out of the fund service provider's own account. The Central Bank expects a fund service provider to notify it through the ONR system when a shortfall (or surplus) requires a material lodgement (or withdrawal) of money by the fund service provider. The fund service provider should also explain in the notification the reason for the transfer. Where there has been a failure to perform a daily calculation, the fund service provider must as soon as possible inform the Central Bank with an explanation of the reasons for such a failure. In any event, the fund service provider shall notify the Central Bank within one working day of the date on which the calculation should have been performed.
5. Risk Management
The fund service provider must have an appropriate risk management system in place which may be incorporated as part of the fund service provider's governance framework. This includes the appointment of a Head of Investor Money Oversight. The Head of Investor Money Oversight is a new role which is a Central Bank "pre-approval controlled function". This role should be carried out by a director of the fund service provider or a senior manager at the fund service provider. The fund service provider must ensure that the Head of Investor Money Oversight has the necessary resources, including staff that are adequately trained with sufficient skill and expertise to carry out the relevant responsibilities set out in the Investor Money Regulations, having regard to the nature, scale and complexity of the business. However, it is the board of directors of the fund service provider that is ultimately responsible for safeguarding investor money.
The specific responsibilities of the Head of Investor Money Oversight include, among other things, ensuring that potential or actual breaches relating to the safeguarding of investor money are reported in writing to the board of the fund service provider and that actual breaches are reported to the Central Bank. The fund service provider shall document in the Investor Money Management Plan the material risks to investor money held, including items such as counterparty risk (including jurisdiction and associated legal risks), concentration risk, operational risk (including risk of fraud), compliance with investor mandates and outsourcing and group arrangements.
6. Investor Monies Examination
An external audit must be conducted annually on the fund service provider's safeguarding of investor monies and an annual assurance report from the auditor must be submitted to the Central Bank. The report should be submitted online via the Central Bank's ONR within four months of the period end. In relation to the assessment of the Investor Money Management Plan, the fund service provider should ensure that the auditor reviews the processes undertaken by the fund service provider to assess the on-going appropriateness of the Investor Money Management Plan, including evidence of the steps taken by the fund service provider to test and maintain the Investor Money Management Plan. The Central Bank expects the fund service provider to engage with the auditor to seek, at a minimum, third party confirmations for a representative sample of account balances held in respect of investor money, both at year-end and also on one other randomly scheduled date during the year.
The responsibilities imposed on fund service providers who hold investor monies are prescriptive and structural changes will be required within fund service providers in order to be compliant with the Investor Money Regulations by 1 April 2016.
The Central Bank has made it clear that contraventions of the investor monies regime will attract penalties including sanctions under the Central Bank's administrative sanctions procedures. It should be noted that the Central Bank announced that compliance with the Investor Money Regulations will be the subject of one of its themed inspections in the near future.
1 The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investor Money Regulations 2015 for Fund Service Providers (the "Investor Monies Regulations").
2 The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Client Asset Regulations 2015 for Investment Firms.
This article 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.