The Central Bank's Fund Management Companies – Guidance (the "Guidance") took effect on 1 July 2018 for entities in existence at the time of its publication following the completion of an extensive period of consultation (CP86) with industry between September 2014 and August 2016. The Guidance is applicable to Irish authorised UCITS management companies, AIFMs and self-managed UCITS and AIFs ("FMCs") and details the Central Bank's expectations in relation to the governance of FMCs, how they should comply with their regulatory obligations and its ability to supervise FMCs without undue constraint and in times of crisis.
Swiftly following implementation, on the 5 July 2018, the Central Bank announced its intention to begin assessing how FMCs "have implemented and embedded the new requirements and related guidance in their organisations". The review, which covered all 358 active FMCs, consisted of three phases comprising of an industry questionnaire, a desk-based review and culminating with onsite reviews. It focused on three aspects of FMCs' responsibilities - investment management, risk management and organisational effectiveness.
On 20 October 2020, the Central Bank issued a letter to the chairperson of the board of directors (the "Board") of all FMCs accompanied by a high level findings document (the "Industry Letter") setting out the findings of their review and identifying actions that FMCs need to take immediately.
The Central Bank set out six findings for all FMCs to consider in the context of their firm:
1. Resourcing and Organisational Structure
The Central Bank identified a noticeable difference between the levels of resourcing of FMCs authorised before and after the Guidance was introduced. It determined that many FMCs authorised before the introduction of the guidance did not have appropriate levels of resources in place to ensure effective implementation of the framework and FMCs with less resources are typically overly reliant on group entities and/ or delegates.
In respect of resourcing, the Central Bank's expectations is that FMCs:
- must be able to clearly demonstrate ongoing and effective management of all activities, including high quality and effective oversight of those activities performed by delegates and that its governance structure is sufficiently resourced;
- should have a minimum of 3 full time employees or equivalent ("FTEs"). The Central Bank noted that this number is a minimum expectation and only relevant to the smallest and simplest of entities, what constitutes such an entity is not defined in the Industry Letter. Consideration needs to be given to the nature, scale and complexity of a FMC's operations;
- should ensure that those employees are suitably qualified and of appropriate seniority to fulfil their roles;
- must appoint locally based persons to perform each of the six managerial functions;
- should have in place a formally documented succession plan.
2. Designated Persons
The Central Bank noted that significant shortcomings were identified in relation to how some Designated Persons discharge their roles. Deficiencies in the following areas were specifically mentioned:
- the level of review carried out on the monthly reports received from delegates and the independent analysis thereof;
- the quality of the information provided by the Designated Person to the Board;
- the time dedicated by the Designated Person to their role and/or the level of support available to enable them to discharge their responsibilities appropriately; and
- evidence of constructive challenge by Designated Persons in relation to information received from other FMC staff and delegates.
3. Delegate Oversight
The Industry Letter states that many FMCs failed to fully implement the Guidance in the area of delegate oversight. The Industry Letter focuses on the following three key areas:
i. Due diligence
The Central Bank noted that a number of FMCs were unable to demonstrate that they had carried out the appropriate level of due diligence on their delegates in advance of the appointment and on an ongoing basis (at least annually) thereafter.
The Central Bank also noted that many FMCs rely on the policies and procedures of their delegates or of the wider corporate group. However, not all FMCs could demonstrate that they had reviewed and approved the delegate or group policies and procedures as being fit for purpose when applied to the FMC. The Central Bank stressed that where reliance is placed on delegates' policies and procedures, the FMC should have a formalised process to review these policies and procedures, both on appointment and on an ongoing basis for the duration of the relationship.
ii. Engagement with delegate investment managers
The Central Bank found a significant number of cases where there was a lack of effective engagement with delegate investment managers and that where issues arose they were not always resolved in a timely manner. They noted that delegate reports received were not always of sufficient quality to allow for a meaningful review of the situation by the FMC, and steps were not taken to address this. Where such issues arise, the Central Bank stated that the FMC should challenge the delegate and, where necessary, take further action (and be able to evidence such).
The Central Bank stated that this issue is of particular significance in circumstances where the FMC has appointed a high number of delegate investment managers.
iii. Service Level Agreements ("SLAs")
The Industry Letter stated that all delegate arrangements should be governed by way of formally documented SLAs and that this was not found to be the case in all reviews.
4. Risk Management Framework
The Central Bank identified further deficiencies in the area of risk management frameworks, noting that many FMCs did not have: (i) an entity specific risk framework; (ii) an entity specific risk register; and/or (iii) a defined risk appetite statement in place. The Central Bank noted that in many cases, this was a result of over-reliance on group frameworks. The Central Bank reiterated that, as per the Guidance, all FMCs are required to have a robust Board approved, entity specific risk management framework which should include a risk register and risk appetite statement and that these should be reviewed at least annually.
5. Board Approval of New Funds
The Central Bank noted that not all FMCs could evidence Board approval of new sub-funds. Even where the Board did approve the launch of a new sub-fund in compliance with the Guidance, the review found that this was often done in such a way that the Board was approving the investment fund/investment strategy immediately prior to launch and there was no evidence of earlier discussions to set or agree the proposed strategy of the new sub-fund prior to submission of the application to the Central Bank.
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