Ireland Changes its Thinking on Substance Requirements for Fund Governance

Over the last two years, the Central Bank of Ireland (CBI) has been investigating the effectiveness of corporate governance in the Irish fund industry. The goal of the investigation is to bolster the governance of Irish funds and ultimately, improve investor protection.

On 3 June 2016, the CBI released its third industry consultation on the topic, which focused on three key areas.

  1.  Governance – Organizational structure and conduct of directors in guiding funds behaviors
  2. Compliance – Ensuring designated persons conduct their assigned managerial functions
  3. Supervisability – The ease and promptness with which the CBI can oversee and as required, engage with funds, directors, and designated persons particularly in times of stress or crisis.

The proposals under the supervisability section have caught the attention of the asset management community; particularly the so-called Location Rule.”

A fund management company (including a UCITS ManCo, an AIFM, a Self-Managed fund, or an internally managed AIF) which has a PRISM (Probability Risk and Impact SysteM) impact rating of Medium Low or above 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; and
  • two-thirds of its directors in the EEA (European Economic Area); and
  • two-thirds of designated persons in the EEA.

A fund management company which has a PRISM impact rating of Low will be required to have at least:

  • two Irish resident directors; and
  • two-thirds of its directors in the EEA; and
  • two-thirds of designated persons in the EEA.


The proposed Location Rule contains two key changes to the status quo.  First, it introduces a new geographical requirement for all funds that at least two-thirds of the directors and designated persons must be from the EEA.  Secondly, for roughly fifteen funds, which the CBI considers a “medium-low” risk, the obligatory number of Irish directors will increase from two to three.  By increasing the local substance requirements, the CBI feels it will be able to maintain effective oversight of Irish funds and better engage with funds, especially in times of crisis.

Interestingly, the CBI has essentially done a 180 on its position on local substance. In its first CP86 consultation the CBI looked to possibly increase the pool of eligible directors and designated persons for funds (emphasis added).

Currently the Central Bank requires fund management companies to have at least two Irish resident directors.  There are two problems with this requirement. The first is that residence is undefined and as work practices become increasingly flexible and based on ease of travel, the absence of a definition calls the requirement into question. Secondly, the Central Bank is particularly concerned to encourage a broad range of relevant skills and competencies on fund management company boards. Competencies in some areas, such as risk management, can be relatively scarce. The Irish residency requirement could limit the pool of individuals (particularly those with portfolio management and risk management experience) available for appointment as directors. For these reasons, it is proposed to relax the requirement for fund management companies to have two Irish resident directors on specific conditions.

To address this issue, the CBI proposed liberalizing the requirement for Irish funds to have two Irish resident directors. Under the original proposal, subject to certain considerations, the CBI required each fund to have two directors in Ireland for at least one hundred and ten working days per year. Additionally, one of these directors could be substituted for a director who is:

  • available to engage with Central Bank supervisors on request within any twenty-four hour working day period and is able to attend meetings at the Central Bank at reasonable notice
  • unconnected to the depository or a service provider
  • competent in one of the six designated tasks

Given the dramatic shift in policy approach, the industry was caught a bit flat footed by the new location rule. As proposed, the new Location Rule could have a substantial impact on the Irish fund industry since the majority of Irish funds are organized as “Self-Managed Investment Companies.” With a self-managed fund there is no management company, per se.  Instead, the duties of the management company are carried out by the fund board.  The Location Rule would have the biggest impact on asset managers with Irish self-managed funds, especially those based outside the EEA, typically in the US or Asia.

The impact of the rules would be most acute for small to mid-sized asset managers. While many larger non-EEA firms have offices in London or other EEA locations, which could be leveraged to comply with the proposed rules, this is not usually the case for smaller to mid-sized asset managers. In order to meet the two-thirds EEA rule, smaller managers will need to choose between establishing an office in the EEA and establishing an Irish Management Company instead of a self-managed fund.

Though they may not face the prospect of having to establish a new office or management company, larger managers will feel the pinch as well. They can shift duties to an EEA office; however, this will still mean either moving people to do the work in the EEA or hiring duplicative staff in the EEA to comply with the rule.

The Location Rule is not set in stone. The consultation runs until 25 August 2016 and we expect that there will be a lot of lobbying between now and then. However, it might behoove impacted managers to start considering their contingency plans should the Location Rule come into effect.