2020 has been a year like no other. One contradictory aspect of this year’s enforced lockdown is that some days have seemed long, drawn out, almost never ending, while at the same time weeks, months, and indeed the year has simply flown by! For me, anyway. In similarly contradictory fashion, for six years now in Ireland, Consultation Paper 86 (CP86) like a badly calibrated pendulum, has swung between being viewed as critically important to being an incidental afterthought, from being urgent and imperative to a marginalized lower priority, all depending on who you ask.
What’s more certain however, is we appear to be at end game for Irish Fund Management Companies (FMCs) caught by CP86. As most readers will already know, on October 20th the Central Bank of Ireland (CBI) published a “Dear Chair” letter outlining findings of the CBI’s thematic review of the CP86 framework. The letter is the result of an 18-month review of all 358 active FMCs in Ireland.
The “Dear Chair” letter points out several areas in need of improvement, including more challenge of fund delegates by designated persons, better quality of reporting, board composition, time commitments, and succession planning. Within the letter, the CBI demand that FMCs “critically assess their position” against the letter’s findings and prepare a board-approved action plan by the end of March 2021. The action plan ensures compliance with the recast parameters of the CP86 framework, with a timeline agreed for the action plans’ execution. The CBI will conduct an industry-wide review of these matters in 2022 “to assess firms’ actions on foot of these findings”. As such, the industry is mobilizing already to ensure compliance.
While the letter is clear on most issues, there were two questions raised uniformly across the industry as it digested its contents, which the Central Bank have subsequently responded to:
- Do the CBI’s prescribed minimum three full-time employees (FTE) apply to Self-Managed Investment Companies (SMICs)?
Here, the CBI is unequivocal and confirms the 3 FTE requirement is a minimum requirement, applying to all FMCs, including SMICs (as well as internally managed alternative investment funds).
- The letter states that FMCs must appoint locally based Designated Persons who conduct managerial functions including oversight of delegated activities. Does this mean all Designated persons must be based in Ireland?
This question is far more nuanced, and arises primarily because the CBI already prescribes an effective supervision rule through Regulation 104 of the Central Bank UCITS Regulations 2019, colloquially known as the “Location Rule”, which speaks to the CBI’s ability to effectively supervise FMCs, including the physical proximity of FMC directors and designated persons. The letter sets out certain recalibrated expectations which to some, were slightly unclear.
The CBI’s response provides some specificity to the local resource issue, but also leaves it open ended and somewhat to the FMC’s own discretion to ensure they have the requisite a level of resource to comply with the CP86 requirements.
The clarification letter states:
“For an Irish-authorised firm, the management of the entity must take place in the jurisdiction. It is difficult to see how a fund management company could be considered to be located in Ireland unless a clear and convincing preponderance of the firm’s Designated Persons and management roles (including key roles) are performed within the jurisdiction.”
So, the general FTE requirements are crystal clear, so too is the fact that the overall FMC management must clearly be anchored in Ireland. However, the term “clear and convincing preponderance” seems open to interpretation, and in its interpretation, perhaps lies some positive news. As set out, it appears to allow for the continued use of designated persons and support resources outside of Ireland. This is particularly true if this non-Irish resource can convince the bank that they are either exclusively or primarily dedicated to functions which support the Irish FMC. This is the case for many global asset managers who have staff in London, New York or other locations, who spend much of their time dedicated to oversight of their Irish UCITS funds product.
The exact acceptable proportion of what is conducted within the jurisdiction and outside remains unclear (or unsaid to be more precise) and may only become evident as FMCs and CBI ultimately discuss their CP86 action plans. However, overall, this is a very significant and possibly positive clarification, as it removes the specter of an expectation that all DP functions and support resources having to exclusively reside in Ireland. This is an area which will certainly be fleshed out as FMC, their advisors, and the CBI engage on the individual action plans to assess a “magic number” for local resources and those from elsewhere that can be utilized while still respecting the effective supervision principles.
The Central Bank will also be influenced by the evolving regulatory environment for fund management companies at an EU level as seen in the recent ESMA AIFMD consultation. Weighing local substance requirements against the continued use of globally dispersed delegates and resources is challenging. This concept initially bubbled up in ESMA’s 2017 Brexit opinion and has remained a key consideration at ESMA ever since. As we enter 2021, it is clear that location, location, location will become increasingly important to all global asset managers operating within the EU.