Insights

Funds industry faces client asset reform

The changes proposed in the Central Bank of Ireland’s consultation on client assets are likely to impact the funds industry. CP 71 proposes to develop a new regime for collection accounts operated by fund service providers as early as Q1 2014.

Insights

IFIA Annual Global Funds Conference

Key insights for the coming year

The Irish Funds Industry Association (IFIA) held its 16th annual global funds conference in Dublin on 18th June 2014. Ireland’s Taoiseach Mr. Enda Kenny announced a number of ground-breaking initiatives from the Irish government to boost Ireland’s fund industry. Mr. Gareth Murphy, the Director of Markets Supervision of the Central Bank of Ireland also addressed the conference and offered key insights into what to expect from the Central Bank over the coming year.

ICAV

Mr. Kenny confirmed that the government would implement the General Scheme for the Irish Collective Asset-management Vehicle (ICAV) bill within the coming weeks. Mr. Murphy added that the Central Bank would be ready to process ICAV authorisations within 2 weeks of the enactment of the ICAV legislation.

The ICAV is a new corporate fund structure offering enhanced distribution and a simplified compliance model. It will be introduced under new legislation designed solely for investment funds. The ICAV will be regulated by the Central Bank of Ireland and may be established as a UCITS or an AIF. 
 

Loan origination funds

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Loan origination by investment funds

In the same vein and underlining the Central Bank’s pro-active commitment to supporting the funds industry, Mr. Murphy announced:
“Following the issuance of the Central Bank’s Discussion Paper on loan origination by investment funds last year and the subsequent considerations by the ESRB in March, the Central Bank intends to consult on the matter before the end of July. This consultation will take the form of a draft chapter to the Central Bank’s AIF Rulebook and aims to ensure that the risks of loan origination by funds are monitored and mitigated whilst opening up this potentially valuable channel of funding to the real economy.”

He explained that the Central Bank had been working extensively over the past year on the possibility of funds originating loans, to such an extent that the Central Bank had become a thought leader in Europe on this issue.
 

UCITS Rulebook

Thanking the conference delegates for their assistance in responding to the Consultation on the Publication of a UCITS Rulebook (CP77), Mr. Murphy confirmed that there would be “tweaks, but one should not expect significant policy changes” to the text of the final UCITS Rulebook.

The publication of the draft UCITS Rulebook under CP77 signalled a change in approach by the Central Bank of Ireland to move to a more concise, rules-based framework. The aim is to eliminate duplication or paraphrasing of the UCITS Regulations and to clearly distinguish between rules and guidance. Much of the guidance will be recast as rules while other elements will be removed entirely or published separately to the Rulebook online. It has yet to be fully determined which guidance will be published separately to the UCITS Rulebook. 

AIFMD update

In the current regulatory environment, no funds conference would be complete without an update on the status of the AIFMD (Alternative Investment Fund Manager’s Directive). Mr. Murphy confirmed that his colleagues in the fund authorisation division of the Central Bank were working on authorising over 60 managers as Alternative Investment Fund Managers (AIFM) and that it was anticipated that over 85 managers would be authorised by the 22 July watershed.

He also advised that his colleagues in funds policy were focusing on “teasing out various interpretative issues arising from AIFMD in the area of depository rules, remuneration and governance”. In many of these cases, it is anticipated that ESMA will issue guidance to ensure a level playing field in Europe but there may be some areas where the Central Bank will have to provide its own guidance.
 

Funds authorisation process

Discussing the authorisation process at the Central Bank, he suggested that a dramatically different authorisation process will soon be evident when submitting fund authorisation applications. The future process will be electronic rather than paper-based, with an online interface with the Central Bank. The streamlining of the process by removing some redundant steps should allow for a potentially quicker turnaround time.

The new platform will allow the funds supervision division within the Central Bank to build a repository of authorisation data which can be combined with data collected from regular online regulatory returns. This would enable a more efficient supervision of Irish funds by spotting outliers and identifying prospectus breaches.  

Client assets

Referring to the recent consultation paper on the Client Asset Regulation and Guidance (CP71), Mr. Murphy voiced the Central Bank’s concern that there should be legal certainty over the ownership of the monies in subscription and redemption accounts for funds in the event of the failure of a funds service provider. He declared that where the subscription and redemption accounts are not held by the depository of the fund, the Central Bank’s general approach is that the Client Asset Regulations will apply to the operators of these accounts that we regulate.

Although he did not give a timeline in which we can expect to see the finalised text of the Client Asset Regulation and Guidance, it is hoped that this will be published before the end of the year.  

Governance in funds and fund management companies

The Central Bank’s interest in governance in funds and fund management companies permeated several areas of Mr. Murphy’s address. He reminded the conference that governance issues had been one of the themed inspections announced by the Central Bank in February. In addition, the PRISM inspections undertaken over the year had identified a number of areas for improvement in the area of governance, particularly in the management of conflict of interests, the separation between certain executive roles and the need for more independent non-executive directors, as well as oversight of delegates and outsourcing and the overview of strategy and risk management.

Mr. Murphy reminded the conference that the IFIA code for fund and fund managers had been operational since 2012, declaring:
“Given the elapse of time since then, it is appropriate that the Central Bank is reviewing the uptake of this code at this stage. Many of you will be aware that we have engaged with certain directors who have a large number of directorships. The Central Bank is concerned that there is a concentration of directorships among a limited number of directors who have extensive directorial responsibilities in this jurisdiction (and perhaps elsewhere). The aim of this engagement is to challenge these directors in relation to their capacity to deliver on their directorial commitments and to manage their conflicts of interest. I have heard it said in certain quarters that there is an insufficient number of capable and experienced directors available. It is a view that I do not share. The Central Bank's work in this area will continue.”

 

AIFMD themed inspections

In his concluding address, Mr. Murphy affirmed the Central Bank’s intention to carry out themed inspections in 2015 to ensure that AIFMs are complying with the 169 requirements expected of managers under AIFMD. The inspections are expected to focus on:

  • to what extent is the AIFM, particularly the board of the AIFM, in control of what it is expected to do?
  • to what extent has it got the capability to undertake these tasks?
  • does it have the capacity to actually do the work? 
  • insofar as third parties, such as outsourcees and consultants are resources for the AIFM, to what extent are potential conflicts of interest being managed?
  • can the AIFM, particularly the board of the AIFM, exercise full control over all outsourcees at any time? 
  • Is the AIFM adequately resourced at all times?

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