Insights

Umbrella Funds

Cash Accounts

In December, the Central Bank published guidance on the funds section of its website with regard to the holding of cash assets of umbrella funds in a single account at the level of an umbrella fund i.e. An Umbrella Level Fund Asset Account.

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Overview

Why is this important?

The guidance is important in the context of the Investor Money Regulations which are applicable to Fund Service Providers in Ireland from 1st April 2016. The Investor Money Regulations refer to the safekeeping of investor money in a subscription/redemption ‘collection account’, but say that if the collection account is an asset of the Investment Fund, then the Regulations do not apply.

The Central Bank had previously confirmed that a Fund can hold assets at the Umbrella Level, and this guidance provides further clarity on what it would deem to be acceptable practice in this regard.

What are the challenges?

As with all regulatory requirements, there are potential operational challenges and risks to the operation of an Umbrella Level Fund Asset Account, some of which the Central Bank has captured in its guidance.

The Central Bank requires funds to disclose potential risks to investors if money due to them is held by the fund in this manner. This will inevitably require an update to the fund’s documentation, and it is not clear when these updates should be made with respect to new investors and if/when existing investors need to be notified of the update.

There is also some consideration required with regard to money received from an investor before the effective Trade Date, for instance in the case of a fund that settles on a ‘cleared funds’ basis, or money being held in the Umbrella Level Fund Assets Account with respect to a redemption or distribution payment that can’t be processed fully due to the fund having incomplete information on the investor or the investor’s payment details. Funds will need to consider what is the expected norm v’s what is the exception in order to evaluate the adequacy of its policy and procedures in this regard.

Fundamentally, funds will need to consider the risk of loss to investors in the case of insolvency, either of a sub-fund, or the umbrella, and the consequence for any money being held in the Umbrella Level Fund Asset Account. 

One area that the guidance does not cover, is sub-fund cash accounts, where investors pay directly to the sub-fund, or directly to the fund where there is no umbrella structure.

What are the next steps?

Fund Service Providers have been asked by the Central Bank to confirm whether or not they will operate an Investor Money Account. This confirmation is due by 5th February 2016, and an attestation is required where the FSP is not intending to operate an Investor Money Account.

One of the reasons why an FSP may not be intending to operate an Investor Money Account could be because all of the funds that the FSP services, will operation Fund Asset Accounts, either at the umbrella or sub-fund level, to which the Investor Money Regulations will not apply.

Next Steps

Fund Service Providers have been asked by the Central Bank to confirm whether or not they will operate an Investor Money Account. This confirmation is due by 5th February 2016, and an attestation is required where the FSP is not intending to operate an Investor Money Account. One of the reasons why a FSP may not be intending to operate an Investor Money Account could be because all of the funds that the FSP services, will operation Fund Asset Accounts, either at the umbrella or sub-fund level, to which the Investor Money Regulations will not apply.

If you would like to discuss this new guidance or the Investor Money Regulations in more detail, please do not hesitate to contact us.
 

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