Fund governance changes loom large
By Keith Parker, Link Asset Services – The Irish funds industry had another bumper year with total assets for 2017 growing by EUR298 billion – a 16 per cent year-on-year increase – to a record high of EUR2.4 trillion1, a substantial figure and testament to the attractiveness of Ireland as a global funds domicile. Of this total just over 76 per cent represents UCITS funds’ assets, the balance representing alternative assets. More than 900 fund managers from 50-plus countries have assets serviced in Ireland.2
There are many service providers that form part of the Irish funds industry; these include custodians, administrators, depositories and investment managers. A key participant in the Industry is the Management Company, typically referred to as the ManCo.
Fund management companies are defined as either a UCITS management company, an authorised Alternative Investment Fund Manager (AIFM), a self-managed UCITS investment company or an internally managed AIF. Legislation also provides for a dual-authorised AIFM/UCITS ManCo, otherwise known as a ‘Super ManCo’.
Link Asset Service’s Management Company is an example of this type of structure and is Ireland’s longest-established 3rd-party ManCo.
This structure is particularly attractive as it opens up additional opportunities for a single legal entity with a single governance structure and with a single capital adequacy requirement to manage UCITS and AIFs across multiple jurisdictions. Capital adequacy is an especially important consideration as ManCos not only need to be capitalised but also need to ensure that they maintain a sufficient buffer in order to accommodate any increases in asset under management.
A ManCo can be defined in a number of different ways but essentially it exists to assist fund boards with regulatory and operational challenges associated with underlying investment funds. At its core a ManCo is all about governance; the prudent management of the fund to safeguard and maximise shareholders’ interests.
With effect from 1st July 2018 the fund governance regime for Irish authorised ManCos (including self-managed funds) is to be overhauled. Since 2014, the Central Bank of Ireland (CBI) has been engaged in a body of work to examine and enhance fund management company effectiveness (CP86). The result is the Management Company Guidance, a new governance regime predicated on three core principles; governance, compliance and effective supervision.
Central to this new regime is the notion of a Designated Person.
The CBI has distilled the entire fund governance spectrum into six clearly delineated managerial functions. These six key managerial functions (regulatory compliance, operational risk management, capital and financial management, fund risk management, investment management and distribution) are required to be carried out by a Designated Person; an individual that demonstrates the appropriate levels of knowledge and experience to manage and oversee their respective functions.
All Designated Persons will need CBI approval to act in such a capacity. It will be possible for a Designated Person to oversee more than one managerial function, and the same Designated Person may carry out the managerial functions of fund risk management and operational risk management. However, under this scenario the Designated Person who performs at least one of these risk management functions man not also perform the investment management function.
CP86 goes much further than just Designated Persons however. The CBI has also introduced a new ‘Location Rule’ which applies to fund directors and Designated Persons. The determining factor is the Bank’s Probability Risk and Impact System (PRISM) rating of each individual management company.
The rating will be such that a ManCo will either be rated ‘Medium Low or above’ or ‘Low’. In the case of the former, the requirement will be for three of the fund’s directors to be resident in the state or at least two directors to be resident in the state and the same for one of the Designated Persons. Additionally, half of the fund’s directors will need to be resident in the EEA and finally half of the fund’s managerial function to be performed by at least two Designated Persons resident in the EEA. It is obvious from these requirements that impact on UK fund managers post-Brexit will be considerable.
The Guidance also extends in to the realm of fund record keeping and the retrievability of these records to ensure extensive records are kept (board minutes, policies and procedures, letters of engagement, etc) and for them to be made available on an ‘immediate’ basis to the CBI. ManCos will also need to set up and monitor a dedicated e-mail address for communications with the CBI.
These varied requirements under the Guidance demonstrate to how seriously the CBI takes fund governance. These enhanced rules bolster Ireland’s already-impressive governance regime and further reduces the likelihood of investment funds failing. Importantly, the new guidance was constructed on a consultative basis and therefore the outcome represents an industry-wide desire for supervisory enhancement.
At Link Asset Services we share the CBI’s vision and efforts to fortify the fund governance regime. As a leading service provider in Ireland’s fund industry we have long championed the idea of a fund governance regime that operates under strict, implementable and achievable rules resulting in a governance methodology that maximises a positive outcome for all participants. CP86 will go a long way to sustain Ireland’s enviable reputation as one of the world’s premier investment fund domiciles.