Irish Funds welcomed the publication by the Central Bank of Ireland (CBI) of its feedback statement to the third and final consultation regarding fund management company effectiveness, which also included final guidance for fund management companies on managerial functions, operational issues and procedural matters.
The rules and guidance contained in these documents and the preceding stages are collectively referred to as ‘CP86’, from the original consultation paper. The final CP86 package contains four new rules and six chapters of guidance from the CBI.
At a headline level, the final requirements provide welcome clarity on the CBI’s effective supervision requirements, which deal with the location of board directors and designated persons. This links the requirements to a company’s Prism rating (probability risk and impact system) as follows:
• Those with low Prism ratings must at least have two directors resident in Ireland; half of all directors being resident in the European Economic Area (EEA), and half of managerial functions performed by at least two designated persons resident in the EEA.
• For those with medium/low, or above, Prism ratings: at least three Irish resident directors or at least two directors resident in Ireland and one designated person resident in Ireland; half of its directors being resident in the EEA; and half of managerial functions performed by at least two designated persons resident in the EEA.
While the requirement to have at least half of directors and managerial functions performed in the EEA may require some changes to boards, particularly with investment management groups that are located primarily outside the EEA, it represents greater flexibility than suggested in the initial consultation, for two-thirds of directors to be based in the EEA.
The recalibration of this requirement by the CBI takes on board responses made by industry and recognises the importance of ensuring that the appropriate skills and expertise are available to fund boards, wherever located.
It is important to note that the CBI specifically took into account Brexit implications when formulating the final rules of the CP86 consultation. The feedback statement includes 14 different factors used by the CBI for determining the extent to which they are able to ‘exert effective supervisory influence’ in assessing the location of key personnel. These factors include, among others: physical proximity; demographic and cultural ties; ease of travel; commonalities of legal system; homogenous legal and regulatory environment; and similarities of approach to regulation, supervision and enforcement.
The importance of this point was reiterated in a speech by Gerry Cross, CBI director of policy and risk, at a recent Irish Funds briefing on CP86: “If/when the UK leaves the EEA as a result of Brexit, we [the CBI] will reassess the UK against the criteria set out in the feedback statement... It is clear that many of the factors relevant to effective supervision seem likely to continue to apply, given their nature.”
The CBI have provided clear transitional arrangements for the implementation of this new regime. A period of 18 months has been provided for existing fund management companies, giving them until July 1, 2018 to be in compliance. However, new applications for management company authorisation submitted on or after July 1, 2017 will only be approved where the fund management company will be organised in a way which complies with the new rules introduced by CP86.
Pat Lardner chief executive of Irish Funds
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