Magazine Issues » February 2018

INSIDE VIEW: Is that it for the SMIC?

Marooned_shipNew governance and supervision requirements will have a profound impact on Ireland’s fund industry this year, says Paul Nunan of Link Asset Services.

Rooted in extensive industry consultation, the new Management Company Guidance regulation known as the CP86 reflects other recent global legislative changes that are reshaping the securities ecosystem and the funds industry. But as overcoming these regulatory and compliance issues becomes more time-consuming, the solution may well mean greater movement away from self-managed investment companies (SMICs) in Ireland.

Due to come into force in Ireland on July 1 this year, the guidance aims to improve governance, compliance and the effective supervision of funds. The changes mean that existing fund management companies, including SMICs, need to ensure that they’re fully compliant. These new provisions significantly increase the risk, responsibility and time requirement for boards and their directors, and coping with the new administrative burden will mean that much less time will be available for fund managers’ core investment activity.

Under CP86, the number of key managerial functions is reduced from ten to six for Ucits, and from 16 to six for alternative investment funds (AIFs). While this reduction may initially seem like less work, in reality, the workload for fund directors will increase. This is because while there are fewer managerial functions, the older ones remain covered with greater detail around managing day-to-day requirements and obligations. In addition, a new category of ‘distribution’ has been introduced.

Boards will now be required to adopt comprehensive risk management frameworks that outline their risk appetite, policies and procedures for both fund and operational risk. Additionally, the changes mean that the board must approve the proposed investment approach of the fund and that the designated person for risk must be different to the person responsible for investments.

There will also be a further increase in the reporting load, with the Central Bank of Ireland (CBI) requiring specific board reporting on how the new rules are being implemented. For example, it has stated that in the case of delegate oversight, fund management companies’ reports should not consist solely of the transmission of reports received from its delegates but also include commentary from the fund management company as to how it has performed its role.

Experience required
The new regulations give directors greater responsibility as well. The independent director who undertakes the organisational effectiveness role will be on alert for all organisational issues and be responsible not only for escalation to the board, but also to act as a change leader, championing proposals to improve effectiveness and ensuring that agreed actions are implemented. Any director carrying out a managerial or ‘designated persons’ role for the fund board must, in future, be able to demonstrate they have the required experience to fulfil that role and will be considered to have an executive role.

The CBI has made it clear that it expects directors to consider carefully their time commitments to each and every sub-fund, requiring them to declare their total time allocation while also including all professional commitments, including other directorships and employments held. It has also been made clear that the approval of new sub-fund launches for existing umbrellas could be delayed if the CBI believes insufficient resources are available.

The increased frequency of regulatory requirements, combined with the increasing responsibility for boards and directors, will not only make it more difficult for many SMICs to react; getting it wrong could have significant financial implications for the underlying fund. As a result, these factors will make self-management less viable for increasing numbers of investment companies. For those concerned about taking on these new duties and responsibilities, the option of using a third-party management company (ManCo) or independent alternative investment fund manager (AIFM) is increasingly attractive.

In this scenario, the ManCo or AIFM takes on the designated person role on behalf of the fund for each of the management functions. This not only removes the requirement for fund directors to act as designated persons and be involved in the day-to-day running of the fund, but also sees the ManCo/AIFM undertake the active management of delegates to ensure that the requirements are met. Perhaps most importantly, this will mean that directors will be able to submit fewer hours per sub-fund.

The actual process of changing an existing SMIC umbrella fund structure to a ManCo structure is fairly straight-forward. It first requires the termination of the existing administration, investment management and distribution agreements. Once the fund directors have appointed an independent ManCo as manager, the directors and manager re-enter into administration, investment management and distribution agreements where the manager has main oversight of delegates, subject to the control of the directors.

The key to making such a set-up work successfully is finding the right partner, one that has regulatory expertise as well as the necessary scale and substance in fund solutions to offer the correct support. This partner also needs to be able to provide not just the cost-effective solutions needed in the immediate future, but must also have the insight and ability to understand and adapt to future regulatory change. Finally, it must also have the financial strength to cover its continuing financial obligations including regulatory capital costs.

In order to have sufficient time to be operationally ready for implementation, a clear pathway to compliance needs to be set out. With the CP86 compliance date firmly set and approaching rapidly, now is the time to act. The clock is ticking.

Paul Nunan is managing director of the Fund Solutions Ireland division of Link Asset Services

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