The regulatory landscape for funds is constantly developing. This last year has seen a number of major events, including Brexit and the Covid-19 pandemic, which have been challenging for funds, driven regulatory reviews of resilience and brought even greater focus and expectation of governance.
Covid-19 stress tested the resilience and flexibility of firms against the backdrop of turbulent financial markets. Liquidity models were tested and though most came through well, some sectors felt pressure. The experience has given rise to international workstreams on money market funds and liquidity management, with regulators including the FSB and Iosco reviewing liquidity management practices. Esma’s recent findings from its Common Supervisory Action (CSA) indicated that there remains scope for improvement in liquidity management practices. The Irish Central Bank issued its own findings, which aligned with those of other EU and EEA national authorities, and issued a letter outlining the actions required of Ucits managers, including the need to review liquidity risk management frameworks and address the CSA findings.
Brexit brought a lengthy period of uncertainty and planning for the related risks and interacting with the Central Bank on it became a standing agenda item for boards.
The experience of this time has led the Central Bank to renew its considerations of the need to develop a macroprudential framework for investment funds, to strengthen the fund sector’s overall resilience to future shocks. In conjunction with this, there is an increasing focus on who is leading the decision-making and oversight for Irish funds.
We have seen the Central Bank report on its thematic review of fund management companies and an assessment of how the sector met the standards expected in terms of strong governance, effective management and substantive oversight and control. The Central Bank believes that culture is set from the top and boards need to set an effective culture built on standards such as professionalism, honesty, integrity and accountability to deliver fair outcomes that centre on the interests of investors. These rely on a strong culture and effective decision-making and the Central Bank believes that achieving this requires diversity at senior management level.
There is also an increasing recognition of the need for individual responsibility. The Central Bank has proposed that a regime assigning responsibility be adopted in Ireland, modelled on the Senior Managers and Certification Regime in the UK. This new framework, includes a Senior Executive Accountability Regime (SEAR), conduct standards, enhancements to the existing Fitness and Probity regime and enhancements to the sanctions regime. This will allow the Central Bank to pursue individuals directly for misconduct and enforcement action to be taken for a breach of the new conduct standards.
The challenges of recent times have brought an even greater regulatory focus on behaviour and culture-related issues and the strengthening of governance so funds are well placed to address current issues and prepare for challenges that emerge.
Tara O’Reilly is partner and co-head, asset management and investment funds, at Arthur Cox
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