Following the completion of an extensive period of consultation, the Central Bank of Ireland ("CBI") introduced its Fund Management Companies – Guidance ("CP86") in December 2016. The objective of CP86 was to introduce initiatives designed to underpin the achievement of substantive control by fund management companies ("FMCs"), acting on behalf of investment funds, over the activities of their delegates. CP86 reflects the CBI's commitment to supporting the supervisory framework for the effective governance of fund management companies and covers the areas of delegate oversight, organisational effectiveness, directors' time commitments, managerial functions, operational issues and procedural matters.
The CP86 framework of rules and guidance became fully effective for firms in scope, namely Irish UCITS management companies, authorised AIFMs, self-managed UCITS and internally-managed alternative investment funds ("AIFs"), from 1 July 2018. Existing FMCs were tasked with critically assessing their operations against the requirements and guidance and making any necessary changes. Generally, there has been a high degree of compliance with most FMCs implementing the guidance alongside having the requisite resources and organisational structure in place. As a result of Brexit, there has been substantial increase in FMC applicants who have already embedded CP86 guidance within their organisations. This broad adherence to the guidance has been encouraging and reinforces that CP86 provides a framework of robust governance and oversight arrangements.
Following a detailed 18-month review of how 358 Irish FMCs have been applying the CP86 guidance, on 20 October 2020 the CBI published its findings in a letter which covered the governance, management and effectiveness of these FMCs. While the CBI's expectation was that existing firms had been compliant since 2018 and, as noted, a high degree of compliance and adherence was discovered, it was found that a significant number of firms have not implemented a governance framework to the standard set out by CP86. The letter was issued to all firms in scope and sets out the CBI's findings and takeaways in the following key areas:
- Resourcing – Finding that many FMCs did not have the appropriate resources in place to ensure effective implementation of the framework, FMCs must clearly demonstrate that the governance structure is sufficiently resourced to achieve effective implementation of the CP86 framework, including a minimum of three full time employees or equivalent.
- Designated persons – The FMC's designated persons must be locally-based (Ireland), suitably qualified and of appropriate seniority to fulfil the role and be committing sufficient time to their role and / or having sufficient support available to discharge their responsibilities appropriately.
- Delegate oversight – The FMC must provide evidence that the appropriate level of due diligence has been carried out on delegates, both initially for determining appointment and on an ongoing basis thereafter.
- Risk management framework – There should be an entity specific framework, an entity specific risk register and / or defined risk appetite in place.
- Board approval of new funds – The FMC must provide evidence of discussions to set or agree the proposed strategy of the fund early in the process and well in advance of submission of the application to the CBI.
- Organisational effectiveness – The FMC should ensure that an organisational effectiveness director ("OED") is in place to improve the effectiveness of the FMC, conducting and keep record of meetings, considering conflicts of interest, monitoring the adequacy of the FMC's internal resources, and formal reporting to the board, among other duties. Interactions between the OED and designated persons should be at least quarterly.
- Governance and culture – The FMC must demonstrate appropriate substance with a senior executive (CEO) responsible for day to day running of the business, consideration of tenure and ongoing independence, as well as gender diversity, as it relates to board composition.
Taking these findings into account, FMCs will need to critically assess their day-to-day operational, resourcing and governance arrangements. At minimum, they must consider:
- The time commitment, skills and expertise of available resources;
- Retained and delegated tasks, including how ongoing independent challenge of delegates can be ensured;
- Tasks required by the framework, including those that must be competed on a fund by fund basis;
- How resources and operational capacity will need to increase to take account of any increase in the nature, scale and complexity of funds under management since authorisation or the last time the FMC critically assessed its operations; and
- How resources and operational capacity will need to increase to deal with a market and / or operational crisis.
One theme that resonates throughout the letter is a lack of evidence that things are being done as required and expected. From an implementation standpoint firms must consider how they can augment their existing operations and evidence their work and processes. This requires adequate resources, technology and governance which can often be effectively addressed via the appointment of a third party management company. Funds utilising a third party management company are not directly impacted by this assessment as it applies to the management company rather than the fund. Third party management companies therefore must ensure that they are in compliance with the above. For self-managed funds, a full assessment and implementation plan around the findings must occur. The most significant item would likely be the minimum requirement of three full time employees or equivalent, no matter how small in size.
The CBI has indicated that follow ups with firms where shortcomings were identified will be conducted and that industry-wide reviews of CP86 adherence will be ongoing. As FMCs assess the practical implications of the CBI review and undertake a review of their business operations, there has been increased demand from self-managed funds considering engaging with a third party management company who have the established platform and infrastructure to comply with CP86 2.0 However, it will be critical for FMCs to ensure that any third party service provider has a robust operating model, institutional-grade technology and a high calibre staff that help FMCs meet their ongoing regulatory and operational obligations.
The Maples Group's CBI-authorised UCITS management company and alternative investment fund manager, MPMF Fund Management (Ireland) Limited ("MPMF") provides services to AIFs and UCITS funds. Our solutions are delivered by an experienced team of investment and risk management professionals and designated individuals with in-depth knowledge of finance and operations, regulatory and compliance matters. At the core of our expertise is a seamless integration of cutting edge technology and deep industry knowledge that enable us to deliver optimal solutions to clients.
MPMF is supported by the Maples Group's comprehensive legal, fiduciary, fund, entity formation and management, and regulatory and compliance offering which provides clients with complementary services including, regulatory reporting, anti-money laundering compliance, global registration services, company secretarial and board support, and entity formation, among others.