New effectiveness framework for fund management companies




  Henri Berthe, Risk, Oversight and Compliance Product Manager, Linedata 

  A version of this article was published in the September 2017 issue of Finance Dublin



New rules being introduced by the Central Bank of Ireland in just under a year for Irish authorised fund management companies (CP86), clearly outlines its expectations and arrangements around the core tenants of governance, compliance and supervision.

Fund management companies with Undertakings in Collective Investment in Transferable Solutions (UCITS) and Alternative Investment Funds (AIFs) authorised in Ireland should take a close look at the implications for their operations before the regulations take effect on 1 July 2018.

The new rules and guidance outlined in CP86 are a welcome development as they formalise the current governance framework in the interest of investor protection. Moreover, with Brexit, the need to prove that boards have the necessary ‘substance’ around oversight, due diligence and the appointment of delegates has been dialled up.  The Central Bank is responding to organisations looking to establish regulated entities in European jurisdictions outside of the UK, and the emergence of new management companies in Ireland as a potential solution.

Unlike Luxembourg, where management companies have been the standard offering, the majority of companies in Ireland have been set up as self-investment management companies. These typically have a Board of Directors responsible for oversight of the running of the fund and risk management. While the CP86 proposals are new for the Irish market, it’s a path well-trodden by other jurisdictions.

Heightened levels of personal responsibility

It’s clear from the final guidance that the accountability of directors and delegated persons carrying out managerial functions is a key focus for the Central Bank. The new rules include a streamlining of managerial functions to six key functions:

  • operational risk management
  • capital and financial management
  • regulatory compliance
  • fund risk management
  • investment management
  • distribution

Each of these must be assigned to and carried out by a director or independent designated person, and it is the responsibility of the board to make sure that the delegated model meets the Central Bank’s expectations.

While these functions have typically been carried out by directors in the past, the personal level of responsibility is coming under increasing scrutiny. The Central Bank will be more prescriptive in its expectations, especially around data, reflected in the increasing scope and complexity of reporting requirements. The Bank itself has undertaken a significant amount of systems improvement so it can better store and analyse data, and it will use this increased capability to enhance its supervision of funds.

Risk management

With this growing oversight and governance responsibility, there is a greater requirement for the board of directors to effectively manage and monitor risk. Roles previously undertaken by directors are increasingly being assigned to designated persons, and the board must be satisfied that it is in receipt of the necessary information that will enable it to identify any red flags. While there has always been a risk analysis requirement, especially for more complex fund structures, the framework under CP86 has become more prescriptive. The new requirements for risk registers and risk appetite statements are indicative of the scope of reporting that must now be discussed at board level.

Fund management companies that invest in automation will be better placed to reduce operational, compliance and financial risk over the long-term. While there remains an element of manual intervention, for example inputting reporting from different delegates, increasing automation can support the board’s decision-making process and risk analysis by enhancing its ability to analyse and understand data effectively.

Those that do not implement automated processes could find it increasingly difficult to keep pace with the Central Bank’s, as well as market, expectations. For example, with a manual NAV control approach it takes 15 to 30 minutes to control a the accuracy of a NAV (price, transactions, dividends).  On the other hand, an automated solution allows hundreds of funds to be monitored in less than 10 minutes and can highlight discrepancies. Experience from Luxembourg is that by effectively planning for incremental, automated functionality starting, for example, with compliance, adding operational risk and then reporting, allows operations to scale efficiently.

Ongoing monitoring

As part of a fund management company’s governance responsibilities, the Central Bank has introduced the requirement for an independent organisational effectiveness (OE) director, whose role it is to monitor the ongoing effectiveness of the board, supervise managerial functions and asses how the delegated model is working in practice. In light of varying fund structures, the Central Bank is trying to steer fund management companies away from a tick-box approach to the OE and instead encourage each board to consider its own requirements for the role, specific to the complexities of its business.

CP86 is a combination of both prescriptive rules and broader guidance and the industry would welcome best practice guidance, whether it comes directly from the regulator or from industry forums. The Central Bank has indicated that it will undertake thematic reviews to check that its expectations are being met, and that requisite checks and processes are in place. Shortcomings could be treated as regulatory breaches, with the potential for sanctions for the funds industry, as there is in the banking sector.

Fund management companies have until 1 July 2018 to prepare for the new arrangements. While many market participants are actively working with this timeframe, there is a long checklist for fund boards to make sure that all policies, procedures and fund documentation are in place. While firms will face varying challenges depending on their fund structures and complexity of business, all fund management companies should be taking action now to review their governance, delegation and risk frameworks to ensure compliance.

Download the pdf here.

For more information, please contact:

Andrea Brevi
+352 29 56 65 210

Pierluigi Cirillo
+44 20 7469 8654