The Central Bank is issuing guidance on the path towards financial services firms paying 100 per cent of the costs of financial services regulation and supervision. This follows earlier consultations.
The approach has been agreed with the Department of Finance and is based on a "user pays" principle to reduce and ultimately eliminate the taxpayer paying some of the costs of financial regulation.
In the future, levies will be based on incurred costs, so the 2019 levies will issue in quarter 3 of 2020.
Table 1 in the Statement on Funding the cost of Financial Regulation sets out a trajectory of recovery rates to fund the cost of financial regulation. Fees for funds and funds service providers (currently showing a 65% recovery rate) are due to increase to 100% recovery rates by levy year 2021 (which will be levied in 2022).
Central Bank Thematic Review of UCITS Performance Fees
The Thematic Review of UCITS Performance Fees has now concluded. As required in the industry letter the UCITS Fund Management Companies of all UCITS that charge performance fees have performed a review of their performance fee methodologies and reported their findings to the Central Bank. A total of €1.5m has been refunded to 636 shareholders and 12 risk mitigation programmes issued across individual UCITS and fund service providers.
Following on from this review the Central Bank’s Guidance on UCITS performance fees has been codified in the updated Central Bank UCITS Regulations. This provides the Central Bank with a firmer statutory footing on which to take action against firms for breaches of performance fees requirements in the future. The Central Bank will continue to make transparency and fees in the investment fund sector a supervisory priority.
Central Bank Speeches
Michael Hodson, Central Bank Director of Asset Management and Investment Banking delivered the following speeches.
"The Central Bank demands compliance at all times with the key underlying principle that the management company, irrespective of the use of delegation, remains the party responsible for all aspects of its business. This means that they must have sufficient substance within the EU and be able to demonstrate, on an on-going basis, that they are fulfilling all their responsibilities." ... "management companies will remain an area of focus for the Central Bank and ESMA".
And on the subject of IT risk management:
"The understanding, oversight and governance of Boards needs to increase in this area in particular with understanding the size and complexities of their IT estates that support their business models. Boards must also be conscious of the increasing role of outsource partners and the need to ensure appropriate due diligence, monitoring and robust challenge on the suitability and the completeness of the services they provide.
Furthermore, the management of the business risks remains with the Board of the regulated firms and to this end firms need to ensure that they have complete and fully operational controls to mitigate cybersecurity risk.
Cybersecurity risk management is a practice that is still underdeveloped in the industry, and firms must both identify and manage the variety of threats they are exposed to, whilst recognising that cybersecurity is an ongoing process, not a one-time solution."
Investment fund errors – the Central Bank is currently drafting guidance and related requirements for the treatment, correction and compensation of errors for investment funds and will consult on them in due course.
Transparency and fees – the Central Bank completed its thematic review on UCITS performance fees and continues to view transparency and fees in the investment fund sector as a supervisory priority.
Fund management company effectiveness – the Central Bank is currently scoping a review of how firms have implemented the package of fund management company effectiveness measures introduced under CP86. It is due to issue a questionnaire to fund management companies and self-managed investment companies in the coming weeks with a short turnaround for responses. Once the responses have been analysed, the Central Bank will follow up with desk-based reviews and onsite inspections for selected firms. The broad aim of this work will be to identify standards of industry compliance, to inform the Central Bank’s supervisory approach and to ensure that management companies have systems of governance in place to protect investors’ best interests.
Corporate governance – the Central Bank has recently completed a thematic review to evaluate the approaches in use regarding part of two of the three lines of defence, namely compliance, risk and internal audit services. The thematic review focussed on firms across both the fund service providers' and MiFID sectors and one of its key findings was that not all boards and senior management were able to demonstrate that they are actively considering the control framework in operation in their firms. The Central Bank is planning to issue an industry letter on this over the coming months.
Brexit: firms should not delay in executing their plans because Brexit has been delayed.
Some recently authorised firms have had conditions of authorisation included in their letter of authorisation, with many of these conditions in place to accommodate transitionary arrangements in the context of Brexit. Such firms must continue to build out their operations and comply with these conditions.
All firms operating in Ireland, both existing and newly authorised, must do so in line with their regulatory licence, and all conditions attaching to it. Compliance with licence conditions is not optional, and breaches are treated seriously by the Central Bank.
Firms dealing with the migration of clients and assets from UK based financial service providers to EU27 authorised entities should have a clear roadmap in place and execute on it. There will be little sympathy from the Central Bank for firms that are deemed to have wasted the additional time permitted to them to ensure migration projects are completed well before any Brexit deadline.
UK Temporary Permissions Regime
The FCA announced that the notification window for the TPR has been further extended until 30 October 2019. This means that any fund managers who have not already submitted a TPR notification now have until 30 October 2019 to do so. We have set out the notification procedure below.