The Front Page, Asset Management & Investment Funds: Irish Practice Developments
The Front Page, Asset Management & Investment Funds: Irish Practice Developments
Some Approaching Deadlines
28 February 2017.Fitness & Probity - The Annual PCF Confirmation Return due date (for the year ending 31/12/16) for Investment Funds and Fund Service Providers (including AIFMs and UCITS management companies) is today, 28 February 2017.
1 March 2017. EMIR - Variation margin requirements for uncleared OTC derivatives come into effect under the EMIR (discussed further below).
The above list does not cover ad hoc filings (such as regulatory reports) or filings of annual accounts (and related documents which include the annual FDI Return) and semi-annual accounts or other similar returns which deadlines will vary to reflect the particular entity's year end.
Central Bank updates its EMIR Q&A regarding the 1st March 2017 deadline for exchange of variation margin
EMIR imposes a deadline of 1 March 2017 for the application of variation margin requirements in respect of non-centrally cleared derivatives. Market participants internationally are struggling to meet this deadline which impacts on Irish domiciled funds using non-centrally cleared derivatives. In a helpful development, the Central Bank of Ireland (Central Bank) has updated its EMIR FAQ to address this issue. The following FAQ 15 has been added;
I cannot comply with the 1st March 2017 deadline for exchange of variation margin for reasons outside of my control. What should I do?
It is a legal obligation to exchange variation margin from the 1st March 2017. However, it has been recognised by authorities across the EU and by IOSCO that there are operational challenges in meeting this deadline. The Central Bank of Ireland applies a risk-based approach to the supervision of the adequacy of processes adopted by entities. All counterparties are expected to make every effort to move into full compliance at the earliest possible date. While the Central Bank does not expect market participants to unwind or avoid transactions that they would have otherwise entered into, it does expect to see evidence of robust planning to achieve compliance at the earliest possible time for all in-scope transactions entered into from 1 March 2017.
Speech by Michael Hodson, Central Bank Director of Asset Management Supervision on 2 February 2017
Michael Hodson, spokeat PWC's Alternative Investment Funds Seminar on 2 February 2017. Mr Hodson discussed a number of issues including the following:
Fund management company effectiveness (CP86) and in particular, the transitional arrangements for the new requirements and guidance.
Central Bank Supervisory Initiatives
Outsourcing of Fund Administration Activities, concluding that; it is imperative for firms to have strong controls in place concerning the governance of outsourcing arrangements; that the Central Bank will issue observations and recommendations which should be taken into account by fund administrators when considering current outsourcing practices; that any submissions concerning outsourcing by Irish fund administrators will be assessed not only on the proposal put forward but also on the basis of the cumulative effect of the overall outsourcing arrangements of the entity, and that the Central Bank is committed to undertaking a review of outsourcing across all financial sectors.
Risk Mitigation Programme Validation. Mr Hodson explained the Central Bank’s approach where it discovers specific issues in a supervised firm, whereby the Central Bank will issue a Risk Mitigation Programme (RMP) to the firm in question which describes the issues involved, the structural improvements and mitigations required to be carried out by the firm and the intended outcome with a deadline by which the firm must submit appropriate evidence of completion of the required action. The board and staff of the firm must ensure that the RMP is sufficiently embedded within that firm and the Central Bank will continue its process of RMP validation. Where the Central Bank finds that sufficient action has not been taken to fully embed the required changes, this will reflect poorly on the firm and its board. Ensuring effective implementation of supervisory findings is a priority for the Central Bank and it will use the full range of our supervisory tools and regulatory powers where necessary.
Implications of Brexit for Asset Management in Ireland. Mr Hodson discussed Brexit and noted that the allocation of additional resources dedicated to Brexit authorisations will significantly increase the Central Bank’s capacity for authorising such firms. The hiring of specialist staff for these teams is to take place immediately. "The Central Bank is seeking to ensure any entity requesting authorisation in Ireland finds that we are engaged, efficient, open and rigorous in our assessment of the applicable regulatory standards."
Central Bank Supervisory & Thematic Priorities will include
Supervisory staff conducting a Supervisory Review and Evaluation Process (or SREP) on the Internal Capital Adequacy Assessment Processes (ICAAPs) of low impact MiFID Investment Firms. This theme commenced in 2016 and will continue this year as it proved particularly effective for the supervision of a large population of entities.
Compliance Function Review – Compliance is a key second line of defence to enable regulated firms manage risk. The focus of this theme will be on the general effectiveness of the compliance function, particularly the framework, outputs and resourcing of the function. When conducting these assessments, Central Bank staff will take particular account of ESMA’s guidelines in this area.
Client Assets - A review will be undertaken examining how investment firms have implemented new governance and risk management requirements introduced by the Client Asset Regulations on 1 October 2015. The review will assess if the Client Asset Management Plan (CAMP) and the role of head of Client Asset Oversight (HCAO) have been adequately embedded as part of the overall risk management framework of these firms.
A review will also be undertaken looking at compliance with ESMA’s suitability (conduct) guidelines as well as firm preparedness for MiFID II. MiFID II will now place these guidelines on a statutory footing and also introduce additional elements in the suitability test (for example risk tolerance and capacity for loss). The focus of this theme will be on the information collection phase of the suitability process and assessing whether firms are seeking the correct information at the outset.
In addition to these activities, the Securities and Markets Supervision (SMS) Directorate is considering conducting a number of thematic inspections specifically examining the funds sector in 2017. These themed reviews are currently being scoped however, the intention is that one of these reviews will focus on late filings of returns by regulated entities.
MiFID II has a compliance deadline of 3 January 2018 and presents a major implementation challenge for firms which are impacted in terms of structure, technology and conflicting priorities. The Central Bank has recognised MiFID II as a key organisational objective for this year.
Money Market Fund Regulation will have direct effect and the Central Bank will have some work to do to ensure its rulebooks (AIF Rulebook and Central Bank UCITS Regulations) are consistent with it. The Regulation provides that it will enter into force twenty days following publication in the Official Journal of the European Union. It shall then apply 12 months after the date of entry into force. Existing Money Market Funds, both UCITS and AIFs, must submit applications to their relevant national competent authority within 18 months of entry into force of the Regulation. Competent authorities will then assess whether the fund is in compliance with new requirements and must issue a decision within two months of receipt of a completed application. Separately, ESMA is being entrusted with drafting implementing technical standards for submission to the Commission with regard certain elements of the Regulation.
AIFMD / UCITS Review - In relation to AIFMD, the EU Commission must commence a review of the AIFMD by 22 July 2017 and the areas of analysis are prescribed in Article 69 of AIFMD. In comparison, the review of the UCITS Directive will be more focused, primarily examining the administrative sanctions laid down by that directive. According to Article 99(3) the Commission is required to complete the UCITS review by 18 September 2017.
Consultation on Capital Markets Union Mid-Term Review closes on 17 March 2017 and is seeking feedback on how the current CMU programme can be updated or complemented ahead of the mid-term review of the action plan.
Speech by Michael Hodson, Central Bank Director of Asset Management Supervision on 7 February 2017
Michael Hodson spoke at a KPMG seminar on 7 February 2017 on recent internal changes at the Central Bank and on preparations for the MiFID II/MiFIR package.
Mr. Hodson firstly noted the recent internal changes at the Central Bank in that, effective 1 January 2017, the directorates of Asset Management Supervision (AMS) and Securities and Markets Supervision (SMS) were established.
Mr. Hodson then discussed in detail the MiFID II /MiFIR package, highlighting the complexity of the package and the level of work required by firms and the Central Bank to ensure its successful implementation by 3 January 2018.
Central Bank Policy Statement - EBA Remuneration Guidelines
The Central Bank published a Policy Statement on 31 January 2017 setting out its position in relation to proportionality relating to the pay-out process applicable to variable remuneration for Irish Less Significant Institutions and CRD IV Investment Firms. Article 92(2) of CRD IV provides for the principle of ‘proportionality’. This allows institutions and groups, when establishing and applying remuneration policies, to comply with the requirements ‘…in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities’. Both quantitative and qualitative considerations apply. In the context of the Central Bank’s assessment of compliance with the EBA Remuneration Guidelines, where firms seek to avail of the principle of proportionality in respect of the pay-out process applicable to variable remuneration (e.g. on the basis that they are smaller, less complex institutions and/or on the basis of the level of variable remuneration that is paid to Identified Staff), the Central Bank’s assessment, in the context of the quantitative aspects will be guided by, inter alia, the European Commission’s thresholds in Article 94(3) of its proposal for amendments to CRD IV published on 23 November 2016. The Central Bank will consider whether an amendment is required to this approach in the light of any future developments relating to the principle of proportionality in the European context. The European Commission’s proposals do not include any amendments to the requirements relating to the bonus cap and therefore this will continue to apply.
Outcome of themed "Fitness and Probity" inspections in credit unions
The Central Bank published the outcome of a thematic inspection of the implementation of the Fitness and Probity (F&P) regime, which assessed the extent to which credit unions had implemented the regime. While this report is not directly relevant to Funds or Fund Service Providers, it is noteworthy that the Central Bank identified some examples of well-embedded processes (these are noted in the report) and also highlighted a number of issues, including a failure to document processes and to maintain due diligence records on file, resulting in a lack of evidence to support compliance.
Regulatory Service Standards Performance Report Published: H2 of 2016
On 2 February 2017, the Central Bank issued its Regulatory Service Standards Performance Report for H2 of 2016. This document sets out the Central Bank's performance against Service Standards that it has committed to for the authorisation of financial service providers and Pre-Approval Control Functions under the fitness and probity regime. The Report reflects that all service standards were met for H2 2016.