The CBI’s Guidance on Fund Management Companies (FMCs)
In December 2016, the Central Bank of Ireland (CBI) published its final guidance on Consultation Paper 86 “Fund Management Companies – Guidance” (Guidance). It came into full effect on 1 July 2018. The CBI has stated that it will assess how FMCs have implemented and embedded the Guidance, and in particular, the Organisational Effectiveness requirements.
Organisational Effectiveness and other key requirements
There is a requirement that there is an independent director with the specific task of reviewing the effectiveness of the FMC’s organisational arrangements. The CBI has listed examples of the activities involved, which will require submission of proposals to the board and driving the related change agenda. The CBI will focus on the assessment work performed by the Organisational Effectiveness role holder, and how the board of the FMC has implemented any related recommendations.
In addition, the Guidance has identified six key managerial functions to be allocated to individual Designated Persons (DP). The DP is responsible for oversight and monitoring of the relevant function, manages the relationship between the board and delegates, and must act in the best interests of investors.
The Guidance identifies six distinct areas, aligned to the managerial functions, where the board of the FMC should direct specific attention in the oversight of delegates. Therefore, DPs are responsible for monitoring and oversight of the approaches and strategies approved by the board and the compliance of delegates and third party outsourced services with these requirements. This is of particular importance where tasks are delegated outside of the jurisdiction.
The UK experience
Governance arrangements of UK FMCs will fall under the Senior Manager and Certification Regime (SMCR) in December 2019. It requires firms to identify specific Senior Manager Functions (SMF), allocate Prescribed Responsibilities to each and document this on a Management Responsibilities Map. SMF holders will have to demonstrate “reasonable steps” taken to discharge the duties of their function, including oversight of delegated tasks.
The FCA will also require FMC’s to act in the best interests of investors. There will be a new responsibility under SMCR to conduct a Value Assessment. Boards, and one director personally, will have to annually attest that their funds provide value to investors.
The CBI has formally announced it will introduce Individual Accountability, in a similar manner to SMCR, this will initially include investment managers, and may extend further than proposed. Furthermore, the CBI’s recent thematic review of UCITS Performance fees indicated that some entities may not be acting in the best interests of investors. The UK experience provides useful guidance for implementation of Organisational Effectiveness and measures to protect investors.
Organisational effectiveness and DP roles – Challenges with implementation will include:
- Recruitment of suitably qualified individuals to perform the organisational effectiveness role
- Definition of the activities, regulatory obligations and risks within each of the managerial functions
- Reconciling the difference between oversight and performance of each managerial function. DP’s should approach information received from delegates with ‘healthy scepticism’. The CBI’s expectation is that DP’s will provide constructive challenge and interrogation of delegates as required
- Execution of, and response to, board evaluation processes. The CBI has not prescribed any particular mechanism for this. However, the organisational effectiveness role holder will have to structure this process according to the requirements of the entity under review
To address these challenges, FMC’s should:
- Communicate the requirements to the board and staff
- Know what ‘good looks like’ for a Fund Management company
- Ensure that value delivered to investors is measurable
- Enable and record challenge of practices and structures that may no longer be appropriate
- Define and execute procedures for monitoring ‘against good’ and enabling change
- Encourage a culture of openness and challenge to embed any necessary changes
The CBI has emphasised that the culture and environment of the FMC is key to effective implementation of the Guidance. FMCs must exercise judgment in the oversight of delegates to ensure that investors’ interests are being adequately served. This duty is becoming increasingly explicit with the regulatory focus on Individual Accountability, performance fees and value assessments.
This is therefore more than a governance exercise, proper implementation will give comfort to regulators that FMC’s are acting as the investors’ agents. Boards should expect to demonstrate this in their future supervisory engagements with the CBI to confirm that the purpose of the Guidance been properly achieved.
Paul Traynor, Advisory Partner - Wealth and Asset Management, EY