Home Knowledge Central Bank Announces New Fund Corporate Governance Requirements

Central Bank Announces New Fund Corporate Governance Requirements


On 12 June 2015 the Central Bank published detailed feedback to its consultation on fund management company effectiveness and delegate oversight (CP 86). This is likely to impact the operations of the boards and management of most Irish fund management companies. The document published by the Central Bank includes:

  • A Feedback Statement on CP86
  • A consultation on draft guidance for delegate oversight
  • Guidance on organisational effectiveness
  • Guidance on directors’ time commitments

William Fry are reviewing the content of the Central Bank’s document in greater detail with a view to advising fund boards on the impact the proposals set out in the document will have for them. We will be working closely with boards and fund promoters in this context. In the meantime, a summary of the document is set out below.

Part I: Feedback Statement on CP86

In CP86, issued in September 2014, the Central Bank set out a number of proposed initiatives which were designed to enhance fund management companies’ control over the activities of their delegates. Key elements of the feedback statement include:

Clarification of meaning of designated person

Many respondents to CP86 commented that the ‘designated director’ role and the proposals contained in CP86 blurred the line between executive and non-executive directors. In response to this, the Central Bank has clarified that it does not require directors to perform managerial functions. It confirmed that it will issue guidance setting out that designated persons should receive separate letters of appointment from fund management companies and that where a director is also appointed as a designated person, he/she should receive two separate letters of appointment.

Streamlining of managerial functions

The Central Bank will streamline the existing managerial functions largely in the manner proposed in CP86, but taking account of some points arising from the consultation which it has found persuasive. Conflicts of interest will be included in the organisational effectiveness role; complaints handling will be separated into complaints concerning distribution, which will fall within the distribution managerial function, and all other complaints, which will fall within the regulatory compliance managerial function. Internal audit will now be included in the organisational effectiveness role. Risk management will be separated into two separate managerial functions, namely fund risk management and operational risk management. These separate managerial functions may, but do not need to be, conducted by a single person. The Central Bank has decided not to classify the organisational effectiveness role as one of the managerial functions. Instead, it is a task which must be undertaken by an independent director with oversight by the board. The independent director with responsibility for the organisational effectiveness role should not perform any of the six managerial functions.

The Central Bank will provide more information on what it expects in relation to each managerial function in a consultation on the managerial functions which it expects to publish later in 2015.

Relaxation of the two Irish resident director requirement

Many respondents did not agree with the proposal by the Central Bank to relax the requirement that two directors must be Irish resident. Many arguments were put forward against this proposal. The argument which the Central Bank found most persuasive was in relation to the important role of Irish resident directors in circumstances where an investment fund or fund management company becomes distressed. In light of these arguments, the Central Bank has decided to retain the requirement for two Irish resident directors.

Definition of Irish resident

In CP86, the Central Bank proposed that the definition of Irish resident be presence in Ireland for 110 working days per year, which is based on half a working year excluding vacation and public holidays. Many respondents were against the proposal because of the additional recordkeeping and compliance burden which it imposed. The Central Bank believes that this is not an onerous requirement since electronic diaries facilitate the recording of working patterns and has therefore confirmed that 110 days presence in Ireland will now constitute the definition of Irish resident. This requirement has already been put in place for AIFMs and will also be introduced in Central Bank UCITS Regulations which are intended to replace the UCITS Notices and which, the Central Bank has advised, will be published shortly.

Requirement to document rationale for Board composition

The Central Bank is of the view that documenting the rationale for the board composition is good practice which will instil the discipline of considering board composition in a systematic way.

The Central Bank is proceeding to implement this proposal and is incorporating the suggestion that this matter be included in a fund management company’s business plan/programme of operations.

Part II: Consultation on delegate oversight guidance

Part II of the document contains draft Central Bank guidance on delegate oversight. The guidance focusses on the matters covered in the Committee on Collective Investment Governance (CCIG) report which was included as part of the CP86 consultation process. However, given that the CCIG report was consulted on in CP86, the Central Bank is undertaking a shortened process on the draft guidance on delegate oversight. The consultation is open until 24 July 2015 and William Fry will be submitting a response.

Part III: Guidance on organisational effectiveness

A number of respondents to CP86 asked for more clarity around the organisational effectiveness role. To address this, the Central Bank has prepared guidance on the role.

Some non-exhaustive examples of the types of matters which the independent director undertaking the organisational effectiveness role will be involved in are:

  • Monitoring the adequacy of a fund management company’s internal resources to its day-to-day managerial roles
  • Reviewing the organisational structure of the fund management company and considering whether it remains fit for purpose
  • Considering the conflicts of interest affecting the fund management company and its investment funds under management and initiating action, such as escalation to the board, where these are having or are likely in the near future to have an adverse impact
  • Reviewing the board composition and reporting on this to the board
  • Organising periodic board effectiveness evaluations and overseeing how well the decision taken by the fund management company and the arrangements for the supervision of delegates are working in the interests of investors

Part IV: Guidance on directors’ time commitments

The Central Bank has identified 13 individuals who hold 652 directorships in the funds industry in Ireland. The Central Bank currently considers that a reasonable number of working hours available for each individual is approximately 2000 per year and a reasonable number of directorships is 20 (all directorships of any nature to be included in this figure). This is based on a 9 hour day and 230 working days per annum. This ‘total’ time allocation should be considered by individuals when taking on new directorship roles and should include all professional commitments including other directorships and employments held.

The Central Bank intends to treat high levels of directorships combined with high aggregate levels of annual professional time commitments as a risk indicator. In the rare case of the proposed appointment of directors who already hold in excess of the defined number of directorships and the defined number of annual hours representing aggregate professional time commitments, the Central Bank will:

  • Request a letter from each board which will set out the proposed time commitment for that director in accordance with paragraph 4.5 of the Irish Funds voluntary Corporate Governance Code (CGC).
  • Withdraw from corporate Qualifying Investor AIF which proposes such a director, the option of the 24 hour authorisation time-frame. In each such case the Central Bank will be considering additional enquiries which will not be capable of being completed within that timeframe.

Previously authorised investment funds which continue to have individual directors who hold more than the defined numbers of directorships and aggregate hours representing annual professional time commitments after 1st January 2016 will be given priority consideration for inclusion in Central Bank thematic reviews where board effectiveness is being tested in any respect.

Part V: Next steps

Authorisation process changes

The authorisation process for fund management companies now requires:

  • A copy of each designated person’s letter of appointment to be submitted
  • The rationale for the board composition to be included in the business plan/programme of operations

Future rule changes

The Central Bank will amend its AIF Rulebook and include in its forthcoming Central Bank UCITS Regulations the following:

  • The number of managerial functions will be reduced to six, namely investment management, fund risk management, operational risk management, distribution, regulatory compliance and capital and financial management.
  • The organisational effectiveness role must be performed by an independent director which must be an independent Chair or an independent board member.
  • The same person must not perform managerial functions in relation to risk management and investment management.
  • The independent director with responsibility for the organisational effectiveness role must not perform any of the six managerial functions.

Further guidance

The Central Bank intends to develop further guidance later in 2015 including:

  • Managerial functions guidance – Central Bank views on the tasks involved for each function
  • On-going control guidance – how designated persons should oversee their regulatory obligations
  • Operational guidance – policies and procedures and record-keeping
  • Authorisation process guidance – to be based on existing rules
  • Fund management company passport guidance – to be based on existing rules

This Central Bank publication provides useful insight into how the Central Bank expects fund management companies to demonstrate compliance with their regulatory obligations. The new requirements are likely to have significant impact on most Irish fund management companies. Although divergence from the guidance will not be a regulatory breach, the Central Bank has indicated that it will refer to this guidance when forming a view as to whether a fund management company has complied with its regulatory obligations.

Boards should also be mindful of the fact that under the Irish Funds CGC, the Chairman, board membership and the performance of individual members and the board must be reviewed formally every three years. As the CGC was adopted by most boards in 2012, the three year review is approaching in many cases. This CGC requirement, together with the proposed Central Bank changes will inevitably require in-depth review by fund boards of their composition, governance, management and operation.

How can William Fry help?

At William Fry, we are offering comprehensive advice, guidance and support services to our investment fund/fund management company clients in relation to corporate governance including regulatory and good practice requirements, document preparation, periodic review process, ongoing monitoring and compliance issues and related matters.

If you would like to know more about the services which we are offering or have any queries in relation to the matters discussed above, please contact our partners listed below or your usual contact at William Fry.