UCITS IV - Implementation in Ireland - Organisation of Management Companies and SMICs

Home Knowledge UCITS IV – Implementation in Ireland – Organisation of Management Companies and SMICs

UCITS IV - Implementation in Ireland - Organisation of Management Companies and SMICs

December 21, 2010

UCITS IV will impose some additional requirements on UCITS management companies and UCITS companies which do not appoint a manager (i.e. self-managed investment companies) (“SMICs”) in terms of organisation, conflicts of interest, conduct of business and risk management. UCITS IV requirements for management companies include the following:

to establish procedures for compliance with decision taking at all levels within the management company, the security, integrity and confidentiality of information and details of the business continuity policy;
to retain the necessary resources and expertise so as to effectively monitor the activities carried out by third party delegates, especially with regard to the management of the risk associated with the arrangements with those parties;
to take into account the “nature scale and complexity” of the business and the nature and range of services and activities undertaken in the course of that business;
to establish and maintain a permanent compliance function which operates independently and whose responsibilities include the monitoring and assessment of the company’s risk management policies and procedures (it is accepted however that the compliance function may be carried out by a third party);
where appropriate and proportionate in view of the nature scale and complexity of their business and the nature and range of the portfolio management activities, to maintain a separate and independent internal audit function;
to establish and maintain a permanent risk management function; (which can be carried out by a third party)
to maintain procedures and independence in the management of potential conflicts of interest;
to ensure that procedures are put in place regarding best execution, order handling and reporting of portfolio transactions (akin to MiFID requirements).

Currently, every UCITS management company and SMIC is required to file a detailed business plan in relation to its organisation. This business plan is required to be kept up to date in all material respects. All management companies and SMICs must satisfy the Central Bank that they have an adequate organisational structure in place to ensure that the business is carried out effectively. The existing UCITS Directive and Regulations require that the conduct of a management company’s business must be decided by at least two qualified persons. The Central Bank has specifically identified eight key management functions for which the management company is responsible. These are (i) decision taking, (ii) compliance monitoring, (iii) risk management, (iv) monitoring of investment performance, (v) financial control, (vi) monitoring of capital, (vii) internal audit and (viii) supervision of delegates. The first seven of these functions may be delegated, subject to certain conditions. There are various methods by which management companies and SMICs currently discharge these management functions. These range from régimes whereby each board member has day to day responsibility for one or more of the functions to ones where the board assumes collective responsibility for each of the functions but delegates these responsibilities to service providers whom they monitor. In this latter situation, the directors very often put in place a system whereby they receive monthly exceptions reports from the various service providers. The directors then review these reports and take such action as they deem necessary arising from these reports. The Central Bank has indicated that because of the detailed nature of the requirements for the organisation of management companies/SMICs as set out in the Level 2 measures, it will no longer be possible for these managerial junctions to be discharged by the board taking collective responsibility for the key management functions of the company but it will require a qualified individual (a “designated person”) to be identified for each function. This individual may be either a director of the board or an individual located in Ireland. This individual could however rely on significant support from a delegate e.g. a director of a management company/SMIC to whom the compliance monitoring function is delegated could look for significant support from the compliance officer within say the investment manager’s organisation to meet this requirement. In addition to the eight key management function areas referred to above, two more will be added, namely (ix) complaints handling and (x) accounting policies and procedures. The Central Bank has indicated that it does not want to prescribe a model for the organisation of management companies and SMICs as, in practice, these differ from case to case including in terms of the “nature, scale and complexity” of the structures. Each management company and SMIC will need to conduct a review to ascertain the extent to which its organisational structure requires adjustment in light of UCITS IV. An Irish management company which is seeking to passport its activities so as to service non-Irish UCITS will clearly need to take into account additional support which might be required to engage in such a development. SMICs cannot of course avail of any passport management activities by providing services to non-Irish UCITS and it is generally accepted by the Central Bank that typically the nature, scale and complexity of their business is likely to be at a significantly lower level to that of many Irish UCITS management companies.

The Central Bank has also indicated that it will no longer be possible for a UCITS management company to use subordinated loan capital in the calculation of its initial capital requirement.

The Central Bank is expecting that management companies will be submitting revised business plans to it from the end of March with a view to these plans being in place by 1 July 2011. Although many of the requirements will also apply to SMICs, the Central Bank will not require revised business plans for SMICs to be submitted before 1 July 2011 but every SMIC will have to confirm that it is complying with the requirements of the revised Regulations and Guidance Notes by that date. It is envisaged that the Central Bank and industry will agree wording in relation to that confirmation.