The Central Bank of Ireland recently took steps to provide further clarity on the governance framework it expects from Fund Management Companies (FMCs) [1] in Ireland. In a 42-page guidance note, it also provided feedback on delegate oversight, the expected organisational effectiveness of FMCs, and further insight into its expectations on director time commitments. This will have operational and governance implications for both internally managed alternative investment funds (AIFs) and UCITS, as well as third-party management companies.

The key areas the Central Bank is focusing its efforts on can be distilled as follows:

• The separation of the Designated Person (DP) role from that of Non-Executive Directors on Irish fund boards;
• The re-organisation of key managerial functions for Irish UCITS and AIFMs;
• More emphasis on the oversight of key management areas for FMCs, like risk management and distribution;
• The introduction of parameters for the time commitments of directors, measured in terms of “aggregate professional time commitments”.

For hedge funds the main impact of these changes is likely to be felt by self-managed UCITS funds and internally managed AIFs. For those utilising their own management company or a third party management company, the changes will primarily impact those entities. The impact on Irish funds with external AIFMs will also be relatively limited and relate to the level of oversight the Board should have over the operations of the AIFM.

This article will concentrate primarily on the impact on self-managed Irish funds and internally managed AIFs although the section on Fund Boards is relevant to all Irish funds.

Irish Fund Management Companies (FMCs)

For FMCs in Ireland, the number of managerial functions are being reduced to six. There are now two items surrounding risk, reflecting the increased importance being placed on risk by the Central Bank, with a risk appetite statement and a risk framework now required. Distribution has been introduced as a new function, with associated analysis and implementation requirements. Importantly, there has been a separation of the DP role between the risk DP and the investments DP. The Central Bank now requires that DPs have the skills and experience to take on these roles, and that this is thoroughly documented.

The DPs must also now have a contract in place with the FMC describing their role and the amount of time that they must allocate to their roles. This requirement now also applies to non-executive directors who fulfil these roles.

The boards of FMCs also face further requirements, including the assignment of an independent director, who is not responsible for any of the six managerial functions, to ensure organisational effectiveness. The Central Bank would now like to see a documented rationale for the board’s composition, as well as the capacity, willingness and expertise of directors for assuming DP roles with the managerial functions. Significantly, it would also like to see clear documentation of directors’ full professional time commitments.

A designated person role should be considered separately to the role of director. A separate time commitment should be allocated for each such designated person and should be commensurate with any additional work that this role required. The time allocated should take into account the ongoing oversight role, daily availability, report review and onsite visits to delegates.

Risk management roles are a larger theme of Central Bank oversight, with the creation of two separate managerial functions, namely fund risk management and operational risk management. The same DP may not perform both risk and investment management functions, although outside this area, it remains acceptable for a DP to handle more than one managerial function. The guidance requires the board of an FMC to confirm its own risk appetite and that of its underlying funds, and to mitigate applicable risks (i.e. develop a risk framework specific to the FMC). Risks should be appropriate to the fund and the FMC. Risk policies should include clear procedures for reporting to the board and the consideration of any breaches of established limits. It will no longer be enough for the board to rely on the risk management functions of the FMC’s delegates.

Boards will now also be required to approve a detailed distribution strategy and the Central Bank’s guidance note includes further information on what this should cover. In particular, tasks will have to be assigned and an appropriate control framework put in place that meets legal and regulatory requirements. The board should receive, and be satisfied with regular reports regarding distribution, should police these reports for possible conflicts with the prospectus, and also be aware of similar conflicts within marketing material, including where there are significant elaborations to the investment approach.

The Central Bank requires existing FMCs to update their business plans / programmes of operation to reflect revised managerial functions and organisational effectiveness by 30 June 2016.

Irish Management Companies

In cases where investment funds have appointed an Irish management company, all of the requirements already outlined will apply to the management company. This will make it easier for a fund to comply with the new requirements. The board of the fund will be expected to hold that management company to the same standards as an FMC, as well as ensuring there is a clear split of the responsibilities of the fund board and the management company, namely strategic versus operational considerations. The board of the investment fund should receive detailed reports from the management company outlining how the delegated tasks are being performed and how potential conflicts of interest are being considered and managed. The board of the management company should hold that management company to the same standards of oversight that an FMC sets for a delegate, but it does not need to replicate the detailed oversight of delegates that an FMC must ensure. Where the board of the fund has appointed an external AIFM the level of oversight expected of a fund board over the AIFM would be similar to that expected over the management company.

Fund Boards

All Irish funds will have to review the current composition of their boards and will be responsible for assessing the time commitments of board directors. There will now be increased scrutiny of annual director time commitments. Any director with more than 20 directorships and an aggregate annual time commitment of more than 2,000 hours will be considered as higher risk. Post 1 January 2016, any investment funds with directors in this category will be subject to additional regulatory scrutiny and prioritised for inclusion in thematic reviews by the Central Bank.

The Central Bank has also commented that individuals with multiple directorships should consider the conflicts which may arise when sitting on a number of boards and the corporate interconnectivity that is created. In addition to their total number of directorships, individuals should consider the additional time required to deal with sub-funds, the type and complexity of the products they are responsible for, the number of their various separate client commitments, and any applicable legal and regulatory obligations. The Central Bank has also said that it will take other factors into account which might impact an individual’s ability to fulfil their board roles at an appropriate standard.

Boards and promoters may need to perform a gap analysis of their current governance models, putting in place any required structural changes. Such a process could include analysis, change identification, new resources requirements, further documentation needs, new procedures and final implementation.

The Central Bank has written to the chairmen of fund boards to ask them to review current board compositions, in particular taking the guidance note into account to ensure that each director has sufficient time allocated to this important role. Chairmen are being asked to note whether the directorship numbers of sitting directors are in line with the new guidelines and are at acceptable and manageable levels.

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