Address by acting Director of Securities & Markets Supervision, Grainne McEvoy, at Irish Funds Breakfast Briefing on 13 January 2017 and the Central Bank’s Independent Fund Directors Briefing on 16 January 2017

17 January 2017 Speech


Good morning ladies and gentlemen. 

I would like to use this occasion to discuss the current regulatory agenda generally and, more specifically, the current priorities of the Central Bank relating to the Funds industry.  The Central Bank has recently undergone some internal changes with the creation of the Securities and Markets Supervision Directorate and also the Asset Management Supervision Directorate.  These changes highlight the Central Bank’s continued committed focus to ensuring a safe and efficient regulatory environment for the primary and secondary securities markets in Ireland.     

My remarks today will centre on the Central Bank’s priorities for 2017 and other domestic workstreams currently underway.  But first I will provide an overview of the supervisory initiatives undertaken last year.

2016 Supervisory Initiatives

To further our mandate of investor protection, market integrity and financial stability, the Central Bank utilises a number of supervisory tools to engage with regulated entities.  One such form of engagement is the use of thematic reviews.  Thematic reviews have many benefits, in that the findings of such reviews influence future Central Bank supervisory interventions and informs policy development.  In most cases, good practices identified during the inspections will be communicated to the wider industry, so as to improve overall compliance standards. 

Total Expense Ratios

During 2016 the Central Bank undertook a review of the Total Expense Ratios (or “TERs”) of UCITS.  As you will be aware, various financial authorities are conducting similar work looking at aspects of fund charges, such as the closet index tracking initiative by ESMA[1] and the value for money[2] review by the UK’s Financial Conduct Authority. 

The Central Bank’s focus in the context of its review centered on the quality, comparability and presentation of fee disclosures pertaining to investment funds and, in particular, whether such disclosures are sufficient to allow investors to make informed investment decisions.  The aim of this exercise was (a) to build up a data-driven approach to understanding TERs and (b) to identify funds that are outliers.  

The Central Bank is of the view that more can be done to provide investors with clear information on the fees and charges they can expect to pay.  I will say more on this a little later.

Briefly to mention our approach to this work – the annual submission of Key Investor Information Documents (“KIIDs”) formed the basis of this review.  The Central Bank machine-read data from over 29,000 PDFs, in conjunction with other regulatory returns, to analyse and compare fees at a share class level.  This included both actively and passively managed investment funds across the spectrum of equity, bond, money-market and mixed mandates.  This data-driven mythology facilitated a resource-efficient approach to filtering a large population of funds.

The work on fees remains ongoing and will carry forward into 2017.  While the final outcomes are not yet determined, there are a series of initial findings which I would like to share with you this morning. 

  • The first finding focuses on the Increased use of Data Driven Supervision – The Central Bank has established a team of data analysts within the Securities and Markets Supervision Directorate to support frontline supervisors in undertaking their work.  This work underscores the effectiveness of adopting such a data-driven approach to supervision.  Which brings me to my next point regarding data quality.
  • Data Quality – The analysis brought into sharp focus the issue of data quality.  Issues of data quality will become an area of increasing focus for supervisors.  This applies not only to UCITS but also other regulatory returns submitted to the Central Bank, such as the AIFMD returns.  Additional follow-up engagement will take place where issues with regard to reporting quality have been identified. 
  • Fee Disclosure - While regulatory disclosures around fees and expenses are comprehensive, the manner in which they are then presented to investors can be disjointed and overly complex, particularly for less sophisticated investors.  This may have the effect of inhibiting an investor’s ability to fully understand the impact such fees and expenses may have on their investment, and may undermine an investors ability to distinguish between different funds or share classes.  The Central Bank believes additional clarity and improved disclosure would assist investors in making informed decisions.
  • Identification of Outliers – Finally, this review has identified specific investment funds which are outliers across a range of different metrics where, for example, certain funds charge higher fees when compared to funds with similar investment strategies.  Supervisory staff are currently in the process of planning follow up engagement with such funds where appropriate.

In recent months, investment fund fees have been identified as a priority by Commissioner Dombrovskis, who announced that the European Supervisory Authorities (ESAs) would be asked to look at the transparency of long-term retail investment and pension products, and to perform an analysis of their actual net performance and fees.[3]  While further details are still pending, it would appear likely that ESMA and the other ESAs will be requested to conduct work on this in 2017. 

It is also likely that the Central Bank will consult further with Industry on the issue of disclosure of fees and charges.  While an industry consultation will be cognisant of existing regulatory disclosure requirements, it will also seek to examine how investment funds might more effectively improve disclosure of fees and charges to investors, in a manner that provides them with sufficient information when considering their investment options.  In addition, the information gained from this work will inform the Central Bank’s contribution and input into wider European initiatives on this matter. 

Themed Review of Fund Share Classes

Moving on, the Central Bank recently undertook a themed review of the use of Share Classes within Irish authorised Investment Funds.  The objective of the review included gathering intelligence with regards to the population of share classes, to determine whether such classes were distributing or accumulating income, whether they were marketed to institutional or retail investors; or were engaging in hedging techniques at share class level.

The review provided valuable information on the use of share classes by investment funds - most funds have only one share class; however approximately 17% of Irish funds have more than five share classes.  This applies across the board to UCITS and AIFs.  There are a limited number of funds have a considerable number of share classes including funds which have in excess of 100 share classes.  It was found that the majority of those share classes within UCITS (72%) and AIFs (79%) which are based on distribution policy, accumulate rather than distribute income.  Finally, of note the predominant hedging activity at share class level is currency hedging[4] and the levels of interest rate hedging, volatility hedging and “other” forms of hedging at share class level were extremely low as a percentage of the overall population of share classes.

We have identified some items requiring follow-up action.  For example, we have identified hedging activity where the objectives behind the hedging policy are not transparent and we will follow up with those individual funds.

Supervisory Priorities - 2017

Looking ahead to supervisory priorities for 2017, let me say something about the supervision of Investment Funds and Fund Managers more generally.  As has been stated publicly,[5] and consistent with the Central Bank’s Strategic Plan 2016 – 2018, the intention of the Central Bank is, over time, to increase its supervisory activities for entities deemed to be low impact under PRISM[6].  This follows significant comment from peer reviews on the level of engagement with low impact entities.  As a large proportion of Fund Managers and all Investment Funds are currently categorised as low impact, it should come as no surprise that these entities will be subject to increasing amounts of engagement and onsite inspections by Central Bank supervisors.  With this in mind, Central Bank supervisory staff are planning a comprehensive programme of activities which will affect the funds industry in 2017. 

Depositary On-Site Inspections

We will continue with our programme of work to include onsite, in-depth inspections of Irish depositaries.  This work commenced last year when selected depositaries were subject to a review of their oversight and monitoring obligations of investment funds.  Our work this year will specifically focus on how depositaries are carrying out their safe-keeping and oversight obligations in the light of the detailed requirements introduced under AIFMD and more recently under UCITS V.

Full Risk Assessments

In addition to the depositary inspections, supervisory staff will also be conducting full risk assessments on selected investment funds.  While no decision has yet been taken on which funds will be subject to a full risk assessment, certain factors will increase the likelihood of a particular fund being selected, including for example (i) where investor complaints have been received, (ii) situations where other issues or additional market intelligence have been brought to the Central Bank’s attention and (iii) other specific areas which the Central Bank has highlighted previously as areas of focus.  One such example of this is where individual fund directors have an aggregate professional time commitment in excess of 2,000 hours a year including commitments to at least 20 fund boards.[7]  Following such Full Risk Assessments, where shortcomings are identified, the Central Bank will issue Risk Mitigation Programmes which must be promptly addressed.  Where necessary and appropriate, the Central Bank may also pursue enforcement action. 

In addition to these activities, the Central Bank also is considering conducting two 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.  Finally, to note that the Central Bank may undertake further themed reviews beyond those which I have already outlined where it has identified areas of emerging risk or regulatory concern.

Automation of Authorisation Processes

Moving away from our inspection priorities for a moment, there are also a number of other workstreams which the Central Bank will be addressing this year.  This includes initiatives such as the automation of the authorisation process for investment funds. 

The authorisation of funds and other regulated entities is an important supervisory gateway and a significant operational activity of the Central Bank.  The Central Bank’s authorisation functions seek to ensure a rigorous assessment of applicable regulatory standards through an efficient process that recognises the competitive pressures of getting to market in a timely manner.  The need for an efficient authorisation process becomes even more apparent in the context of external events which may impact on the pipeline of authorisation applications, for example Brexit.   

Those of you involved in submitting investment fund applications to the Central Bank will be aware that the initiative to automate the authorisation process for investment funds is now at an advanced stage.  An important subset of fund applications, namely Qualifying Investor Alternative Investment Funds or QIAIFs, are presently being processed using the new automated system, Orion.  The next component of Orion is scheduled to go live in February 2017.  This will mean that approximately eighty per cent of investment fund applications will be processed using the new system.  It should be noted that the new system does not change the standard or approach of the Central Bank to reviewing relevant documents and Central Bank staff will continue to perform an in-depth review of fund documentation, particularly for retail investment funds.  However, the new system improves the quality and efficiency of the authorisation process through the use of online applications and automated workflows which ultimately will improves authorisation turnaround times. 

The Central Bank is also considering the introduction of application fees to assist in covering the costs of processing applications.  Such a system, which would be comparable to other European jurisdictions, and would be beneficial as the costs would be borne directly by the applicant rather than imposing such costs on existing regulated entities which is currently the case. 

Streamlining Reporting Requirements

Another workstream for 2017 will relate to regulatory reporting requirements.  As has been previously stated[8], the Central Bank has developed a supervisory model where data analysts are supporting frontline supervisory staff to undertake extensive data analysis.  This data-driven approach to supervision will increasingly form part of the Central Bank’s engagement with supervised entities.  The Central Bank is however cognisant that existing regulatory reporting is extensive and places significant burdens on industry.  Therefore, as a priority in 2017, the Central Bank will conduct a review to evaluate the current system of regulatory reporting and consider options for streamlining and consolidating reporting requirements.  This will not be an easy task as existing reporting obligations are primarily mandated by European legislative requirements.  However, we are committed to (i) improving the ease of which industry participants can submit regulatory information and (ii) improving the usability of data for regulatory authorities.  These objectives are not mutually exclusive and this is an area where I believe the Central Bank can bring thought leadership to European and International supervisory forums.  I look forward to providing further updates on this work throughout the coming year.

Further afield, the Central Bank is maintaining its leadership role in supervisory convergence and policy development at a global level.  Examples of this include the election of Deputy Governor Cyril Roux to the Investment Management Standing Committee of ESMA and Martin Moloney, Head of Markets Policy to the Board of IOSCO.  These appointments are further recognition of the Central Bank’s range and depth of knowledge in Ireland’s investment funds sector and of its standing in European and International policy forums.  The Central Bank dedicates significant resources to such forums with the expressed intention of contributing to a safe and efficient regulatory environment globally and ensuring that the position of Ireland is advocated effectively. 

There is no doubt that 2017 will bring change for the funds industry, both for industry participants and regulatory authorities.  I look forward to working with you, in the spirit of mutual respect and cooperation, in order to progress some of the key issues I have mentioned here today. 

I will conclude by thanking you for your attention this morning.

[1] ESMA -

[2] FCA -


[4]        Of the share classes featuring in the review which had a different base currency to the base currency of the fund, for 61% of those share classes the currency exposure of the share class is hedged back to the base currency (the figure is 58% for UCITS and is substantially higher for AIFs at 88%).

[5]        Central Bank Strategic Plan 2016-2018, page 16 – “We will extend our on-site inspection activities to further sectors of the industry”

[6]        Probability Risk and Impact SysteM.


[8]        Remarks by Director of Markets Supervision on 3 March 2016 and on 10 February 2016.