Address by Director of Markets Supervision, Gareth Murphy, at the 4th Annual Funds Congress

26 February 2015 Speech

View the programme of themed inspections for Markets Supervision, 2015

Good morning ladies and gentlemen. I would like to thank the organisers of today's event for the opportunity to speak once again at this annual Funds Congress.

I will start by mentioning some aspects of our work at the Central Bank of Ireland which are likely to be of interest to you, then I will touch on some of the current hot topics in investment management amongst European regulators and, finally, I will share with you some of my thoughts on legislative developments in Europe, especially Capital Markets Union.

Policy issues at the Central Bank of Ireland

Our mission in the Markets Supervision Directorate (of the Central Bank of Ireland) is to ensure that markets are safe and efficient by pursuing the three goals of investor protection, market integrity and financial stability. Effective and efficient supervision is what we aim for.

Effective and efficient supervision

Allow me to elaborate further. During the course of 2015, the Central Bank expects to go live with an electronic funds authorisation platform with a substantially re-engineered workflow process. This is something that we have flagged some while ago as being a priority.1  Indeed, when I started at the Central Bank over four years ago, one of the goals that I set for myself was to reduce the amount of paper received by the Central Bank in authorisation and supervision.

By re-engineering funds authorisation, we will deliver efficiency benefits for the Central Bank and for industry. This should translate into (a) a clear audit trail, (b) better management of supervisory data, (c) a more manageable workload for industry and my staff and (d) improved turnaround times.

Of course, such technology projects do not come for free. In due course, once the new platform has been proven, we will introduce reasonable application fees for those funds/promoters who wish to avail of the enhanced authorisation process.

As I said, effectiveness and efficiency is what we strive for. And a significant project such as this ticks both of these boxes in a big way.

Industry engagement

An essential part of our mission is to build trust both with investors and with industry.

In a world where regulation has changed at breakneck speed and where supervisory approaches have developed beyond recognition over the last five years, it has never been more important for supervisors to engage with industry.

First and foremost, such engagement aims to set out the expectations of supervisors to raise standards, encourage compliance and reduce uncertainty. For example, after having conducted supervisory assessments of firms2 (so-called 'full risk assessments'), we issue letters setting out our assessment of the areas of weakness and we indicate which remedial actions must be undertaken. To ensure that the outcomes we seek are clear and comprehensible, we take the time to meet the boards of firms to explain our reasoning. Whilst firms may not always be happy with the mitigation plans that we impose [as you would expect], this engagement ensures that there is always a clear understanding of why we insist upon them.

Second, active engagement with our firms allows us to gather market intelligence and ensure that we are keeping abreast of market developments especially in a world where the financial services activity may be challenging the perimeter of regulation. This informs ongoing supervision and our contribution to new policy initiatives that may be brewing.

Third, we make a point of ensuring that industry is aware of the Central Bank's supervisory priorities in Markets Supervision. So we make a point of announcing our programme of themed inspections which reflect some of our annual supervisory priorities, such as:3

  • fund managers' and administrators' approach to dealing with NAV Pricing Errors;
  • operational risks arising from cyber-security and IT failures;
  • the quality and integrity of regulatory reporting;
  • the quality of oversight exercised by depositories over managers and their delegates; and
  • risk management processes employed by UCITS.

A final point that I would make is that we believe that it is important that our considerable supervisory experience over a significant part of the European funds industry is used to good effect by ensuring that some of the key policy debates are well-informed by us with strong analysis and extensive supervisory insight.


You will be aware that the Central Bank has undertaken a body of work looking at the operation of fund management companies and, in particular, their oversight of delegates. We launched a consultation paper, known as CP86, last October and also conducted a number of interviews of fund management companies recently.

This is a significant piece of work. Almost 50 consultation responses were received. Along with this, my staff conducted in-depth interviews with a diverse sample of 15 fund management companies (who would not ordinarily respond to a consultation).

There are many issues for us to consider. We looked at the 200 (or so) fund management companies through what I call the 4Cs: control, capability, capacity and conflict management. We also had regard for nature, scale and complexity as measured in terms of (i) AUM, (ii) number of umbrellas structures and sub-funds and (iii) the number of servicing relationships. Whilst it is still too early to disclose the detailed areas of feedback (which will be published in the coming months), I would point out that for some of the larger fund management companies, there is still room for their organisational arrangements to be further strengthened. We will clarify our expectations around this in due course.

Third Country Passport and National Private Placement Regimes

Last November 4, ESMA launched a public 'Call for Evidence' in relation to: the working of the AIFM passport; the functioning of national private placement regimes; and interaction with third country funds regimes. During that time, ESMA was also gathering quarterly feedback from national competent authorities on these issues.

The purpose of this work is to meet the legislative deadline which has been set for ESMA to provide an opinion on the working of the internal AIFM passport and advice on the extension of that passport to third countries. This is likely to be the most significant piece of work in the investment management arena that ESMA carries out this year.

The advice will cover:

  • non-EU AIFM compliance with Articles 22, 23 and 24;
  • cooperation arrangements for the monitoring of systemic risk;
  • investor protection issues;
  • impediments to effective EU supervision; and
  • issues related to market disruption and distortion of competition.

Clearly, these are broad areas. But I expect that ESMA will confine its advice to technical regulatory issues which are strictly within its remit and competence and will not stray into some of the more thorny issues which made the political negotiations on AIFMD very challenging back in 2010.

What that means for the extension of the passport to third countries - I cannot say. That is ultimately a decision for the European Commission and the co-legislators. But clearly, the third countries which are party to the MOUs which were co-ordinated by ESMA in 2013 differ from one another and ESMA's advice is likely to reflect on these differences.

UCITS V remuneration guidelines

Probably the second most significant development in the investment management arena from ESMA this year will be issuance of guidelines on remuneration as required under the UCITS V Directive. As with the Article 67 advice, work is already well-advanced in this area. The general starting point, which indeed is part of the legislative mandate 5, is the AIFMD remuneration guidelines. Whilst there are some minor differences between the level 1 requirements in this area and there are some obvious practical differences between UCITS managers and AIF managers, the general principle which we have adopted is to minimise, as much as possible, the differences between the two sets of remuneration guidelines. Indeed, in an ideal world, we would like to have only one set of guidelines for the European funds industry and we are willing to explore if this is legally and practically possible as an ultimate goal.

Let me say something about legislative developments in Europe.

Securities Financing Transactions Regulation (SFTR)

SFTR similar to EMIR insofar as it creates reporting requirements - in this case for counter-parties to securities financing transactions. UCITS and AIFs are in scope. Within the European Council, a general approach has been achieved and the ECON Committee of the European Parliament is currently working on the file. It is likely that agreement will be reached between Council and Parliament before the end of the Latvian Presidency. So this regulation is likely to go live sometime in 2017.

Money Market Funds

As of last year, there was an impasse on negotiations to conclude a new set of regulations on Money Market Funds. So fragmented were the discussions by the end of the year that over a half-a-dozen different proposals were being discussed by legislators.

As discussions resume, I believe that it is the job of regulators to reiterate the fundamental reasons why these reforms are needed - and this is to minimise the systemic risk that arises from investor runs on open-ended fund vehicles which can lead to either (a) an inefficient interruption in financing for corporates (especially banks) or (b) the need for sponsor support which has the capacity to undermine the sponsor or to draw central banks into providing indirect liquidity support.

With that in mind, I would make three points:

  1. The only way to disabuse investors of the idea that sponsors will support VNAV or CNAV MMFs is to ban sponsor support outright - in this regard current proposals do not go far enough.
  2. There are lessons to be drawn from the US Securities and Exchange Commission in the way that the operational issues of tax and accounting were tackled before producing their final rule; from my meetings with industry, much of the resistance from corporate treasurers to a move away from CNAV to an alternative model, whatever that may be, is based on the need for an operationally workable alternative solution.
  3. It is undesirable and inconsistent with global financial stability that there would be a patchwork of different regulatory regimes for MMFs; the Financial Stability Board will, in due course, make observations on the implementation of the regulatory reform agenda (which was announced by the G20 at the Cannes Summit in 2011) and I would not be surprised if the consistency, or otherwise, of the various regulatory approaches is subjected to some critical observations.

Capital Markets Union

Let me say a few words about Capital Markets Union (or CMU for short) which was announced by the incoming president of the European Commission last year and which is now the subject of a recently issued Green Paper.6

Whilst many in industry will complain about the various raft of regulatory initiatives which have emanated from Brussels in the last 5 years - with various levels of justification - I do believe that CMU is a significant opportunity for industry to seize the initiative in supporting policy-makers in creating the environment for a more effective flow of finance to the European real economy.

The evidence is clear. Europe's real economy relies on sources of finance which are fragmented and predominantly bank-reliant.7   And the contrast with other jurisdictions could not be more striking. However, the fault-lines which give rise to this outcome are very significant.

Reading the EC Green Paper it is encouraging to see that CMU will aim to deliver some quick wins - and I note the initiatives in relation to prospectuses and securitisation - but there would also appear to be a level of ambition to tackle some of the really significant issues which lead to fragmented capital markets in Europe. These are called out towards the end of the paper in the section headed Company law, corporate governance, insolvency and taxation.

For example, variations in insolvency law mean that recoveries on distressed loans vary markedly between jurisdictions. And apart from the differing tax treatments for pension and insurance products - which is a very thorny issue - companies are likely to run excessive leverage since most jurisdictions allow debt interest to be tax deductible in contrast to dividend distributions which are not.9

You might ask why a central banker is raising these issues. I will suggest two reasons.

A less fragmented capital market in Europe offers the possibility of a more level playing-field and a more consistent set of rules for investor protection and market integrity. This is not only good for investors and for supervisory convergence, it will also alleviate some of the compliance burden for industry by avoiding costly duplication.

Also, by encouraging more equity-based finance of the European real economy, we can look forward to more resilience and greater financial stability in the face of potential shocks in the future. The significant efforts to reform and rebuild Europe's banking system in the wake of the crisis is evidence of the vulnerabilities that had built up due to excessive leverage stemming from debt-based financing.

For CMU to be a long-term success, industry has a significant role providing the necessary evidence and market intelligence to policy-makers so that they are informed and galvanised in the face of the challenges that lie ahead.


I am conscious that you have a packed agenda ahead of you today which I am sure will stimulate some interesting discussion.

Before I close, I would remind you that the funds landscape in coming years is likely to be influenced to a greater extent by (i) the liberalisation of the Chinese capital account which goes hand-in-hand with the increasing circulation of the Renminbi and (ii) the greater use of technology in financial services. Both of these are likely to be secular drivers of the global asset management industry.

Between UCITS V, AIFMD, MMFs, CMU, China and developments in technology you will have much to debate and discuss - the future in investment management in certainly going to be very interesting.

Thank you very much.


1 See the Central Bank's proposals for Authorisation Service Standards issued in 2013 (CP67).

2 The Central Bank's risk-based supervisory framework is known as PRISM, see PRISM page

3 See Home


5 See Recital 9 of 2014/91/EU (UCITS V Directive)

6 See

According to ECB President Mario Draghi “in the United States 80% of credit intermediation goes via the capital markets.... in the European situation it is the other way round.... 80% of financial intermediation goes through the banking system”. And there are other countries such as Australia and Canada which offer interesting case studies in the role of non-bank intermediation. See also:

8 This short extract from the EC Green Paper is instructive: "It is true that many of the issues at stake – insolvency and securities laws, tax treatments – have been discussed for many years. The need to make progress is, however, more pressing than ever. While this will be a long term project, requiring sustained effort over many years, that should not stop us making early progress"

9 See Admati and Hellwig (2013), "The Bankers' New Clothes", Princeton University Press