Address by Director of Policy and Risk, Gerry Cross to Independent Fund Directors at Central Bank Breakfast Briefing

03 July 2015 Speech

Ladies and gentlemen,

It is a pleasure to be here this morning. Many thanks to Gareth Murphy and colleagues for the invitation. And to you all for your participation at this early hour.

With the recent publication of the feedback statement on CP 86 together with the draft “Delegation Oversight” guidance material, I thought it would be useful to focus on this area this morning. First of all, let me offer my thanks for and acknowledgement of the very constructive and committed way that you and other stakeholders have engaged in the consultation process and follow up.

The trigger for this work was implementation of AIFMD. At the time we said that we would continue to look at the way in which AIFMs carry out their functions and how they delegate functions. We also said we would be doing thematic inspections to look closely at the way in which requirements are being applied in practice; particularly as regards the activities of the Fund Management Company including the oversight of their key delegates between board meetings. All to the end of ensuring the achievement of effective control.

The way in which we are undertaking the work since AIFMD was implemented is not so different from the approach to the work we carried out in the implementation of that directive, in the sense that we are following a building block approach in order to achieve our objective. This is to encourage and support the continuous improvement of Fund Management Company effectiveness.

The issue for us is about having a good organisation and governance structure, with Fund Management Companies well-focused on the quality of their governance and management. A Fund Management Company which is complying with its regulatory obligations will be one carrying on an important range of activities and demonstrating effective control over its delegates. Such a Fund ManCo must be well-controlled by its board and should closely control its delegates through ongoing and effective supervision and oversight.

I should also clarify that CP 86 was not overly focussed on the introduction of additional rules, although some are unavoidable because of the particular structure of our industry here.  There are already plenty of rules and standards in the EU investment fund legislation. It is these of course that underpin the availability of European passports, passports from which the Irish industry have benefitted so much.

We clearly explain in our feedback that the Central Bank does not require directors to perform managerial functions. Indeed separate letters of appointment are required in respect of board appointments and designated functions. We have also, as you are aware, included guidance on directors’ time commitments in our recent publication.

We were very encouraged with the level of support for the report of the Committee on Collective Investment Governance (CCIG) on Delegate Oversight. I want to take the opportunity to thank the Members of the Committee for their work. This was the first document I read after appointment to my new role and I was impressed by its content and quality. My view was that it was a very solid basis for the production of Central Bank guidance. To this end, we have formulated draft Central Bank guidance which draws significantly on this work and we have published this for a short consultation. The closing date for comments is 24 July.

We were also encouraged with the degree of support for the introduction of an organisational effectiveness function. I acknowledge that many respondents were not in favour of this proposal, for a variety of reasons as are summarised in the feedback statement, but I hope that the changes we have made to the role – particularly that we have not included this as a managerial function and that we have also provided specific guidance - will be helpful to address those concerns. We consider this to be a very useful development towards the on-going improvement of Fund Management Company effectiveness.  No doubt you will have some questions about this role which we will have an opportunity to explore during the Q&A session this morning.

We decided, to modify our initial proposal and leave unchanged our rule on the number of Irish resident directors on the board of fund management companies.  We have been persuaded by those arguments regarding the role of local directors in times of distress. We are also mindful of the arguments which have been made about availability of investment management skills in this jurisdiction. We will monitor closely how the composition of boards reflects this local expertise.

Let me talk a little bit about where all of this is leading. Our aim is to have Fund Management Companies which are well run having regard to the developing context and which can clearly demonstrate compliance with their regulatory obligations. 

In the “next steps” section of the CP 86 Feedback document we map out the remaining stages as we see them. This includes the development of Fund Management Company guidance on managerial functions and operations.  In the case of “managerial functions” we will examine the regulatory obligations related to each function and consider how the Fund Management Company can demonstrate compliance.  Under operations we will look at the potential for reliance on policies and procedures of delegates and also record-keeping which would assist a Fund Management Company demonstrate compliance.

We have indicated that this guidance will issue in 2015 and are currently working out timing. We remain committed to concluding this project in as efficient a manner as possible and are targeting late Q3 / early Q4.

The level of engagement by you with our consultations on the organisation of Fund Management Companies, evidenced by the high number of contributions and the large attendance at this and previous briefings once again demonstrates your commitment and continued interest in ensuring that Ireland continues to build on the success of our fund industry. Effective dialogue between the Central Bank and industry is key to good understanding and high quality regulation and supervision.

Thank you very much for your attention.