Address by Director of Policy and Risk Patrick Brady to the International Funds Industry Association Annual Global Funds Conference

12 June 2013 Speech

I would like to thank IFIA for inviting me to speak here today at your annual Conference.

UCITS – A European Success Story

As we come to the end of the Irish Presidency, I want to spend a few minutes on the importance of UCITS to investors both in Europe and around the world. Recent figures bear out the point. In Quarter 1 this year, net inflows into UCITS have been €100bn and this inflow into UCITS has been two and a half times the level of inflows into the US mutual fund market during the same period. In Ireland, the Net Asset Value of Irish UCITS has broken through the €1 trillion mark for the first time reaching €1,028 billion in March 2013.

The success of UCITS is built upon investor confidence. This confidence depends upon the UCITS regulatory framework being robust and up-to-date. UCITS regulatory developments do not just generate this response among European investors and the European distributors trying to attract those investors, but also their equivalents in Asia, America and Australia. Their confidence in UCITS was not easily won and it will not easily be retained. We should never presume upon it.

That is one of the reasons why it is so important that the development of UCITS regulation be well thought-out and implemented in a timely fashion. This is challenging, both because of the complexity of the European legislative process and because of the complexity of the funds industry, where different interests are invariably pulling in different directions.

I sometimes hear complaints about the incessant pace and volume of regulatory change. At first glance, this might appear reasonable in the context of a large body of legislative proposals such as CRDIV, MiFiD II, and EMIR to name but three. The burden is substantial. It is easy to forget that UCITS IV was being implemented as recently as 2011. We are all currently caught up in the implementation of the AIFMD and the related remuneration guidelines which apply from July this year. In between there have been the ESMA guidelines on ETFs and other issues to be implemented. Many of these changes are driven by developments at a global level; others are directly in response to lessons learned during the financial crisis while others are specifically aimed at improving investor confidence. For example, on the table are the UCITS V and UCITS VI proposals.

The willingness of Europe to continue to refine and develop the legislative and regulatory framework needs to be seen as an important contributor to the success of UCITS. The costs and complexity of that constant process of regulatory development should be seen as an inherent part of a successful funds industry. While we all may be tempted to believe that the burden of regulatory development is creating too much change, uncertainty or costs, it is important that we keep a focus on this fact. Europe can never afford to rest on its laurels in relation to this hugely important area. We must be constantly vigilant to refine and develop regulation to respond to changing demand in the market place and emerging risks.
At the same time, we also need to recognise that the era of having significantly diverse regulatory regimes in different EU countries is fast disappearing.

We in the Central Bank welcome and support the role which the EU single market is playing in delivering a level playing field for financial regulation and, particularly through the work of the European Supervisory Authorities, the increasing consistency of supervisory cultures across Europe.

Effective Representation

The Central Bank’s commitment to that process of regulatory development is seen, for example, in our commitment to ESMA. The appointment of my colleague Gareth Murphy as Chair of the Investment Management Standing Committee is a substantial new engagement on our part with the process of developing a single European rulebook for the funds sector. It allows us to be even more effective and influential in bringing our extensive experience of funds regulation to bear on the European policy making process.

In addition, we encourage IFIA to build up its engagement with that process even further than in the past. If we needed reminding, our role in the Presidency has very effectively reminded us of the complexity of the European legislative process. Industry in Ireland has an important part to play in ensuring that, at all levels, the stakeholders in this process are fully informed about the funds industry. That means not only the European Commission and us, but also other Member States, and the various parties in the Parliament, particularly those who participate in the trilogue process. The AIFMD legislative process was a strong reminder of the importance of the Level Two process. It is not realistic to think that everything can be dealt with at Level One. If anything, the engagement with the Commission and others involved in the Level Two process needs to be even more intensive because it is at that level that unintended consequences are most likely as the detailed provisions are worked out. Even then, your work is not at an end.

ESMA welcomes dialogue with industry. It operates the Securities and Markets Stakeholder Group and a number of consultative working groups for its various Standing Committees.

These are important structures. The mandate of the current Securities and Markets Stakeholder Group ends at the end of this year. A call for expressions of interest in membership issued only on Monday last. There is substantial expertise in this country which could contribute to that group. I am glad to see that Darina Barrett is a member of the IMSC consultative group. We need more commitment of that order.
My own directorate, the Policy and Risk Directorate, has also contributed significant additional resources to increasing our attendance at and the quality of our contributions to a range of ESMA and IOSCO Standing Committees.

We are a small country, but we have high quality experience and expertise in a number of areas of markets supervision, not least funds. By focusing our attention in those areas, we can influence the international policy formation process. The kind of expertise necessary to do that is expensive to maintain and it is a long term investment, sometimes with limited short term benefit. But this is a long game and our commitment must be to get better and better at contributing to those international processes for developing regulation. Once we recognise that regulatory development is an un-ending and essential process, the thing we can be legitimately criticised for would be not getting better at contributing to it.

During our presidency, we have worked on UCITS V and PRIPS with our co-legislator in the European Parliament. At this point, it will be the Lithuanian Presidency that will take forward the UCITS V file.
The important issues that both presidencies are focused on are concerns over the depository proposals and the views from Parliament favouring the notion of capping remuneration in a manner aligned with the CRD IV approach, along with changes to the performance fee structures of UCITS funds. Other current issues are the use of derivatives, repo transactions, securities lending and re-hypothecation. These have also been raised by European Parliament members, and I expect these will be carefully considered both in the Council Working Group and in the trilogue process. These are substantial issues and we will work closely with the incoming Lithuanian presidency to ensure a smooth transition in the handling of these significant points.

As to PRIPs, this dossier is progressing well. A Council Working Party was held last week. The Irish Presidency is hopeful agreement can still be reached on the file prior to the end of June. The Regulation will require the provision of a standard Key Information Document to retail investors in respect of packaged retail investment products, such as investment funds, life assurance policies with an investment element and structured deposits. The current proposed Regulation includes an exemption for five years where the UCITS Key Investor Information Document (KIID) is required.

AIFMD – Implementing Change

As important as that work on the regulatory framework is, it is only part of our job. The other half of our job is the practical day-to-day work of implementing changes in regulation and supervising the industry. Increasingly, our core competence as a national authority will need to be in those areas of managing change and day-to-day supervision.

What is important to us, in managing regulatory change, is that it be done in as orderly and transparent a manner as possible and that it leads to rules and guidance which support risk-based supervision which is proportionate in its application. AIFMD is a good example of how we manage this. We treated the implementation as a key change management task.

The Central Bank went into full AIFMD implementation mode in early 2012 when it convened the first meeting of the Tri-Party Working Group, made up of ourselves, industry and, where appropriate, the Department of Finance. Having specialist policy staff contributing to that process has allowed us to see that this was the time to recast the non-UCITS notices, which had built up over time in an ad-hoc way, into a new structure of rules and guidance. What we have now is a clear and robust framework for the regulation of AIFs and AIFMs that is capable of developing in an orderly fashion as the AIFMD framework becomes more and more important – as I am convinced it will.

A key concept here has been to differentiate clearly between rules and guidance. I think we will need now to move to look at the UCITs Notices from the same perspective.

Let me say a little more about the work of the AIFMD working group and its sub-groups on which IFIA played such an important part. I think this was an important innovation. Our work with this group was part of a wider process of consultation, including written public consultation and meetings with INEDs, promoters and others, both here and abroad, which helped in the development of the AIFMD Rulebook.

Our approach in the Central Bank to such a group is very straightforward. Our aim is to engage constructively with industry and key stakeholders to understand critical implementation issues, to check the impact of our regulations and to ensure that implementation guidance is provided where required. Clearly, industry comes to such a group with its own agenda. We understand that. However, industry’s agenda is not our agenda. We come to such a group with the intention of developing a supervisory approach which compensates for market failures, which focuses on key risks and which protects investors to the extent necessary. We emphasised this point at the first meeting of the Group and it has been a continuing theme of ours.

For that reason, debate in this group was often robust and occasionally agreement was not reached. This was to be expected.

It is not a failure of such a group that we were not always persuaded. Our different mandates will always mean that there is an element of tension between us as our perspectives are not directly aligned.
The legitimate point of such a group is to allow industry to test what the regulator plans and, therefore, to allow the regulator to avoid any unintended consequences of its plans. We are happy to see our plans tested in dialogue; and, while we would never be willing – and this hardly needs saying - to give industry a veto over our approach, we are rightly open to challenge.

I want to acknowledge the scale and importance of the work the working group and its sub-groups did. It worked hard – meeting 24 or so times up to May 2013. They tackled a range of difficult issues. Substantial submissions were produced by industry which we considered very carefully.

Three issues spring to mind which illustrate what the group focused on:

  1. The approach to master/feeder AIFs: how not to overly constrain the ability to build these products but at the same time mitigate the risk that these structures could be used for circumvention purposes;
  2. The requirements for QIAIF with registered AIFMs: how to address QIAIFs which have a registered AIFM when many flexibilities are being introduced into the regulation of QIAIFs on the basis that there will be an authorised AIFM (e.g. the end of the promoter regime);
  3. The transitional arrangements for non EU AIFMs: how to find a practical way to implement the AIFMD which is compliant with the Directive’s requirements but also recognises the many non-EU AIFMs already performing activities in Ireland.

The process of testing these kinds of points allowed the Central Bank to issue a consultation paper which was tighter and more focussed than would have otherwise been possible. It has allowed us to produce a Q&A document which, I hear from industry participants, has been hugely helpful to industry in planning the transition. And it has allowed us to change the format of our non-UCITs requirements, from notices to rules plus guidance, with a minimum of disturbance.

The working group kept both sides on their toes. We in the Central Bank believe that this kind of engagement leads to a better outcome for investors. It is an approach we are willing to repeat if there is a commitment from industry to keep up the quality of its input.

The combination of the establishment of an expert Markets Policy Division within my directorate, the ratcheting up of Ireland’s involvement in ESMA and IOSCO policy formation processes, new communication tools such as our recently launched Markets Newsletter and this positive experience of intensified liaison with industry through this working group mean that Ireland is responding to the requirement to get more professional in our contributions to both the formulation and implementation of regulatory change.

Developing Funds Supervision

This is only part of the change process we have underway. In addition, we have a major project in progress to re-engineer the authorisation process and we are refining our risk-based supervision which, in relation to the funds industry, will mean an increased use of themed inspections. This latter is a particularly important point.

You will already be aware of the introduction of online reporting or ‘ONR’. It came into full effect in April of this year when funds started to submit their annual reports electronically.

ONR now provides a streamlined process for filings by funds with the Central Bank. All communications from a fund to its supervisor will now take place through the online reporting system. This includes;

  • the filing of annual and semi-annual reports,
  • the financial derivative instruments report,
  • the annual statutory duty confirmation and, shortly,
  • the key investor information document.   

The experience of ONR has so far been extremely positive and initial feedback points towards increased compliance by funds with their filing deadlines. We know that the completion of sub-fund profiles is time consuming but hopefully we can comfort you with the knowledge that once they have been completed initially, the profiles are largely pre-populated for future filings.

The success of the launch of ONR allows us to explore how increased automation can positively impact other areas of our interaction with funds, for example in relation to authorisation and post authorisation applications. The ability to manage data effectively is critical to developing risk-based supervision and the work you have put into moving to on-line reporting helps us to focus our supervisory efforts where they are most needed, by facilitating the analysis of where the industry is, to identify where the highest levels of regulatory risk are. Therefore, we are grateful for your support for this important work.

Shadow Banking

Let me turn for a moment to the area of shadow banking. The funds industry is, I know, often uncomfortable with being folded into this crucially important debate. You may not see yourselves as a critical risk area in relation to non-bank credit creation. But we all need to accept the fact that in the work of the Financial Stability Board, IOSCO, the European Systemic Risk Board and the Financial Stability Oversight Council in the United States, the funds industry is on the agenda. Rather than just object to that, I think everyone is now reconciled to engaging with the issues.

Let me turn for a moment to the area of shadow banking. The funds industry is, I know, often uncomfortable with being folded into this crucially important debate. You may not see yourselves as a critical risk area in relation to non-bank credit creation. But we all need to accept the fact that in the work of the Financial Stability Board, IOSCO, the European Systemic Risk Board and the Financial Stability Oversight Council in the United States, the funds industry is on the agenda. Rather than just object to that, I think everyone is now reconciled to engaging with the issues.

I want to mention two of those issues: money market funds and loan funds.

The MMF reform agenda took a significant step forward last week, when the US Securities and Exchange Commission unanimously proposed for public comment alternatives for amending MMF rules in the US. We very much welcome the unanimity with which the SEC has been able to publish these proposals given previous divergent views.

The first alternative is to end penny rounding for prime Money Market Funds. This would require prime institutional MMFs to operate with a floating NAV rounded to the fourth decimal place. Floating NAV would not apply to government MMFs.

The second alternative would require that non-government MMFs impose a 2% liquidity fee if the fund’s level of “weekly liquid assets” falls below 15% of total assets, unless the fund’s board of directors determines that it would not be in the fund’s best interest to impose the fee or determines to impose a lower liquidity fee. Government MMFs would be permitted, but not required, to impose liquidity fees. In addition, under such circumstances, the fund’s board of directors would be empowered to temporarily suspend shareholder redemptions for up to 30 days.

The SEC has indicated that it could adopt either alternative or a combination of the two.
In addition to these changes, the SEC consultation suggests amendments such as tightening diversification requirements, enhancing disclosure requirements, strengthening stress testing and increasing reporting obligations.

The SEC’s consultation document is tremendously detailed and runs to almost 700 pages. Included in this is a detailed analysis of the macroeconomic effects of the proposals.
The MMF reform debate on this side of the Atlantic is, so far, lacking in this level of detailed analysis. I know that there is a set of proposals doing the rounds purporting to be the European Commission’s MMF proposals. This contains draft rules regarding portfolio construction, stress testing and know your customer. However, the meat of the proposal is a requirement for constant NAV MMFs to maintain a NAV buffer of 3%.

Furthermore, the ESRB has made it known what its views are on the Money Market debate, releasing its policy recommendations for additional money market fund reform.
A summary of its four recommendations are;

  1. First, a mandatory move to variable net asset value – All MMFs should have a variable net asset value (VNAV), using fair valuation and limited amortised cost accounting.
  2. Secondly, liquidity requirements – MMFs should have explicit minimum liquidity requirements, and managers and regulators should be able to take additional actions in times of stress (for example temporary suspensions of redemptions).
  3. Thirdly, public disclosure – MMF legal disclosures should include additional disclosures, including underscoring a lack of guarantees on MMFs, making firm commitments explicit, and disclosing fair valuation practices.
  4. Fourthly, reporting and information sharing – MMF sponsors should be required to report to regulators on capital support and to other national supervisory authorities within the same Member State, or from other Member States, the European Supervisory Authorities, the members of the European System of Central Banks and the ESRB.

From an Irish point of view, we have two priorities:

  • reduction in systemic risk by mitigating potential run-risk where there is evidence to suggest that run-risk exists; and
  • there should be sufficient alignment across the Atlantic so that there is no distortion in the location of money market funds; money market funds located in the U.S. or indeed in Cayman, can invest in European Banks and, therefore, present as much of a systemic risk for Europe as money market funds located in Europe.

The Central Bank would prefer to see a globally aligned outcome. While we understand that in both the U.S. and the EU the focus is now on local rule making, we would not be averse to seeing the matter referred back to the FSB and in turn IOSCO for further work, should there be a danger that aligned outcomes are not being achieved.

The second issue I want to briefly mention is loan funds.

There is a debate over how best to raise financing for firms in Europe without relying so heavily on the banking system. The lack of credit from the traditional banking system has led to calls that an alternative to traditional forms of lending must be considered as a way of meeting that demand. UCITS are unlikely, in my view, to have a role in this regard. However, I think the time has come to ask the question of whether AIFs could have a role. Would it ever be appropriate for a collective investment type structure to operate as a vehicle for funding of corporates and SMEs in Europe?

This type of product is apparently available in a couple of European jurisdictions. The Central Bank of Ireland is working to see if there is justification for a similar product to be available in Ireland, and if so, what regulatory controls should be placed on the issuers of such a product. While we have been approached on the point, there seems to us a lack of clarity as to precisely what kind of lending is being talked about and how the risk mitigants might work. There are, potentially, very significant difficulties and challenges, but it is something we see as worth discussing. The next step in our work is to consider how to structure the public aspect of that debate. We will push this matter forward over the summer and we will consider whether to issue a discussion paper on the issue in the near future.

The domestic agenda

While the main event in terms of funds regulation is at European and global level, there is still some domestic legislative discretion. In particular you will be aware of the ICAV proposal currently being developed by the Government. The concept here is to create a corporate fund structure separate from the Companies Acts. I won’t comment in any detail on this, except to emphasise that our advice to Government is to ensure that the legislation provides the necessary protections both in terms of investors and in terms of corporate governance. We look forward to authorising the first funds structured as ICAV in the near future.

While the main event in terms of funds regulation is at European and global level, there is still some domestic legislative discretion. In particular you will be aware of the ICAV proposal currently being developed by the Government. The concept here is to create a corporate fund structure separate from the Companies Acts. I won’t comment in any detail on this, except to emphasise that our advice to Government is to ensure that the legislation provides the necessary protections both in terms of investors and in terms of corporate governance. We look forward to authorising the first funds structured as ICAV in the near future.

On our own agenda, there are two other pressing issues. The first is exempt unit trusts and the fact that the scope of the AIFMD is broader than Irish funds legislation has been in the past.

In our feedback statement on CP60, which issued in February of this year, we undertook to consider the responses received in relation to these as part of a separate work stream which would run in tandem with the implementation of the AIFMD. This work is well advanced but, as you will understand, it will not be finished by July 22nd of this year when the regulations come into force. The obligation, meanwhile, is on every entity that may fall under the AIFMD definition to seek authorisation, except to the extent that they benefit from the transition period.

Secondly, I wanted to mention IFIA’s voluntary corporate governance code. Matthew Elderfield wrote to IFIA inviting it to prepare and issue a voluntary corporate governance code in April 2010. In that letter, he said that this would be for a trial period and that the Central Bank reserved the right to take action if we deemed this necessary. The transitional period for the code expired in December 2012 and the Central Bank is now collating information on compliance by funds and managers with it. This exercise will help inform our view about the effectiveness of the ‘comply or explain’ approach and whether any further action is necessary.


To conclude, it is one year since we established a specialist markets policy division within my directorate. My ambition has been that it would combine an increased focus on rigorous rule-making with increased consultation with our domestic industry and increased influence internationally. I believe we are achieving those outcomes.

At the same time, our supervisory colleagues are well advanced in implementing the PRISM supervisory framework for the funds sector as for other sectors and developing the key I.T. and enforcement tools to back up the kind of challenging, risk-focused supervision that is required. Although the regulatory interface between supervisors and some of you will be limited, due to the low impact nature of individual funds, we are, of course, always ready and prepared to engage with you on wider policy issues, recognising the significant importance of the industry.

All of these developments in the quality of our regulatory and policy work help to keep Ireland a well regulated jurisdiction for the funds sector and that is in all our interests.

I hope that the positive working relationships which have developed over the last 12 months will continue long into the future. Thank you for your attention.