Address by Martin Moloney, Head of Markets Policy Division, to the Irish Funds Industry Association

18 July 2013 Speech


Seminar on implementation of the Alternative Investment Fund Managers Directive

Good afternoon. I will speak to you today about the implementation in Ireland of the Alternative Investment Fund Managers Directive (AIFMD) and, in particular, about the restructuring of the regulatory framework for non-UCITS which the Central Bank has undertaken at the same time as transposing the AIFMD. I think understanding this structure has become an important matter which it is worth reflecting on.

The EU Regulatory Framework

The place to begin is probably to remind ourselves of the structure of the applicable EU regulatory framework which consists of the following:

  • Level 1 – the AIFMD, which has now been implemented into Irish law by the European Union (Alternative Investment Fund Managers) Regulations 2013, signed on 16 July by the Minister for Finance
  • Level 2 – the Commission Delegation Regulation (EU) No 231/2013, dated 19 December 2012: Much of the attention in relation to this Regulation has focussed on the delegation and depositary related rules. However there are a number of other areas addressed which introduce substantial and quite detailed changes to the way in which the entities it covers are to operate and which, of course, apply directly – a significant point for those of you seeking to compile and understand all the relevant rules, as will be evident in a moment.
  • Then there is Level 3 which can take the form of ESMA Regulatory Technical Standards or Guidelines – some explanation in relation to these seems warranted as their importance might be missed.

 Let me begin there. Under the ESMA Regulation 1, ESMA has a number of powers including the ability to develop draft regulatory and implementing technical standards and also to issue guidelines, recommendations and opinions.

In the case of technical standards, if these are adopted by the European Commission and published in the Official Journal, they have direct effect in the Member States and do not require implementation measures. Under AIFMD, RTS were required in respect of Article 4(4) regarding types of AIFM. You may recall that ESMA consulted on this matter and a final RTS is awaited. Other than the obligatory regulatory technical standards under Chapter VII of AIFMD, in relation to third countries, other technical standards under AIFMD are optional and therefore it may be some time before ESMA turns its attention to these.

ESMA Guidelines are important, but might sometimes not be given due regard. Unlike guidelines issued by its predecessor, CESR, guidelines issued by ESMA are subject to a comply or explain procedure by national competent authorities. The ESMA Regulation requires competent authorities and financial market participants to make every effort to comply with ESMA guidelines. In the event that a competent authority does not comply, or does not intend to comply, it must inform ESMA stating its reasons. ESMA is then obliged to publish details of the non-compliance. In doing so ESMA can decide on a case-by-case basis whether it should publish the reasons which the competent authority has provided for not complying. Additionally, in its annual report, which is sent to the European Parliament, the Council and the Commission and is made public, ESMA must indicate which competent[1] authority has not complied with guidelines and recommendations and must outline how ESMA “intends to ensure that the competent authority concerned follows its recommendations and guidelines in the future”.

From an Irish perspective the Central Bank approach is to seek to apply all ESMA guidelines. But the way we implement such guidelines can vary and this is an important point. We implement guidelines in one of two ways. Where a set of ESMA guidelines impacts on rules we already have in place, we incorporate the guidelines into our rules. Where that is not the case, the ESMA guidelines are deemed by us to apply directly.

In both situations, we will communicate with relevant firms amending the conditions which apply to their authorisation and will also publish either:

  1. an amended rulebook or,
  2. where appropriate, in our Markets Update newsletter, a link to the ESMA guideline.

For example, the recent guidelines on ETFs and other UCITS issues were implemented through amendments to the UCITS Notices, while the guidelines on remuneration apply directly.

Although the ESMA guidelines are in this way integrated with the existing domestic rules they are matters of Union law and therefore subject to potential intervention by ESMA in the event of non-compliance. The ESMA Regulation empowers ESMA to investigate alleged breaches or non-application of Union law and sets out detailed procedures in relation to the process around that investigation.

The AIFM Regulations

A lot more could be said about the structure and legal basis of Union law, but let me park that complex topic there and turn to the way we structure our domestic rules. The Central Bank is the competent authority for the purposes of the AIFMD and has been working on implementation since April 2012. I am happy to say that that the AIFM Regulations have been now been published by the Minister. This is the last element in the transposition package.

Both the structure and the text of the AIFM Regulations follow the AIFMD closely. There have been adjustments to the AIFMD’s text where necessary to clarify which provisions apply to Irish AIFMs and which apply to non-Irish AIFMs. It was necessary to make some amendments to our domestic investment fund legislation to take account of the AIFMD and these amendments are located in the last part of the AIFM Regulations at Regulations 64 to 67. As the AIFMD is being transposed by secondary legislation, it was only possible to make necessary consequential amendments to this legislation. General updates and nice-to-haves have not been included. This means, for example, that the requirement in the Unit Trusts Act 1990 and the Investment Funds, Companies and Miscellaneous Provisions Act 2005 for unit trusts and common contractual funds respectively to produce semi-annual accounts has not been removed.

Therefore, I think there are few challenges for you in the structure of the AIFM Regulations and how these transpose the Level One text.

A New Approach to Funds Regulation

The structural complexity is elsewhere. While the detail of the AIFMD has necessarily pre-occupied us for much of the last 15 months and will no doubt be the focus of your questions, today I want to focus the bulk of my remaining remarks on a fundamental change that we have introduced at the same time as planning the AIFMD transposition, namely the replacement of the non-UCITS Notices by a rulebook and by separate, thematic guidance notes. We are today in a position to update our AIF Rulebook to take the AIFM Regulations into account. That will be the final stage in the preparation of the AIF Rulebook for next Monday, from which date we will begin to issue authorisations and to process passport notifications in relation to AIFM and their AIF.

I would like to begin by putting that Rulebook into the context of the Central Bank’s increasingly risk based supervision. The Probability Risk and Impact SystemTM (or PRISMTM) is the Central Bank’s risk-based framework for the supervision of regulated firms introduced in 2011. Under PRISMTM, the most significant firms - those with the ability to have the greatest impact on financial stability and the consumer - receive a high level of supervision. This is done under structured engagement plans, designed to lead to early interventions to mitigate potential risks. Conversely, those firms which have the lowest potential adverse impact are supervised reactively and through thematic assessments, with the Central Bank taking targeted enforcement action against firms across all impact categories whose poor behaviour threatens our statutory objectives

PRISMTM has provided the context for our changed approach to rule making in relation to AIFMD. We needed to ensure that there is sufficient transparency around our rules so firms know what they have to comply with and that these rules are enforceable. This facilitates a more effective engagement with firms. For the compliant firm, the question of enforcement should not be important. But there is a benefit for that compliant firm in the approach we have adopted, because it makes our rules clearer.

This change of approach has initially been applied in the case of alternative investment funds (AIF) and alternative investment fund managers (AIFM). But we will in the coming months turn our attention to UCITS and UCITS management companies with a view to producing a similar UCITS Rulebook and UCITS guidance which will replace the UCITS Notices.

With that in mind, let me:

  • Outline the structure of the AIF Rulebook
  • Explain how our guidance material works and how you can get access to it

The AIF Rulebook

The AIF Rulebook comes into effect on 22 July and will replace the current NU Series of Notices. These Non-UCITS Notices, that many of you are familiar with, included much material which appeared advisory or clarificatory in character, cheek by jowl with rules. The Notices also needed to be read with a number of other Guidance and Policy Notes and letters to industry which together set out not only the conditions we imposed on non-UCITS funds (or AIFs) but also a range of other matters of varying importance.

This is now changed. Other than those AIF subject to transitional arrangements to which the Non-UCITS Notices will continue to apply for some time, the consolidated set of conditions which will apply to AIF from 22 July are now set out, pro forma, in a single document – the AIF Rulebook.

The Rulebook is different to the NU Series of Notices in a number of ways. It does not include any provisions which already apply directly from domestic investment fund legislation. To identify those, you must read the relevant legislation. For example, the obligation to notify the Central Bank in the event of a suspension of redemptions is not specified in our AIF Rulebook, because it is in the legislation. Nor is the prohibition on any amendment to a trust deed or deed of constitution without Central Bank approval. These had been included in the NU Series of Notices. We have left them out of the AIF Rulebook because repeating – or worse paraphrasing - legislative provisions in rulebooks is not good practice. I recognise that the inclusion of all relevant rules in a single document was convenient. It is less convenient that you must now go to the original source to ensure you comply with all relevant rules. However, a more important regulatory purpose has superseded such convenience – namely precision.

Even the way the requirements are written has changed. Conditions which are set out in the Rulebook are drafted with a view towards increased certainty, certainty both for you in your compliance work and, where necessary, for the enforcement process. The Rules are written in a directive style to minimise any such uncertainty and to avoid more discursive language which may allow for some doubt as to whether they are rules or best practice.

The Rulebook is structured in an entity-focused way, in that a single set of conditions are included in separate chapters for each of Retail Investor AIF, Qualifying Investor AIF, AIFM, AIF Management Companies, Fund Administrators and Depositaries. This means that common conditions applicable to RIAIF and QIAIF are separately set out in both chapters. That avoids any ambiguity as to which conditions are applicable to each type of AIF.

The way to understand this is that on authorisation of a RIAIF for example, conditions will be served on the newly authorised RIAIF which are equivalent, more or less, to those in the RIAIF chapter. Conditions more or less equivalent to those in the AIFM Chapter will be placed on the AIFM and the Depositary chapter on a depositary and so on.

In the case of depositaries who will act for a number of AIF, we will apply the conditions on the occasion of each authorisation, as depositaries are approved as part of the authorisation of each AIF and not in their own right.

There are three further points I want to make in relation to the AIF Rulebook approach:

Firstly, Fund administration firms typically act for a number of AIF and UCITS. Under existing arrangements the applicable conditions are set out in both the UCITS and NU Series of Notices – this is not ideal. From 22 July the Fund Administrator Chapter which is currently published in the AIF Rulebook will apply in respect of AIF and UCITS and will replace the conditions set out in the existing Notices. This matter will be set out clearly in individual letters to each firm. Ultimately it is likely that the Fund Administrator chapter will move from the AIF Rulebook to the Handbook applicable to firms authorised under the Investment Intermediaries Act, 1995. However, there is further work to be done to see if this is the best option.

Secondly, imposing these rules as conditions, while being adopted for the present, is somewhat cumbersome and arguably not the ideal approach and we will, in due course, do work to see if there is a better option.

Thirdly, the final AIF Rulebook does not refer to any grandfathering arrangements. The grandfathering chapter which had been included in the draft AIF Handbook issued on 1st February in response to our AIFMD consultation is no longer necessary because each professional investor fund is being notified of the obligations with which they must comply from 22 July. Transitional arrangements in respect of existing closed-ended AIF are set out in the AIFM Regulations and accordingly there is no need nor is it appropriate to repeat these in the AIF Rulebook. The grandfathering chapter in the draft Handbook had also clarified that existing derogations in relation to investment in unregulated master funds remain operational for existing QIF and this clarification has now been set out in the our AIFMD Q&A.

The AIF Guidance Notes

If the AIF Rulebook is one pillar of our regime, the second is our guidance material. Having guidance material available, which is separate from our rules and which is organised so that it can be easily updated and clarified, is an important part of a healthy regulatory regime. It allows us to guide firms who want to minimise the doubts attaching to any compliance matter, while also giving firms the flexibility to manage compliance costs where a matter is not critical to us.

All guidance material set out in the NU Series of Notices has been carved out and is not included in the AIF Rulebook. I know this was a little disorientating for some of you, particularly those who knew the non-UCITS notices best. It has added to your difficulties that the best continuing source for that guidance for some months now has been our consultation response issued on 1st February last. It hasn’t been entirely clear what survived as guidance and what did not within that document.

We recognise the difficulty. Therefore, we have now published a compendium of discrete thematic guidance notes. These were included in a recent edition of our ‘Markets Update’ and are available from the AIFMD page of our website.

A topic-based approach is applied with a view to having easily accessible guidance material which can be updated and revised as necessary. Material will be indexed for ease of access. Where guidance changes over time, individual guidance notes will be amended and published in the Markets Update. The Markets Update will be organised so that it is clear when a guidance note replaces an earlier one. Therefore you will be able to access current and archived guidance from now on.

It is important to have a proper understanding of the status of guidance material. While enforcement is dealt with elsewhere in the Central Bank and I have no legal expertise, my individual perspective is that any guidance issued by the Central Bank should probably not be viewed by line supervisors as uniformly enforceable per se. Personally, it seems to me the best option that guidance should not be viewed by our supervisors as creating legal obligations. When first assessing whether a prescribed contravention may have occurred, it is better if it were not treated as sufficient for us just to observe that a firm is acting contrary to a provision in guidance material. It would be better if we operated within a culture which involved us recognising the desirability of showing an underlying rule or principle-breach or breach of legislation in order to assess that a prescribed contravention had occurred which should be followed up.

From this perspective, guidance will tend to cover matters we may take into account in deciding how to escalate our consideration of a matter and whether to proceed into enforcement in relation to a suspected contravention, but the precise contravention is a discrete point. Guidance is thus of substantial value to firms. It helps you to understand the thinking of your supervisors in their day-to-day interaction with you and it helps you to identify when your compliance risk is higher and, in effect, how it can be lowered. Guidance also gives you an insight into how we allocate our regulatory resources. Simply, where guidance is complied with, we are less likely to investigate further.

As a rule of thumb guidance tends to cover matters we consider to have a comply-or-explain status. But this is only a rule of thumb. The matter is not black and white. While guidance increases the amount of information you have about our thinking and improves your capacity to manage compliance risk, it does not resolve all uncertainty. It is intended to reduce uncertainty, not eliminate it and it is intended to facilitate compliance cost management not provide an alternative to the exercise of judgement.

Will reliance on both Rules & Guidance Work?

This approach reflects an ambition on our part both to be resolute in imposing a clear set of rules on firms, rules which protect investors and are evidently enforceable, but at the same time to allow firms appropriate discretion where we have judged we may not need rigorous rules.

For this approach to work, the bulk of firms in Ireland need to be culturally committed to compliance, by starting from a position of openness and cooperation in their dealings with their regulator. Our aim is to challenge firms, to challenge their business models, to challenge their assessment of risk and to challenge their compliance arrangements. We aim to do that as part of a robust, but constructive dialogue. A culture of compliance allows the flexibility of guidance to be part of that dialogue. Where such a culture applies, it is reasonable that there be a substantial scope for guidance which is considered as something that it is within the discretion of a firm to comply with or not – because the culturally committed firm will only decide not to comply with guidance when it has an alternative approach which achieves the same substantial outcome. To reject guidance on any other basis would, for such a firm, be a failure of internal systems and controls.

By contrast, should the culture within Ireland be more combative, then it seems to me, this could present a problem for our approach. Then, what I have said above could not reasonably apply. Our approach of relying on some guidance would then come under pressure. We would need to move more areas we currently cover by guidance into the AIF Rulebook in order to reduce the potential, for those who are not behaving as we require, to avoid the appropriate penalty. This would reduce your flexibility and increase your compliance costs.

Therefore, I can imagine a number of situations indicative of a need to go back on our new approach – for example, situations where firms’ understanding of being cooperative involved exercising every discretionary legal right they might have, exercise of which had the effect of impeding, slowing down or obscuring their interaction with the Central Bank. Similarly, if firms sought, at all costs, to avoid all penalties where they had been misguided enough to break our rules or not to comply - absent good reason - with our guidance. Another example would be where firms decided to treat routine supervisory visits with the same level of caution as interaction during an enforcement process - that would also reflect just such a dysfunctional culture and would call our ability to make extensive use of guidance into question. Firms could also slip into this culture by being overly cautious in the provision of information and/or assistance to the Central Bank for fear of enforcement or for fear of accidentally waiving legal privilege. Such an approach would indicate a decision by the firm in question - or at the very least advice to that firm - that all interactions with the Central Bank should be treated as occurring in contemplation of litigation or an equivalent.

Where such an excessively defensive mentality applies, blocking us from a good understanding of the true situation, it seems to me, guidance cannot be treated by us as covering matters we can leave within the discretion of a firm to comply with or not. It becomes, on the contrary, a standard against which we must judge a firm. – simply because we have not been given the insight and cooperation to allow us to judge otherwise. Should firms then resist that and should we be told by our lawyers that we cannot enforce such a guidance-based standard, then such guidance would have to be changed into rules. Our approach would have to change. As you can see, faced with such a combative and resistant culture, the burden of regulation would have to rise and become inflexible.

I have seen at least one published legal advisory note which, to my mind suggests that such a disappointing attitude might be abroad at least in some quarters within the Irish financial services sector. While lawyers must always be advocates for their clients, I do not think they serve their clients well if they fall into a short-sighted approach which pointlessly increases the compliance costs of compliant firms, supposedly to head off compliance risks which are remote and have little or no reality for most firms. We, in the Markets Policy Division of the Central Bank, will continue to liaise closely with our supervisory colleagues. If they are experiencing a constructive, engaged approach from firms, I think guidance can continue to form a major and perhaps even growing part of our regulatory framework. If not, we will have to revisit that. Meanwhile, we will press ahead with developing the Rules + guidance approach for UCITS.


Before concluding I want to thank you for your engagement with us in relation to the development of our AIFMD regulatory regime. The process, initiated in the early stages of 2012, has worked well thanks to the commitment of all involved. Of course there is much more to do and perhaps before I finish I should flag some of the more important topics.

These include – reporting by AIFM; you are aware that the consultation by ESMA closed on 1 July and responses are under review. While ESMA is leading the design of the relevant systems it will be up to each competent authority to build their own systems once the parameters have been agreed at ESMA level. It will also be necessary to provide clarification in relation to the initial reporting dates to allow AIFM make the necessary preparation.

We also expect questions to continue to arise in relation to potential AIF, in particular those undertakings which have not been subject to authorisation to-date. It may be useful for further consideration of some of these by ESMA. While these will remain under review there are likely to be questions on other issues which will be addressed through amendments to the AIFMD Q&A over the coming days.

I would also like to mention that the way in which AIFM carry out their functions and how they delegate functions will continue under scrutiny. The organisational requirements applicable to AIFMs are a dynamic area of AIFM regulation which will continue to be reviewed over time. We will for example engage in themed inspections to look closely at the way in which requirements are being applied in practice. We will, as all Member States should, keep this matter under rigorous review.

And lastly, you will note that marketing of AIF to retail investors is permitted under the AIFM Regulations but subject to approval of the Central Bank. For now our Rulebook addresses the marketing of AIF which are regulated. We will now turn our attention to the marketing of unauthorised AIF.


1 Regulation (EU) No 1095/2010 of 24 November 2010