The Central Bank has begun analysis on 2000-plus Irish domiciled UCITS funds that report to be actively managed – Director General Derville Rowland

04 December 2018 Speech

Derville Rowland

Speaking at the EY 'Funds Forum', Shelbourne Hotel, Dublin


Good morning ladies and gentlemen.

It is a pleasure to be with you and I want to thank Lisa Kealy and EY for the invitation.
The theme of this Funds Forum, ‘Breaking New Ground’, is very timely.

It’s a moment of significant change – and challenge – within the financial services sector as a whole, and new ground will be broken in the period ahead in lots of different ways.
Let me give you the regulator’s perspective on this, looking at two issues in particular – the importance of effective culture within the sector, and the importance of being prepared for Brexit.1

Counting the cost

I’ll start with a number - $320 billion.

That’s the estimated cost to banks globally of their misconduct in the decade after the financial crisis.

While I’m conscious that the asset management sector is not the banking sector, and vice versa, there are lessons for all of us in the issues that arose in banks.

The Chair of the Financial Stability Board, Bank of England Governor Mark Carney, estimated that this money foregone in fines could otherwise have been used to support up to $5 trillion of lending to households and businesses.2

In the wake of the financial crisis, the Central Bank of Ireland, like regulators everywhere, focused firstly on putting out the fire and building new architecture to strengthen the system.

In more recent years, the focus has widened to consider cultural issues, in recognition of the extent to which culture within firms contributed to the crisis.

The Central Bank is increasingly insisting that firms comply not only with our regulations and codes, but that the people who lead the firms we regulate and supervise set the right tone from the top and create a culture that minimises the risk of misconduct.

Why culture is critical

Conduct risk arises from inappropriate, unethical or unlawful behaviour. Culture drives such behaviour and, ultimately, consumer and investor outcomes.

Trust in financial services and banking in particular was severely damaged by the crisis and, ten years later, I suspect most of the metrics have not greatly improved.

I am a lawyer by training, and when I think of culture, I am always reminded of a quote by the late US Supreme Court justice, Louis D Brandeis:

“If we desire respect for the law, we must first make the law respectable.”3

Applying this to the financial services sector, one might say it is critical for firms to understand the distinction between merely seeking people’s trust and actually demonstrating trustworthiness.

The route to demonstrating trustworthiness is through effective culture. 

To be clear, many previous conduct issues have resulted from rules and laws being broken. So, it is important to emphasise that a starting point for operating in a regulated environment is compliance with the rules and regulations that govern the industry.

But it is also clear that rules and regulations are not always sufficient to drive the appropriate outcomes from both a prudential and a conduct perspective.

The fact that something is considered legal does not necessarily mean it is right, nor does it mean that it is fair or equitable.

Now, culture is a matter for each individual firm in the first instance, and no two cultures will be precisely the same.

It is globally recognised that regulators cannot prescribe culture for individual firms.
However, regulators monitor, assess and influence culture within firms in order to guard against conduct risk and drive better outcomes for investors.

Culture Review

This brings me to our report on current cultures and behaviours in the Irish retail banks, which we published in July.

The report broke new ground in the methodology it applied - a blend of our own Consumer Protection Risk Assessment Framework and tools developed by De Nederlandsche Bank (DNB), leaders in the field of behaviour and culture.

The report identified a series of risks which we have required the five banks to mitigate. More widely, the report has given us a template for assessing culture across the wider financial services industry into the future – including the asset management and funds industry.

Culture should be driven by institutional standards such as fairness, respect, integrity and honesty, which are promoted from the top down, echoed from the bottom up and visible throughout the organisation.

Every member of an organisation should be clear on what is expected of them, and the consequences of deviating from such standards.

Firms should ensure the standards to which they aspire are understood and reflected in every business area, from corporate governance structures to individual accountability; from strategy setting to product development; from risk management to people management; and from internal challenge to how whistleblowers are treated.

There should be a dedicated focus at board and management level to ensure a truly diverse and inclusive organisation, from the top down, to mitigate risks such as group-think, over-confidence and lack of internal challenge, and to improve the quality of decision-making.

All regulated firms must implement conduct and consumer protection risk management frameworks that are proportionate to the nature, scale and complexity of the firm and the risks they are designed to manage.

It is essential to remember in all of this that people’s actions and words are merely the visible parts of culture – the chunk of the iceberg above sea level.

As the G30 notes in its latest publication on this issue, actions and words are directly influenced by what lies beneath the surface – a firm’s unspoken rules, ideas and norms.

“Managing culture thus requires understanding visible conduct and behaviors as well as the complex web of influences that lie beneath them.”4

Boards and executive management need to be acutely conscious of this. Being a board member or a senior leader is a tough job that requires strong, independent thinkers, who are fully informed, curious and willing to challenge the organisations they direct.

Fund Management Companies - CP86

The CP86 process is particularly relevant in this regard. As you know, the objective of CP86 is to improve the governance of fund management companies with a view to enhancing effectiveness and improving investor protection outcomes.

This body of work commenced in 2014 and entailed the Central Bank issuing three consultation papers and also engaging with stakeholders to inform our considerations.

The new requirements and guidance stemming from this work came into full effect on 1 July 2018. CP86 has introduced important changes to how fund management companies should structure themselves with a heavy emphasis on the critical managerial roles performed by designated persons.

The Central Bank is now turning its attention to assessing how firms implemented and embedded the key CP86 requirements into their arrangements.

This will involve supervisory engagements in 2019 with individual firms to understand how they are complying with the requirements.

The board of the fund management company will hold ultimate responsibility for the actions of not only the board itself but also the personnel associated with the management company and its delegates.

Our supervisory engagement will focus on the key role the board plays but it will also take account of our strongly held view of the importance of designated person roles (DPs) to ensure the fund management company is organised and run effectively.

DPs are the management members who ensure that the strategies, policies and directions of the board are implemented. They also monitor and oversee a fund management company’s compliance with regulatory obligations. In addition, DPs report to the board on a regular basis and escalate matters as appropriate.

In my view, these roles require experienced and knowledgeable people to discharge them and that people in these roles must be dedicating a considerable amount of time to them. Importantly, the DPs will play a critical role in shaping the culture that prevails within a company.

Fund management companies play a critical role in the EU funds industry. They allow investment managers from outside the EU to gain access to EU fund products, UCITS, AIFs and EU investors.

However, this access comes with responsibilities, and management companies authorised in Ireland - or in other EU member states - must demonstrate that they are independent and make their own decisions. They are EU regulated entities and we expect them to ensure the proper implementation of EU rules and the protection of the underlying investors in the funds.

An effective culture within the operation of the management company will support compliance with these requirements, both domestic and European.

Specific issues within the sector

Having given that broad perspective on culture and CP86 specifically, let me turn to a few specific areas of focus within the asset management sector.

The sector in Ireland has seen substantial growth since 2008. For example, in terms of funds serviced here, ten years ago the funds under administration were estimated to be less than €1,398bn and now this stands at €4,463bn (as of September 2018).

The sector is evolving in many ways, not just in size, and both industry and regulators need to be mindful of this and ensure that they remain alert to the necessary changes required to keep the industry fit for purpose - both at an industry level and at an individual firm level.

There are a number of issues which we are currently investigating that very much relate to the areas of culture and risk control within firms.

Given recent developments, the issue to the fore is, of course, Brexit.

We enter a pivotal week in terms of the politics, and it’s fair to say nobody can predict with accuracy precisely how the next few days, weeks and months will play out.
It’s therefore essential that industry and regulators alike prepare and plan for all plausible scenarios.

Brexit presents many risks to the financial services system. Financial services firms operating in Ireland, or intending to do so, need to understand these risks and ensure they have effective mitigation plans in place.

As regulator, we have seen variation in the levels of contingency planning by entities over recent months.

Such variation, in many ways, can be linked back to the culture of a firm. In tandem with other regulators, we have pushed firms to prepare for worst-case scenarios rather than “hoping for the best”.

But well-run firms with effective cultures that place investor protection high on their agenda don’t need to be told this.

They will have analysed the risks and taken steps to mitigate the worst effects for their specific business models and clients.

On the post-Brexit environment for financial services more widely, the general shape – notwithstanding the uncertainties – is well understood.5 

The UK and EU27 financial systems will be separately regulated, with each making its own decisions as to the extent that trade in financial services can be permitted under equivalence principles.

On the specific issue of memorandums of understanding (MoUs), the Central Bank is working through the European Securities and Markets Authority (ESMA) in order to reach a coordination solution with UK regulators.

Our clear objective, like other regulators, is to prepare for and mitigate significant cliff-edge effects to the greatest extent possible, regardless of the outcome of the political negotiations.

This is a vital objective in terms of protecting investors from the impact of any disorderly interruption of portfolio management mandates, and as a regulator, we are confident in its achievement.

Closet Indexing

Turning from Brexit, we are also focused on a number of specific investor protection issues in the period ahead.

We are keen to ensure investors are not misled or misinformed about their investments in Irish domiciled funds.

That includes the issue of closet indexing.

Work is ongoing at ESMA level as well as at national level. The Central Bank has begun analysis on 2,000-plus Irish domiciled UCITS funds that report to be actively managed.
It is a key priority for the Central Bank to ensure that investors are not disadvantaged by funds operating in a manner that is not consistent with the way in which they have presented their objectives, policies and charges in the fund documentation.

Having identified outliers, a full desk-based review of the funds documentation such as KIIDs and prospectus as well as their relevant disclosures will be assessed, and we will follow up appropriately.


In a similar vein, we expect that, in the case of a fund management company operating a delegating model, the board satisfies itself that its staff really are operating at all times for the benefit of the management company and the underlying investors of the funds they have.

It is also imperative that firms put in place robust structures to ensure that the best interests of investors are being protected in areas such as fees and incentives, as evidenced in the findings of our recent review of performance fees in UCITS. 6

Looking ahead – ETFs

Finally, on the topic of exchange traded funds (ETFs), these have been an area of focus for the Central Bank for some time.

IOSCO is taking two workstreams forward. These can be broadly split into two areas, namely (i) product-facing, investor-related issues and (ii) market-facing, arbitrage and trading issues.

What will be important is that regulators understand what impact that ETF characteristics may have, particularly at times of market stress.

This work continues at IOSCO and the Central Bank’s approach will remain unchanged. We are leading from the front, using the valuable input provided by industry to inform our contributions and looking for consistency of approach on a global basis.

Apart from IOSCO, I would just note that we are seeing increased focus on ETFs both internationally and within European from other authorities.

Currently, ETFs are the subject of discussion and analysis in one form or another at the FSB and the ESRB. This is in addition to domestic work being carried out by National Competent Authorities.

So I think it is fair to say that there is likely to be increased attention on ETFs for the foreseeable future.


I will conclude by offering a reflection on one particular finding from our culture report, namely over-optimism.

In short, the retail banks felt that, having weathered the financial crisis, they should surely complete the transition to having a truly consumer-focused culture.

Again, the banking sector is different from the asset management sector.

But I think this finding is something we should all keep in mind, industry and regulator alike.

In developing truly effective cultures, and in preparing for significant challenges like Brexit, optimism can be a force multiplier but over-optimism can present fundamental risks.

That is where proper and effective planning, well embedded conduct risk frameworks, and constant vigilance by boards and senior management to the whole of the iceberg make all the difference.

Thank you for your attention, and I wish you a productive and engaging forum.


1 With thanks to James O’Sullivan, Fionnghuala O’Sullivan and Kathleen Barrington for their contributions to this speech

2 See:

3 See:

4 See:

5 On Brexit and the macroeconomic environment, see:

6 See: