Financial Regulator opening address to the Joint Committee on European Scrutiny

14 July 2009 Speech

Good afternoon. Thank you Chairman and members of the Committee for the invitation to discuss the proposed Directive on Alternative Investment Fund Managers.

In broad terms we welcome many aspects of this Directive but we have reservations about some of the proposals contained therein. In particular we agree that enhanced regulatory cooperation in the context of gathering information on hedge funds is necessary.

Before discussing the proposed Directive it might be useful to give a very broad outline of the current Irish investment funds regime.

There are two broad categories of funds in Ireland – UCITS and non-UCITS. UCITS are targeted at the retail market and accordingly are subject to a prescriptive authorisation regime. The UCITS are based on European law and once authorised in one Member State can be marketed throughout the Community without further authorisation.

Non-UCITS funds, which must also be authorised by the Financial Regulator, can range from those targeted at the retail market to those targeted at the institutional or professional investor market although many would fall into the latter category and are authorised as Qualifying Investor Funds.

At end March 2009, the value of Irish authorised investment funds amounted to about €632 billion while the value of funds not authorised in Ireland but administered by Irish authorised administration firms amounted to another €720 billion approximately. The Irish Funds Industry employs significant numbers of people and it is for these reasons that any European Union legislation dealing with funds is important for Ireland.

Turning back to the proposed Directive we would like to highlight some of our concerns and why we are concerned.

Scope of the Directive

There are many questions in relation to the scope of the Directive. It refers to managers of alternative investment funds (or AIF) and AIF refers to investment funds other than those authorised as UCITS, whether established within the European Union or in third countries. However “manager” in the context of an investment fund can have many meanings. It can include an investment manager and also the board of directors in the case of a corporate investment fund. The proposed text indicates that manager could also include a fund administrator, appointed by the manager or by the AIF to provide fund administration services.

Minimum or maximum harmonisation

The extent to which this proposal could be regarded as minimum or maximum harmonisation is very unclear. For example, on the one hand it provides (in Recital 8) that the Directive does not regulate AIF and therefore does not prevent Member States from adopting or from continuing to apply additional requirements in respect of AIF established on their territory. However later text (Article 25 (4)) provides that Member States may only impose additional limits to the level of leverage that an AIFM can employ in exceptional circumstances. Most Member States authorise and regulate AIF and impose a regulatory regime based on the nature of the AIF and its investors. It will be important to clarify therefore the extent to which these regimes may continue to apply.

Management Company passport

The Directive provides that a manager will be able to provide services in other Member States without further authorisation. However as AIF are not regulated under the Directive it is not clear how a manager in one Member State could establish an AIF in another Member State under national legislation.


The requirement that each AIF must have a depositary is reasonable but the necessity for the depositary to be an EU credit institution is of concern. Irish AIF are required to have an independent depositary but this entity may be established as a subsidiary of an EU or non-EU credit institution, provided the liabilities are guaranteed by the parent.

This is a stricter requirement then for UCITS and we also believe that it is inappropriate to have a stricter standard of liability for AIF then for UCITS.

The European Commission recently launched a public consultation on the UCITS depositary function. The Committee of European Securities Regulators is also considering similar issues. This proposal should await the outcome of both initiatives.


Irish authorised Qualifying Investor Funds are not subject to any regulatory imposed investment restrictions. The Irish QIF regime works well and QIFs are recognised as avoiding many of the problems associated with hedge funds worldwide, due in part to the requirement to have an independent depositary and services provided by Irish fund administrators. Under the proposal, a limit on leverage may be imposed. There is no evidence that such a restriction is necessary and it would in any event be difficult to implement in practice, not least because leverage can be employed in various ways for example through borrowings and also through the use of derivatives.

Independent valuator

It is proposed that each AIF under management must have appointed a valuator, independent of the manager. While it is important that an AIF is subject to independent valuation, in particular where assets cannot be valued by reference to market pricing, responsibility for valuation must rest with the manager and not a third party which is not subject to prudential regulation. The Directive proposals are based on a concern that many hedge funds did not have appropriate valuation policies and invested in assets for which transparent pricing was not available. This is a valid concern, particularly in the context of unregulated AIF, but the proposal should focus on the valuation process, perhaps by reference to the principles set out by the International Organisation of Securities Commissions (IOSCO) in this area.

These are some of our principal concerns although there are others including the disclosure requirements which will apply to private equity funds, the overlap with other EU Directives and the restrictive rules on delegation, which in the latter case go beyond delegation rules which apply to UCITS management companies. We also believe that the proposed capital requirements are unnecessary and will impose significant additional costs to Irish AIFM.


In conclusion and notwithstanding the significant concerns outlined above we continue to believe that it should be possible to introduce a regulatory framework for AIF which builds on the existing regulatory regimes within the EU and which provides a sound basis for the enhanced monitoring of macro-prudential risks which may arise within alternative investment funds. To this end we will provide as much assistance as possible to the Department of Finance during Council negotiations. We will be glad to answer any questions the Committee might have.