Remarks by Directors of Asset Management Supervision, Michael Hodson, at PWC's Alternative Investment Funds Seminar

02 February 2017 Speech


Good afternoon ladies and gentlemen. 

I would like to thank the organisers of this event for inviting me to address you today.  As we look ahead to what 2017 will hold, it is always useful to consider the regulatory agenda, both domestic and further afield.

In my remarks, I will spend a little time:

  • Discussing key European and domestic regulatory matters which industry should be cognisant of; and
  • Sharing some views on the United Kingdom’s withdrawal from the European Union, in particular what it might mean for asset management in Ireland.    

But first, before I do so, let me take a few moments to reflect on recent domestic initiatives and current supervisory priorities.

Supervisory and policy initiatives

As noted in the Central Bank’s strategic plan (2016-2018), as an authority “we are committed to being an independent, forthright and influential organisation with a compelling, clear and challenging vision.  This vision is of an organisation which is ‘Trusted by the Public, Respected by our Peers, [and a] Fulfilling Workplace for our People’”.  This overarching objective was at the heart of a range of different work streams undertaken last year. 

One initiative to recently conclude, which was primarily motivated by the changing nature of the regulatory landscape, is the Central Bank’s work on fund management company effectiveness (which has otherwise came to be known as ‘CP86’).  As you will be aware, this body of work has been ongoing since 2014 and consisted of three separate consultations.  The work was prompted by the increasing comprehensiveness of regulation, under legislative initiatives such as AIFMD and UCITS.  In addition, the Central Bank recognised that enhancing the effectiveness of fund management companies would improve investor protection.  This matter has been discussed at length since 2014 and I do not intend to reopen old discussion points today.  Instead, I would like to spend a few moments setting out the transitional arrangements for the new requirements and guidance.      

When publishing its feedback statement on the third and final CP86 consultation, the Central Bank was mindful that it may be burdensome for fund management companies which need to revise organisational structures. To allow sufficient time for planning and execution, a transition period for existing fund management companies to 1 July 2018 has been provided for.  For new fund management companies, the applicable date is 1 July 2017.  This will allow sufficient time for any applications currently being reviewed by the Central Bank to be completed.  It may appear that a transitional period of 18 months allows a good deal of time to address the requirements.  However, I would stress that this is only the case if firms begin such preparations as soon as possible.  I would strongly encourage management company boards to ensure such planning is included in 2017 work programmes.  In addition, there are some elements of the guidance which come into effect at an earlier date.  For example, by 30 June 2017 Fund Management Companies will be required to create a dedicated email address and establish procedures so that this mailbox is monitored on a daily basis.[1]  The Central Bank has published a table setting out the various transitional periods in both the UCITS Q&A and AIFMD Q&A.  I would encourage all fund management company boards to take account of these transitional arrangements as early as possible.

Supervisory Initiatives

From a supervisory perspective the Central Bank has continued to pursue assertive risk-based supervision underpinned by a credible threat of enforcement.  This included an extensive supervisory work programme, comprising firm specific engagements, cross-sectorial thematic reviews and other specific inspections associated with particular risk areas (such as client asset or conduct requirements). 

Outsourcing of Fund Administration Activities

One supervisory initiative in 2016 related to a review of outsourcing of fund administration activities.  This work was undertaken as outsourcing is a key area of operational risk and an increasingly common feature of almost all large Fund Administrators.[2]  In this context, outsourcing is the means by which an Irish regulated Fund Administrator uses a third party to perform particular administration activities.  In the past, these activities would have typically been undertaken by the Fund Administrator in Ireland.  These third parties or ‘Outsourcing Service Providers’ may be an authorised or unauthorised entity and can be located globally.  

The Central Bank’s review focused on:

(i)            fully understanding the extent to which certain Irish Fund Administrators outsource their activities; and

(ii)          assessing the control environment, including governance and oversight arrangements, which are in place within Fund Administrators.

It was found that outsourcing amongst certain Fund Administrators is extensive and is continuing to grow.  As of 31 December 2015, the review identified a sizeable amount of administration activity being carried out by Full Time Equivalents (FTEs) in Outsourcing Service Providers.[3]  The evolution of these outsourcing arrangements in fund administration presents challenges to the Central Bank's supervisory approach.  In addition, the Central Bank considers that it is imperative for firms to have strong controls in place concerning the governance of outsourcing arrangements.  The Central Bank will issue observations and recommendations which should be taken into account by fund administrators when considering current outsourcing practices.  In addition, going forward, any submissions concerning outsourcing by Irish fund administrators will be assessed not only on the proposal put forward but also on the basis of the cumulative effect of the overall outsourcing arrangements of the entity, as we may have now approached the outer limits of what can be outsourced for this industry.    

To further progress this work, the Central Bank has also committed to undertaking a review of outsourcing across all financial sectors.

Risk Mitigation Programme Validation

I would now like to spend a few moments setting out the Central Bank’s approach where it discovers specific issues in a supervised firm.  Where this occurs, the Central Bank will issue a Risk Mitigation Programme (or RMP) to the firm in question.  This describes the issues involved, the structural improvements and mitigations required to be carried out by the firm and the intended outcome.  The RMP will set out a deadline by which the firm must submit appropriate evidence of completion of the required action. 

Completing an RMP action is an important step, but it is not the final step.  Instead, the board and staff of the firm must ensure that the RMP is sufficiently embedded within that firm.  In 2016 Central Bank staff completed a number of RMP validation reviews to ensure that the required changes are fully embedded within the selected firms and the intended outcome achieved.  I am disappointed to say that in a number of instances we found evidence that RMPs were not fully embedded within the firms and have taken appropriate follow up action in this regard.  This process of RMP validation will continue throughout 2017.  Where the Central Bank finds that sufficient action has not been taken to fully embed the required changes, this will reflect poorly on the firm and its board.  Ensuring effective implementation of supervisory findings is a priority for the Central Bank and we will use the full range of our supervisory tools and regulatory powers where necessary.

Implications of Brexit for Asset Management in Ireland

2017 holds uncertainties for Ireland’s asset management industry.  Many of these uncertainties have arisen as a result of the United Kingdom’s decision to exit the European Union. The most significant feature of the post-referendum period has been uncertainty.  Central Bank activities since then have focused on understanding and addressing the resulting consequences, where possible.  Central Bank staff have also engaged with a substantial number of firms regarding potential relocation decisions and the resulting authorisation applications.  Not all of these enquiries relate to the funds industry.  In fact, it is likely that the most significant influx of firms will relate to MiFID Investments Firms and Market infrastructure more generally.  There are approximately 2,250 MiFID firms, 212 AIFMs and 32 UCITS Management Companies currently based in the United Kingdom which passport into another EU or EEA state.[4]  To put these figures in context, there are currently 114 MiFID Firms and 206 Fund Management Companies authorised by the Central Bank.  It is possible that some of these UK firms may seek to make alternative arrangements if it appears that access to the relevant passporting regimes will be restricted after brexit.  In some cases, these firms will be similar to those already operating in Ireland.  In others, these will be new firm types, new business models or new pieces of market infrastructure. This has the potential to significantly change the landscape of Ireland’s asset management industry.  This will present challenges, both for the Central Bank and for industry.  However, recent internal changes, with the establishment of a dedicated Asset Management Supervision Directorate, should highlight the Central Bank’s commitment to addressing this new landscape.  In particular, the allocation of additional resources dedicated to Brexit authorisations will significantly increase the Central Bank’s capacity for authorising such firms.  The hiring of specialist staff for these teams is to take place immediately.  The Central Bank is seeking to ensure any entity requesting authorisation in Ireland finds that we are engaged, efficient, open and rigorous in our assessment of the applicable regulatory standards.  It is timely that the Central Bank has today published its semi-annual Regulatory Service Standards Performance Report.  This publication is  available on the Central Bank website and is designed to ensure transparent and predictable timelines for authorisation processes.[5]  The report measures the Central Bank's performance against turnaround times committed to and sets out details of where guidance on submitting an application can be obtained. 

European and domestic regulatory

Let me say a brief few words about the European and domestic regulatory outlook for 2017. 

Supervisory & Thematic Priorities

Looking close to home initially, the Central Bank will undertake a number of thematic inspections relevant for the asset management industry.  These will include:

  1. Supervisory staff conducting a Supervisory Review and Evaluation Process (or SREP) on the Internal Capital Adequacy Assessment Processes (ICAAPs) of low impact MiFID Investment Firms.  This theme commenced in 2016 and will continue this year as it proved particularly effective for the supervision of a large population of entities. 
  2. Compliance Function Review – Compliance is a key second line of defence to enable regulated firms manage risk. The focus of this theme will be on the general effectiveness of the compliance function, particularly the framework, outputs and resourcing of the function.  When conducting these assessments, Central Bank staff will take particular account of ESMA’s guidelines in this area.
  3. Client Assets - A review will be undertaken examining how investment firms have implemented new governance and risk management requirements introduced by the Client Asset Regulations on 1 October 2015.  The review will assess if the Client Asset Management Plan (CAMP) and the role of Head of Client Asset Oversight (HCAO) have been adequately embedded as part of the overall risk management framework of these firms.
  4. A review will also be undertaken looking at compliance with ESMA’s suitability (conduct) guidelines as well as firm preparedness for MiFID II.  MiFID II will now place these guidelines on a statutory footing and also introduce additional elements in the suitability test (for example risk tolerance and capacity for loss).  The focus of this theme will be on the information collection phase of the suitability process and assessing whether firms are seeking the correct information at the outset. 

In addition to these activities, as has been publicly mentioned previously[6], the Securities and Markets Supervision (SMS) Directorate is considering conducting a number of thematic inspections specifically examining the funds sector in 2017.  These themed reviews are currently being scoped however, the intention is that one of these reviews will focus on late filings of returns by regulated entities.


Let me now turn to MiFID II.  MiFID II represents the most substantial overhaul of EU legislation for markets in financial instruments in over a decade.  It presents a major implementation challenge not only for firms but also for Regulatory Authorities.  The volume and complexity of MiFID II should not be underestimated.  This is why the Central Bank has recognised MiFID II as a key organisational objective for this year.  To effectively tackle the new requirements, firms should structure their programme of work around various forthcoming European Securities and Market Authority (ESMA) measures required within the directive and regulation.  This is a significant challenge given the differing sizes of the various players both in this jurisdiction and across Europe.  Each firm will have its own specific challenges in terms of structure, technology and conflicting priorities.  For those impacted however, I would encourage you to dedicate sufficient resources immediately so as to ensure the compliance deadline of 3 January 2018 is met. 

Money Market Fund Regulation

Another matter which is on the horizon relates to the long awaited Money Market Fund Regulation.  As you will be aware, the agreed proposal seeks to balance addressing potential financial stability issues which might arise with Money Market Funds during periods of market stress, and the role these vehicles play in diversifying cash holdings (while maintaining liquidity).  As an EU Regulation, the Money Market Funds Regulation will have direct effect.  And so while no major transposition work is required, the Central Bank will have some work to do to ensure our Rulebooks are consistent with it.   The Regulation provides that it will enter into force twenty days following publication in the Official Journal of the European Union.  It shall then apply 12 months after the date of entry into force.   Existing Money Market Funds, both UCITS and AIFs, must submit applications to their relevant national competent authority within 18 months of entry into force of the Regulation.  Competent authorities will then assess whether the fund is in compliance with new requirements and must issue a decision within two months of receipt of a completed application.  Separately, ESMA is being entrusted with drafting implementing technical standards for submission to the Commission with regard certain elements of the Regulation.


One other initiative which I would like to highlight relates to the European Commission’s review of AIFMD and UCITS.  In relation to AIFMD, the Commission is obligated to commence a review of the directive by 22 July 2017.  This review will be quite broad and the areas of analysis are prescribed in Article 69 of the directive.  In comparison, the review of the UCITS Directive will be more focused, primarily examining the administrative sanctions laid down by that directive. According to Article 99(3) the Commission is required to complete the UCITS review by 18 September 2017.  I would urge industry to actively engage in any public consultations which may arise as a result of these reviews.  Initiatives such as these should provide a useful opportunity to improve the overall functioning of the directives.  The Central Bank looks forward to providing any assistance possible, either directly to the European Commission or through other forums such as ESMA.         

Consultation on Capital Markets Union Mid-Term Review

Finally, let me say a few words in relation to the public consultation on the Capital Markets Union (or CMU) Programme currently underway by the European Commission.  This consultation closes on 17 March 2017 and is seeking feedback on how the current CMU programme can be updated or complemented ahead of the mid-term review of the action plan.  In particular, the continued focus on barriers to the cross-border distribution of investment fund is welcome and I am optimistic this work can be progressed in the near-term.   I would encourage all industry participants to participate in this consultation.  If relevant stakeholders are committed to the core aims of delivering safe and efficient capital markets in Europe, the CMU agenda has the potential to bring significant benefits to the European economy and shape the asset management industry into the future.[7] 


At this juncture, let me conclude by once again thanking the organisers for the opportunity to address you today.  I hope my remarks have provided you with an insight into the regulatory landscape for 2017 and beyond.  The pipeline of new legislative initiatives has slowed since its peak following the financial crisis.  Nevertheless, there remains considerable implementation and compliance challenges on the horizon.  My overall message to firms would be to engage with these issues as early as possible.  This will ensure sufficient time is set aside to appropriately deal with the resulting challenges. 



[1] See Operational Issues Guidance (Part V).

[2] Particularly Fund Administrators rated as Medium Low and Medium High under PRISM.

[3] Full Time Equivalent (FTE) is based on how many staff within the Outsourcing Service Providers carry out the task on an FTE basis and how many staff within the Irish firm review this work based on the information submitted on the sample of firms inspected.


[4] See FCA letter to the Treasury Committee dated 17 August 2016. Available here.

[5] These service standards cover the authorisation of Investment Funds, Financial Service Providers, Regulated Disclosures (Prospectus Approval), Retail Intermediaries, Money Lenders, Payment Firms, Bureaux de Change, Debt Management Firms, Insurance / Reinsurance Undertakings, Credit Institutions and Trust / Company Service Provider sand the processing of Fitness and Probity Pre-Approval Controlled Functions (“PCF”) Individual Questionnaire (“IQ”). 

[6] See speech by Acting Director of Securities and Markets Supervision, Grainne McEvoy, published on 17 January 2017.  

[7] See the Central Bank’s response to the European Commission Green Paper on Capital Markets Union (available here)