Fit for the future – Brexit, Supervision and Corporate Governance - Michael Hodson, Director of Asset Management and Investment Banking

11 June 2019 Speech

Michael Hodson

Remarks delivered to Maples Group Event


Good afternoon ladies and gentlemen. 

I am delighted to be here this afternoon and am grateful to the Maples Group for the invitation.

In my remarks today I will cover:

  1. Brexit;
  2. Some key supervisory developments; and
  3. Corporate Governance.

I hope that from my remarks you will get a sense of what we are seeing in terms of industry preparation for Brexit, the work that is ongoing as part of our supervisory function and the importance we place on firms embedding a sound corporate governance framework.


If I may first turn to Brexit.

To “cross the Rubicon” is a phrase that originates from the time of Julius Caesar. It means to take an irrevocable step that commits oneself to a specific course of action.

From a Brexit point of view, we have come close to a Rubicon crossing on the 29th March and again on the 12th April; and while Brexit has been a key regulatory focus since before the UK Referendum, our engagement with industry heightened in the lead-up to the plausible risk of a hard-Brexit on each of these dates.

This entailed daily liquidity reporting and also more extensive supervisory engagement with firms to ensure that they are adequately prepared and resilient enough to cope with the possible effects of a no-deal scenario. While in general, we have found firms to be well prepared, inevitably there are lessons to be learned and these will be taken forward into our ongoing supervisory efforts.

We must not forget that the time remaining to October will pass quickly and as a consequence, it is vital that you take advantage of the extra time to prepare for all plausible scenarios.

Brexit – regulatory focus towards October 2019

For our part, as regulators, over the coming months we will continue to engage with industry in order to drive regulated firms to address the risks associated with Brexit and to ensure that the interests of your clients are being safeguarded.

Needless to say, this focus will also extend to firms that have now received their authorisation or have gone substantially through the process and are at the final stage. 

A number of firms which have recently been authorised have had conditions of authorisation included in their letter of authorisation, with many of these conditions in place to accommodate transitionary arrangements in the context of Brexit. I cannot stress how important it is that firms continue to build out their operations and comply with these conditions.

While I acknowledge that the pace of the build out of a new firm may change, in engaging with any firm seeking authorisation, we have been very clear on our regulatory and authorisation expectations.

All firms operating in Ireland, both existing and newly authorised, must do so in line with their regulatory licence, and all conditions attaching to it. Compliance with licence conditions is not optional, and breaches are treated seriously by the Central Bank.

On a related matter, the migration of clients and assets from UK based financial service providers to EU27 authorised entities are being undertaken against the backdrop of a considerable level of uncertainty surrounding Brexit. While we have seen migration plans fully complete or progressing well, in some instances we have noted that migration has been delayed or postponed.

For firms that still have a distance to travel, my advice is to have a clear roadmap in place and execute on it. Your clients need to be made aware of the importance of the migration to the newly authorised entities, including any required re-papering. Leaving this migration to the last minute, will open the firm up to unnecessary and material operational and execution risks.

The last thing you want is for an avalanche of client paperwork landing all at once, which might not be processed in time. Should this happen, there will be little sympathy from the Central Bank for firms that are deemed to have wasted the additional time permitted to them to ensure migration projects are completed well before any Brexit deadline.

Brexit – functioning of the financial system

Notwithstanding this, our regulatory focus on Brexit also extends to the functioning of the financial system. This is necessary to ensure that the system as a whole can continue to function and is resilient enough to withstand a Brexit shock or cliff effects.

As I have outlined in a keynote address last month1, at this point in time the most material cliff-edge risks have been mitigated or are now manageable. However, there are some risks and uncertainties that remain and given the audience present, perhaps I can hone in on three specific examples relevant to the asset management sector:

  • Firstly, the European Commission’s granting of temporary equivalence together with ESMA’s approval of Euroclear UK and Ireland Limited as a third country CSD, means that the Irish market will have continued access to a CSD in the event of a no-deal Brexit.

The market operator, in engaging with market participants, has selected Euroclear Bank as the long-term CSD solution and following the publication by Euroclear of the White Paper detailing the solution, the project has moved to implementation stage to migrate the Irish market to Euroclear Bank.

Migration must occur by March 2021 and the Central Bank would encourage all interested parties to engage constructively in this process over the coming months as this is a complex project which must be delivered within a tight timeline.

  • Secondly, there is the authorisation risk which is applicable to any firm that has been slow to engage with us or has failed to do so and still has aspirations of being authorised by 31 October 2019.

As regulators, our gatekeeper role is critically important in ensuring that we safeguard financial stability and protect consumers. This in turn means that, while we will always be open to engaging with any firm seeking authorisation in this jurisdiction, those firms looking to engage with us now have a lot to do to be authorised by the end of October.

The onus must be on firms themselves to develop and implement contingency plans and consider the best course of action for their EU clients to ensure continuity of service under a hard Brexit scenario.

  • And finally, a third matter relates to share trading obligations.

We continue to monitor market developments in light of the impact that a hard Brexit could have on EU firms’ compliance with the share trading obligations under Article 23 of MiFIR.

This issue is particularly relevant to Ireland given the large number of Irish issuers listed on the London Stock Exchange and the presence of significant liquidity for these shares in the UK. In the months ahead, the Central Bank will closely monitor trends in liquidity in the event of a no deal Brexit scenario and will continue to engage with industry on the basis of emerging issues that a no-deal scenario may generate.

Brexit – the regulatory ecosystem

Of course, engagement with our EU partners has proven to be an essential ingredient in tackling the broad spectrum of risks presented by Brexit.

As a national competent authority, we remain committed to providing high quality and credible supervision across the vast array of regulated entities within this jurisdiction. However, we must not forget the cross-border nature of financial services within the EU and this does highlight the importance of active participation at EU fora.

The Central Bank engages with a range of EU authorities on a day-to-day basis. This includes the European Central Bank and the three European Supervisory Authorities – ESMA, EIOPA and the EBA.

Indeed, from my own participation at ESMA I have witnessed the benefits first hand with discussions taking place at ESMA’s Supervisory Coordination Network fostering consistency in authorisation, supervision and enforcement matters related to the relocation of entities, activities and functions from the UK.

With Brexit looming, the vacuum created by the diminishing voice of the UK means that there will be a loss of expertise at the European table, and from an Irish viewpoint, I will be selfish and say that it also means the loss of a neighbour that is very much aligned with us in terms of our approach and supervisory philosophy.

Nevertheless, in a post-Brexit environment, my colleagues and I will continue to be active participants at Europe, across the various decision-making bodies, standing committees and working groups. This is necessary to ensure (i) that the Irish voice is heard in the face of continued regulatory evolution and (ii) that we play our part in protecting the integrity of the EU single market.

Supervisory Developments

At this juncture, perhaps I can move away from Brexit and take a few moments to consider some key supervisory developments with respect to the asset management sector.

1. Investment Fund Errors: An area where the Central Bank continues to focus on relates to the treatment, correction and compensation of errors for investment funds.

The Central Bank does not currently provide guidance in relation to how errors in investment funds should be dealt with. Irish Funds has produced a useful industry guidance paper2 in this area and this is utilised widely.

However, industry guidance is not legally binding and does not carry the weight of regulatory requirements. As such, we consider that it is important for the Central Bank to issue guidance and related requirements in this area in order to ensure that Irish authorised funds and their service providers are actively identifying any errors in the valuation and pricing of funds and dealing with these in an appropriate manner.

It is the intention of the Central Bank to establish a clear regulatory framework for errors which will outline our expectations in terms of what should happen when an error occurs, for example, what communication or disclosure should be undertaken and when it may be appropriate to pay compensation to affected parties.

At present the Central Bank is in the process of drafting these requirements and will consult on this in due course. The consultation paper will seek to set out a consistent and transparent approach for industry, highlighting best practice and promoting investor protection. In doing so, we are cognisant of the existing industry guidance. Furthermore, we are utilising our experience with issues that have arisen in this area in the past and are also considering the approaches adopted by peer regulatory authorities.

2. Thematic review of UCITS performance fees: You may be aware that last year, the Central Bank carried out a thematic review of UCITS performance fees to establish whether the procedures used to calculate and pay performance fees in UCITS ensures that investors’ interests are protected at all times.

The review investigated the methodologies used in calculating performance fees to determine if they are in line with the Central Bank’s UCITS Performance Fees Guidance. We published our key findings in an Industry Letter3 issued in September 2018 and subsequently undertook supervisory engagement with all UCITS fund management companies where instances of supervisory concern were identified.

As outlined in the Central Bank’s Markets Update4 published last week, the thematic review has now concluded with redress of €1.5 million refunded to shareholders, however the Central Bank continues to view transparency and fees in the investment fund sector as a supervisory priority.

3. Fund Management Company Effectiveness (CP86): We are currently scoping a review of how firms have implemented the measures introduced under CP86.

In line with our normal thematic tools, this body of work will commence with a questionnaire being issued to fund management companies and Self-Managed Investment Companies in the coming weeks with a short turnaround for responses. Once the responses have been analysed, this will then be followed up with desk based reviews and onsite inspections for selected firms.

To be brief, this work will aim to identify standards of industry compliance in order to inform our supervisory approach and ensure that the required effectiveness and systems of governance are in place to protect investors’ best interests.

4. MiFID II – market surveillance: The ongoing supervisory focus on MiFID II implementation continues to be a key priority with our Market Surveillance Team analysing vast amounts of data.

We will continue to proactively engage with existing firms as well as newly authorised firms on the accuracy and completeness of the data submitted.

The analysis of the data as part of our data led supervision is becoming an increasingly important part of our engagement and provides us with pertinent insights into the activities of the firms we supervise most notably in the areas of transparency, the growth of alternative liquidity sources such as periodic auctions and systematic internalisers and the use of algorithmic trading strategies.

5. MiFID II – thematic review on Investment Research: Finally, alongside such data-lead supervision, our MiFID II thematic work continues with regards to investment research.

Following the introduction of rules around inducements and research under MiFID II, there has been much debate on this topic within the industry with concern across the EU that the rules are overly burdensome and are impacting upon the provision of research in the sector.

Given this and the Central Bank’s interaction with industry in Ireland in the lead up to the implementation of MiFID II, a focussed review is currently underway across asset management and stockbroking firms. The objective of this review is to assess how investment firms are treating investment research under MiFID II and whether it is in compliance with the relevant rules under MiFID II, in addition to the implications these rules are having on the sector. To date some of the key trends arising from this review are as follows:

  • There has been limited use of the option to use a Research Payment Account (“RPA”) to charge clients for the cost of research used in the provision of an investment service;
  • The review has included both asset management and stockbroking firms, with the cost of absorbing research costs impacting both sectors, but appears to be slightly more costly on the asset management side;
  • In the case of group companies, there appears to be a lack of consistency and understanding as to how the cost of research is absorbed in line with the requirements; and
  • There has been very few issues noted to date in relation to the availability or quality of research within the Irish market, compared with reports from the UK market, however firms are placing limits on the number of providers who they engage with.

At this stage, we are in the process of assessing the information received which will enhance our understanding of the impact that the rules are having as industry settles into a second year cycle post-implementation of MiFID II.

Looking ahead, we may also seek to have further discussions with heavily impacted firms over the coming months and this will allow the Central Bank to provide meaningful feedback to ESMA on the matter, in keeping with the push towards supervisory convergence across the EU.

Corporate Governance

Before I conclude, perhaps I can speak briefly on the topic of corporate governance.

In preparing for today’s address, I spent some time reflecting on why firms fail within the financial services sector today. And, if I ask the audience present for their views, I imagine you would refer to capital shortfalls, insufficient liquidity, poor business models or firms pursing overly aggressive growth strategies and thereby being pioneers into risky markets. These are all very tangible and valid reasons however, if we delve deeper, inevitably poor corporate governance has a role to play.

At the most basic level, corporate governance can be defined as the set of rules, practices and processes by which a firm is directed and controlled. It is something that prevails across all levels, from the board of directors to your most junior staff, and in doing so, it impacts and drives day-to-day operations, the strategic direction and the culture of a firm.

It is therefore no wonder as to why corporate governance remains a key area of focus for us as supervisors and why we continue to challenge boards and senior management, as captains of industry, on how good corporate governance is at the core of their firm.

In this context, the three lines of defence structure has an important role to play in ensuring that high standards of corporate governance are in place. For example, all three functions can provide assurance regarding the control environment of a firm by means of the monitoring, testing, risk assessments and audits that they perform.

On the note, you may be interested to hear that the Central Bank has recently completed a thematic review to evaluate the approaches in use regarding compliance, risk and internal audit services which form part of two of the three lines of defence.
The thematic focussed on firms across both the fund service providers and MiFID sectors and one of the key findings from this body of work was that not all boards and senior management were able to demonstrate that they are actively considering the control framework in operation in their firms.

It is envisaged that an industry letter will be issued in the coming months and I would encourage all firms to consider what actions need to be taken, if any, in light of the issues raised therein.

So, a final thought on corporate governance.

Investment firms, fund service providers and more, all provide essential services that people, businesses, and the economy depend on. However, your success must never be solely defined by the bottom line.

We must consider what lessons can be learned from the corporate governance mistakes of the past such as the Libor scandal, Wells Fargo’s mis-selling to customers and closer to home, the recent tracker mortgage failings.

This is because sound corporate governance is critical for the avoidance of failure and as highlighted by the Central Bank’s Deputy Governor, Ed Sibley5, we should not only consider it as a damage limitation tool, it is much more than this and should be seen as a mechanism to maximise the chances of success.

I would extend this further and be of the view that the future of the financial services sector must be built on a strong governance framework. This will enable firms to take advantage of long-term opportunities, develop long lasting relationships with clients and may even prove to be a gateway to a competitive advantage.


I will stop there.

Maybe I am showing my accounting background when I say that in all decisions we make, there is a trade-off or opportunity cost to consider.

The opportunity cost of Brexit has no doubt been significant, as both industry and regulators have devoted a considerable amount of time and energy in preparing since the Referendum results.

I am certain that life will go on after Brexit and my hope is that by investing the time now to this challenge, regardless of any opportunity cost, then we will all be playing our part in facilitating a well-functioning financial system now and into the future.

Thank you for your attention.

With thanks to Adrian O’Mahony, Darragh Rossi, Lorcan Byrne, Sara Byrne, Sharon Cunningham and Stephanie Kearns for their assistance in preparing these remarks.


1 Hodson, Michael: Reflections on Brexit, insights on supervision and enhancing diversity (14 May 2019).

2 Irish Funds: Guidance Paper 6 “Incorrect Pricing of Funds Correction and Compensation” (February 2009).

3 Central Bank of Ireland: Thematic Review of UCITS Performance Fees (4 September 2018).

4 Central Bank of Ireland: Markets Update (6 June 2019).

5 Sibley, Ed: Address to the Institute of Banking (17 November 2016).