Commencing in 2014, following three rounds of consultation, the final text of Consultation Paper 86 (CP86) was pronounced in December 2016 with an implementation date of 1st July 2018. On the anniversary of its issuance, the Central Bank of Ireland (CBI) 

The publication of the Dear Chair Letter on October 20^th indicated considerable pockets of non-adherence to a published market standard; a standard widely acknowledged as one fit for purpose, driving the credibility of the jurisdiction forward.

The tone and focus of the letter resound other authorities. The Commission de Surveillance du Secteur Financier (CSSF) Circular 18/698 in 2018, the review of the Authorised Corporate Director (ACD) Market by the Financial Conduct Authority (FCA) in early 2020, the ESMA AIFMD Letter in August and the European Commission public consultation on AIFMD all have themes on substance and delegation. Indeed, the European Commission consultation on AIFMD was released two days after the Dear Chair Letter, so there is an international coalescing symphony of critique. The length of commentary, tone and repeated disappointments expressed in the Dear Chair Letter, puts the CBI in the frame of first violin with its exacting feedback.

There was widespread expectation the letter would have comment on substance and an equal amount of speculation on what fate may be levied on Self-Managed Investment Companies, more commonly referred to in their acronymic brevity; SMIC. Tellingly, and commencing the scope of Dear Chair, SMICs are clearly defined in footnote number one as being in scope of the definition of a Fund Management Company (FMC). From that act of inclusivity onward, everything in the letter now clearly applies.

In a sweeping serving of common obligation, all FMCs are now required to have a Full Time Equivalent (FTE) minimum of three. FMCs are now required to further self-determine their resourcing requirements.

What follows in Dear Chair was a full landscape commentary on the role of locally based staff who conduct the management functions; the designated persons (DPs). The expectation is that they be locally based and there was disappointment in the exhibition of challenge in their roles. With the absence of that challenge, it was of little surprise that there was rebuke for the quality of DP reporting to the board and the insufficient review of delegate reports; both symptomatic of DP time commitments falling below CBI expectation. It’s clear the CBI sees the time commitment of DPs, and the heavy reliance on Group or on delegates as the main protagonists to several natural outcomes.

This censure continues with respect to oversight of delegates, the lack of a risk appetite statement, the lack of a risk register, the lack of formal SLA’s for all delegated activities and notably the lack of effective engagement with delegated investment managers. Setting out a clear expectation, the CBI wants due diligence at the on-boarding of a delegate or material service provider and then refreshed annually, with formal review of delegate policies and procedures if they are relied upon; although there is clear preference the FMC would have its own policies and procedures where possible.

Flagged clearly to the industry in a partnered event with Irish Funds in March, the CBI tilted its lance at the role of the board in the launch processes of new funds, citing instances where it could not see board approval during the launch process or, in instances, no board approval prior to the fund launch. The CBI expects the board to be involved when first formulating the investment strategy through to launch. Tenures of Independent Non-Executive Directors (INEDs) greater than 5 years and greater than 10 years came in for observation and there was spotlighting of the stark gender imbalance. Lastly the CBI observed that there were low levels of executive role holders; stating that all but the smallest FMC should have a CEO responsible for the day to day running of the business.

What next?
 

The actions are self-answering, the Dear Chair is laid out as a blueprint on how CP86 should have been implemented and reiterates what is already contained within CP86. The only two mandated actions are a minimum of 3 FTE and a plan to be approved by the board by the end of Q1 2021. The rest is self-assessment for individual businesses against the tapestry of negative observations to learn from.

Industry reaction has varied, there will be need for clarifications on several points and these are already being inventoried by the industry groups. The words of Pat Lardner, CEO of Irish Funds, best encapsulate the mood when he said the CBI’s findings were “demonstrable evidence that Ireland takes substance and governance seriously and that it has justifiably earned its reputation as one of the most robust and credible international regulatory regimes”.

Closing thought

Noting that February to April is a busy board period for Q4 period board meetings and the approval and filing of December year-end financial statements, boards need to plan their calendars specifically for the action incumbent on them from this Dear Chair letter which has a deadline of end of March 2021. With a plan to be approved by the end of March, formulative distillation of thought will need to commence as soon as possible.

CP86 ended its consultation phase in December 2016 and is required to be fully implemented by July 2018.It’s a living breathing governance standard that is fit for purpose, exacting in its ambition to protect investors and will continue to raise the credibility of the jurisdiction. In her comments to the Irish Funds Conference 2020 on 21^st October, Derville Rowland, Director General of Financial Conduct in CBI, was succinct in her summation “CP86 was intended to bring about a step change in the sector. Our findings are that this has not been achieved to date.”

There was audible tonal emphasis in her voice for her last sentence. “It now needs to be.”

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Photo credit: Eoin Motherway