Ireland as a domicile of choice
Ireland has a long and well-established reputation as a fund-friendly domicile. Its pragmatic regulatory environment benefits from the passports available under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Manager Directive (AIFMD). This allow funds to be sold and marketed into the EU and beyond under various regulatory regimes, while the portfolio management can be performed outside of Ireland in jurisdictions such as the UK, US and Asia. Up to a few years ago, the SMIC model had been the preferred vehicle of choice for US and UK managers who were looking for UCITS to provide a gateway into Europe.
Although the CBI had introduced the concept of designated persons and managerial functions as far back as 2009, the time commitments required for the managerial functions were not significant and it was typical to see the independent non-executive directors (INEDs) undertake those managerial functions, or for existing ManCos to outsource the designated persons to SMICs or indeed other ManCos.
The introduction of the Alternative Investment Fund Manager Directive (AIFMD)
The introduction of AIFMD in July 2013 started a process of change in relation to managing the business affairs of the underlying funds under management. Unlike the UCITS regime, which is largely a product directive but also enshrines principles around the management of UCITS, AIFMD focuses on the regulation and ongoing supervision of the Alternative Investment Fund Manager (AIFM).
Although AIFMD permits both an internally managed Alternative Investment Fund (AIF) structure, as well as the appointment of an external AIFM, the rules around governance, supervision and the extent to which an AIFM can delegate duties were far more prescriptive than the UCITS regime. This made the concept of an internally managed AIF (similar to the SMIC model under the UCITS regime) far more challenging.
Furthermore, Article 82(1)(d) of the Level 2 AIFM Directive sets out in significant detail the rules around delegation and includes both quantitative and qualitative criteria around what can be delegated and what can be retained. Article 82(2) also provides that the EU Commission may review AIFMD delegation models to ensure that the AIFM does not become a ‘letter-box entity’. Article 82(3) further provides that the European Securities and Markets Authority (ESMA) may issue guidelines to ensure a consistent assessment of delegation structures across the EU. This prompted the CBI to consider the effectiveness of the delegation structures by Irish management companies.
CP86 review of the governance and effectiveness of Irish-authorised fund management companies
At the end of 2014, the CBI reviewed the effectiveness in governance of the funds under its supervision – the CP86 review – and published its Fund Management Company Governance framework. This new framework revamped the previous 10 UCITS and 16 AIFMD management functions into six identical new managerial functions to be undertaken by designated persons. Specific rules around delegation, supervision of those delegates, and enhanced guidance around time commitments of INEDs and designated persons were also introduced.
The CP86 regime was formally introduced on 1 July 2018. What was particularly important about this, and as noted above, was that it applied to UCITS management companies, as well as AIFMs, even though the UCITS Directive did not include the same level of detail around UCITS management company delegation arrangements. It was felt that since both the UCITS and AIFM regimes permitted a single regulated entity to be licensed as both an AIFM and a UCITS management company, a so-called Super ManCo, the same standards around oversight, delegation and supervision needed to apply not only to AIFMs but also to UCITS management companies. This meant that a designated person within a ManCo could act for both UCITS and AIFs.
ESMA opinion on requirements ‘post-Brexit’
Following the UK referendum on leaving the EU, ESMA issued opinions in July 2017 which focused on the level of substance which management companies operating in the EU would be required to have. The ESMA opinions signposted a jump in terms of the regulation of ManCos and sought to ensure that a newly established ManCo needed to have real substance, and ‘boots on the ground’, in the relevant EU jurisdiction in which it was established.
Since the CBI had already introduced the CP86 regime, it was felt that Ireland was ahead of the curve compared to other leading fund management company domiciles. It was believed in 2017 that the ESMA Brexit opinions would not result in any significant changes around the structure and supervision of management company authorisations, designated persons and managerial functions. However, given the political pressures at play as part of the Brexit negotiations and the greater level of involvement that ESMA began to have in new ManCo and MiFID applications, through the newly established Supervisory Convergence Network (SCN), local EU regulators were required to ensure that new ‘Brexit-related’ firms would have a degree of local substance to be able to rebut any suggestions that those newly licensed were ‘letter-box entities’.
A revised view of the minimum requirements for substance
This greater ESMA involvement in setting uniform standards for management companies and MiFID firms across the EU led, over time, to an increase in the level of substance and time commitments in the context of new ManCo applications during 2018 and 2019. It was then acknowledged that the model of designating two persons to undertake the six managerial functions would not be sufficient to meet the increased substance requirements for new management companies. In late 2018, the CBI identified a minimum of 660 days across six managerial functions for new ManCos with significant assets under management. And, in a number of other cases, a lot more substance was required depending on the nature, scale and complexity of the ManCo business model.
Once the wave of Brexit applications was over, the CBI was keen to ensure that there was not an uneven playing field in terms of substance requirements between existing SMICs and ManCos and those recently approved ManCos who had been subjected to higher levels of substance and time commitments as part of their licence approval process. A further CP86 thematic review was commenced in the summer of 2019 via the issuance of surveys in order to assess the typical level of substance and time commitments within existing SMICs and ManCos. This was on the understanding that there would be no appetite, from a regulatory perspective, for having significant differences around substance and time commitments between existing SMICs and ManCos on the one hand, and new ManCos on the other.
This CP86 thematic review is still ongoing and the industry is expected to receive the findings from the CBI during 2020.
Photo credit: Chris Head