Background

The Central Bank of Ireland (CBI) conducted an industry wide review into the effectiveness of Fund Management Companies (“FMCs”) in 2019. This was commonly referred to as the CP86 Review.

Readers will recall that the Central Bank focused on FMC’s having sufficient time commitments, skills and a robust governance framework to oversee their work.

In June 2022 the CBI conducted an industry survey to assess how the industry had responded to the ‘Dear CEO letter’. The survey focused on governance structure and resources available to FMCs.

Survey Findings

The CBI noted that the environment had changed significantly. The number of FMCs in Ireland has dropped considerably from 358 in 2019 to 148 in 2022. The number of self-managed investment companies had dropped by 90% with much of this business moving to third-party or proprietary management companies. Given the additional resourcing requirements, this outcome has not come as a surprise.

Mirroring the trend on the decline of the SMIC has been the growth of the third-party management companies with AUM for the sector now topping €540bn. The CBI noted that it expected to see a corresponding increase in resources as the nature scale and complexity of third-party FMCs grows.

There has been a marked growth in the activity of FMCs with MiFID top-ups with AUM for separately managed accounts increasing by more than twenty-fold to €432bn. This activity is normally undertaken by proprietary management companies.

Corporate Governance and Resourcing

Growth of the CEO role

The Central Bank indicated that it expected all but the smallest FMCs to employ a CEO. It was noted that 67% of FMCs now had a full-time CEO, a 50% increase since 2019.

Increasing Time Commitments

The Central Bank noted that the amount of time committed by Directors to FMCs had almost doubled since 2019. For Designated Persons this has increased by more than three-fold with an average FTE[1] commitment of 10. For the largest 10 FMCs the CBI noted an average headcount of 23 FTE which is reflective of the CBI’s view that resources should increase in line with the nature, scale and complexity of the business.

Tenure

The CBI had focused on the tenure of INEDs noting that this should be considered as a factor in assessing a director’s independence. For FMCs the CBI noted a drop of 7% to 18% for the number of directors with a tenure of greater than 10 years who are still classified as independent. The CBI noted that it expected tenure and independence to continue to be part of the review of board composition undertaken by the Organisational Effectiveness Director (OED).

Diversity

The Bank noted that there had been a small increase in the number of directorships held by women from 16% to 20%. However, it was clear that more work needs to be undertaken in this area and that FMC’s should consider factors such as skills, age, gender, culture and ethnicity when considering board composition.

Analysis

It is clear from the above that much progress has been made in the governance of FMCs since the Central Bank’s last review in 2019.

Market Dynamics & Resourcing

The market has shifted significantly since 2019 with the decline of the SMIC. In essence, the Irish industry is now similar in nature to Luxembourg where proprietary and third-party management companies are the two dominant solutions.

While there has been a significant increase in resources dedicated to both third-party and proprietary FMCs it is expected that this trend on increasing resources will continue for all FMCs. This is also reflected in ESMA’s recently published review on Brexit relocation processes where there was a significant focus on substance. All FMCs will know that attracting and retaining appropriately skilled designated persons and support staff has become a challenge given the market growth.

The increase in the AUM in separately managed accounts is not a surprise given the relocation of a number of firms to Ireland post Brexit. Many of these firms have MiFID top-ups and use Ireland as a location for booking their EU MiFID business. It is worth noting that the CBI does not favour the delegation of MiFID activities outside of group entities and hence this activity is confined to proprietary management companies.

With the increase in the number of firms employing a full-time CEO the future of the OED role may come under review. While the OED role is typically held by an independent Chair the effectiveness of an organisation is usually the responsibility of the CEO.

Governance

Tenure and Diversity continue to be areas of focus for the CBI when it comes to FMC board composition. The Bank has noted that there has been marginal improvement in both areas but that improvements must continue to be made.

Conclusion

Given the global nature of the Irish Funds industry and the crucial role of the FMCs in overseeing their operations, regulation of FMCs will continue to be a key area of focus for the CBI. Firms operating in this area should be clear that they will be subject to continual ongoing scrutiny with a strong focus on resourcing and expertise.

The Bank expects that the Dear Chair Letter summarising the findings will be discussed by the boards of FMCs and that “any areas requiring improvement that directly relate to a firm are given due consideration to ensure robust and appropriate governance arrangements are in place.”

[1] Full-time equivalent