CP86 thematic review and findings

Regulatory Update

News

20 October 2020

The Central Bank of Ireland (CBI) today published their findings from their thematic review of Fund Management Companies’ (FMC) governance, management and effectiveness (“CP86 Review”).

Following their in-depth analysis, the CBI confirmed, that when applied correctly, CP86 provides a framework for robust governance, management and oversight arrangements.

However, the CBI found that a significant number of previously authorised FMC’s have not fully implemented the framework. Areas of deficiency included a lack of sufficient resources, three full time equivalents (FTEs) is a minimum expectation; lack of sufficient challenge by Designated Persons; insufficient oversight of delegates; and other governance shortcomings.

The Central Bank expects all FMC’s to revisit the CP86 requirements and guidance, taking into account the findings of this review. This review and an action plan to address compliance must be completed by the end of Q1 2021.

Resourcing & Designated Persons

The Central Bank noted a difference between the time commitments for FMC’s authorised after the implementation of the CP86 guidance in 2017 for new firms, which would have included many firms implementing Brexit related solutions, and those authorised prior to that date. The Bank noted that all FMC’s should have a minimum of three full time equivalents. Depending on the nature, scale and complexity of the activities of the FMC significantly more resources may be required. The Bank noted that the Designated Persons, who undertake the six managerial functions, must be “locally based” and that for larger firms there is an expectation that Designated Persons will be full-time rather than part-time roles.

Designated Persons are expected to constructively challenge other FMC staff and delegates and the Central Bank would expect to see evidence of this challenge when assessing the effectiveness of the Designated Persons.

Delegate Oversight

The Central Bank highlighted that it expects due diligence to be carried out on delegates, including investment managers, in advance of appointment and annually thereafter. When placing reliance on a delegate’s policy, the CBI noted that the FMC should have a formalised process for reviewing these policies and procedures on appointment and on an ongoing basis. Service level agreements must be in place with all delegates.

Risk Management Framework

All FMC’s are required to have an entity specific risk management framework which must include, inter alia, a risk register and risk appetite statement.

Board Approval of New Funds

New funds and sub-funds should be considered by Board’s earlier in the launch process rather than just prior to launch. The Central Bank expects evidence of robust discussion and challenge by the Board in relation to any new fund strategies and their attendant risks.

Director for Organisational Effectiveness (OED)

The Central Bank expects the OED to be a change leader. The Bank highlighted lack of evidence of meetings between the OED Director and the Designated Persons which should occur at least quarterly. The Bank also noted that the OED is responsible for monitoring the FMC’s resources and that the OED’s report should include detail on how conclusions were reached on the adequacy of resources.

Governance and Trends

The Central Bank noted that the majority of FMC’s did not have a CEO and outlined their expectation that all but the smallest FMC should have a CEO.

The Central Bank also highlighted the tenure of independent directors noting that 28% of FMC’s have at least one INED with more than ten years tenure.

The Central Bank noted that only 16% of the Director roles are held by women and that gender diversity should be considered as part of the governance review.

Action Required & Next Steps

The Central Bank has commenced supervisory engagement with FMC’s where specific issues have been identified and these firms will be issued with risk mitigation programmes (RMPs) which require specific actions to be taken.

All FMC’s, regardless of whether they receive an RMP, are required to critically assess their day to day operational resourcing and governance arrangements against all relevant rules and guidance taking into account the findings of this review.

This assessment must cover:

Time commitment, skills and expertise of available resources;
The FMC’s retained and delegated tasks, including how ongoing independent challenge of all delegates can be ensured;
The tasks required by the CP86 framework, including those that must be completed on a fund by fund basis;
How resources and operational capacity will need to increase to take account of any increase in the nature, scale and complexity of the funds under management since authorisation or the last time the FMC critically assessed its operations;
How resources and operational capacity will need to increase to deal with a market and/or operational crisis.

The firm’s analysis should be completed and a time-bound action plan must be discussed and approved by the Board by end Q1 2021.

Funds utilising a 3^rd party management company are not directly impacted by this assessment as it applies to the management company rather than the fund. They do not need to carry out an action plan although the CBI’s recommendations should be factored into their ongoing oversight of the management company.

How Carne can help

Carne is Ireland’s largest 3^rd party management company. With over 170 employees in Ireland Carne has the resources needed to ensure compliance with CP86 requirements
Carne supports firms by providing designated persons and compliance services
Carne can assist firms in critically assessing their day-to-day operational, resourcing and governance requirements against the CP86 requirements and Central Bank findings.
Carne can assist firms in drawing up time-bound action plans addressing the Central Bank findings
CORR, Carne’s command and control technology, assists management companies in complying with, and demonstrating compliance with, the CP86 requirements.

Read the full industry letter

If you would like to discuss any of the above in more detail please talk to you Carne Relationship Manager or a member of the team below.

CARNE CONTACT DETAILS

Ireland

Des Fullam
Group Chief Product & Regulatory Officer
+353 1 489 6805 | M: +353 86 807 4436
des.fullam@carnegroup.com

Ireland

Yvonne Connolly
Country Head, Ireland
+353 1 489 6821 | M:+353 87 8258 925
yvonne.connolly@carnegroup.com

Ireland

John Skelly
Principal
+353 1 489 6806 | M: +353 86 8222 457
john.skelly@carnegroup.com

United Kingdom

Jeremy Soutter
CEO, UK
+44 203 973 0104 | M: +44 7798 828 567
jeremy.soutter@carnegroup.com

United Kingdom