Central Bank publishes outcome of thematic review of fund management companies

• A significant number of firms have not fully implemented the framework for governance, management and oversight in fund management companies.
• The Central Bank of Ireland requires urgent remediation by those firms where we found shortcomings.
• All other fund management companies required to critically assess their position against the findings and put action plans in place by Q1 2021.

The Central Bank of Ireland has today (20 October 2020) published the outcome of a thematic review of the implementation of its framework for governance, management and oversight in fund management companies (FMCs) (PDF 614.8KB). The framework was introduced in 2017 for new firms and in 2018 for existing firms. It includes detailed requirements on organisational effectiveness, the performance of managerial functions, delegate oversight, and resourcing. It is key to protecting investors, ensuring the integrity of the market, and promoting systemic stability.

The review found that when applied correctly by firms, the rules and guidance provide a framework of robust governance and oversight arrangements. These findings align with our experience in respect of the large number of recent applications for authorisation. In the case of these applications, the framework has provided a strong basis for firms to identify and retain the level and nature of resources needed and to put in place the required governance, management, systems and controls.

In the case of previously authorised FMCs, those who were able to demonstrate that they were largely compliant with the framework had resourcing and operational structures in place that enabled a considered, well-planned approach to implementation of the framework. However the review found that a significant number of previously authorised FMCs have not fully implemented the framework, with many only able to evidence the introduction of limited changes following implementation of the framework.

Some of the key issues identified in the review related to:

• Resourcing: A large number of FMCs authorised before the framework have not appropriately increased resources to ensure effective implementation of the framework. The Central Bank expects that the number of FTE should reflect the nature, scale and complexity of the firm and must ensure that sufficient resources are in place.
• Designated Persons: Significant shortcomings were also identified in relation to how some Designated Persons discharged their roles.
• Delegate Oversight: Some firms were unable to evidence that they had carried out the appropriate level of due diligence on their delegates. Not all could demonstrate that they had reviewed and approved delegate/group policies and procedures as being fit for purpose when applied to the firm.
• Risk Management Framework: Deficiencies were identified for a significant number of FMCs, with many firms not having an entity-specific risk management framework, no entity-specific risk register, and/or no defined risk appetite in place.
• Board approval of new funds: Not all FMCs could evidence approval by the Board of the launch of sub-funds. The Central Bank expects evidence of robust discussion and challenge by the Board in relation to proposed new fund strategies/structures and their attendant risks.
• Organisational Effectiveness Director In many cases, the Organisational Effectiveness Director could not evidence that meetings were conducted and no formal records were kept of meetings with Designated Persons. An absence of formal reporting to the Board was also identified, particularly in the area of resource evaluation.
• Gender Balance: The review found a significant gender imbalance on the Boards of FMCs, with only 16% of Director roles held by women.

All FMCs are required to critically assess their daily operations against the requirements, while taking into account the findings of the review, and implement the necessary changes to ensure full and effective embedding of all aspects of the framework. The firm’s analysis should be completed and an action plan discussed and approved by the Board by end Q1 2021.

The Central Bank has commenced supervisory engagement with those FMCs where specific concerns have been identified. It is reviewing some of the more serious findings and will have regard to the full suite of tools available under the Central Bank Act 1942 and the Central Bank (Supervision and Enforcement) Act 2013 to resolve the matters identified in this Review.

Director General of Financial Conduct Derville Rowland said:

“The Central Bank introduced this framework to ensure good governance, effective management and good organisation in fund management companies for the protection of investors and the integrity of the market. We committed to reviewing the implementation of the framework to ensure that these goals were met and that firms had taken all necessary actions to meet its requirements.

“The review’s findings demonstrate that the framework, when properly implemented, helps firms to ensure that their operational arrangements are robust and meet our expectations. However, too many firms evidenced significant shortcomings. The lack of attention to issues that affect good governance is unacceptable and raises serious concern for the Central Bank. It is particularly concerning in light of the increasingly complex landscape in which firms operate.

“The Central Bank will be following up with the firms where we identified specific shortcomings. We are also requiring all other firms to consider the findings of this review as a matter of priority and to take immediate action to ensure that they meet our expectations. Firms should also note that this is not a one-off review. Assessing the implementation of this framework will form part of our ongoing regulatory and supervisory engagement and we will continue to challenge firms where we see weaknesses.”

Notes to Editor

The first consultation on fund management company effectiveness, CP86, was published in July 2014.  The resulting feedback was accompanied by a mini consultation in 2015 and it was then decided to use CP86 in relation to the third consultation in June 2016.

The term CP86 has become synonymous with the organisation of fund management companies and is now used widely both within the Central Bank and externally.

The Central Bank published the Guidance in December 2016 (PDF 1.29MB), concluding a three-part CP86 consultation process. Existing FMCs were expected to comply with the relevant provisions introduced under CP86 by 1 July 2018 (PDF 349.91KB).  At that point, the Central Bank signalled to industry that it would carry out a body of work to assess implementation of the requirements and the Guidance by FMCs.

In Q2 2019, the Central Bank began a comprehensive Thematic Review consisting of three distinct phases: an industry questionnaire, a desk-based review, and culminating with onsite reviews. The Review spanned 18 months and covered all 358 active FMCs.