Regulatory news April 2017

Regulatory news April 2017

For news and analysis of immediate regulatory matters.

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Investment Firm Regulations – S.I. 60 2017

These new regulations apply to investment firms, certain investment business firms (excluding retail intermediaries) and fund administrators.

The Central Bank has used powers, available to it under the Central Bank (Supervision and Enforcement) Act 2013, to consolidate and place existing requirements on a statutory footing. On 7 March 2017, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Firms) Regulations 2017 (“Investment Firm Regulations”) came into force. These new regulations apply to investment firms, certain investment business firms (excluding retail intermediaries) and fund administrators. They supplement existing legislative requirements, in particular the European Communities (Markets in Financial Instruments) Regulations 2007 and the Investment Intermediaries Act 1995.

In the main, the new regulations replace the various conditions and requirements which the Central Bank had imposed on a piecemeal basis on firms in the investment management sector, for example the Prudential Handbook for Investment Firms is now obsolete. However firms should take note as they do contain some new provisions and they have been supplemented by a new Central Bank Q&A on Investment Firms and new guidance on;

  • the relationship with the Central Bank;
  • outsourcing;
  • and capital management;

The biggest impact of the new regulations is on fund administrators, authorised under the Investment Intermediaries Act 1995. The regulations contain new provisions on directors, outsourcing and capital and replace Chapter 5 of the AIF Rulebook.

Previously fund administrators had to have a minimum of two Irish resident directors. Residency has been defined and now fund administrators must have a minimum of two directors present in the State for 110 working days in the year. This is aligned with the residency rule for directors of fund management companies.

In relation to outsourcing, the majority of the new regulations reflect the requirements in Chapter 5 in the AIF Rulebook. It is noteworthy that they confirm that the fund administrator must check and release the final NAV and the outsourcing service provider can only do so in circumstances determined by the Central Bank, as is already the case. There is a new requirement for fund administrators to submit an annual return template to the Central Bank concerning its outsourced activities. The Central Bank has also issued an industry letter which sets out its expectations in relation to the level of outsourced activity and recommendations on governance and oversight of the activities.

The capital rules for fund administrators aim to ensure that they are subject to capital requirements similar to those set out in the CRD framework. For example own funds are still the higher of €125,000 or the fund administrator’s expenditure requirement but the method of calculation of the expenditure requirement, particularly around the treatment of fixed expenses, is more prescriptive. Own funds have been redefined and Tier 2 capital is limited to one third of Tier 1 capital. All instruments need the prior written approval of the Central Bank for inclusion as own funds, with transitional arrangements in place for pre-existing instruments.

In addition a fund administrator must now develop a risk analysis and capital adequacy assessment process, including having written policies and procedures in place to identify, assess and manage risk. The regulations set out the following minimum risks, which must be considered - credit and counterparty risk, concentration risk, market risk, operational risk, liquidity risk, strategy or business model risk, group risk, environmental risk and governance risk. Larger and more complex fund administrators or those operating in a particularly dynamic environment will need to consider whether or not they should have a stress-testing framework in place to adequately manage liquidity and capital.

The Central Bank has had to update the UCITS and AIFMD Q&As and the AIF Rulebook to reflect these changes. These updates were made on 13 March 2017.

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Further information

For more information on previously issued News articles, please contact Margaret Murphy, Director, KPMG Regulatory.

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