Regulatory Update DATE: 21 JANUARY

Transcription

1 DATE: 21 JANUARY

2 Table of Contents Regulatory Reporting Deadlines 3 2. New Regulatory Framework for Irish UCITS 4 3. CP 86 Consultation Paper on Fund Management Effectiveness & Delegate Oversight 5 4. UCITS V 7 5. Central Bank Themed Reviews Client Asset and Investor Money Regulations 9 7. AML Update Political Agreement Reached on AML IV Central Bank Report on the outcome of its AML reviews of the Irish Funds sector Common Reporting Standard Companies Act Cyber-Security 13

3 Regulatory Reporting Deadlines 2016 will be a very busy year for funds. We have summarised the impending regulatory requirements that Boards will need to consider in the coming year in the table below. Deadline Regulatory Requirement 1 January 2016 Common Reporting Standards are effective 31 January 2016 Fitness and Probity Deadline for the Annual PCF Confirmation Return for management companies 19 February 2016 UCITS KIID filing deadline 28 February 2016 Fitness and Probity Deadline for the Annual PCF Confirmation Return for funds 18 March 2016 UCITS V implementation deadline depositary agreement and prospectus updates and remuneration policies 1 April 2016 Investor Money Regulations become effective 30 April 2016 Filing of annual financial statements and annual FDI reports for funds/companies with 31 December 2015 year end 30 June 2016 Annual Sub-Fund Profile Return due 31 August 2016 Filing of interim financial statements for funds/companies as at 30 June September 2016 Companies Act 2014 UCITS management companies or AIFMs converting to a Designated Activity Company must pass an ordinary resolution by this date 30 November 2016 Companies Act UCITS management companies or AIFMs converting to a Company Limited by Shares must pass an special resolution to adopt a new constitution by this date Probable Q3~Q CP86 update of Business Plans/Programmes of Activity to reflect the revised managerial functions and organisational effectiveness role We have expanded on the major topics outlined above in our. 3

4 2. New Regulatory Framework for Irish UCITS Implementation Date: 1 November 2015 On 5 October 2015, the Central Bank of Ireland (the "Central Bank") issued a statutory instrument that formed the basis for a new Irish regulatory framework for UCITS. The Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1) (Undertakings for Collective Investment in Transferable Securities) Regulations 2015 (the "UCITS Regulations") replaced the long established UCITS Notices which, along with the accompanying Central Bank Guidance Notes, now fall away. The UCITS Regulations complement the main Irish regulations which implemented the UCITS Directive. Both regulations will be supplemented by supporting regulatory guidance and Q&As (to be published by the Central Bank on specific UCITS issues), which on a combined basis, make up the complete UCITS regulatory framework. This effectively marks a full overhaul of the regulatory rules for Irish UCITS. Key Points to Note: The removal of the requirement for each UCITS to have a fund sponsor or "promoter" approved for such purposes by the Central Bank. Eligible markets to be assessed by UCITS themselves. Second half-year unaudited management accounts are now required for UCITS management companies (and depositaries). This is effective from the start of the Management Company s next financial year. Dealings with Connected Persons: Clarity has been provided in respect of services provided by delegate of the UCITS. The Central Bank has confirmed that the appointments of service providers to carry out services are not connected party transactions with the UCITS. It has also noted that dealings in a UCITS (i.e. subscriptions/redemptions of shares of the UCITS) by any person, including connected persons, are governed by the dealing provisions in the UCITS constitutional document or prospectus and are not considered connected party transactions. Collateral rules: Conditions are set out for the receipt of collateral by a UCITS, in line with the changes to the ESMA Guidelines on ETFs and other UCITS issues regarding collateral country diversification and issuer credit quality. This is the outcome of the Central Bank's July 2014 consultation in this area (CP84). Depositary breach monitoring and reporting: New detailed rules apply to depositaries regarding regulatory breaches by UCITS it acts as depositary for, covering recordkeeping and notifications to the Central Bank. In addition to the existing requirement to promptly report any material breach to the Central Bank, there is a new requirement to notify the Central Bank promptly of any non-material breach that is not resolved within four weeks of the Depositary becoming aware of that breach. It should be noted the regulatory rules governing the operation of Irish UCITS have shifted from being a set of administrative rules to legally binding legislation. Additionally if a UCITS holds an existing derogation from any particular Central Bank requirement, it will need to assess whether this derogation now conflicts in any way with the UCITS Regulations, particularly as these are legally binding. The UCITS will need to determine whether to seek a Central Bank waiver of the relevant requirement in the UCITS Regulations or whether the derogation may no longer be effective. 4

5 3. CP 86 Consultation Paper on Fund Management Effectiveness & Delegate Oversight Implementation Date: Quarter 3 / Quarter In June 2015, the Central Bank released a response indicating that it would implement some of the recommendations proposed in the original document, would relednt on others and would be proposing some changes and would publish further guidance for fund management companies by the end of The Central Bank also advised that it would require existing fund management companies* to update business plans/programmes of activity to reflect the revised managerial functions and the organisational effectiveness role by 30 June (*Fund Management Companies includes the following: UCITS Management Company, an authorised Alternative Investment Fund Manager, a self-managed UCITS investment company and an internally managed Alternative Investment Fund which is authorised as an AIFM) As at 23 December 2015 work on preparing the additional draft guidance for fund management companies was ongoing and the Central Bank anticipates publishing it for public consultation by the end of Quarter To reflect this extended timeframe and to facilitate orderly transition, the deadline for compliance by existing fund management companies (i.e. fund management companies authorised before 1 November 2015) with the revised managerial functions and new organisational effectiveness requirements will be at least six months after the completion of the consultation process. Thus the original 30 June 2016 compliance date is likely to be extended into Quarter 3 or Quarter 4 of Some of the key components of the Central Bank s review that will affect the Fund include: The Central Bank is monitoring the number of directorships held by individual directors. It has determined that 20 directorships is a reasonable number and individual directors holding more than that number will likely be asked to justify their ability to meet the time commitment required to fulfil their roles. They have noted that where directors continue to hold what the Central Bank considers to be an excessive number of directorships, this may lead to greater scrutiny of the fund s operations by the Central Bank. For new funds seeking authorisation, the Central Bank has implemented the streamlining of the existing managerial functions, largely as set out in CP86 but taking into account some points raised in the feedback received. The revised management functions are as follows: 5

6 Revised To Cover Existing Management Functions Risk Management Risk Management, Operational Risk and Liquidity Risk Investment Management Monitoring of Investment Policy, Investment Strategies and Performance Regulatory Compliance Monitoring Compliance, AIFMD Reporting Process and Remuneration Distribution Complaints Handling Capital and Financial Management Monitoring of Capital, Financial Control, Record Keeping and Internal Audit Organisational Effectiveness Supervision of Delegates and Conflicts of Interest The Central Bank is proposing that each Board appoint an independent director with responsibility for undertaking the organisational effectiveness role. The appointed director should not perform any of the other six managerial functions. Fund management companies must appoint designated persons to perform managerial functions. While the Central Bank does not require directors to perform these functions, it has concluded that designated persons should be given separate letters of appointment which will document the time commitment and rate of payment for that role. Overview of the Central Bank s Feedback statement Designated Individuals to be appointed formally by the fund Boards and to receive letters of appointment. Designated individuals may perform more than one managerial function. However, the Central Bank has reiterated that one individual may not perform managerial functions relation to risk management and investment management. The requirement for two Irish resident directors is being maintained as is the determining factor of 110 days residency. Fund Management companies will be required to explain the rationale for the Board s composition in its Business Plan or Programme of Operations. The Central Bank is preparing a separate set of guidance notes for the industry relating to the number of directorships held by individual non-executive directors and the time commitment involved. The Central Bank has also set out a range of good practice recommendations for boards of investment companies, UCITS management companies, AIFMs and AIF management companies. These cover such topics as: Investment Management Distribution Risk Management (Operational and Investment Risk) Operation and Administration 6

7 Support and Resourcing Boards of externally managed investment companies In relation to the number of directorships held by individual non executive directors, initially, the Central Bank is setting the risk indicator in terms of having (a) more than 20 directorships and (b) having an aggregate professional time commitment in excess of 2,000 hours. In an address by Mr. Gareth Murphy, the Director of Market Supervision at the Central Bank on 9 October 2015, Mr. Murphy emphasised that the Central Bank expects directors to consider carefully their time commitments to each and every sub-fund and that investment fund regulation does not stop at umbrella level but applies also at sub-fund level. Directors are required to consider carefully their time commitments to each and every sub-fund and to set aside sufficient time consistent with the nature of the sub-fund in order that they can meet their obligations. We see this item now reflected in the Central Bank s 2016 themed inspections. 4. UCITS V Implementation Date: 18 March 2016 The UCITS V Directive came into effect on 17 September 2014 and must be transposed into national law by 18 March The main purpose of the Directive is to align the provisions with that of the AIFMD. This will impact the fund in the following areas: The appointment of a single eligible Depositary. This should not be an issue for the fund as it has appointed a single custodian. On 18 December 2015 the European Commission published the long awaited UCITS V Level 2 Regulation relating to depositary issues only. The process of replacing or amending the existing Custody Agreement with a new Depositary Agreement to reflect the regulatory changes, with potential legal and Depositary fee implications for the funds, can now begin. UCITS funds will need to document and implement a Remuneration Policy. It is expected that this will include a review of the existing Remuneration Policies of the Investment Manager, where appropriate. We await the ESMA Guidelines on UCITS V Remuneration (which, as above, is not expected to vary widely from that of the ESMA Guidelines on AIFMD Remuneration). Fund documentation will need to be updated to reflect the new disclosure requirements in respect of depositaries and remuneration. Where there is a management company in place, the remuneration rules would come into play if the management company was the Investment Manager and senior persons in the management company could take risk positions on behalf of the fund. The key elements of UCITS V include: Eligibility to act as a depositary depository liability has been strengthened and a list of entities that are eligible to act as a UCITS depository has been set out. The aim of the proposal is to eliminate the diverging interpretations regarding the scope of a depositary s duties and the liability at member state level as were evidenced following the Lehman and Madoff bankruptcies. Duties of the depositary. UCITS V includes a uniform list of oversight duties and safe-keeping obligations of depositaries in order to ensure maximum harmonisation between member states. The duties of the 7

8 depository have been aligned with those set out under the AIFMD and include direction on oversight duties and on-going monitoring of the sub-custodian. UCITS V will introduce a new, cash monitoring role for the depositary. Similar to the provisions of the AIFMD, the depositary will need to ensure that the cash flows are properly monitored and in particular that all payments made by or on behalf of the investors, upon the subscription of units of the UCITS, have been received, and that all cash of the UCITS has been booked in cash accounts. Responsibilities and liability for the loss of financial instruments held in custody. UCITS V has upgraded the responsibilities of the depository, its ability to delegate and the liability of the depository, which now moves away from a negligence-based approach (failure to monitor and supervise) to strict liability for returning lost instruments at the cost of the principal custodian, without any option for the principal custodian to discharge liability in case of delegated custody (unless there is a force majeure event). The remuneration of UCITS managers so that remuneration practices do not encourage excessive risktaking. Again, the changes generally align UCITS remuneration policies with those of AIFMD. Certain disclosures will be required to be made in annual reports in relation to fixed and variable remuneration paid by the UCITS fund. Harmonisation of the administrative sanctions regime across all EU member states. 5. Central Bank Themed Reviews 2016 In December 2015, the Central Bank published a list of its enforcement priorities for The list includes the following areas - a number of which are of particular relevance for funds: Cross-sector enforcement priority areas: Outsourcing Arrangements inspection of service level agreements and operational arrangements AIFM Programme of Activities review of the AIFM s adherence to the terms of the POA Risk Function focus on the risk culture within firms including governance arrangements, risk ownership and responsibility Investment Funds analysis of the production costs of investment funds Financial Indices review the use of financial indices as eligible investments for UCITS investment funds Director time commitments continued focus on various issues Client Assets Focused review of the Client Asset Management Plans for Investment Firms Information Technology Risk focus on resilience of firms IT systems Suitability review of the suitability assessment of clients Conduct examination of the information provided to clients on an ongoing basis Hedging Arrangements review of hedging arrangements at share class level for investment funds Market Integrity review the practices of firms when dealing with insider information and their compliance with Market Abuse Regulations. During October 2015, the Central Bank began a themed inspection on risk management in UCITS funds covering the examination of the on-going application of risk management processes employed by UCITS funds. The initial 8

9 request from the Central Bank was to supply information on the current Risk Management Process ( RMP ) document, details on the financial derivative instruments held in the funds and the VaR and leverage reports for specific dates. This was then followed up with an onsite visit by Central Bank personnel. The visits generally tended to be discussions around the use of the RMP document, which the Central Bank hope should be a working document. 6. Client Asset and Investor Money Regulations Next date of note 1 April 2016 As of 30 March 2015, there are now two regulations: 1. Investor Money Regulations which are specifically for fund service providers who own and operate bank accounts for the collection and payment of money from and to investors in respect of subscriptions and redemptions in funds. The new rules must be implemented by 1 April 2016 and will have a significant impact on the daily processes and controls for some fund service providers. 2. Client Asset Regulations for investment business firms who hold client assets, came into effect on 1 October 2015 with the revocation of the previous Client Asset Requirements of 2007, Where fund service providers (FSP) operate collection accounts, then the new Investor Money Regulations (IMR) will apply. The IMR introduces six core principles along with a new pre-approved control function, Head of Investor Money Oversight, under the Central Bank s existing Fitness and Probity regime. are as follows: These core principles I. Segregation investor money should be held separate from non-investor money 3. Designation investor money should be clearly identified in the internal records of the FSP 4. Reconciliation accurate books and records should be kept by the FSP to provide a record of investor money held by the FSP at any time. Reconciliations should be daily. 5. Daily Calculation FSP should ensure that the aggregate balance of collection accounts as at close of business on the previous working day is equal to the amount it should be holding on behalf of investors 6. Risk Management systems and controls should be maintained to appropriately identify risks 7. Investor Money Examination a FSP should engage an external auditor to report at least annually on the FSP s safeguarding of investor money. However, in instances where the collection account is an asset of the fund, the new Investor Money Regulations will not apply. A collection account opened in the name of a fund will be deemed to be an asset of the fund and falls outside the definition of a collection account for the purposes of the regulations. In that context we are seeing a move by fund service providers to facilitate the opening of bank accounts in the name of the funds for the purposes of collecting investor subscriptions and processing all redemption and money flows associated with the fund. Funds should engage with their service providers to ensure that they meet the requirements under the regulations by the deadline. During December 2015, the Central Bank issued guidance on the operation of cash accounts at umbrella fund level which supports the approach to be adopted where such cash is treated as fund assets and not investor monies 9

10 falling within the remit of the Investor Money Regulations. The guidance sets out the principles, policies and procedures that apply to holding such cash. The Prospectus and Application Form will need to be updated to support the change and a detailed policy must be established to govern the operation of the account which should be reviewed at least annually and amended as necessary. The policy should include at a minimum a reconciliation process, the treatment of money in the cash account when calculating the NAV, procedures to apply where money would be transferred from the cash account to an Investor Money Regulation account e.g. where redemption or dividend money cannot be transmitted to an investor who has not provided relevant AML/CTF documentation, erroneous recording, late/non-payments, resolutions of shortfalls and reporting. During January 2016, the Central Bank issued correspondence to some fund boards to establish whether funds would be holding investor monies, as defined in the Investor Money Regulations, after 1 April Funds are requested to complete a short questionnaire and submit a letter of attestation, signed by two directors of the board if the fund will not be holding investor money, to the Central Bank by close of business on 5 February AML Update Political Agreement Reached on AML IV Implementation Date: 26 June 2017 On 20 May 2015, the European Parliament adopted the Fourth Money Laundering Directive (AML IV). Key provisions of the Directive are as follows: Transparency: EU Member States for the first time will be obliged to maintain registers with information on the beneficial owners of both corporate and legal entities as well as trusts. In addition to Competent Authorities who will have access to these registers without any restrictions, any person who can demonstrate a legitimate interest, such as investigative journalists or concerned citizens, will also be able to access the central registers. The extension of the Politically Exposed Person (PEP) regime to cover domestic PEPs and persons entrusted with a prominent function by an international organisation. The removal of the automatic entitlement to apply Simplified Customer Due Diligence ( Simplified CDD ) when dealing with specified customers and products. An increased range of sanctions which may be imposed for breaches by Designated Persons of their AML and CTF obligations. The introduction of risk assessments at EU and national level. It is proposed that these risk assessments will be shared with Designated Persons to assist them in preparing their own risk assessment of their business and customers. Member states must transpose the Directive into national law by 26 June

11 8. Central Bank Report on the outcome of its AML reviews of the Irish Funds sector The Central Bank published the above paper on the 18 November The paper sets out, in some detail, the observations and expectations of the CBI following the completion of its reviews in Quarter 3 and 4 of The key findings are summarised below. Each has implications for the Board, the MLRO, the Administrator or a combination of the parties and will require that the Board oversee the review and update of the Fund s AML Policy along with engagement with the Administrator to confirm that it has adequately addressed the points raised by the Central Bank. Summary of Key Findings 1. Oversight process of the Board where AML/CFT is outsourced to a delegate 2. Commentary on format and monitoring of the Risk Assessment Process 3. A lack of policies and controls to comply with the requirements of S33 8 (a) and (b)* which are the provisions which apply when Customer Due Diligence ( CDD ) is not supplied. This is particularly relevant in the context of the Company s policy document for the time permitted to provide CDD which typically is in the region of 90 to 120 days 4. Limited assurance testing completed in relation to Section 40 of the CJA 2010 i.e. third party reliance letters 5. Commentary on the process for reporting of suspicious transactions by directors 6. Inadequacies in the on-going monitoring of investor transactions 7. Evidence of compliance with regulatory AML training by delegates/training records 8. Adherence to agreed policies in particular the application of triggers 9. Approval and on-boarding process for PEPs including senior management sign off and the completion of source of wealth and of funds checks. *S33 8 (a) not provide the service or carry out the transaction sought by the customer for so long as the failure remains unrectified and (b) discontinue the business relationship (if any) with the customer Summary of Suggested Actions: 1. Oversight process by the Board of both policies and procedures We would suggest that the Company s AML policy is updated to include the processes available to the Board to satisfy itself as to the adequacy of the Administrator s policies and procedures. In some cases Administrators do not make their policies and procedures widely available. 11

12 2. Representation required from the Administrator in respect of the recent report by the Central Bank We suggested that each Board requests that the Administrator provides a confirmation to the Board that the report has been reviewed, a gap analysis has been prepared with a supporting confirmation of any gaps that have been identified and the steps required to remediate such gaps. 3. Quarterly board reporting format (both the Administrator and the MLRO) We suggest that the Board, or the MLRO on behalf of the Board, liaises with the Administrator to request additional management information ( MI ) in line with the comments of the Central Bank and to be satisfied as to the adequacy of such reporting. 4. Process for the treatment for aged non-compliant investors We suggest that each Board prepares a timeline for consideration by the Board which outlines the communication process with non-compliant investors. The Board or MLRO should also liaise with the Company s legal advisors to confirm a view for the steps required to satisfy the particular provisions of both S33 8 (a) and (b), but in particular, S33 8 (b). As this is an issue for all Funds we expect there to be significant discussion on this topic over the coming weeks and months. 9. Common Reporting Standard Implementation Date: 1 January 2016 for early adopters, which includes Ireland The Standard for Automatic Exchange of Financial Account Information was approved on 15 July The CRS is part of this and is the component that contains the reporting and due diligence requirements that underpins the automatic exchange of financial account information. The effective start date of the CRS was 1 January 2016 (new account opening procedures were required to be in place by 1 January 2016 with pre-existing accounts being those open on 31 December 2015). The first exchange of information is currently targeted to take place by the end of September Fund documentation had to be amended to facilitate the capture of investor tax status information. 10. Companies Act 2014 Implementation Date: 1 June 2015 with 18 months transition period (30 November 2016) This change to the Companies Act will directly impact the Company. The provisions of the Act came into effect on 1 June 2015, with a transition period of 18 months for certain elements. The Act replaces the Companies Acts and represents a significant reform of Ireland s company law regime by consolidating, reforming and amending the existing company law legislation. The Act impacts every Irish company together with all directors and shareholders. One aspect of the new Act that applies to all Irish companies is the introduction of a codification of the principal fiduciary duties of the directors 12

13 of an Irish company. Companies may choose to update their Memorandum and Articles of Association to reflect the provisions of the Companies Act 2014 when planning their Annual General Meetings for UCITS Management Companies and AIFMs The Central Bank has clarified that management companies, alternative investment fund managers, AIF management companies, fund administrators, depositaries and investment firms which are companies are not required to convert to designated activity companies (DACs) under the Companies Act 2014 nor are they required to do so by the Central Bank. If within 18 months, an existing private company has not re-registered, it will be deemed to be a CLS (Company Limited by Shares), one of the two new types of company under the Act. For companies converting to a CLS, shareholders must pass a special resolution to adopt a new constitution which must be filed with the Companies Registration Office by 30 November Investment companies structured as public limited companies Some changes will arise for investment companies structured as public limited companies, but the Act amounts to more or less a restatement of existing company law as it applies to such companies. Public limited companies will not need to convert as a result of the Act. Investment companies structured as public limited companies should consider updating their Memorandum and Articles of Association to align themselves with the new Act. 11. Cyber-Security The Central Bank issued a letter to industry on 22 September 2015 on the back of a series of themed cyber-security inspections. The Central Bank noted in its letter that cyber security is a real and live threat and a successful attack could have a significant negative impact on daily operations. The Central Bank has highlighted that it is the board s responsibility to ensure a firm is properly governed and has the necessary processes and systems to protect the firm and all of its assets. The Central Bank provided a guide to best practice for firms which the Central Bank will have regard to when exercising its regulatory and enforcement powers. A self-assessment questionnaire was also included for firms. The Best Practice Guide sets out 17 separate topics and below is a selection: 1. The board should drive a culture of security and resilience throughout the firm and cyber security should be a standing agenda item. 2. A clear reporting line to the board should be established for cyber-security threats. 3. Firms should have appropriate processes in place to verify the legitimacy of requests, e.g. redemption or information requests. 4. Firms should satisfy themselves that the cyber security standards of third parties/vendors it utilises are comprehensive. 5. The firm should have contingency plans in place should their systems be breached or their data compromised. 6. Firms should report any successful breach or substantial attacks of their systems to the Central Bank. 13

14 7. Firms should ensure that they are kept up to date on current cyber security threats. Boards may consider requesting their service providers to complete the Central Bank s questionnaire on the assessment on their cyber security capabilities and making this assessment available to the board, together with a presentation on their cyber security procedures. Gerry Cross, Director, Policy and Risk, Central Bank of Ireland in his address at ACOI Annual Conference in November 2015 also noted that the Central Bank of Ireland will publish an initial paper setting out our current thinking and experience of this risk and overall expectations of regulated firms early next year. The Central Bank has also noted that a themed review of Information Technology Risk is included in their inspections in