The CBI1 oversees in excess of 6,000 Irish domiciled funds. The CBI conducts themed inspections to supplement its supervisory activities under its risk-based supervisory framework PRISM2.
In 2015, CBI themed inspections focussed on cyber security, integrity of regulatory returns, depositary oversight, UCITS3 risk management and the treatment of pricing errors.
The CBI recently published its 2016 programme of themed reviews and inspections for investment firms, funds and market participants. There is a focus on the need for firms to strengthen their culture of regulatory compliance. The planned themed inspections for 2016 include:
- Outsourcing Arrangements – The CBI plans to inspect SLA’s4 with service providers where fund managers and fund service providers have outsourced certain activities. This will be an important issue for fund directors to consider as part of their overall review and monitoring of service providers
- AIFMD5 Programme of Activities – The CBI requires each AIFM6 to be responsible for a number of managerial functions. The way in which an AIFM performs these functions must be set out in a document known as a programme of activity. In 2016, the CBI will inspect adherence to programmes of activities. This is likely to include inspections of designated persons to determine whether they are carrying out the functions allocated to them. This follows on from the publication issued by the CBI in June 2015 entitled Fund Management Company Boards where the responsibility of the designated person was clearly defined. The designated person role is becoming more substantive with a separate time commitment required for each designated person to take account of the requirement to perform tasks assigned to them in the programme of activity.
- Risk Function – In 2016, the CBI will continue to concentrate on risk structures within firms including governance arrangements, risk ownership and responsibility. This follows the 2014 discussion paper issued by the CBI where it discussed the responsibility of fund directors for the risk appetite framework within investment funds. The risk appetite framework outlines the overall approach, policies, controls and systems through which risk appetite is established, communicated and monitored.
- Fees Charged by Investment Funds – The CBI has highlighted the importance of end investor value for money and the problem of investors paying too much for poor performance. The focus of the CBI investigation will be on the TERs7 of investment funds. A similar investigation is expected to be carried out in the UK during 2016. The CBI investigation on fund fees is expected be the largest of its kind in Europe.
- The Use of Financial Indices for UCITS – ESMA8 has set out a series of rules regarding financial indices that a UCITS may invest in. The CBI intends to review the use of financial indices by Irish domiciled UCITS. This is likely to involve an assessment of the existing CBI eligibility criteria. The current criteria involves:
- A review of the index composition and whether it is sufficiently diversified,
- An evaluation of whether the index represents an adequate benchmark for the market to which it refers
- A review of the index transparency and whether the index is published in an appropriate manner
- A review of whether the index is managed independently from the management of the UCITS.
- Director Time Commitments – The CBI issued a consultation paper Fund Management Company Effectiveness – Delegate Oversight “CP86”. In CP86, the CBI outlined that a reasonable time commitment for a director should be 2,000 hours a year. The CBI will continue to pay particular attention to the area of director time commitments in 2016. While the above is not a firm limit, the CBI deems directors with excessive time commitments to be a key risk indicator for investment funds.
- Information Technology Risk – The CBI identified cyber security as one of its key thematic review inspection areas for 2015. In September 2015, the CBI issued a cyber security best practice guide addressed to investment firms, fund service providers and stockbrokers. Related to this, the CBI intends to review the resilience of firms’ IT systems in 2016. The CBI is likely to focus on the best practice recommendation from 2015 in respect of periodic penetration testing of IT systems on an annual basis by external specialists.
- Hedging Arrangements – Hedged share classes are designed for investors who want exposure to assets denominated in foreign currencies without the associated currency risk of the base currency of a fund. While share class hedging can limit investor’s exposure to exchange rate movements, it will not eliminate all currency risk. In line with the CBI’s focus on investor protection, it intends to review hedging arrangements at share class level for investment funds domiciled in Ireland.
- Market Integrity – The MAD9 was adopted in 2003 and established an EU-wide framework for tackling insider dealing and manipulation. Following the financial crisis, the EU proposed that the regime be updated and strengthened. This resulted in the introduction of MAR10 which will become effective from July 2016. MAR will apply to a broader range of securities and derivatives than MAD. As a result of this new regulation, the CBI will place increased focus on the practices of firms when dealing with insider information in 2016.
How can KB Associates Assist?
KB Associates offers a range of services to investment funds including:
- The provision of designated persons to perform UCITS business plan and AIFMD programme of activity managerial functions
- The provision of UCITS/AIF11 operational support
- The provision of UCITS/AIF management company services
- Service provider selection
- The provision of directors
- MLRO12 services
- Company secretarial services.
If you would like to discuss any issues raised in this article or related to KB Associates’ services in general, please feel free to contact Mike Kirby (+353 1 667 1980), Peter Northcott (+44 203 170 8813) or Mike Parton (+1 345 946 4224).