IRELAND: Central Bank of Ireland Publishes Consultation on Investment Firm Regulations 2015

Tuesday December 1 2015

The Central Bank of Ireland has published a Consultation Paper on proposed Central Bank Regulations to apply to certain Investment Firms.

Investment Firms are typically authorised in Ireland as MiFID firms under the EC (Markets in Financial Instruments) Regulations, 2007 (SI 60 of 2007) (“MiFID”) which transposes the Market in Financial Instruments Directive into Irish law. Where the nature of the activities of an investment firm do not bring the firm within the scope of MiFID, they may be authorised under the Investment Intermediaries Act 1995 (“the IIA”), as investment business firms.

The Central Bank (Supervision and Enforcement) Act 2013 (the “2013 Act”) sets out that the Central Bank may make regulations for the proper and effective regulation of regulated financial service providers. The Central Bank proposes publishing an Investment Firms rulebook which will consolidate into one document all of the conditions and requirements which the Central Bank imposes on investment firms. The Central Bank proposes to issue the rulebook in the form of Central Bank regulations under the 2013 Act. When the consultation process is complete the Central Bank intends to publish a final set of Central Bank Investment Firm Regulations. The Central Bank will also consider whether any guidance on the requirements might also be useful.

The Central Bank, whilst consulting on the full set of proposed regulations, welcomes stakeholder’s views on the following:

Chapter 5 of the Central Bank’s AIF Rulebook (June 2015) contains certain requirements applicable to Fund Administrators including those related to capital. It is proposed that those requirements including capital will be removed from the AIF Rulebook and will, in the future, form part of the proposed Central Bank Investment Firm Regulations. The requirements will remain similar to the existing requirements but there are some changes proposed as described below:

The definitions of own funds items will be brought broadly into line with certain modernisations made by the CRR/CRD IV regime. In particular, it is proposed that tier 2 capital will be capped at one-third of tier 1 capital – presently no limit is applied. In addition, there are certain new deductions from capital proposed;

The method of calculation of the fixed overhead requirement will be refined to better align with CRR/CRD IV. The proposals state that fund administrators shall calculate their fixed overheads of the preceding year, using figures resulting from the applicable accounting framework, by subtracting the following items from the total expenses after distribution of profits to shareholders in their most recent audited financial statements, or, where audited statements are not available, in annual financial statements validated by the Bank:

• fully discretionary staff bonuses;
• employees’, directors’ and partners’ shares in profits, to the extent that they are fully discretionary;
• other appropriations of profits and other variable remuneration, to the extent that they are fully discretionary;
• shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue, and where the payment of the commission and fees payable is contingent upon the actual receipt of the commission and fees receivable;
• fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;
• interest paid to customers on client funds or investor money;
• non-recurring expenses from non-ordinary activities.

Additionally, Chapter 5 of the Central Bank’s AIF Rulebook (June 2015) also contains certain requirements applicable when Fund Administrators outsource activities. The proposed changes are as follows:

The circumstances and conditions where the final check and release of the NAV may be outsourced by the administrator are more clearly specified and defined. The Outsourcing Service Provider may release the Final NAV provided the following conditions are met:

• The fund is daily dealing;
• The outsourcing service provider who releases the Final NAV is an entity within the administrator’s group and the administrator and the outsourcing service provider share the same systems, controls, staff training, procedures and processes for the valuation of each fund’s NAV;
• The prices for investments used for valuation purposes are not available from markets before 5pm Irish time in order to facilitate a release of the final NAV within normal Irish business hours;
• The administrator shall be able to demonstrate that release of the Final NAV outside of normal Irish business hours (8am – 6pm) is necessary in order to facilitate investor dealing due to specified circumstances.

Furthermore, a new requirement for Fund Administrators to make an annual return to the Central Bank concerning outsourced activities is proposed, which shall include:

• all outsourcing models being used;
• the locations of the outsourcing service provider;
• the Central Bank clearance date;
• the names of all funds (including sub-funds) where the Fund Administrator has outsourced the check and release of Final NAV.

The primary purpose behind these changes is to set out clearly the limited circumstances in which a Fund Administrator may outsource the check and release of Final NAV calculations and to specify the conditions to be complied with by Fund Administrators in such circumstances. The requirement to make an annual return to the Central Bank will also assist in the supervision of Fund Administrators with regard to their outsourced activities.

The intention of the Central Bank is that, in future, as the Central Bank develops additional or revised requirements for Investment Firms these will be brought in by way of amendment to the proposed Investment Firm Regulations, to the extent that it is legally sound to do so.

In addition, the Central Bank anticipates that there may be additional requirements relevant to MIFID firms arising from the implementation of MIFID II and the Central Bank will look at that as part of the implementation of MIFID II. Furthermore, it may be appropriate to carry across certain MIFID rules and apply them to other Investment Firms.

Finally, once the transition period is complete for the implementation of the Client Asset and Investor Money rules, the Central Bank will examine the feasibility of consolidating those rules together with the Investment Firms rules. In this way the Investment Firms Regulations will be a living single document, subject to regular amendment over time in the interests of increasing the clarity, transparency and appropriateness of the regulatory rules applying to Irish investment firms.

The draft Act is attached to the Consultation Paper.

Responses to the consultation should be submitted no later than 27 January 2016.

Click on the link above for further details.