IRELAND: Central Bank Publishes Feedback Statement on Consultation on Delegate Oversight Guidance

Monday November 9 2015

On 4^th November 2015, the Central Bank published a feedback statement on CP86: Fund Management Company Boards – Feedback statement on consultation on delegate oversight guidance.

The feedback statement is accompanied by the finalised Delegate Oversight Guidance. The Central Bank published finalised guidance on the Organisational Effectiveness role and on Directors’ Time Commitments as part of the CP86 feedback statement. All three pieces of guidance have now been located in a new document titled “Fund Management Companies – Guidance”. The Central Bank intends that future fund management company guidance will also ultimately be located in this document.

The principal comments received on the draft Delegate Oversight Guidance were as follows:

• The Delegate Oversight Guidance should be consistent in how it refers to the purpose of the paper as it used the terms “good practice”, “guidance” and “principles” somewhat interchangeably. It would also be beneficial for the Delegate Oversight Guidance to differentiate between principles and explanatory material, including examples of good practice. One respondent cautioned against the prescriptive nature of some of the matters set out in the draft Delegate Oversight Guidance and believed that setting out a step by step process may lead to a “check the box” approach.
• To ensure consistency of guidance and rules it would be helpful if the Delegate Oversight Guidance included reference to the specific rules on which the guidance is seeking to elaborate.
• Further clarity on what is expected in connection with the risk appetite statement would be beneficial.
• To avoid duplicative reporting by management companies, the delegate monitoring responsibilities of externally managed investment companies should be capable of being satisfied by relaying the periodic reports received by the management company to the investment company boards for their consideration.
• With respect to the distinction between the role of designated persons and directors, Irish funds should not need to appoint another Irish delegate (in addition to the administrator and depositary) in order to be able to meet the Central Bank’s requirements on managerial functions. The use of an Irish delegate to perform management roles should not be the default position.
• The definition of “delegate” should be amended to clarify that it relates to third parties performing the critical regulated activity of the investment fund or fund management company.
• The terms “relevant company” and “fund management company” appear to be used substantially interchangeably. One term should be used throughout.
• Paragraph 22 should be amended to refer to situations where “reporting” standards fall short of the required levels and require remedial action to be taken.
• There were several comments directed at narrowing the scope of the board an limiting the information provided by a delegate. Paragraph 23 should be amended to limit the scope of information to be provided by delegates as they will not wish to provide information which is not relevant to the delegation and is unnecessary. Paragraphs 27 should be amended to specify that investment managers should only report breaches of policies that specifically relate to the portfolio management function relevant to the fund. Similarly, paragraph 28 should be amended so that the directors are required to understand the relevant aspects of the investment manager’s business so as to allow them effectively supervise their delegate.
• Paragraph 24 should be amended to provide that the board should approve a proposed investment approach “based on the recommendations of the Investment Manager who has expertise in this regard”.
• Paragraph 26 should be amended so that only material or significant changes to the investment approach would require board approval.
• Paragraph 31 infers that the board should be monitoring or overseeing marketing materials. Given the large amount of marketing material that may be produced, this expectation is unreasonable. Distributors are required to comply with applicable regulatory requirements themselves such as MiFID.
• The Delegate Oversight Guidance states that the board has ultimate responsibility for all aspects of management. Therefore, it is not clear why paragraph 32 states that the board retains ultimate responsibility for risk management. This may imply that risk management differs from other management functions.
• A fund management company would typically receive a summary of the business continuity plan and not the business continuity plan programme itself. As such the board cannot be satisfied that the programme is adequate. Rather the fund management company must be satisfied that the information provided demonstrates that the delegate has in place processes/procedures to ensure the tasks can be carried out where there is business interruption.
• The depositary is not a delegate of the investment fund or fund management company and paragraphs 45 and 58 should be amended to reflect this.

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