Show me the resources, the expertise and the evidence
Following the publication of the Central Bank’s thematic review of Fund Management Companies’ (FMC) governance, management and effectiveness (“CP86 Review”) we assess what action is required by FMCs and examine the key takeaways from the review. An overview of the findings is available here
All FMCs, regardless of whether they receive an RMP, are required to critically assess their day to day operational resourcing and governance arrangements against all relevant rules and guidance taking into account the findings of this review.
This assessment must cover:
- Time commitment, skills and expertise of available resources.
- The FMC’s retained and delegated tasks, including how ongoing independent challenge of all delegates can be ensured.
- The tasks required by the CP86 framework, including those that must be completed on a fund by fund basis.
- How resources and operational capacity will need to increase to take account of any increase in the nature, scale and complexity of the funds under management since authorisation or the last time the FMC critically assessed its operations.
- How resources and operational capacity will need to increase to deal with a market and/or operational crisis.
The firm’s analysis should be completed and an action plan discussed and approved by the Board by end Q1 2021.
Funds utilising a 3rd party management company are not directly impacted by this assessment as it applies to the management company rather than the fund. They do not need to carry out an action plan although the CBI’s recommendations should be factored into their ongoing oversight of the management company.
To Staff Up or to Outsource?
For many firms this analysis will trigger a consideration of their future operating model. They can choose to staff up and increase the level of resources at the FMC or SMIC or they can consider appointing a third-party management company.
For the smallest and simplest FMCs a minimum of three FTEs will be required, for everyone else more, and in some cases significantly more resources will be required. These resources will need to be sourced at a time when many other firms are seeking resources from the same pool. The Central Bank will expect firms to have succession plans in place to replace key employees. Mood music from ESMA would suggest that substance is only going to increase as the AIFMD review process continues.
Adequate resourcing does not just mean adding more people. One theme that resonates throughout the CBI letter is a lack of evidence that things are being done as expected. In implementing their action plans firms must consider how they can evidence that work is being done, that reports are being thoroughly reviewed and challenged, that SLAs exist and are being refreshed, that due diligence is carried out on delegates in advance and on an ongoing basis. Firms must consider how they document their oversight processes and evidence that they have been carried out. In a world of increasing and changing regulation, where delegates are often located in other jurisdictions, and in the current remote environment, a robust technology solution must play a part in effectively implementing the requirements of CP86.
Considering these challenges, the outsourcing option may look attractive but firms looking at this route will need to ensure that their provider has sufficient resources and has the calibre of people necessary to constructively challenge delegates. The provider should have the systems in place to evidence compliance with CP86 and they will need to effectively oversee their delegates some of whom may be based overseas. Third-party management companies will not be immune to the heated jobs market and your provider should have a robust operating model which is not dependent on a small number of key personnel.
The headlines all focused on resources. The Central Bank drew a clear distinction between the resources in many FMC’s authorised prior to the implementation of CP86 for new firms in 2017 and those authorised after its implementation. The Bank is very clear that a minimum of three full time equivalents are required for ‘even the smallest and simplest of entities’. Other firms will be expected to have more resources to be determined by the nature, scale and complexity of its operations. While the Bank does not give metrics, it is clear that firms managing a significant amount of assets; a number of sub-funds or different strategies; having varying permissions (i.e. UCITS & AIF permissions and/or MiFID top-ups) will be expected to have additional resources over and above the minimum amount.
The Central Bank highlighted deficiencies in the oversight of the monthly reports received from delegates. These deficiencies included:
- Inadequate challenge of delegates
- Poor quality of reporting received from delegates
- Insufficient review of delegate reporting
- Varying levels of independent verification being performed
- Lack of clearly defined thresholds which would trigger escalation to the Board
The Central Bank pointed out that evidence of constructive challenge and interrogation of the information received from FMC staff and delegates was a hallmark of a well-managed FMC.
The Bank noted that many FMC’s failed to fully implement CP86 guidance in relation to delegate oversight:
- Lack of evidence that due diligence was performed in advance of the appointment of a delegate and on an ongoing basis thereafter
- Absence of a formally documented SLA with all delegates
- When relying on policies and procedures of delegates or group entities there was a lack of evidence of a review of these policies
- No entity specific Risk Appetite Statement or Risk Register
Board Approval of New Funds
The Central Bank expects FMC Boards to review and approve new sub-funds. There should be evidence of robust discussion and challenge on new strategies and their attendant risks. Boards should be involved in the approval of new strategies at an early stage.
Director for Organisational Effectiveness
The OED is expected to be a ‘change leader’ who is responsible for assessing the effectiveness of an FMC and the adequacy of its resources on an ongoing basis.
The Central Bank noted several areas of concern in relation to the functioning of the role of the OED, including:
- No formal records of meetings with designated persons which should take place at least quarterly
- Lack of board reporting on resource evaluation in particular
- OEDs should be particularly cognisant of the findings in relation to the Designated Persons and Delegate oversight noted above in fulfilling their duties
HOW CARNE CAN HELP
Carne is Ireland’s largest third-party management company. With over 170 employees in Ireland Carne has the resources needed to ensure compliance with CP86 requirements.
- CORR, Carne’s command and control technology system, assists management companies in complying with, and demonstrating compliance with, the CP86 requirements.
- Carne can assist firms in critically assessing their day-to-day operational, resourcing and governance requirements against the CP86 requirements and Central Bank findings.
- Carne can assist firms in drawing up time-bound action plans addressing the Central Bank findings
- Carne supports firms by providing designated persons and compliance services
To find out more about our CP86 services and solutions talk to your Carne Relationship Manager or contact a member of the team below.
CARNE CONTACT DETAILS
Group Chief Product & Regulatory Officer
T: +353 1 489 6805 | M: +353 86 807 4436
Country Head, Ireland
T: +353 1 489 6821 | M:+353 87 8258 925
T: +353 1 489 6806 | M: +353 86 8222 457
Managing Director, UK
T: +44 203 973 0108 | M: +44 7788 408 136
Managing Director, UK
T: +44 203 973 0104 | M: +44 7798 828 567
Director, New York
T: +1 347 410 0927
Director, New York
T: +1 732 642 5808
CARNE LONDON & ASIA
Managing Director, London & Asia
T: +44 203 973 0107 | M: +44 7900 058 752