CP86 results published: Next steps for Irish fund management companies

On 20 October 2020, the CBI published the findings of its CP86 thematic review in the form of a ‘Dear CEO’ letter. All Irish authorised fund management companies (and self-managed funds) (FMCs) must carry out an assessment of their operational, resourcing and governance arrangements by end Q1 2021.

Background – CP86 framework

In 2016, the CBI published its FMC Guidance (known to industry as CP86) following extensive review and engagement with industry participants. CP86 sets out the CBI’s requirements and expectations in respect of the governance, management and oversight of FMCs. The CBI’s review consisted of three phases: (i) industry questionnaires; (ii) desk-based reviews; and (iii) on-site reviews. The focus was on three core aspects of FMCs’ responsibilities – investment management, risk management and organisational effectiveness.

Thematic Review findings

• FMCs deemed by the CBI to have met the requirements of the framework were cited to have demonstrable “robust governance and oversight arrangements” underpinned by a considered, well-planned approach to implementing CP86. Other FMCs, which we expect are mainly those authorised prior to the full implementation of CP86, often lacked evidence of having undertaken a demonstrable critical assessment of business operations following the introduction of CP86.
• Most interesting and helpful is the clarity that has been provided by the CBI with regard to its requirements for locally based resources and its expectations of the Organisational Effectiveness Director (OED).
• The enhanced resourcing requirements were not unexpected but resourcing generally is likely to continue to be the key challenge for FMCs when meeting their ongoing regulatory requirements as set out in CP86 and in light of the Dear CEO letter.

Key takeaways

Resourcing

• The governance structure and resourcing should reflect the nature, scale and complexity of the FMC.
• Sufficient resources should be in place, taking into account the need for high quality and effective oversight of all FMC delegates.
• A minimum of 3 full time employees/equivalents (suitably qualified and of requisite seniority) required for all FMCs.

Designated persons (DPs)

• DPs must be based locally.
• For larger FMCs – DPs are to be full-time roles.
• DPs to constructively challenge and interrogate the information received from FMC staff and delegates.
• DPs to dedicate sufficient time and sufficient support to effectively discharge their responsibilities.

Delegate oversight

• Appropriate due diligence to be undertaken by FMCs on their delegates. This is to be documented.. Such due diligence to be carried out not only at initial take on of the delegate but annually thereafter.
• Where FMCs rely on policies and procedures of delegates, FMCs must ensure that such policies and procedures are fit for purpose when applied to the FMC. The FMC should have a formalised process in place to review such policies and procedures.
• Effective engagement between the FMC and delegates is essential. Where delegate reports are of not sufficient quality to enable the FMC to carry out a meaningful review, the FMC should take steps to address this by challenging the delegate and taking further action where necessary – such challenge and any further action to be documented by the FMC.
• All third party appointments must be documented by way of a service level agreement.

Risk management framework

• FMCs should have an entity-specific risk management framework and risk register with a defined risk appetite and not rely on any group level framework/risk appetite.
• Boards of FMCs to be satisfied that the risk management framework is fit for purpose.
• Risk management framework to be reviewed regularly but no less than annually.

Board approval of new funds

• Boards of FMCs to be involved early in the process (eg when formulating the fund’s investment strategy or prior to submission of fund application to the CBI – evidence of robust discussion and challenge by the board is expected in relation to proposed new fund strategies/structures and their attendant risks.

Organisational effectiveness director

• OED to be a “change leader” and bring to the FMC’s board proposals to improve the effectiveness of the FMC.
• Records of formal meetings with DPs to be maintained by the OED.
• Evidence of the OED’s consideration of conflicts of interest and personal transactions on an ongoing basis required. OED to produce a detailed report to the board on an annual basis.
• Formal reporting by the OED to the board required.
• Resource Evaluation: OED should evaluate existing resource levels and to document its findings / report to the board on at least an annual basis. Meaningful and regular interaction between the OED, the DPs and the board is required – all such interaction to be documented. Interaction between the OED and DPs should be at least quarterly or as necessary.

Board composition/gender balance/governance trends

• Independent non-executive director tenure and their ongoing independence are highlighted to be considered as part of the OED’s review of board composition and to form part of related reporting to the board. The review should consider how to achieve a sufficiently regular rotation of board members to ensure independent challenge at board level – should review to be made available to the CBI upon request.
• FMCs are expected to consider gender diversity as part of their governance review.
• FMCs are expected tohave appointed a CEO (except for the smallest FMCs)

I am a FMC – What do I need to do?

The CBI expects you to critically assess your daily operational, resourcing and governance arrangements against all relevant rules and guidance taking into account the findings of the review. FMCs should continually evaluate their arrangements to ensure they remain fit for purpose. FMCs are required to do this by end Q1 2021. As part of this assessment, FMCs are required to implement a time-bound plan for making the necessary changes to ensure full and effective embedding of all aspects of the Guidance.

Please contact your usual Simmons & Simmons contact to discuss how we can help.