Irish fund governance and management review - Central Bank feedback

On 7 December 2022, the Central Bank of Ireland (the Central Bank) sent an Industry Letter to the Chairs of Fund Management Companies (FMCs) entitled, “Follow up on thematic review of fund management companies’ governance, management and effectiveness” (the Letter).

The Central Bank expects that the letter will be discussed by the Board and that any areas that require improvement ‘are given due consideration’.

The findings from the FMC review will inform the Central Bank’s policy development. The Central Bank will continue to work on identifying changes necessary to enhance and clarify certain aspects of the existing FMC requirements and Guidance.

A summary of the key points raised in the Letter was also given in a speech given on 6 December 2022 by Patricia Dunne, the Central Bank’s Director of Securities and Markets Supervision.

The background to the Letter

In 2019 and 2020, the Central Bank conducted a review of compliance with its FMC framework (the Framework), including related guidance on the organisation of FMCs.

In October 2020, the Central Bank published a Dear Chair letter setting out its main findings and what actions it now expected FMCs to take to ensure compliance.

In June 2022, the Central Bank conducted a follow-up industry survey to assess how the governance, structure and resources available to FMCs had evolved as a result of the October 2020 letter. The new letter published on 7 December 2022 gives an indication of progress achieved in areas such as substance and resources.

What has the Central Bank found?

The Letter notes that, although there has been progress over the past few years, there is more work to be done.

FMCs “will be challenged on all aspects of their compliance with the framework as part of ongoing firm engagement and, in particular, as and when their operations grow”.

Irish FMCs must perform their duties to a high standard so there is a high degree of confidence in how the FMCs discharge these duties and so protect the interests of their investors.

The Central Bank identifies a notable increase in resources available to FMCs and progress in areas such as CEO appointments, director time commitments and resourcing of managerial functions. There has also been a material change in the sector’s scale, structure, complexity and risk profile.

A Changing Landscape

• the most recent survey was completed by 148 FMCs - in 2019, there were 358 in scope FMCs. There has, though, been ‘sizeable growth’ in the AuM these manage
• the number of Self-Managed Investment Companies operating in Ireland has decreased by 90%, largely as a result of large-scale restructuring, migration of business to third party FMCs and redomiciliations, liquidations and consolidations
• this decline has led to significant growth in FMCs providing services to third party funds. The Central Bank, then, expects to see corresponding increased resources and expertise as the nature, scale and complexity of third party FMCs grows
• the survey highlights the growth in the level and extent to which FMCs are providing MiFID services such as individual portfolio management (IPM) – in terms of AuM, IPM services have grown from €19bn in 2019 to €432bn.

Corporate Governance and Resourcing

Findings from the follow up survey highlighted in the Letter include:

• Chief Executive Officer (CEO)
  While there has been a significant uplift in the number of FMCs which have a dedicated CEO (up 50% since the 2019 survey), the Central Bank expects all but the smallest FMCs to appoint a CEO

• Director time commitments
  The average time committed by directors has almost doubled since 2019 – however, the Central Bank is continuing to monitor how many directorships individual directors hold, in order to ensure this is sustainable. Where the number is deemed to be excessive, these will be challenged by the Central Bank.

• Designated Persons & Support Staff
  The average Full Time Employee (or equivalent) increase per firm within all Designated Person and related support roles since 2019 is three-fold (from 3.2 to 10).

  The top ten FMCs (in terms of AUM) show around a 200% increase in Managerial Function resource, while Medium-High/Medium-Low PRISM Impact firms now have an average headcount of approximately 23 FTE.

  The Central Bank’s expectation is that the level of FMC resourcing is continuously monitored and should grow in line with the nature, scale and complexity of the business.

• Independent Non-Executive Director (INED) Tenure
  The number of INEDs with a tenure of longer than 10 years is down by 7% (25% in 2019, 18% in 2022). Although a move in the right direction, it still means that a sizeable number of directors who are classified as ‘independent’ have been in situ for a decade or longer.

  As length of tenure can impact a director’s ability to act independently, it should be continually assessed as part of the Organisational Effectiveness Director’s (OED’s) review of Board composition.

  Such a review should set out an approach whereby a FMC can ensure a regular rotation of Board members and should be available to the Central Bank upon request.

• Board Diversity
  Directorships held by women have increased marginally since 2019 from 16% to 20% in 2022. This means that there is still a significant gender imbalance at Board level within FMCs.

  The Central Bank expects FMCs to continue to consider diversity as part of ongoing internal governance reviews including due consideration of factors such as skills, age, gender, culture and ethnicity.