The rise of Irish management companies (Mancos) show few signs of abating, with assets under management continuing to climb and private equity behemoths like the Carlyle Group looking to cash in on the trend.
Yet their ascent has also caught the attention of the Central Bank of Ireland (CBI) which, in 2016, introduced a series of new requirements that offered a ‘framework for governance, management and oversight in fund management companies.’ Hoping to create a gold standard within the industry, the rules outlined the CBI’s expectations when it comes to six key functions of a Manco: capital and financial management, operational risk management, fund risk management, investment management, distribution, and regulatory compliance.
Commonly referred to within the industry as CP86, these rules came into effect for new firms in 2017, while existing firms had to comply from 2018. Many Mancos, however, are still not fully compliant with CP86.
In a thematic review released in October 2020, Derville Rowland, Central Bank Director General of Financial Conduct, said that ‘too many firms evidenced significant shortcomings.’ She added that, ‘The lack of attention to issues that affect good governance is unacceptable and raises serious concern.’
In fact, some 358 Irish Mancos had failed to properly implement the framework or could only show limited changes, the regulator said. The central bank warned that follow-ups with firms where shortcomings were identified would be forthcoming.
As the designated person is officially a PCF position, too, they are subject to the CBI’s enforcement powers, including cautions, fines and disqualifications for any contraventions of their regulatory obligations. All Mancos, meanwhile, are expected to assess their adherence to CP86 and to have had an approved action plan ready by the end of Q1 2021.
With the CBI promising to review CP86 again in 2022, firms can expect much more scrutiny in the months ahead. Here, we look at how firms can adhere to the CP86, and how they can better serve their clients to grow their business.
1. Capital and financial management
Mancos and their designated persons are expected to oversee and report on capital and financial management. This includes completion and filing of annual reports, capital adequacy reports, reporting to competent authorities (sub-fund returns, KIIDS, Annex IV), and reports on the valuation of assets.
Although the central bank review found very few shortcomings when it came to conduct and reporting in this area, Mancos may still want to consider how they can streamline and improve their reporting overall – including their regulatory compliance and reporting (see below).
2. Operational risk management
The CBI expects Mancos to conduct a wide range of tasks when it comes to operational risk management. These include: risk management policy and processes, business continuity policy and disaster recovery, appointment of a prime broker, delegation monitoring, and on-site meetings and due diligence.
The Covid-19 crisis is likely to have put to the test the business continuity policies of Mancos, for instance, and many will have made key adjustments. But it’s delegate oversight where the CBI has been most critical of Mancos. In their October 2020 review, they found that some companies were unable to show that appropriate due diligence had been carried out on delegates, with some not having formal SLA documents.
Other times there was an overreliance on a group-wide framework, policies or procedures, without the necessary evidence to show proper engagement and due diligence. Going forward, companies should be able to show that there has been ample due diligence, regular ongoing reviews, and regular engagement or visits when delegating important tasks or functions.
3. Fund risk management
The risk management of funds is another core role of Mancos and their designated persons. These tasks include investment policies, risk-profiling and exposure (VaR, back-testing), leverage monitoring and stress testing, and have grown substantially since ESMA introduced its liquidity stress testing guidelines for UCITS and AIFs in September last year.
According to the guidelines, funds should be doing liquidity stress tests on an annual basis at least, but there is a clear recommendation to perform it quarterly. However, additional factors, including the asset classes and their liquidity, means that there’s no one size fits all and investment managers (and their Mancos) should assess the need to test – and how they test – on a case by case basis.
Moreover, funds are now expected to have clearly documented procedures and practices that go beyond testing and risk-profiling. Governance, including clear escalation paths and clearly defined roles and responsibilities, has become a crucial part of fund risk management – and something Mancos must be acutely aware of going forward.
As with delegate oversight, the CBI review found that there was often an over-reliance on group-wide frameworks, policies and procedures, rather than entity-specific risk management frameworks.
An entity-specific risk management framework requires a fair amount of effort and detail, especially if the Manco is designing a different framework for each fund. But there are solutions that can help here, and using a third party will also ensure that the stress tests, and wider governance, is inline with industry best practices.
4. Investment management
Mancos and designated persons are also expected to oversee and report on the investment management. This may include due diligence of the investments, as well as ongoing leverage and liquidity oversight, margin and collateral considerations and voting rights strategies and execution.
Unlike fund liquidity, Mancos here should make sure the fund type and portfolio reflect the fund’s strategy and its prospectus. Investor requirements and risk appetite should be fully met, while certain rules (i.e. no more than 10% in one security for a UCITS fund) are also implemented.
These rules can change frequently, such as AIFs and UCITS needing to report their short selling activities if it’s greater than 0.1% following the Covid-19 crisis. So Mancos will need to keep abreast of all the latest regulatory news and requirements.
Many will have sought out a third party investment breach monitoring platform, which track pre and post-trade compliance monitoring and issue real-time alerts to the Manco if investment or trading limits have been breached.
A third party platform may also include a rules builder, which allows you to add any specific rules from the fund’s prospectus, and will also ensure that you’re fully compliant with any changes to the regulations.
The fifth expected role is distribution. Mancos should oversee any sales flows in the current pipeline, any proposed new developments and initiatives (such as passporting), and should be aware of any legal, regulatory, tax or other compliance issues. While most Mancos will be well versed in the laws around passporting under the UCITS and AIFMD regimes, for example, there are subtle differences between jurisdictions when it comes to marketing materials.
6. Regulatory compliance
The final role identified by the CBI was regulatory compliance, a role that continues to evolve as the EU regulatory landscape grows ever more demanding and complex.
For Mancos, this may include: authorisation, compliance with regulations (UCITS, AIF, Annex IV, Liquidity Stress Tests), upstream regulation and risk monitoring, depository oversight, remuneration policies and procedures, investor disclosures and senior management oversight.
When it came to the authorisation of new funds, for instance, the CBI review found that not all companies could show the requisite approval by the Board of the launch of sub-funds, or there was insufficient time dedicated to discussing the fund’s approval and authorisation.
Elsewhere, asset managers are increasingly relying on their Mancos and Fund Administrators for compliance and regulatory reporting, too. But this, in turn, means Mancos face a real challenge in trying to meet the increased reporting and compliance requirements of their growing clientele, particularly if using manual legacy systems or Excel.
For mancos or supermancos operating in multiple jurisdictions, meanwhile, there’s a need to streamline their regulatory reporting and operate from a single, standalone platform that gives them a birds eye view of their clients reporting. Being able to see all your global funds, and have all your risk and reporting in one place, is becoming increasingly important.
This is especially the case given the market faces a wave of consolidations and many existing Mancos look to expand their business – offering new reporting solutions and jurisdictional coverage in order to attract more clients.
And with more regulatory change coming down the pipeline in the near future, including SFDR and a renewed focus on risk and liquidity, it’s not surprising many are turning toward third party platforms in order to future-proof their business and stand out from the crowd. Utilising a third party platform in this way ensures that you’re ahead of the regulatory curve, while also automating and managing your data as efficiently as possible.
With the CBI putting companies on notice and promising to review CP86 again next year, Irish Mancos have a few months to ensure that they’ve fully implemented the regulations. And as the competition amongst the industry continues to heat up, finding the best technology is one way to ensure you’re always fully compliant and ahead of the crowd.