CP86 substance requirements

Insights - What we think

By Ed Hamilton-Russell, Head of Business Development (EMEA)

How your Self-Managed Investment Company can transition to a third-party Management Company.

This week, the Central Bank of Ireland (CBI) announced that all Irish fund management companies (FMC) must be fully compliant with CP86 by the end of Q1 2021.

The CBI expects all FMCs to take immediate action to consider its findings from the consultation paper. FMCs must then take the necessary steps to finalise an action plan and ensure board approval by this new deadline.

Within the funds industry, CP86 refers to the CBI’s rules and guidance on the effectiveness of a fund management company (including UCITS Managers, AIFMs and self-managed UCITS/AIF (SMICS).

CP86 amalgamates and builds on guidance on delegate oversight, organisational effectiveness, directors’ time commitments, managerial functions, operational issues and procedural matters. The CBI believes a fund management company should exercise capability in these key areas, demonstrating substance and the ability to oversee service providers and act in the best interests of investors.

In December 2016, the CBI addressed substance requirements in their final rules and guidance on the effectiveness of fund management companies – which became effective on 1 July 2018.

The CBI has previously consolidated the existing fund managerial functions for into six areas:

  • Investment management
  • Distribution
  • Fund risk management
  • Operational risk management
  • Regulatory compliance
  • Capital and financial management

Fund management companies must appoint a designated person (DP) to each managerial function. Though a DP can perform more than one function, fund risk management and investment management need to be performed by separate people. Substance requirements include time commitments of DPs, who are responsible for the functions.

What does this mean for SMICs?

Following the implementation of CP86, SMICs who applied for authorisation from the CBI were required to give greater time commitments from DPs than before.

As many SMICs rely on external consultants to provide DPs, increased time commitments mean higher costs. For SMICs, the time commitments for DPs apply to the individual DPs appointed by the SMIC, whereas for a third-party Management Company it applies to the Management Company itself.

It is anticipated that many UCITS and AIF’s may wish to transition to a third-party Management Company to assist with the capability to meet the CBI’s substance requirements, rather than encounter any added complexity and cost.

When a SMIC appoints a third-party Management Company, the board of the SMIC can remain in place. However, under this arrangement, many of the responsibilities for regulatory obligations, policies and procedures shift from the board of the SMIC to the third-party Management Company.

How can a ManCo/AIFM help?

The Management Company takes on the DP roles on behalf of the fund for each of the management functions. This removes the requirement for SMIC directors/employees/external consultants to act as DPs and their involvement in the day-to-day running of the fund. The Management Company undertakes active oversight of delegates to ensure requirements are met, adopting all ongoing monitoring and reporting (including regulatory reporting).

Three steps to make the transition

Changing an existing SMIC umbrella fund structure to a Manco/AIFM structure is a fairly straight-forward process.

1. Notify the Shareholders

  • Shareholders to be notified in advance of the SMICs intention to appoint a third-party management company

2. Update legal agreements

The fund directors terminate the existing administration, investment management and distribution agreements

  • The fund directors then appoint a third-party Management Company as fund manager, via a Change of Service Provider (‘COSP’) form filed with the CBI.
  • The manager along with the fund directors re-enter into any previous administration, investment management and distribution agreements where the manager retains the main oversight of delegates.

3. Update fund documentation

  • The prospectus, supplements (and KIID for UCITS structures) reflecting the appointment of the third-party ManCo to be approved by the CBI.

As one of Ireland’s largest third-party Management Companies, we are ahead of the curve in regulation, compliance and best practice. It’s our role to help our clients by overseeing the requirements of their Irish funds, so get in touch to hear how we can help you make a smooth transition.

For more information, please contact Ed Hamilton-Russell at ed.hamilton-russell@linkgroup.co.uk

Ed Hamilton-Russell

Head of Business Development (EMEA)

Tel: +44 (0)7725 628 137

Email: Ed Hamilton-Russell