ACOI Welcomes our Members to the 4th seminar in the
ACOI lunch time CPD seminar series January - June 2012.
CPD Reference: 2012-0733
Our Event: Regulatory Updates for The Funds Industry.
Chaired: Mr. Ken Sharkey, Chairman of the Funds
Working Group, and Compliance Manager, Invesco
Speakers: Mr. Kevin O’Doherty, Regulator Affairs Consultant,
Compliance Ireland and Mr. Shay Lydon, Partner, Matheson Ormsby
Prentice
• Upcoming Events
Date Topic
17/04/2012 Lunchtime Seminar: Data Protection Directive
08/05/2012 Lunchtime Seminar: CBI Sanctions
15/05/2012 Lunchtime Seminar: FACTA - An Overview & Our Experience to Date
12/06/2012 Technical Workshop: AML / Data Protection
12/06/2012 Technical Workshop: CPC
22/06/2012 Lunchtime Seminar: Buildling a Shared Commitment to Ethics Excellence - A Global Perspective
22/06/2012 Annual Dinner: Celebrating the Buidling of a Shared Commitment to Compliance Excellence
Funds Regulatory Update – Part IIKevin O’Doherty, Compliance Ireland
3 April 2012
FUNDS REGULATORY UPDATE
Topic 5 – IFIA Corporate Governance Code for CIS and ManCos
IFIA Governance Code Issued by IFIA NOT by Central Bank NOT legally mandated Came into effect on 1 January 2012 One year transition period Applicable to:
Irish authorised Collective Investment Scheme [“CIS”]
Irish authorised Management Company [“ManCo”]
© Compliance Ireland Training 2012 5
IFIA Governance Code Voluntary Code ‘Comply or Explain’
Financial Statements Website
Minimum Requirements Board remains responsible No individual to have unfettered powers Governance structure to be adequately
sophisticated© Compliance Ireland Training 2012 6
IFIA Governance Code Board to be of sufficient size and expertise to
oversee adequately the operations of the CIS or ManCo
Minimum of three Directors Majority of non-executive directors [“NEDs”]
recommended At least one Independent NED [“INED”] At least one director connected with promoter
or investment manager© Compliance Ireland Training 2012 7
IFIA Governance Code Two Irish-resident directors Two directors capable of meeting CBI at short
notice Directors to have sufficiency of time
Time commitment spelt out in advance Requirement to have a buffer Directors to disclose to ManCo/CIS other time
commitments Duty to re-evaluate during periods of stress
© Compliance Ireland Training 2012 8
IFIA Governance Code Up to 8 other non-funds directorships
permitted rebuttable presumption – ‘comply or explain’
Carve-outs for Group companies Public interest and charitable Non-trading or shelf companies
Conflicts of interest to be documented
© Compliance Ireland Training 2012 9
IFIA Governance Code CIS and ManCos shall formally review Board
membership at least once every three years. Directorships subject to Fit & Proper Regime Directors should be aware of company law
obligations Chairman should be an INED
shall lead the Board, encourage critical discussions and challenge mindsets
shall promote effective communication
© Compliance Ireland Training 2012 10
IFIA Governance Code INEDs to be identified clearly in the annual
report INEDs must have knowledge and
understanding of: the investment objectives the regulation of collective investment schemes policies and outsourcing arrangements
Consider with requirement for balance of skills and expertise on board
© Compliance Ireland Training 2012 11
IFIA Governance Code Section 7 of Code sets out reserved powers
of board Formal documented board effectiveness
review to take place every three years Delegation to third-party administrators
[“TPAs”] is permitted Requirement for board to ensure internal control
procedures of TPAs are being monitored
© Compliance Ireland Training 2012 12
IFIA Governance Code Board retains responsibility for compliance
function Board retains responsibility for risk
management Regular reporting from TPAs and notifications
of breaches
© Compliance Ireland Training 2012 13
FUNDS REGULATORY UPDATE
Topic 6 – Central Bank of Ireland Fit & Proper Regime
Requirement
Requirement to be Fit & Proper: A person cannot perform a controlled function
at a regulated financial service provider [“RFSP”] unless: (a) The firm is satisfied on reasonable grounds
that the person complies with Fit & Proper Code (b) the person has agreed to abide by Fit &
Proper Code Section 21 of CBRA 2010
© Compliance Ireland Training 2011 15
Background
Part 3 of CBRA 2010 SI437 of 2011 – the Central Bank Reform Act 2010
(Sections 20 and 22) Regulations 2011 SI615 of 2011 – the Central Bank Reform Act 2010
(Sections 20 and 22) (Amendment) Regulations 2011 Fitness and Probity Standards (Code issued
under Section 50 of the Central Bank Reform Act 2010)
Guidance on Fitness and Probity Standards There is also an FAQs document
© Compliance Ireland Training 2011 16
Requirement
CBRA 2010 sets out persons affected by Fit & Proper:
Control Functions [“CFs”] Defined in Section 20 of CBRA 2010
Pre-approval Control Functions [“PCFs”] Defined in Section 22 of CBRA 2010 These are also CFs – just really important ones!
© Compliance Ireland Training 2011 17
Commencement
Five exemptions: “Call Centre” exemption – scripted Outsourced to another RFSP – e.g. funds Foreign RFSPs providing services cross-border
into Ireland Branches of foreign RFSPs in Ireland Group dominant influences
© Compliance Ireland Training 2011 18
PCFs
PCF-1: Executive Director PCF-2: Non-executive Director PCF-3: Chairman of the Board PCF-4: Chairman of the Audit Committee PCF-5: Chairman of the Risk Committee PCF-6: Chairman of the Remuneration
Committee PCF-7: Chairman of the Nomination
Committee
© Compliance Ireland Training 2011 19
PCFs
PCF-8: Chief Executive PCF-11: Head of Finance PCF-12: Head of Compliance PCF-13: Head of Internal Audit PCF-14: Head of Risk PCF-15: Head of Compliance with
responsibility for Anti-Money Laundering and Counter Terrorist Financing Legislation Not the same thing as the MLRO
© Compliance Ireland Training 2011 20
PCFs
PCF-33: Branch Manager of branches in other EEA countries
PCF-34: Head of Transfer Agency PCF-35: Head of Accounting (Valuations) PCF-36: Head of Trustee Services PCF-37: Head of Custody Services
© Compliance Ireland Training 2011 21
PCFs
PCF-38: Head of Transfer Agency [SMICs & ManCos]
PCF-39: Head of Accounting (Valuations) [SMICs & ManCos]
PCF-40: Designated Person with powers delegated from a SMIC or Manco
© Compliance Ireland Training 2011 22
Control Functions
CF-1:function in relation to the provision of a financial service likely to enable the person to exercise a significant influence on the conduct of a RFSP
CF-2:function in relation to the provision of a financial service related to ensuring, controlling or monitoring compliance by a RFSP
The Guidelines suggest there should be a higher degree of due diligence in relation to these CFs
© Compliance Ireland Training 2011 23
Standard
Persons who are subject to the Fit & Proper Standards must:
(a) be competent and capable (b) act honestly, ethically and with integrity (c) be financially sound
Requirement that employee undertakes to abide by the Code
© Compliance Ireland Training 2011 24
Checks to be done
© Compliance Ireland Training 2011 25
FUNDS REGULATORY UPDATE
Topic 7 – Central Bank of Ireland PRISM system
Irish Risk Rating RegimePrism is the Central Bank’s key new
supervisory assessment tool: Probabilistic Risk Impact SysteM
© Compliance Ireland Training 2012 27
Irish Risk Rating RegimePrism is designed to allow Central Bank to: Adopt a consistent way of thinking about risk
across all supervised firms Allocate resources based on impact and
probability Undertake a significant level of engagement
with all higher impact firms Assess firm risks in a systematic and
structured fashion© Compliance Ireland Training 2012 28
Irish Risk Rating & Selection Process Evaluates institutions under a number of general & specific risk
headings including: supervisory complexity, structure, corporate governance, capital, contagion and related party transactions, business risk, reputational risk, regulatory risk, operational risk, and foreign exchange risk
Specific risk categories include credit, funding, liquidity and market risk. Potential impact of an institution on a number of stakeholders is also
evaluated and forms part of the final score
© Compliance Ireland Training 2012 29
How does PRISM work?IMPACT: Central bank will devote considerably more
time to firms which have greatest potential impact
Indicators have been selected after examining consultation on what measures would be good empirical determinants of impact (December 2010)
© Compliance Ireland Training 2012 30
Category E: CIS and Other Service Providers and UCITS SMICSAssets under management
Turnover
© Compliance Ireland Training 2012 31
Impact rating
Breakdown of Impact categories
High (Including ultra high) – circa 20 firms Medium high – circa 70 firms Medium low – circa 450 firms Low – circa 10,300 firms
© Compliance Ireland Training 2012 32
FUNDS
Resourcing
© Compliance Ireland Training 2012 33
Engagement
Central Bank will engage with firms at a level that corresponds to their impact category. Engagement will consist of a variety of reviews, assessments and meetings.
High impact firms will receive an inspection visit every quarter with each visit having a different focus.
Medium-high impact firms will have full risk assessments conducted very 2 to 4 years.
10% of medium-low impact firms will be subject to proportionate full risk assessment visits each year
© Compliance Ireland Training 2012 34
Engagement
Low impact firms will be regulated using a combination of reactive and thematic techniques. Technology will analyse financial returns. Supervisors will receive automatic alerts when a low-impact firm fails key financial health checks.
Consumer focused low impact firms will be subject to thematic visits to ensure that they are treating customers fairly.
Summary inspections will be conducted occasionally.
© Compliance Ireland Training 2012 35
Risk Categories
© Compliance Ireland Training 2012 36
Mitigating Risk Supervisors not only will analyse and identify risks, they
should focus on ensuring appropriate and achievable mitigating actions are taken to address any risks deemed unacceptable.
Any risk category that is probability rated as medium high or high must be mitigated.
A Risk Mitigation Programme(RMP) will be opened. One or more outcome focused actions to reduce the risk will be constructed by the supervisor. A deadline will be given.
© Compliance Ireland Training 2012 37
Mitigating Risk
Examples of an RMP could be to raise more capital, cease a particular activity or strengthen the control framework. Occasionally it may include telling a firm that the staff running a particular business line or support function lack the requisite skills and to address this.
RMP will be focused on risks which if left unmitigated could ultimately threaten the financial future of the firm or lead to a material mistreatment of consumers.
© Compliance Ireland Training 2012 38
Mitigating Risk When the firm has completed the RMP action,
information will be provided to the supervisor.
This information will be evaluated and the supervisor will decide whether it was successful or not in achieving its desired outcome. If it has the RMP will be closed. If it hasn’t, the supervisor will consult with supervisory
management, and a new RMP action to mitigate the risk will be constructed.
Wilful non-compliance with an RMP action will be taken seriously by the Central bank
© Compliance Ireland Training 2012 39
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