The majority of FBC member firms now have UK & EU domiciled fund ranges and we are increasingly seeing firms working towards a centralised approach to fund governance. This FBC ‘View from the Liffey’ is the inaugural column which aims to focus on the key regulatory happenings in the Irish market and the implications for UK based fund management firms.
Throughout 2023 Ireland is again likely to have been one of the fastest growing economies in Europe. It is also Europe’s fastest growing major domicile for funds, now accounting for over 19% of all European fund assets. As global investment fund flows migrate to the Exchange Traded Fund (ETF) structure, largely at the expense of active mutual funds, Ireland is well positioned. In the European ETF market it already has an Assets Under Management (AUM) market share of 66%.
Eat, sleep, reg, repeat
Given this rapid growth, it is no surprise that the Central Bank of Ireland has continued to evolve its governance, supervisory and enforcement activities at a rapid pace. In 2022 the Central Bank issued fines of €213m, a single year record, and the end of November 2023 saw its first monetary penalty imposed on an investment fund (€192,500 for failing to report derivative financial contracts).
Some of the current areas of regulatory focus will feel very familiar to UK fund directors. The labels may differ, but it is reassuring to see a high degree of commonality and collaboration (let’s not yet call it convergence!) between the various fund regulatory bodies.
November 2023 also saw the publication of the Central Bank’s final guidance for the Individual Accountability Framework, including the Senior Executive Accountability Regime (SEAR). For UK readers think FCA’s Senior Managers and Certification Regime (SMCR) with some tweaks.
The latest guidance did, importantly, grant a one-year deferral of application for NEDs/INEDs, but the new conduct standards will still apply. In practice, therefore, the delay just affords the luxury of some time for NEDs/INEDs to observe and learn from the implementation of the rules from their executive director colleagues. This will be an important initiative to keep on top of in 2024.
Not quite AoV for Europe
UK Authorised Fund Managers have been refining their value assessment processes now for four years and latterly the focus has broadened out considerably with the implementation of Consumer Duty. In the EU, ESMA had hinted at some similar elements with its 2020 briefing on fees and charges. In March 2023 the Central Bank of Ireland followed up with its own ‘Dear Chair’ letter on the supervision of costs and fees on UCITS funds. While this was a long way from being a prescriptive ‘UK style’ assessment of value exercise it did note widespread deficiencies in pricing governance and requires firms to have conducted a gap analysis and produced an action plan by the end of Q3 2023.
Dear Chair/CEO letters and thematic reviews do seem to be an increasingly popular tool in the Irish and UK fund regulatory toolkit. Central Bank staff talk fondly of how thematic reviews have helped their own learning about a specific sector. Anecdotal evidence points to those being regulated as also being generally happy with this approach also (certainly compared to more heavy-handed alternatives).
Meanwhile the Sustainable Finance Disclosure Regulation (SFDR) rumbles on. As a potentially seismic initiative this will hopefully become clearer in 2024. December 2023 is the deadline for consultation feedback to the EU. The hope for intermediary buyers of UK & EU UCITs funds (and many FBC members!) must surely be for something that has strong alignment with the FCA’s recently published labelling regime (the Sustainability Disclosure Regime, SDR). London based managers of multi asset funds are increasingly holding UK funds, EU UCITS and ETF building blocks interchangeably in the same portfolio. Having widely different standards of fund labelling and governance is not desirable.
A full agenda in 2024
The 2024 agenda of fun doesn’t stop there. AIFMS and UCITS reviews will be going on at the same time. Likely areas of focus include liquidity requirements, substance, and delegation (including to third countries). The Central Bank is also going to update their rulebook to allow ELTIFs in early 2024. The 2.0 version of this pan-European structure has the potential to access retail and institutional clients for long-term assets (including private equity, real assets, infrastructure etc). They will also be removing the current €10k minimum to improve retail client access (note the UK’s recent move to allow LTAFs to be included in ISAs). Note also the potential charging ‘reprieve’ for UK Investment trusts announced recently. The AIC estimates that alternative assets account for 36% of investment trust sector AUM.
So, the battle for alternative/long term asset dominance is likely to be an interesting one. Channel access (platforms) for illiquid strategies remains a potential barrier. Underneath the wrapper ‘wars’, the very essence of more specialised, illiquid investment assets continues to attract strategic interest from active managers who are seeing mainstream assets move increasingly to index managers. Regulators have their eye on this emerging trend too. Standby for more of what makes UCITS an attractive structure globally coming to an AIF structure near you soon.
Lots to monitor then in the coming year. Future columns will feature the views of FBC members, and others, active in the Irish market. As always, FBC will seek to share good practice and ensure fund boards are at the forefront of excellence in fund governance.
Simon Hynes is a senior adviser to FBC and a portfolio iNED with roles in Ireland, the UK and the Isle of Man.