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Markets and Securities Services |
International
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ESMA’s Work Programme for 2017 includes
pursuing common approaches on delegation
of collective portfolio management and
depositary functions under UCITS and the
AIFMD, including promoting a common
understanding of the “substance” requirements
for UCITS management companies and AIFMs.
10
Various ESMA opinions are expected in July on
various topics including delegation and these
are awaited with interest. They could herald a
strengthening of currently imposed standards.
Certainly Steven Maijoor’s speech on 11 April
2017 is clear in discussing his view that ESMA
should coordinate consideration of key issues
and that there is a case for stronger supervisory
convergence powers.
11
UK asset managers will
need to monitor this ESMA workstream because
it might well affect prospective arrangements
for delegation arrangements for investment
management and other services back to the UK
from EU-based firms and products.
Management Companies (ManCos)
Of course, the corollary of the question about
how much can still be carried on in London is:
how much should be carried on in the location
from which the delegation is made?
Typically for asset managers, this equates
to how much needs to be carried on in
the domicile where investment funds are
established, so Luxembourg’s and Dublin’s
regulatory requirements for the resourcing of
UCITS ManCos and the AIFMs are crucial.
Most UK-based asset managers have operations
in at least two of the three main fund domiciles
(the UK, Luxembourg and Dublin) and so can
look to build up their UCITS and AIF ManCo
arrangements from an existing starting point.
UK-based asset managers may decide to utilise
Article 6(3)/(4) UCITS provisions, or Article
6(4) of AIFMD powers, so that it is possible
for portfolio management to be encompassed
within their ManCo operations.
Clearly, in all fund domicile jurisdictions, there
has been considerable focus in recent years
on fund governance. When we were looking at
UCITS IV, there was much discussion of ManCo
“letterbox” issues, and perhaps some of these
still remain, but certainly many are looking to
strengthen the resources of their ManCos.
Current discussion regarding Brexit plans often
focuses on how much real strength needs to be
created in ManCo establishments: is considerable
investment required in Luxembourg or Dublin in
manpower and other resources?
Notably the Central Bank of Ireland in December
2016 concluded its consultation process on fund
management company effectiveness.
12
This
comprises a package of measures, including
certain rules with which all ManCos need to
comply and additional guidance, which is
designed to ensure compliance by ManCos with
their regulatory obligations and to allow the
Central Bank to carry out its engagement model
without undue constraint.
13
There are location rules to follow — which depend
on the ManCo’s PRISM rating.
14
If low, the ManCo
must have at least two Irish resident directors,
half of its directors resident in the EEA and at
least half of the managerial functions carried out
by at least two designated persons resident in
the EEA. For firms with a rating of medium-low
or above, they need three Irish resident directors
or two Irish residents and one designated person
who is Irish resident, half of the directors located
in the EEA and at least half of the management
functions carried out by at least two designated
persons located in the EEA.
Based on CP86 feedback statement, the factors
that the Central Bank of Ireland considers relevant
to the location of key personnel when considering
the extent to which the Central Bank is in a position
to exert effective supervisory influence over a firm
and its management where those personnel are
in a location rather than Ireland include: physical
proximity, demographic, cultural and historic ties,
ease of travel, homogenous legal and regulatory
environment, commonalities of the legal system,
and similarities of approach to regulation,
supervision and enforcement. These factors would
all suggest that a hard Brexit scenario — one, for
example, in which the UK is no longer part of the
EEA — would not prevent Irish ManCos with UK-
based designated persons and/or directors from
continuing to satisfy these requirements.
Obviously, though, ESMA’s work and any
requirements that come from it would
need to be considered both in Dublin and in
Luxembourg, which might change the position.
Host ManCos
Given the space, personnel and other practical
circumstances, particularly for Luxembourg,
the use of hosted arrangements with third-
party ManCos is increasingly likely to be a