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Corporate Governance
Link & learn
2© 2017 Deloitte
Melissa Scully Senior Manager –Corporate Governance LeaderDeloitte IrelandE: [email protected]: +353 1 417 8656
Sandrine LeclercqDirectorFinancial ServicesDeloitte LuxemburgE: [email protected]: +352691890258
Derina Bannon
Manager
Legal and Regulatory
ETF Expert
Deloitte Ireland
E:
T: +353 1 417 2637
Speakers
3© 2017 Deloitte
01 Introduction – Corporate Governance
03 Themes in fund Governance
Agenda
04 Questions
02 Overview of CP86
4© 2017 Deloitte
Introduction – Corporate Governance
Sandrine Leclercq
5© 2017 Deloitte
Sanctions
A Growing Trend?
6© 2017 Deloitte
ManCo
Depositary bank
- AIFM- UCITS- SFTR etc.
- MIFID, AML / KYC, PRIIPS, CRDIV etc.
Distributor
Fund
How much is governance instrumental ?
Regulations are useless without a proper conductor
7© 2017 Deloitte
Governance
The two axes
Separation of functions and controls
Qu
alifi
cati
on
an
d
ho
no
rab
ilit
y
0
1
2
3
4
5
6Long term client
satisfaction
Governance is the art of allocating roles properly, ensuring that entrusted persons and
delegated entities do actually perform and that they remain at all times in position to do so
8© 2017 Deloitte
Mrs XMr YMrs Z
Board of Directors
Conducting Officer
Conducting Officer
Risk management
ComplianceDelegation oversight
Portfolio management
WHISTLE BLOWING
PROPORTIONALITY
4 EYES PRINCIPLE
CONFLICT OF INTEREST
3 LINES OF DEFENSE
INDEPENDENCE
RISK BASED APPROACH
COMMITTEES
REPORTNG
ESCALATION
SUBSTANCE
IT AND CYBERSECURITYDATA
PROTECTION
SEPARATION OF FUNCTIONS
EXPERTISE
Gender balance
SUPERVISION
BEST EXECUTIONCLEAR
DELEGATIONS
SOUND REMUNERATIO
N
Fraud & abuse
Governance
The key concepts
No single set of rules: UCITS/AIFMD/MIFID/MAD-MAR/CSSF circulars/ Codes of conduct/IOSCO principles/ ESMA/ CSSF soft rules etc.
9© 2017 Deloitte
Structured Agendas
Maintain expertise
Policies and procedures
Regulatory Watch
Document due implementation of
processes
Play it locally
Enhance your contracts
Reassess policies and
controls periodically
Minute your meetings
Due diligence
Monitoring
Refine orgchart
Governance
The Anti beat tool box
10© 2017 Deloitte
Hot topics
Some takeaways
CSSF
inspections
Branch
Tax
Governance
Supervision
of delegates
Data
Protection
Group
Policies
No one size fits all it is all about being pragmatic and actually efficient…
ProportionalityIT and
cybersecurity
11© 2017 Deloitte
CP86
Derina Bannon
12© 2017 Deloitte
CP86 is a set of rules and guidance issued by the Central Bank of Ireland ( CBI ) related to the governance and effectiveness of Irish authorised fund management companies including self-managed funds. The first set of guidance was published in November 2015 and the finalised guidance was issued in December 2016.
o It is the conclusion of three years of policy work by the Central Bank of Ireland (“CBI”) and three separate consultations were undertaken.
The aim of CP86 is not to introduce a whole series of additional regulatory compliance rules but to ensure high quality compliance with existing regulatory obligations.
CP86
The CBI indicated that it does not expect the boards of fund management companies to simply “comply or explain” their approach to the adoption of CP86, but rather to aim for full compliance with the guidance. Compliance with CP86 is intended to provide the CBI with comfort that the regulatory obligations of the fund management company are being managed and that the company is effectively supervisable and within the sphere of influence of the CBI.
CP86 is focused on three areas Governance: how do the directors perform their governance duties Compliance: how do the designated persons perform their managerial duties Supervisability: how does the management company interact with the CBI.
13© 2017 Deloitte© 2017 Deloitte
CP86The conclusion CP86 reflects the CBI’s commitment to supporting the supervisory framework for the effective governance of fund management companies. CP86 in its entirety covers the areas of delegate oversight, organisational effectiveness, directors’ time commitments, managerial functions, operational issues and procedural matters.
Fund management companies are UCITS management companies, authorised alternative investment fund managers (AIFMS), self-managed UCITS and internally managed alternative investment funds (AIFs).
There is a new role of ‘organisational effectiveness’. The organisational effectiveness role is to ensure that there is an independent director within the fund management board who takes overall responsibility for its effectiveness. As the CBI considers this a strategic and inward looking role, it decided not to classify this role as one of the managerial functions. Instead, it is a task which must be undertaken by one of the independent directors who will report to the board.
Each designated person is responsible for conducting their assigned managerial function on a day to day basis. Where a director chooses to take on a managerial function role, s/he is consenting to becoming involved the fund management company on a day to day basis. The director should not assume this role if s/he believes it could affect his/her independence. This role will require a stand-alone letter of appointment – separate to the letter appointing the director. There is no assumption that the designated person must always occupy a more senior role than the delegate being overseen.
A designated person can perform two roles – for example the same person can perform both the fund risk management and the operational risk management roles; however, the same person cannot perform both risk management and investment management.. The individual responsible for ‘organisational effectiveness’ must not perform any of the six managerial functions.
The CBI has streamlined the existing managerial functions from 15 into 6. The content of each role has been outlined in the Guidance. The six managerial functions comprise:
• investment risk management
• investment portfolio management
• compliance
• distribution
• capital and financial management
• operational risk.
14© 2017 Deloitte© 2017 Deloitte
Fund management company boards –CP86
The Delegate Oversight Guidance sets out recommendations regarding good practice for boards of investment companies, UCITS management companies, AIFMs and AIF management companies incorporated and authorised in Ireland.
The focus of this document is on the role of boards where significant tasks are delegated externally. Delegation does not dilute the board’s ultimate responsibility and it must at all time retain and exercise control over the relevant delegate’s management.
Delegate Oversight
One independent director of a fund management company (including the Chair if he or she is independent) should undertake an organisational effectiveness role.
They must be on alert for organisational issues and escalate these to the board. Their role is a ‘change leader’, who proposes improvements in effectiveness to the board and drives the implementation of any agreed actions, including replacing outdated or inappropriate organisational arrangements such as:
• monitoring the adequacy of a fund management company’s internal resources against its day-to-day managerial roles;
• reviewing the organisational structure of the fund management company and considering whether it remains fit for purpose;
When all sections of the Central Bank’s fund management company guidance have been finalised, the Central Bank will amend the AIF Rulebook and include in its forthcoming Central Bank UCITS Regulations a rule that the organisational effectiveness role must beperformed by an independent director.
Organisational Effectiveness
As part of the authorisation process, requiring fund managers to document how a Board’s composition provides it with sufficient expertise to achieve an appropriate balance of skills and competencies on their boards.
A fund management company must include this rationale in its business plan/programme of operations, and update this plan/programme everything the board constitutions changes.
The new role of ‘organisational effectiveness’ will include keeping the board composition under review and reporting to the Board on this matter.
Rationale for board composition
15© 2017 Deloitte
Fund management company boardsCP86
The Central Bank (CBI) also conducted a thematic review to assess the number of directorships held by individuals on the boards of corporate investment funds, fund management companies and AIF management companies. The aim of this review was to determine the impact on governance where directors hold multiple directorships. The Irish funds industry has 2,057 active directors, and the CBI review discovered that 13 of those individuals hold 652 directorships within the Irish funds industry, along with what they described as an ‘extensive level of aggregate professional time commitments’.
It has therefore issued this Central Bank Guidance on Directors’ Time Commitments to assist Boards and directors in complying with requirements
Directors’ Time Commitments
The CBI considers that a governance ‘risk indicator’ is triggered when an individual holds more than 20 directorships and an aggregate professional time commitment exceeding 2,000 hours annually. The consequences of such high time commitments include:
• The director being contacted by the CBI to ensure their legal obligations and responsibilities are being met.
• The CBI will monitor director’s commitments to prevent any risk of weakening of governance standards
• The CBI will treat this as a ‘risk indicator’, which triggers additional CBI supervision as appropriate under the CBI’s risk based approach.
• Where a fund is considering appointing a director with such time commitments (including non-Irish fund-directorships and non-fund directorships), the CBI will
i. request a letter from each board setting out the proposed time commitment (IFIA Code para 4.5) and
ii.dis-allow the 24 hour guaranteed corporate QIAIF approval time
• After 1 January 2016, any previously authorised funds with such directors will be given priority consideration for CBI thematic review where board effectiveness is already being considered.
CBI supervision of the time allocation
16© 2017 Deloitte
Fund management company boards
CP86
2000 hours per director • based on a 9 hour day and 230 working days per annum. • This ‘total’ time allocation should include all professional commitments including other directorships and employments held. • Directors must satisfy themselves, and their boards, that they have sufficient time to fully discharge their duties.
Minimum time allocation for board meeting attendance
• Boards and directors must agree this and record it in the director’s appointment letter• Must incorporate sufficient time to allow for preparation, document review and travel time
Additional time requirements – in addition to the normal time allocated to each director role
• ‘Buffer’ – incorporate this to allow for ad-hoc queries which arise occasionally• Chairperson – extra responsibilities and work require additional time be set aside. This extra time allocation should be agreed with the
board.• Sub-funds – these each require extra time; cannot just account for the umbrella fund alone• Type of fund and investment complexity – must consider whether these require extra time• Different client relationships – consider the number of such relationships when assessing time commitments• Board committees – membership should be regarded as a separate role; must be included in assessing time commitment and availability• Designated person role – this is a separate role to that of director and must be considered separately. A separate time commitment should
be allocated for each such role, and must be commensurate with any additional work the role requires and remuneration received. Allocated time must incorporate an on-going oversight role, daily availability, report review and onsite visits to delegates.
Letters of appointment • Directors - require a letter of appointment. • Designated person role for managerial functions – this requires a separate letter of appointment. • Both letters must:
include a written contract outlining job specifications; time expectations; fee arrangements be subject to annual review by the board and made available to the CBI upon request.
Conflicts • In cases of multiple directorships, directors must consider: any potential conflicts ‘corporate interconnectivity’
• Where individuals have full-time positions in a service provider to the board, any potential conflicts must be considered and appropriate action taken
Expertise • Must consider the type and complexity of individual funds and sub-funds when assessing the time commitment and necessary expertise to oversee that fund
Regulatory and legal obligations • of differing types of boards and legal structures – consider before appointment
17© 2017 Deloitte
CP86
Investment
Distribution
Risk
Operation
The Board of the Fund Manager should seek a report or presentation from the investment manager prior to the issue of the prospectus and launch of the investment fund or sub-fund, and should approve the investment approach which the investment manager proposes to take. Following the (sub)fund launch, the board should oversee the investment manager’s compliance with this approach. The Board is also asked to seek comprehensive annual presentations from the investment manager regarding the investment manager’s performance and investment team. The directors are required to have a good understanding of the investment manager’s business, which may necessitate due diligence visits to their premises
The Board are required to review and approve the proposed distribution strategy prior to a (sub) funds’ launch, and to receive regular updates on distribution including patters of distribution, sales flow and any legal, regulatory or tax issues.
Although a management company may delegate (internally or externally) many day to day risk management tasks, its board retains ultimate responsibility for risk management. It should adopt a risk management framework, including identifying risks and risk mitigants, confirming the risk appetite, and incorporating appropriate policies for measurement and management of risk. It sets out specific requirements for each of investment risk, operational risk and enterprise risk and business continuity.
When appointing a delegate to undertake operational and administrative tasks, a board should establish that the delegate has sufficient capacity and flexibility to manage varying levels of business, operational resilience and suitable procedures for confidentiality and data protection. It should regularly receive reports on operational matters including depositary reports, administrator reports, performance, and operation of anti-money laundering procedures. The Board should adopt an appropriate valuation policy and a budget for payment exceeding the investment management fee.
18© 2017 Deloitte
CP86
Support and
resourcing
Boards of externally managed
companies
Management companies must have sufficient resources to enable them to carry out their functions properly, taking into account the nature, scale and complexity of their business. The Guidance suggests that matters which may require support include proactive monitoring of developments between board meetings, management of board meetings, a regular review of the management company’s suite of policies and procedures. It also suggests that individual directors may be designated with particular roles in the oversight of certain functions. In that case, the board should ensure that that person is sufficiently experienced and qualified for the role, s/he has sufficient resources to enable them to undertake that role and their nomination for that role does not comprise either their or the board’s independence.
This section of the Guidance caters for externally managed investment companies (EMIC) which are not regulated as management companies. It emphasises that the board of an EMIC retains ultimate responsibility for its management including the appointment and oversight of the management company which is its principal delegate. The EMIC Board also remains responsible for issuing the prospectus and publishing audited annual financial statements. It should receive regular reports from the management company describing its compliance with the sections 1 (investment management), 3 (risk management) and 4 (administrative tasks) of the Guidance, developments in the distribution of the funds, and the extent of its delegation of any tasks and its control framework for oversight of the delegates’ performance. The Guidance asks the Board to consider whether it considers it appropriate to receive reports from any of the delegates of the management company.
The Guidance acknowledges that some AIF management companies (AMC) may appoint external AIFMs. These AMCs are not regulated as AIFMs, however, they remain responsible for the AIFs under management, the oversight of the AIFM, issuing the prospectus and publishing audited financial statements. The AMB’s Board is also required to apply the same principles to the oversight of the AIFMD as described above for EMICs. To avoid doubt, the Guidance clarifies that this section (6) is limited to EMICs, to AMCs with external AIFMs, and that it does not apply to other forms of investment fund or management company.
19© 2017 Deloitte© 2017 Deloitte
Supervisability
The CBI described the concept of “supervisability” and the ability of the CBI to exert effective influence over a firm on an ongoing basis.
In this context, the CBI has set out a number of factors, thirteen in total, which it considers as being necessary to allow it to supervise a regulated entity..
What are some of these factors ; physical proximity, ease of travel, common supervisory, legal and cultural demographics , the ability to access documents, records and other data, and the ability to request this information from any person involved in the management of a regulated financial service provider. The CBI consider it necessary to be able to carry out investigations and on-site inspections and to be able to access existing records of telephone conversations and electronic communications.
The CBI’s ability to exert effective influence over fund managers means that firms must understand the demands and expectations of the CBI, feel the presence of the CBI and understand what the outcome would be for a firm if it were to fall below the standards set by the CBI.
20© 2017 Deloitte© 2017 Deloitte
CP86
A challenge for the boards of fund management companies, in preparation for compliance with CP86 will be to assess how supervisable they are.
How easily can records be retrieved for provision to the CBI and what is the quality of those records?
Is there an agreement in place with delegates that will allow the management company to access certain information in a timely manner if requested to do so by the CBI?
How accessible are the Directors and Designated Persons to the CBI? Is there a clear line of communication?
Has the Board tested these arrangements to ensure that it can respond to a CBI request for information or notice of investigation/on-site inspection efficiently and effectively?
21© 2017 Deloitte© 2017 Deloitte
The Location Rule
As noted above, a number of the factors considered by the CBI to be necessary to ensure that a firm can be effectively supervised, include the physical proximity of the Directors and Designated persons and the ease with which these individuals can travel to meet with the CBI (or the ease with which the CBI could travel to meet those individuals). The CBI has also expressed its views on the need for firms to operate within similar cultural, legal and regulatory and supervisory environments to Ireland, so that the expectations of the CBI are understood and can be met. In weighing up these factors with the need for skilled, experienced individuals on the boards of management companies, the CBI finalised the CP86 Location Rule as follows:
Where a management company has a PRISM impact rating of:
a) Medium Low or above, the management company shall have at leasti. 3 directors resident in the State or, at least, 2 directors resident in the State and one designated person resident in State,ii. half of its directors resident in the EEA, andiii. half of its managerial functions performed by at least 2 designated persons resident in the EEA, or
b) Low, the management company shall have at least -i. 2 directors resident in the State,ii. half of its directors resident in the EEA, andiii. half of its managerial functions performed by at least 2 designated persons resident in the EEA.
Currently there are 40% (US) and 36.9% (UK) fund managers in Ireland and these managers could have been heavily impacted by this rule*. However, once the rule comes into effect, it will still be possible for non EEA managers to continue to manage Irish funds, although some may need to consider the location of board members. Firms will continue to apply a global strategy and investors will benefit from the availability of local and global expertise in the management of their investments.
*Fund management companies based outside Ireland, with passported Irish domiciled funds, are not subject to the location rule.
22© 2017 Deloitte© 2017 Deloitte
CP86
CP86 Designated Email Address : Deadline 30th of June 2017
The requirement for fund managers to designate an email address for CBI communications is required by the CBI’s Guidance for Fund Management Companies.
The CBI’s AIFMD and UCITS Q&A sets out the designated email address must be submitted to the following CBI addresses:
an internally managed AIF/ UCITS self-managed investment company must submit the details to [email protected];
an authorised AIFM/UCITS ManCo that is classified as “low impact” under PRISM must submit the details to [email protected];
an authorised AIFM/UCITS ManCo that is classified as “medium-low impact” or “medium-high impact” under PRISM must provide the details to its supervisor.
What will be the impact of the designated email address ?
It will allow the CBI to send letters, request meetings, send out surveys or request information. It will also make it easier for the CBI to send out industry letters and will act as communication channel.
CP86 also sets out details for how the designated email address should be approved and monitored.
If there are any changes to the designated email address this must be communicated to the CBI via the Online Reporting System (ONR) as a “Regulatory Report” within five business days.
23© 2017 Deloitte
Themes in fund governance
Melissa Scully
24© 2017 Deloitte© 2017 Deloitte
Themes in fund governance
Continued scrutiny from stakeholders
As we enter an era of uncertainly in the geo-political and economic landscape, one thing that is certain is that governance will remain an area of focus in the investment funds industry. Good governance is critical to
the efficient and effective operation of capital markets. The subject continues to create debate amongst investment fund Boards, investment managers, institutional investors and regulators alike.
New waves of regulation
Board effectiveness
Evolving Board responsibilities
Enhanced accountability
Increased transparency
Effectively understanding and overseeing risk (see case study)
25© 2017 Deloitte© 2017 Deloitte
For further information please see our website -
https://www2.deloitte.com/content/dam/Deloitte/ie/Documents/FinancialServices/investme
ntmanagement/IE_2015_RiskBasedOversightFramework_Deloitte_Ireland.pdf
Additional resources:
http://www.mfdf.org/images/Newsroom/Risk_Publication_2017.pdf
https://www2.deloitte.com/ie/en/pages/financial-services/articles/etf-themes-in-
governance.html
Area of focus
Effectively understanding and overseeing risk
Risk-based oversight framework - introduction
Traditional corporate governance models do not easily lend themselves to investment fund structures due to their unique characteristics. Further, there are tensions created between legal and regulatory obligations and how funds have traditionally been formed, authorised and managed.
Given these competing demands, how can a Board best position themselves to demonstrate they are complying with their obligations and have a robust and suitable governance framework in place? We have developed a Risk-Based Oversight Framework with the CIFDI which can be used to review or support the design of a robust approach to governance.
Unique
characteristics
Demonstrate
compliance
Risk-based
approach
Outsource risk Investor
protection
Key Features
26© 2017 Deloitte© 2017 Deloitte
Area of focus
Effectively understanding and overseeing risk (continued)
Risk-based oversight framework – case study
• Reporting structures
• Board composition
• Board member engagement
• Holding to account
• Board reporting
• Service provider arrangements
• Role of the Chairman
• Risk responsibilities
• Formal governance documents and
processes
• Structure: fund set-up; outsourcing model; reporting structure; controls; and the Board structure and composition.
• Oversight: Board and Committee oversight responsibilities.
• Infrastructure: policies and procedures; reporting and communication; and technology.
• Desktop review of key fund and
governance documentation.
• Confidential interviews with all
Board members (and a number of
stakeholders, such as Service
Providers.
• Case studies.
• Board observation.
SC
OP
EA
PP
RO
AC
H
Findings
27© 2017 Deloitte© 2017 Deloitte
Area of focus
Effectively understanding and overseeing risk (continued)
Risk-based oversight framework – sample report structure
Each area of the governance framework component has a separate heading, with a concise summary of the key findings set out. We report on a thematic basis, that is the key themes arising.
In addition to best practice we can provide a section on ‘insights and good practice’ , providing observations from our work with other Boards and fund companies.
We set out our
recommendations clearly, and
focus on providing pragmatic,
value added recommendations
that are proportionate to the
client’s business.
28© 2017 Deloitte© 2017 Deloitte
Deloitte Ireland Centre for Corporate Governance
About us
Deloitte Ireland Centre for Corporate Governance
Our Centre for Corporate Governance is designed to provide boards and senior management with a single point of access to current developments, Deloitte perspectives, learning materials and other useful information related to corporate governance.
We provide a range of corporate governance services across all industries, bringing insight into the latest developments and the practical challenges. We work collaboratively with clients to either assess their existing governance arrangements in place or to assist in the design and implementation of new solutions. Our approach is tailored to your needs and will be dependent upon a number of factors to include: sector you operate in, ownership and legal structure, whether you are regulated and the stage of maturity your business is.
See our website for further details - http://www2.deloitte.com/ie/en/pages/governance-risk-and-compliance/solutions/center-corporate-governance.html
David
Kinsella
Partner
Colm
McDonnell
Partner
Sean Smith
Partner
Melissa
Scully
Senior
Manager
29© 2017 Deloitte© 2017 Deloitte
Questions?
30© 2017 Deloitte
Next Link’n’Learn
Date: June 22nd 2017Topic: Digital Landscape in the Investment Management industry
31© 2017 Deloitte
Deloitte is a multidisciplinary service organization which is subject to certain regulatory and professional restrictions on the types of services we can provide to our clients, particularly where an audit relationship exists, as independence issues and other conflicts of interest may arise. Any services we commit to deliver to you will comply fully with applicable restrictions.
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