CBI publishes outcome of FMCs thematic review

On 20 October 2020, the Central Bank of Ireland issued a letter unveiling its findings following the completion of the fund management companies (FMCs) thematic review. While CP86 is widely implemented and FMCs have largely complied and adhered to its framework, the Bank noted some deficiencies over the 18-month review period and has now provided further guidance to firms. The industry welcomed the publication and the greater clarity it provides to FMCs. Our internal CP86 working group is currently reviewing the letter and assessing any impact on the Irish products we service so that we can provide full support and comfort to our clients. Read the official CBI letter at this link  and a summary of the findings below: The key findings identified during the bank’s thematic review in relation to the implementation and embedding of the FMC Guidance (known as CP86) are as follows:

1. Designated Persons
   1. Lack of effective delegate oversight/demonstrable challenge of delegate
   2. Deficiencies in the level of review on monthly reporting and further independent analysis/verification of same
   3. Poor quality of reporting received from delegates
   4. Lack of demonstrated criteria to enable board escalation

2. Delegate Oversight
   1. FMCs unable to evidence appropriate level of delegate due diligence both initial and ongoing – ongoing being prescribed as at the very least annually
   2. Where FMCs rely on delegate policies/procedures, unable to demonstrate review and approval of same
   3. No formalised process for initial and ongoing review of delegate policies/procedures
   4. Lack of effective engagement with delegates – particularly Investment Management and multi manager investment management umbrellas
   5. Lack of SLAs with each third party arrangement in place at inception and review on an ongoing basis giving rise to the risk that those activities are not governed/compliant with legal/regulatory requirements

3. Operational Risk – Guidance states that a FMC must have a board approved risk framework including risk register/appetite
   1. No entity specific risk management framework
   2. No entity specific risk appetite statement/risk register

4. Board Approval of new sub funds
   1. Per Part 1 of delegation oversight, a board should be able to evidence robust discussion and challenge of any proposed new strategies.  This should be carried out in advance of a new sub fund launch.  There was a lack of evidence of early discussion to agree/set proposed strategy with the board

5. Organisational Effectiveness – role of an independent director on the board of the FMC
   1. No evidence of formal meetings taking place between the OED and the board or the DPs
   2. More focus needed on conflicts of interest and personal transactions of the OED
   3. Should have at a minimum quarterly meetings with the DPs with a focus on delegate oversight
   4. Required to submit a report to the board at least annually including conflicts of interest/personal transactions

6. Governance & Culture
   1. All but the smallest of FMCs should appoint a CEO who is responsible for the day to day management of the FMC
   2. Independent directors tenure exceeded 10 years in 28% of cases and 5 years in 2/3 of cases – tenure needs to be addressed
   3. Gender imbalance – of the 1,654 directorships only 16% are held by women – diversity needs to be addressed
   4. Absence of board specific Terms of Reference

7. Resourcing
   1. Time commitment of DPs and more generally, resourcing levels were below CBI expectations
   2. Some instances of co-mingling of support staff in both the IM and Risk functions
   3. Lack of succession planning

Worth highlighting that the letter states (for the first time) the minimum FTE the bank expects.  That number is 3 FTE, however this is for the most simple, small entities.  Other firms need to have adequate resources in place depending on the nature, scale and complexity of operations.  In all cases, resources should be adequately qualified and of appropriate seniority. Should you have any questions, do not hesitate to reach out to your FundRock relationship manager.