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13/09/17
Ireland: A Post-Brexit Stepping Stone into the EU
This article explores the potential impact of Brexit on Ireland's funds industry, structuring options for UK investment managers who want to relocate their funds business to Ireland and the European Securities and Markets Authority's (ESMA) position with respect to UK managers relocating in an EU member state.
Why does Brexit matter to Ireland's Fund's Industry?
Ireland has a thriving funds industry with Irish domiciled assets surpassing €2 trillion at the end of 2016, making Ireland the third-largest home for regulated funds globally and the second largest in Europe. The UK and its asset management industry is a huge part of that success. Statistics show that UK investors have invested in over 2,000 Irish funds that are actively distributed in the UK using EU passporting arrangements. In addition, some 170 UK based-investment firms provide services (via delegation) to Irish funds.
The continued success of Ireland with the UK has been impacted upon by ESMA's assumption in its recent investment management opinion issued on 13 July that the UK will be a ‘third country’ after its withdrawal from the EU in March 2019. Accordingly, it appears that a private placement arrangement between the Central Bank of Ireland (the ‘Central Bank’) and the UK Financial Conduct Authority will need to be put in place to maintain UK investor access to Irish funds. In conjunction with this, Ireland has a lot to offer UK managers seeking a stepping stone into the EU. UK managers can achieve this in Ireland through an Irish authorisation which has the ability to avail of the management and marketing passporting regimes under the UCITS Directive (2009/65/EC), AIFMD (2011/61/EU) and MiFID (2004/39/EC).
Ireland – A Solution for UK Managers Seeking a Presence in the EU
Where UK managers believe that their business model and/or investor base require an EU presence, Ireland:
· is the only native English speaking and common law jurisdiction in the Eurozone;
· has close similarities with the UK regulatory environment with well-defined robust regulatory guidance for fund management companies and an accessible regulator;
· has a thriving funds industry with significant fund management,administration and safekeeping experience; and
· has a favourable corporation tax (12.5 per cent) on trading income.
The following table explores the three main structuring options available to UK managers seeking to relocate to Ireland:
|
Options |
Set up Management Company (AIFM, UCITS manager or both, i.e. Supermanco) |
Set up internally managed company |
Set up a MiFID firm |
|
Activities |
Manage other fund umbrellas under AIFMD and the UCITS Directive. Where the manager performs day-to-day investment and risk management, it may also via add-on licences, manage segregated mandates. |
Manage one fund umbrella and cannot avail of the management passport to manage funds in other EU jurisdictions/can avail of marketing passport for the fund. Cannot manage segregated mandates. |
Full range of MiFID services/potential business lines available. Can manage other fund umbrellas and segregated mandates.
|
|
Substance |
2-3 Irish resident directors 2-3 designated persons The Central Bank will assess whether the firm is "Low" or "Medium" under the Probability Risk and Impact System ("PRISM"). Low PRISM rated firms need 2 directors to be Irish resident and Medium PRISM rated firms need 3 directors or 2 directors plus 1 designated person to be Irish resident. Both PRISM ratings require half of the directors and at least 2 designated persons performing half of the management functions to be EEA resident. Additional employees depend on the nature, scale and complexity of the firm. Head of Investments / Risk / Compliance / Finance and Internal Audit may also be required and will be assessed on a case-by-case basis. |
2 Irish resident directors 2-3 designated persons These firms are generally classed by the Central Bank as low PRISM rated firms (see left hand column).
|
Substantive presence required in Ireland (the firm's board and management must run the firm from Ireland and make decisions in Ireland with sufficient staff and resources to manage the risks). The need for specific roles in Ireland may differ on a case-by-case basis, e.g., legal and compliance, financial control and risk management.
|
|
Delegation / Outsourcing |
May perform and/or delegate day-to-day investment/risk management activities subject to retaining oversight of these functions. Extent of delegation permitted depends on the nature, scale and complexity of the firm. |
Delegate all day-to-day investment/risk management activities subject to retaining oversight of these functions. |
Outsourcing allowed if in line with applicable law and best practice. |
|
Indicative Authorisation time-line (not inclusive of preparation time or where the Central Bank stops the clock. |
6 months from the date of a complete application. |
3 to 4 months from the date of a complete application. |
5-9 months from the date of a complete application. |
Another option available to UK managers is to appoint an existing Irish based management company to perform the management role and delegate investment management back to the UK. ESMA's opinion advised that regulators will need to apply additional scrutiny to these entities to ensure they have sufficient human and technical resources to manage additional business and comply with applicable delegation requirements.
Irish Authorisation Regime within a European Supervisory Framework
ESMA's opinion seeks to promote convergence in how EU regulators review applications from firms seeking to relocate from the UK and provides a strong stance on substance and delegation considerations which the Central Bank supports. However, the opinion is unlikely to impact current Irish authorisation requirements to any large extent.
ESMA has indicated that additional scrutiny should be given to applications where the relocating entity has less than three full-time equivalents (FTE) in the EU member state (including time commitments at both senior management and staff level). These individuals will be responsible for the performance of investment management and/or risk management functions and/or monitoring delegates. First, it should be noted an FTE, by ESMA's own definition, is not necessarily a full-time employee but rather a ‘dedicated resource’ and that the requirement is to apply ‘additional scrutiny’ and will depend on the nature, scale and complexity of the applicant. One possible interpretation of this statement is that the Central Bank could apply a ‘medium’ PRISM rating to relocating entities which would necessitate three Irish resident directors or two Irish resident directors and one Irish resident designated person.
ESMA has indicated that combining risk, compliance and/or internal audit functions should generally be avoided as this is likely to undermine the effectiveness and independence of these control functions. The Central Bank already requires the appointment of at least two designated persons to perform the management functions and requires applicants to apply an appropriate conflicts of interest assessment in the context of each management function. For instance, the person responsible for investment management function cannot also be responsible for the risk management functions and the person responsible for the compliance function cannot be responsible for the activities he/she monitors.
ESMA has clarified that relocating entities will need to avoid a scenario where: (i) substantially more investment management and/or risk management functions continue to be carried on under a delegation back to the UK; and (ii) maintain substantially more relevant human and technical resources in the UK despite a relocation. The application of this statement in Ireland will need to be carefully considered in light of the nature, scale and complexity of the relocating entity, which may not necessarily immediately require the movement of a number of employees to Ireland, provided senior management maintains oversight of all delegated activities from Ireland. The Central Bank has consistently stated, and again more recently in its Brexit FAQ, that the criteria to be applied to relocating entities are that they are ‘controlled by their boards and management and not run from elsewhere’ and that ‘while it may be appropriate for a firm to outsource a particular activity, the responsibility for the performance of that activity remains with the regulated entity’ and it is ‘the amount, quality and robustness of outsourcing oversight that is also a key factor in helping [the Central Bank] to determine whether an entity can demonstrate sufficient substance in the jurisdiction’. It anticipated that this view will be re-affirmed for Irish authorisation purposes, subject to examining each application on a case-by-case basis. The impact of ESMA's opinion will also need to be assessed in terms of it creating a two-tier system. To avoid this, it is likely that these requirements will be applied consistently in Ireland to all third country managers.
In that context, Michael Hodson, Director of Asset Management Supervision at the Central Bank, confirmed in his speech on 26 July that ‘before granting authorisation, the Central Bank needs to be satisfied that relocating entities have transferred a sufficient and appropriate element of their core activities, of which portfolio management and risk management are the key constituents, as part of an overall approach of ensuring strong oversight and control of delegates’. He further goes on to state that, ‘[t]he Central Bank has previously published extensive Fund Management Company guidance and clearly set out in substantial detail [its] expectations about the centrality of oversight and control’. This would indicate that the Central Bank's view is that Ireland is well placed right now to receive applications from UK investment managers considering Ireland as a domicile.
To ‘wait and see’ is no longer an option for UK investment managers (despite the possibility of a further two-year implementation phase after the UK officially leaves the EU in March 2019). Early contingency planning and engagement with European advisors and regulators is recommended. Ireland is positioned as one of the leading European locations offering UK managers the ability to avoid, in Prime Minister May's words, a ‘disruptive cliff edge’.
Eimear Keane
Eimear is a Senior Associate in Walkers' Investment Funds practice in Ireland. She is highly experienced in advising a broad spectrum of EU and non-EU managers on establishing and operating management companies (including Supermancos) and self-managed investment funds (including fund of funds, master feeder, private equity and real estate funds) in Ireland, with particular expertise in AIFMD and UCITS regulatory requirements. Eimear has advised in relation to UCITS mergers into and out of Ireland, re-domiciliation into Ireland from the Cayman Islands, UCITS index submissions to the Central Bank as well advising on numerous recent management company applications under the Central Bank's fund management company guidance (CP86). Eimear is an active participant in the Irish Funds Industry AIFMD Working Group.
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