The OE role has not succeeded in nudging legacy mancos to increase resources so:
the resources issue should be dealt with through rulemaking or Central Bank directions; and
the OE role and Chairperson role should merge, and the combined role should be carried out by an independent person.
Background and Purpose
CP86 introduced just 4 new rules for Irish authorised fund management companies, one of which was a requirement to have an organisational effectiveness role performed by an independent director or Chairperson. The job of the OE role is to keep “the effectiveness of the organisational arrangements of the company under ongoing review”. Importantly, the OE role must monitor “the adequacy of a fund management company’s internal resources to its day-to-day managerial roles”.
The fact that the OE role has to be performed by an independent person is important. In effect, it gives someone from outside the fund promoter’s organisation ‘permission’ to call it out where they see something that needs fixing - without that individual being perceived by the promoter as troublesome or difficult. In particular, if a manco’s size and complexity has grown without its internal resources keeping pace, it is the OE role’s job to speak truth to power.
Shortly after the final CP86 package was published, ESMA issued its Brexit Opinion on Asset Management where it drew a line in the sand in terms of minimum staffing at a fund manco - 3 FTEs. Since then, all prospective Irish fund mancos can expect that their staffing plan will have to meet this minimum standard if they want to get through the authorisation process. But what of the legacy mancos and self-managed funds that pre-date ESMA’s Brexit Opinion?
In a speech in October 2018, the Central Bank said that legacy mancos should be mindful of the resource requirements being asked of new mancos. Reading between the lines, the message was legacy mancos should increase their resources to a level commensurate with new mancos. And the OE role was identified as the person who would have to explain and justify situations where a legacy manco’s resources fell short of this expectation.
The Central Bank’s intention was clear – the OE role should push legacy mancos to increase their resources.
Has the OE role worked?
In a word, no. Certainly not when it comes to the OE role leading legacy mancos to increase resources. While most new mancos have resourcing levels in or around 3 FTEs, or above, legacy mancos have been very slow to follow suit. At this stage, it is clear to me that nudging legacy mancos to increase resources via the OE role has not worked. This is understandable given the considerable cost and upheaval involved in either hiring staff or moving to a third party manco. And there is a human behavioural tendency to procrastinate where possible – just ask my wife when it comes to me doing handyman jobs around the house! Does anyone disagree that legacy mancos will only increase resources en masse when specifically directed to do so by the Central Bank?
What next for the OE role?
While the OE role has not succeeded on the thorny issue of resources, there are some aspects of it which are worthy. Most especially, it means that there is someone on the lookout for continuous improvements in how the manco goes about its work.
The Central Bank acknowledged from the outset that this was a Chairperson-type role and now is the time to consider merging the two. Here is what I suggest:
Dispense with a separate OE role
Introduce a requirement that all mancos have an independent Chairperson
Merge the OE role into the Chairperson’s role so that in addition to the normal responsibilities of the Chairperson, she/he is now specifically responsible for identifying and driving through continuous improvements
Reduce the time commitment. Currently, regulator expectations and market practice are for the OE director to commit 6 to 12 days to the OE role. As part of a combined Chairperson/OE role, the OE element should add only 2 to 3 days per year. This time commitment reflects the efficiencies that can be gained by having both roles performed by the same person
Revise the Central Bank’s guidance on the OE role to reflect the changes described above and to set out the positive and weak practices identified by the Central Bank during its CP86 Thematic Review process
Will any of this happen? I think so but not before the nettle has been grasped and the resourcing issue has been put to bed for good. After that, much of the rationale for CP86 falls away and a rethink of things such as the OE role and the Designated Persons roles (do well-staffed mancos really benefit from having DP roles and C-suite roles?) would be sensible.
In the meantime, the OE role must keep up the good fight on resourcing and continuous improvement.
Meet Daniel Lawlor:
As the former head of the Central Bank of Ireland’s Funds Policy Team and the Central Bank’s Project Lead on CP86, Daniel was involved in designing, drafting and implementing regulatory initiatives affecting the funds industry from 2010 to 2017. Investment Funds Lawyer for 9 years at William Fry, one of Ireland’s leading law firms.
Today, Daniel Lawlor is MD of Aquest; a boutique firm dedicated to improving your experience with the Financial Regulator.
Regulatory counsel, practically applied. Aquest was born out of a desire to inspire firms to find the most efficient path towards regulatory and compliance matters. Delivering training across the industry, we ran master classes, built an online-academy, and ran bespoke training on-site, for regulated firms all over Ireland. Nuts and bolts training has its place, however time and time again, we saw firms acquire a knowledge transfer, only to fall short at resolving how to practically apply it to their unique situation.
Today Aquest delivers regulatory counsel through Training & Advisory services for Irish Authorised firms.
You may connect with Daniel through the following sites:
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A transcript of the conversation is available for download: