ACOI Welcomes our Members to the 4th seminar in the ACOI lunch time CPD seminar series January - June 2012. CPD Referen

1. ACOI Welcomes our Members to the 4th seminar in the ACOI lunch time CPD seminar series January - June 2012. CPD Reference: 2012-0733 Our Event:Regulatory Updates for The Funds Industry. Chaired:Mr. Ken Sharkey, Chairman of the Funds Working Group, and Compliance Manager, Invesco Speakers:Mr. Kevin O’Doherty, Regulator Affairs Consultant, Compliance Ireland and Mr. Shay Lydon, Partner, Matheson Ormsby Prentice

2. Upcoming Events

3. Funds Regulatory Update – Part IIKevin O’Doherty, Compliance Ireland 3 April 2012

4. Funds regulatory update Topic 5 – IFIA Corporate Governance Code for CIS and ManCos

5. IFIA Governance Code • Issued by IFIA NOT by Central Bank • NOT legally mandated • Came into effect on 1 January 2012 • One year transition period • Applicable to: • Irish authorised Collective Investment Scheme [“CIS”] • Irish authorised Management Company [“ManCo”]

6. IFIA Governance Code • Voluntary Code • ‘Comply or Explain’ • Financial Statements • Website • Minimum Requirements • Board remains responsible • No individual to have unfettered powers • Governance structure to be adequately sophisticated

7. IFIA Governance Code • Board to be of sufficient size and expertise to oversee adequately the operations of the CIS or ManCo • Minimum of three Directors • Majority of non-executive directors [“NEDs”] recommended • At least one Independent NED [“INED”] • At least one director connected with promoter or investment manager

8. IFIA Governance Code • Two Irish-resident directors • Two directors capable of meeting CBI at short notice • Directors to have sufficiency of time • Time commitment spelt out in advance • Requirement to have a buffer • Directors to disclose to ManCo/CIS other time commitments • Duty to re-evaluate during periods of stress

9. IFIA Governance Code • Up to 8 other non-funds directorships permitted • rebuttable presumption – ‘comply or explain’ • Carve-outs for • Group companies • Public interest and charitable • Non-trading or shelf companies • Conflicts of interest to be documented

10. IFIA Governance Code • CIS and ManCos shall formally review Board membership at least once every three years. • Directorships subject to Fit & Proper Regime • Directors should be aware of company law obligations • Chairman should be an INED • shall lead the Board, encourage critical discussions and challenge mindsets • shall promote effective communication

11. IFIA Governance Code • INEDs to be identified clearly in the annual report • INEDs must have knowledge and understanding of: • the investment objectives • the regulation of collective investment schemes • policies and outsourcing arrangements • Consider with requirement for balance of skills and expertise on board

12. IFIA Governance Code • Section 7 of Code sets out reserved powers of board • Formal documented board effectiveness review to take place every three years • Delegation to third-party administrators [“TPAs”] is permitted • Requirement for board to ensure internal control procedures of TPAs are being monitored

13. IFIA Governance Code • Board retains responsibility for compliance function • Board retains responsibility for risk management • Regular reporting from TPAs and notifications of breaches

14. Funds regulatory update Topic 6 – Central Bank of Ireland Fit & Proper Regime

15. Requirement Requirement to be Fit & Proper: • A person cannot perform a controlled function at a regulated financial service provider [“RFSP”] unless: • (a) The firm is satisfied on reasonable grounds that the person complies with Fit & Proper Code • (b) the person has agreed to abide by Fit & Proper Code • Section 21 of CBRA 2010

16. Background • Part 3 of CBRA 2010 • SI437 of 2011 – the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 • SI615 of 2011 – the Central Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations 2011 • Fitness and Probity Standards (Code issued under Section 50 of the Central Bank Reform Act 2010) • Guidance on Fitness and Probity Standards • There is also an FAQs document

17. Requirement • CBRA 2010 sets out persons affected by Fit & Proper: • Control Functions [“CFs”] • Defined in Section 20 of CBRA 2010 • Pre-approval Control Functions [“PCFs”] • Defined in Section 22 of CBRA 2010 • These are also CFs – just really important ones!

18. Commencement Five exemptions: • “Call Centre” exemption – scripted • Outsourced to another RFSP – e.g. funds • Foreign RFSPs providing services cross-border into Ireland • Branches of foreign RFSPs in Ireland • Group dominant influences

19. PCFs • PCF-1: Executive Director • PCF-2: Non-executive Director • PCF-3: Chairman of the Board • PCF-4: Chairman of the Audit Committee • PCF-5: Chairman of the Risk Committee • PCF-6: Chairman of the Remuneration Committee • PCF-7: Chairman of the Nomination Committee

20. PCFs • PCF-8:Chief Executive • PCF-11: Head of Finance • PCF-12: Head of Compliance • PCF-13: Head of Internal Audit • PCF-14: Head of Risk • PCF-15: Head of Compliance with responsibility for Anti-Money Laundering and Counter Terrorist Financing Legislation • Not the same thing as the MLRO

21. PCFs • PCF-33: Branch Manager of branches in other EEA countries • PCF-34: Head of Transfer Agency • PCF-35: Head of Accounting (Valuations) • PCF-36: Head of Trustee Services • PCF-37: Head of Custody Services

22. PCFs • PCF-38: Head of Transfer Agency [SMICs & ManCos] • PCF-39: Head of Accounting (Valuations) [SMICs & ManCos] • PCF-40:Designated Person with powers delegated from a SMIC or Manco

23. Control Functions • CF-1: function in relation to the provision of a financial service likely to enable the person to exercise a significant influence on the conduct of a RFSP • CF-2: function in relation to the provision of a financial service related to ensuring, controlling or monitoring compliance by a RFSP • The Guidelines suggest there should be a higher degree of due diligence in relation to these CFs

24. Standard Persons who are subject to the Fit & Proper Standards must: • (a) be competent and capable • (b) act honestly, ethically and with integrity • (c) be financially sound • Requirement that employee undertakes to abide by the Code

25. Checks to be done

26. Funds regulatory update Topic 7 – Central Bank of Ireland PRISM system

27. Irish Risk Rating Regime Prism is the Central Bank’s key new supervisory assessment tool: • Probabilistic • Risk • Impact • SysteM

28. Irish Risk Rating Regime Prism is designed to allow Central Bank to: • Adopt a consistent way of thinking about risk across all supervised firms • Allocate resources based on impact and probability • Undertake a significant level of engagement with all higher impact firms • Assess firm risks in a systematic and structured fashion

29. IrishRisk Rating & Selection Process • Evaluates institutions under a number of general & specific risk headings including: • supervisory complexity, • structure, • corporate governance, • capital, contagion and related party transactions, • business risk, • reputational risk, • regulatory risk, • operational risk, and • foreign exchange risk • Specific risk categories include credit, funding, liquidity and market risk. • Potential impact of an institution on a number of stakeholders is also evaluated and forms part of the final score

30. How does PRISM work? IMPACT: • Central bank will devote considerably more time to firms which have greatest potential impact • Indicators have been selected after examining consultation on what measures would be good empirical determinants of impact (December 2010)

31. Category E: CIS and Other Service Providers and UCITS SMICS Assets under management Turnover

32. Impact rating FUNDS Breakdown of Impact categories High (Including ultra high) – circa 20 firms Medium high – circa 70 firms Medium low – circa 450 firms Low – circa 10,300 firms

33. Resourcing

34. Engagement Central Bank will engage with firms at a level that corresponds to their impact category. Engagement will consist of a variety of reviews, assessments and meetings. High impact firms will receive an inspection visit every quarter with each visit having a different focus. Medium-high impact firms will have full risk assessments conducted very 2 to 4 years. 10% of medium-low impact firms will be subject to proportionate full risk assessment visits each year

35. Engagement Low impact firms will be regulated using a combination of reactive and thematic techniques. Technology will analyse financial returns. Supervisors will receive automatic alerts when a low-impact firm fails key financial health checks. Consumer focused low impact firms will be subject to thematic visits to ensure that they are treating customers fairly. Summary inspections will be conducted occasionally.

36. Risk Categories

37. Mitigating Risk Supervisors not only will analyse and identify risks, they should focus on ensuring appropriate and achievable mitigating actions are taken to address any risks deemed unacceptable. Any risk category that is probability rated as medium high or high must be mitigated. A Risk Mitigation Programme(RMP) will be opened. One or more outcome focused actions to reduce the risk will be constructed by the supervisor. A deadline will be given.

38. Mitigating Risk Examples of an RMP could be to raise more capital, cease a particular activity or strengthen the control framework. Occasionally it may include telling a firm that the staff running a particular business line or support function lack the requisite skills and to address this. RMP will be focused on risks which if left unmitigated could ultimately threaten the financial future of the firm or lead to a material mistreatment of consumers.

39. Mitigating Risk • When the firm has completed the RMP action, information will be provided to the supervisor. • This information will be evaluated and the supervisor will decide whether it was successful or not in achieving its desired outcome. • If it has the RMP will be closed. • If it hasn’t, the supervisor will consult with supervisory management, and a new RMP action to mitigate the risk will be constructed. • Wilful non-compliance with an RMP action will be taken seriously by the Central bank