CP86: A Risk Managers Perspective
So, it is finally here – the much-vaunted Central Bank of Ireland (“CBI”) feedback on the implementation of CP86[1]. From a purely risk management perspective the path this leads ManCos/UCITS and AIFMs down is interesting. It is widely acknowledged in the Irish funds industry that any application to set up a Self-managed Investment Company (“SMIC”) is probably going to be difficult to get authorised, and there are very serious question marks over the continued survival of those currently operating in their current form. It is speculated that the aim of the CBI is to have all Fund Management companies (“FMC”) hosted on ManCo platforms, or to appoint their own Management Company. Certainly any reference to the fate of SMICS was conspicuous by its absence in the feedback letter.
Even it is not the CBI’s intended ambition, the significantly increased cost for Designated Persons (“DPs”) – via the CBI’s mandated increase in number of days allocated – ensures the current situation is almost certainly unsustainable for SMICs. Anecdotally we have heard demands from the CBI ranging from 150 to 220 days for DP Fund Risk role alone. This is effectively one full time person to be employed by the ManCo as DP for fund risk[2]. The pressure on costs for suitably qualified and experienced risk personnel will be immense (whether they exist in Ireland in sufficient number is a topic for another day – spoiler alert almost certainly they do not).
The question arising now is whether the FMC can meet the CBI’s expectations by employing a locally based risk manager (or a quasi-full time DP for fund risk). Remember two of the significant findings in the Thematic Review – High Level Findings paper that accompanied the Dear Chair letter referred to above:
- insufficient review of delegate reports
- varying degrees in level of independent verification performed by the Designated Person
This option will potentially be available to an in-house management company where the Irish based risk manager can leverage off internal systems of the asset manager. It is not so easy for third-party ManCos where there may be myriad investment managers scattered globally (this is one of the attractions of the third party ManCo model after all). Expecting timely, standardised, sufficiently detailed risk reporting from dispersed investment managers is a big ask. The absence of this reporting makes scaling the risk management capability of a ManCo platform extremely difficult.
At RiskSystem we have spent several years specifically designing a fit for purpose solution for ManCos that allows managers to see all their funds on a single screen clearly highlighting any ambers or reds that may require further investigation. Furthermore, all risk data is securely archived evidencing the fact that the risk management function is operating properly. Thus, the CEO (and the board of directors) can rest assured that the risk of all the funds on the Platform are being monitored regularly and independently in full compliance with CBI expectations.
At a recent online webinar[3] the CBI outlined what it see this as being best practice following the CP86 onsite reviews namely DPs with systems that allowed them to interrogate data (sourced from the admins) and compare/contrast with data being supplied by the IM. This in essence is exactly what RiskSystem allows ManCos to do. We already deliver Risk Management functionality to over 200 funds providing their management (and ultimately their regulators if requested) with customised risk reporting, precisely what they require in terms of granularity and timeliness. And with a nod to the annus horribilis that has been 2020 a third-party DP for Fund Risk, risk manager or risk analyst using RiskSystem, can happily work from home using our secure cloud-based solution and have all the necessary reports and information at his or her fingertips.
[1] https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/funds/industry-communications/dear-chair-letter—thematic-review-of-fund-management-companies-governance-management-and-effectiveness—20-october-2020.pdf?sfvrsn=4
[2] Our understanding is 220 days equates to exactly one FTE.
[3] Funds Ireland Minicon.
