UCITS, NON-UCITS & HEDGE FUNDS

(i) UCITS IV- ESMA reacts to UCITS IV delays

The deadline for transposition of UCITS IV into national legislation was 1 July 2011. However, most EU Member States have not yet fully transposed the Directive and its implementing measures.

This creates challenges for fund promoters seeking to avail of the cross-border provisions under UCITS IV and with this in mind ESMA has issued an opinion proposing a number of practical arrangements to alleviate any issues arising as follows:

  • UCITS Notifications;
    • the host Member State competent authority cannot refuse a valid notification under UCITS IV even if that Member State has not transposed the Directive.
    • A non-transposing Member State cannot automatically notify under UCITS IV. However, ESMA has set out specific conditions under which fund notification could be possible from a country where the Directive has not yet been implemented.
  • Management Company Passport;
    • ESMA believes that UCITS Management Companies established in a transposing Member State should be able to create a fund via the management company passport in a Member State where UCITS IV has not yet been transposed.
    • Management Companies established in non-transposing Member States can make use of the management company passport only if the current national legislation in the non-transposing Member State materially complies with the Directive.
  • Mergers;
    • Cross-Border mergers involving UCITS established in different Member States one of which has not transposed the Directive are not possible.
    • A merger of UCITS located within the same non-transposing Member State where at least one of the two UCITS is marketed in another Member State, may be possible if current national legislation in the non-transposing Member State materially complies with the Directive.
  • Master Feeder Structures;
    • ESMA has taken the view that master feeder structures should not be permitted if one of the two Member States in which the UCITS are established has not transposed the Directive.

(ii) Subscriptions and Redemptions under UCITS IV

The Irish Funds Industry Association (the "IFIA") has prepared an industry agreed information note detailing some of the provisions around the treatment of subscriptions and redemptions under UCITS IV and information about meeting the requirements for recording and handling of subscription and redemption orders.

The issue which arose surrounded the requirement under the Central Bank's UCITS Notice 2 that Management Companies record certain information in relation to subscriptions and redemptions, including the date and time of receipt of the order. This requirement applied to all Management Companies from 1 July 2011, but did not appear to apply to self managed investment companies ("SMICs") until 1 July 2013.

However, there is a separate requirement in UCITS Notice 16 for the date and time of receipt of subscription or redemption orders to be included on the contract note issued to an investor and this is applicable to both SMICs and Management Companies since 1 July 2011.

The new IFIA information note provides guidance on UCITS Notice 2, Paragraph 38 and UCITS Notice 16 (Paragraphs 13-17) by setting out the information that should be firstly recorded on receipt of a subscription or redemption order and secondly displayed on the contract note that is issued to an investor following execution of the order.

(iii) Central Bank review of Business Plans for UCITS Self Managed Investment Companies

The Central Bank, as part of the implementation of the UCITS IV Directive, required UCITS Management Companies to file revised UCITS IV business plans with the Central Bank for review by 1 July 2011. However, SMICs were only required to provide written confirmation to the Central Bank that they were UCTS IV compliant as at 30 June 2011, but were not required to actually file any business plans.

The required confirmation included that the business plan had been amended to provide for the provisions of UCITS IV which applied to SMICs as at 1 July 2011. While this included some UCITS IV polices and procedures, there are a number of requirements which SMICs would not be required to comply with until July 2013.

The Central Bank proposes to review business plans (incorporating all the UCITS IV requirements) for existing SMICs in advance of the July 2013 deadline. The Central Bank has indicated that it is preparing a timeframe to manage the submission of business plans on a quarterly basis beginning the first quarter of 2012. This schedule is due to be communicated to law firms by January 2012. To ensure an even distribution of business plans throughout the period, it is expected that the authorisation date of each SMIC will be used to allocate the submission within each quarter.

The review will be a full review of compliance with all UCITS IV requirements (which currently apply to UCITS Management Companies).

(iv) Amendments to UCITS Notices, NU Notices and related Guidance Notes

The Central Bank has made amendments to the UCITS Notices and NU Series of Notices as well as the following Guidance Notes:

  • Guidance Note 1/97
  • Guidance Note 2/97
  • Guidance Note 2/99
  • Guidance Note 3/03
  • Guidance Note 1/07
  • Guidance Note 2/07
  • Guidance Note 4/07
  • Guidance Note 2/11

The majority of the amendments are technical in nature, however a number of policy changes have been affected including:

  • Back-to-Back Loans: (UCITS Notice 11 and NU Notice 3) the notices have been amended so that the off-setting deposit to a back-to-back loan is not required to be denominated in the base currency of the collective investment scheme ("CIS"). It should be noted that before availing of this amendment, the CIS may need to amend the fund's prospectus / constitutional document.
  • UCITS Financial Indices: (Guidance Note 2/07) the Guidance Note has been revised to clarify, in Section 1.2, that indices which meet with the UCITS diversification requirements at the outset are not required to be submitted to the Central Bank if the constituents of the index move to the extent that it no longer meets the 5/10/40% rule but does meet the 20/35% requirements set out in Regulation 71 of the UCITS Regulations.
  • Closed-Ended CIS: (Guidance Note 2/97) the Guidance Note has been amended to clarify the Central Bank's policy regarding changes to duration, objectives and policy or fees and to include reference to CIS with limited liability.

The revised Notices and Guidance Notes are available on the Central Bank's website at; www.centralbank.ie.

The Notices and Guidance Notes are effective since 23 December 2011.

(v) Swiss Key Investor Information Document (KIID)

Where a KIID is to be issued to investors in Switzerland, the Swiss Financial Market Supervisory Authority ("FINMA") requires information specific to Switzerland to be included in the KIID.

The Swiss specific information is comprised of an insertion in the following form; "The Prospectus, the Key Investor Information Document, the Articles of the Company as well as the annual and semi-annual reports can be obtained free of charge from the representative in Switzerland, [insert name and full business address of Swiss representative]. The paying agent of the Company in Switzerland is [insert name and full business address of Swiss paying agent]"

FINMA have also suggested that the foregoing insertion should be included in the "Practical Information" section of the KIID issued to investors in Switzerland.

The Central Bank has confirmed that where the specific Swiss disclosures are the only difference between a KIID circulated within the EU and that circulated in Switzerland, it will not be necessary to file the Swiss KIID with the Central Bank.

(vi) The Appointment of Directors to Investment Funds through Conduit Firms

The Central Bank has issued correspondence to industry regarding the appointment of directors to investment funds and/or Management Companies. It is the Central Bank's view that it is not appropriate to have the terms of a director's appointment documented in and governed by an agreement between the CIS or Management Company and a conduit firm or other third party.

The Central Bank has stated that the terms of a director's appointment should be documented in a letter of appointment which should be issued by the CIS or Management Company directly to the director and the only parties to it should be the CIS or Management Company and the director. The Central Bank will not allow such letters to issue to any conduit firm or third party on behalf of or in relation to the director. Further the terms and conditions relating to the appointment of the director cannot be included in a separate agreement between the CIS or Management Company and a conduit firm or third party acting on behalf of or in relation to the director.

The Central Bank is aware that there are agreements currently in place between CIS and/or Management Companies and conduit firms/third parties which relate to director appointments and have stated that they will allow a period up to 31 December 2012 for these arrangements, where applicable to be terminated or amended.

(vii) European Commission Proposals for Venture Capital and Social Entrepreneurship Funds

On 7 December 2011, the European Commission published proposals to create two new European fund types:

  • Proposal for a Regulation on European Venture Capital Funds:

    The proposal lays down a uniform single rule book governing the marketing of funds under the designation European Venture Capital Funds ("EVCF"). An EVCF is defined by three essential requirements:

    1. It invests 70% of the capital committed by its sponsors in Small and Medium Enterprises ("SME");
    2. It provides equity or quasi-equity finance to these SMEs (i.e. 'fresh capital'); and
    3. It does not use leverage (i.e. the fund does not invest more capital than that committed by investors so is not indebted).

  • Proposal for a Regulation on European Social Entrepreneurship Funds:

    Funds that market themselves using this brand would have to invest at least 70% of their money in social businesses (i.e. businesses focused on environmental or ethical missions). With this label, investors will know that the majority of their investment is going into social businesses. Uniform rules on disclosure will ensure that investors get clear and effective information on these investments.

These proposals will now pass to the European Parliament and the Council for negotiation and adoption under the co-decision procedure.

The proposals can be viewed on the European Commission website at: http://europa.eu.

(viii) European Commission proposal: CRA III

In November 2011, the European Commission published legislative proposals for a package of reforms (referred to as CRA III) relating to credit rating agencies (CRAs) and the use of external ratings by financial institutions. The general objective of the proposals is to contribute to reducing the risks to financial stability and restoring the confidence of investors and other market participants in financial markets and ratings quality.

CRA III includes:

  • A proposal for a Regulation amending the EU Regulation on CRAs; and
  • A Directive amending the UCITS IV Directive and the Alternative Investment Fund Managers Directive ("AIFMD").

The proposed Regulation sets out extensive amendments to the EU Regulation on Credit Rating Agencies ((EC) No 1060/2009). These amendments include measures relating to:

  • Reducing over-reliance on external credit ratings by financial institutions;
  • Enhancing CRA's transparency;
  • Additional requirements for CRAs when rating sovereign debt;
  • A "rotation rule", preventing a CRA , except in certain circumstances, from issuing ratings for an issuer for more than three years, where it is paid by the issuer for ratings; and
  • Imposing civil liability for CRAs.

The proposed Directive amending UCITS IV and AIFMD is intended to reduce over-reliance on external ratings by funds, specifying that fund managers should not solely or mechanistically rely on external credit ratings to assess the creditworthiness of fund assets.

(ix) Update on the Regulation of Short Selling and Credit Default Swaps

On 15 November 2011, the European Parliament voted to adopt a Regulation on short selling and credit default swaps (CDS). The Regulation is due to come into effect in November 2012, and will introduce restrictions and disclosure requirements on persons short selling EU shares and sovereign bonds and prohibit naked or uncovered CDS relating to EU sovereign debt.

The Regulation will also introduce increased reporting requirements to national regulators and European supervisors.

ESMA will issue implementing technical standards to clarify certain terms in the Regulation and set the liquidity thresholds in relation to sovereign debt, as well as provide other technical standards. These technical standards are due to be issued in March 2012.

(x) IFIA Voluntary Corporate Governance Code for Investment Funds

In December 2011, the IFIA published a voluntary Corporate Governance Code for Irish authorised Collective Investment Schemes and Management Companies (the "Code"). An accompanying Frequently Asked Questions (FAQs) document has also been published to complement the Code and support its introduction.

The preparation of the Code followed an invitation from the Central Bank to the industry, through the IFIA, to develop a voluntary Corporate Governance Code for the funds industry in Ireland.

Following considerable engagement with and input from the Central Bank a draft code was prepared and circulated for consultation in early 2011. During the consultation process, a significant amount of feedback was received. This feedback was discussed with the Central Bank following which the final form of the Code was agreed.

Whilst the Code is voluntary, its adoption is strongly recommended. There is an expectation that all CIS and Management Companies will adopt the Code. The Central Bank has asked the IFIA to report on its adoption after the first 12 months of implementation and a review will be carried out within an 18 month period to assess adoption rates among industry at which time the Central Bank may determine to compulsorily apply the Code to CIS and Management Companies.

The Code is effective as of 1 January 2012, with a 12 month transitional period so that the first statement of compliance with the Code should be included in the audited financial statement of the CIS or Management Company with a year end after 1 January 2012. The Code and FAQs are available on the IFIA's website at: www.irishfunds.ie.

A more in-depth review of the Code may be found on the Dillon Eustace website at: www.dilloneustace.ie.

MiFID II PROPOSALS

On 20 October 2011, the European Commission published legislative proposals to amend the Markets in Financial Instruments Directive (2004/39/EC) and its implementing legislation (MiFID). The proposals (MIFID II) consist of a Directive and a Regulation.

The MiFID II proposals aim to:

  • Establish more robust and efficient market structures;
  • Take account of technological innovations;
  • Increase transparency and oversight;
  • Reinforce supervisory powers and introduce a stricter framework for commodity derivative markets; and
  • Enhance investor protection.

A key focus in the MiFID II proposals is to increase the intervention and enforcement powers of the new European regulator, ESMA and the various national regulators across Europe. If the proposals are adopted in their current form, ESMA and the various national regulators would be given broad powers to intervene and, temporarily, prohibit or restrict types of financial instruments or practices which they consider damaging to investors or the market more generally. This could include limiting the ability of any person or class of persons from entering into commodity derivatives transactions and intervening early in a product lifecycle to prevent products from being launched to the market generally, or to a particular class of investors.

The amendments also seek to harmonise the range of disciplinary tools that national regulators can use against those who breach the requirements of MIFID.

Of particular note from an investment funds perspective, is the MiFID II proposal to classify structured UCITS as 'complex instruments' for the purpose of the appropriateness test (i.e. the requirement to seek information from retail clients to determine whether the client has the knowledge and experience to understand the risks involved in the transaction or service being offered). Currently, all UCITS funds are classified as 'non-complex' for the purpose of this test. The MiFID II proposal to classify structured UCITS as 'complex instruments' would require investment firms to apply the appropriateness test when selling structured UCITS to retail investors but not when selling other UCITS products.

The MiFID II proposals are currently only at European Commission proposal stage and will be subject to further amendment by the European Parliament and European Council. At present, the implementation timeline is unclear.

The legislative proposals can be viewed at: http://ec.europa.eu.

NEW PROPOSED MARKET ABUSE REGULATION AND DIRECTIVE

On 20 October 2011, the European Commission published plans to introduce a new Market Abuse Regulation and a new Market Abuse Directive, to replace the existing EU Market Abuse regime.

The new Regulation seeks to create a uniform, directly applicable set of rules for the regulation, avoidance, governance and detection of market abuse enforced by national administrative sanctions. In addition, the new Directive would require all Member States to introduce criminal sanctions for intentional insider dealing and market manipulation.

The new Regulation would expand the scope of the market abuse regime to cover financial instruments admitted to trading on multilateral trading facilities and the new category of organised trading facilities and any related financial instruments traded over-the-counter (OTC). This is to ensure the protection of investors and the integrity of markets are preserved and to ensure that market manipulation of derivatives traded OTC, such as credit default swaps, is clearly prohibited. The new Regulation would require Member States to implement effective, proportionate and dissuasive rules on administrative measures and sanctions for breach of the Regulation and the proposed new Directive requires that the offences of insider dealing and market manipulation should be regarded as criminal offences if committed intentionally. In addition, inciting, aiding and abetting, insider dealing and market manipulation would also be classed as criminal offences. The proposed Regulation and Directive will enter the EU legislative process alongside the Commission's MiFID II proposals (as discussed above). It is likely that this process will take up to a year. Once adopted, the proposals will become effective in Member States 2 years after their entry into force. The European Commission proposals can be found at: http://ec.europa.eu.

EUROPEAN COMMISSION: CONSULTATION ON THE APPLICATION OF DIRECTIVE 2007/44/EC

The European Commission has issued a consultation paper on the application of Directive 2007/44/EC as regards acquisitions and increase of holdings in the financial sector. The provisions of Directive 2007/44/EC apply to MiFID firms and UCITS managers, however it does not apply to investment funds.

The Directive was adopted in 2007 and lays down uniform rules and evaluation criteria for national supervisors to prudentially assess mergers and acquisitions in the financial sector. The main objective of the Directive was to make sure that all acquisitions of a qualifying holding are treated in the same way throughout the EU and across sectors, in particular due to the frequent use of group structures that extend across multiple Member States whereby a single acquisition of a qualifying holding may be subject to scrutiny in several Member States by several sectoral authorities.

According to Article 6 of the Directive, the Commission has to review the application of the Directive and submit a report to the European Parliament and the Council, together with any appropriate proposals to review the Directive. The Commission is seeking evidence on how the Directive was applied in the EU Member States to assist it in the preparation of this report.

The public consultation has been grouped into four sections:

  • General questions on the application of the Directive in the EU Member States;
  • Specific questions regarding the procedure as laid down in the directive for the prudential assessment of the acquisitions of qualifying holdings in the financial sector, i.e. notification requirements and time limits amongst others;
  • Specific questions in relation to the assessment criteria, required information and competing proposals; and
  • Other issues, including questions on sanctions and the uniformity of application of the provisions of the Directive.

The consultation period is open until 10 February 2012 and interested parties may respond via email to MARKT-02@EC.EUROPA.EU.

The Consultation paper may be viewed on the Commission's website at: http://ec.europa.eu.

ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE ("AIFMD")

The AIFMD, which introduces harmonised EU rules for the authorisation and supervision of entities engaged in the management of alternative investment funds ("AIFs"), came into force on 21 July 2011. Member States must implement the AIFMD by 22 July 2013.

It is envisaged that the final version of the Level 2 implementing measures, which should afford clarity to the investment fund industry as to how the AIFMD will operate in practice, will be published by the European Commission in early 2012.

In this regard, ESMA issued its final technical advice on AIFMD on 16 November 2011. This Guidance can be found on the ESMA website at: http://www.esma.europa.eu/.

For the most part, the final advice does not contain substantial changes to the draft advice published on 13 July 2011. ESMA's final advice is in the form of a 500 page document which covers the four broad areas set out below:

  • General provisions for managers, authorisation and operating conditions

    This part sets out the general operating conditions and clarifies the operation of the thresholds that determine whether or not an alternative investment fund manager ("AIFM") is subject to the Directive. ESMA proposes to require AIFMs to have additional own funds and/or professional indemnity insurance to cover risks arising from professional negligence. Many of the rules in this section, such as on conflicts of interest, record keeping and organisational requirements are based on the equivalent provisions of the MiFID and UCITS frameworks.
  • Governance of AIFs' depositaries

    This part sets out the framework governing depositaries of AIFs. Key issues include the criteria for assessing whether the prudential regulation and supervision applicable to a depositary established in a third country has the same effect as the provisions of the AIFMD, the duties of depositaries, the criteria regarding depositaries' liability such as the conditions which would have to be fulfilled in order for an asset to be considered lost. Further important concepts which ESMA's advice aims to clarify relates to which events would constitute external events beyond the reasonable control of the depositary. Finally, the advice clarifies the objective reasons that would allow a depositary to contractually discharge its liability.
  • Transparency requirements and leverage

    This part sets out implementing measures with regard to leverage and transparency requirements. ESMA's advice clarifies the definition of leverage, how it should be calculated and in what circumstances a competent authority should be able to impose limits on the leverage a particular AIFM may employ. ESMA's advice also specifies the form and content of information to be reported to competent authorities and investors, as well as of the information to be included in the annual report.
  • Supervision

    This part of the advice covers the implementing measures on co-operation arrangements with third country authorities and the determination of the Member State of reference for non-EU AIFMs. ESMA's advice envisages that the arrangements between EU and non-EU authorities should take the form of written agreements allowing for exchange of information for both supervisory and enforcement purposes.

The European Commission will now work to prepare the implementing measures in light of ESMA's advice.

On 28 November 2011, the Department of Finance published it's consultation paper in respect of the transposition of the AIFMD. This consultation paper can be viewed on the Department of Finance website at: http://www.finance.gov.ie.

The consultation process will chiefly serve to inform the Department's approach with regard to the national discretions contained in the AIFMD. Responses to the consultation paper were required to be submitted by 14 December 2011.

REFORM OF THE EU DATA PROTECTION DIRECTIVE

On 29 November 2011, the EU's Justice Commissioner Viviane Reding announced formal proposals to revise and update EU data protection law. It was indicated that the European Commission will submit proposals to reform the Data Protection Directive (95/46/EC) by the end of January 2012.

The proposals aim to fix weaknesses in the current data protection framework. The proposals suggested include:

  • Creating a single and streamlined data protection regime whereby the binding corporate rules ("BCR") approved by any one Data Protection Authority in a Member State are recognised in all other EU Member States with no need for further authorisation. Currently BCRs must be approved by the Data Protection Authority in each EU Member State before they are considered effective;
  • Creation of a more business-friendly regulatory environment by removing unnecessary costs and administrative burdens; and
  • Strengthening and coordinating the powers of data protection authorities so that all data protection agencies may use administrative sanctions whenever there is a breach of the law.

CREDIT INSTITUTIONS (ELIGIBLE LIABILITIES GUARANTEE) (AMENDMENT) SCHEME 2011

On 8 December 2011, the Credit Institutions (Eligible Liabilities Guarantee) (Amendment) Scheme 2011 was signed into law by the Minister for Finance Michael Noonan. This scheme provides for further amendments to the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (S.I. No. 490 of 2009) by extending the Government Guarantee for short-term bank liabilities, including corporate and interbank deposits as well as debt securities with participating credit institutions up until the 31 December 2012 (subject to continuing EU State aid approval).

The full text of this legislation may be found on www.irishstatutebook.ie.

CENTRAL BANK OF IRELAND

(i) Revised Fitness and Probity Regime

On 1 September 2011 the Central Bank introduced a new regime to regulate the 'fitness and probity' of persons in Pre-Approval Controlled Functions ("PCF") and Controlled Functions ("CF") in regulated financial service providers (each a "Regulated Firm"). The new regime will apply to both new and existing PCFs from 1 December 2011 and to new CFs from 1 March 2012. Persons currently occupying a CF function have until 1 December 2012 to comply.

While the Central Bank had issued Regulations and Standards of Fitness and Probity on 1 September 2011, modified Regulations (S.I 615 of 2011) and Standards of Fitness and Probity ("Standards") were issued on 1 December 2011, in line with the publication of the final Guidance on the Fitness and Probity Standards on 23 November 2011.

The final Guidance ("Guidance") as well as the updated Regulations and Standards can be accessed on the Central Bank's website at: www.centralbank.ie.

The revised Guidance addresses issues raised during the consultation process by several industry participants. Some welcome clarifications in the revised guidance include:

  • PCF Due Diligence Process:

    Each Regulated Firm was required to identify persons performing PCFs who are in place on 1 December 2011 and provide the Central Bank with a list of all such persons by 31 December 2011. However, a Regulated Firm will now have until 31 March 2012 to carry out its due diligence process on persons performing PCFs and to confirm in writing to the Central Bank that it has carried out such due diligence and that it is satisfied on reasonable grounds, that those persons performing PCFs are compliant with the Standards.
  • Outsourcing to a Regulated Entity

    Where a CF or PCF is outsourced by a Regulated Firm to another regulated entity (which includes entities authorised in any country by an authority that performs functions comparable to those performed by the Central Bank in Ireland) and the functions are performed pursuant to a written outsourcing agreement, the Standards will not apply. Accordingly, no prior approval from the Central Bank is required for a PCF (e.g. Head of Internal Audit) that is outsourced to a regulated entity.
  • Outsourcing to an Unregulated Entity

    Where a PCF is outsourced to an unregulated entity, the position is unchanged from the draft Guidance. The agreement (i.e. a service level agreement) between the Regulated Firm and the service provider must identify the individual who will perform the outsourced PCF and the individual in the Regulated Firm who will be responsible for overseeing the performance of the outsourced PCF. The Regulated Firm must also ensure that it obtains the Central Bank's prior written approval for the appointment of the PCF in the unregulated entity. For CFs, the unregulated entity performing the outsourced activities must be able to identity the individuals who will perform the CFs, and assess whether such persons comply with the Standards. The entity must also obtain the CFs agreement to abide by the Standards.
  • Company Secretary

    The Company Secretary function is no longer a PCF and has been removed from the categories of PCF contained in the updated Regulations. However, the Central Bank has noted, that where an individual in the position of Company Secretary exercises significant influence, they will continue to be captured under CF1.
  • Provision of services on a branch basis

    The Standards will not apply to EEA authorised institutions operating in Ireland on a cross border or branch basis, however it should be noted that this exemption does not extend to regulated third country entities.

    Where a Regulated Firm authorised by the Central Bank provides services in another EEA member state on a cross border or branch basis, the Standards will apply.

In line with the new regime, the Central Bank has issued a revised form of the Individual Questionnaire ("IQ") with effect from 1 December 2011. Since 1 December 2011, the IQ is an online application and the Central Bank will no longer accept the old paper based IQ. Persons proposed for appointment to a PCF will be required to complete the online IQ which must be endorsed by the Regulated Firm and submitted for approval to the Central Bank electronically using the Online Reporting System ("ONR"). Guidance on the use and navigation of the new IQ and the ONR system can be found on the Central Banks website at: www.centralbank.ie.

(ii) Guidance on Fitness and Probity Investigations

In December 2011, the Central Bank issued 'Guidance on Investigations Conducted under Part 3 of the Central Bank Reform Act 2010' which provides PCF/CFs and Regulated Firms with an overview of the manner in which investigations as to the Fitness and Probity of a PCF/CF and the decisions following from such investigations will operate. This Guidance can be found on the Central Bank's website in the fitness and probity section at: www.centralbank.ie.

(iii) Publication of Central Bank's Auditor Protocol

On 6 December 2011, the Central Bank published the Protocol between the Central Bank and Auditors of Regulated Financial Service Providers (the "Auditor Protocol"). The Auditor Protocol provides a framework which allows the Central Bank and the auditing profession to exchange relevant information on a timely basis with the aim of enhancing both the regulatory and statutory audit processes.

In order to fulfil its objectives, the Auditor Protocol requires that communication channels between the Central Bank and auditors should remain open. To achieve this, the Auditor Protocol requires that:

  • Firms must advise the Central Bank of the contact details of the audit partner responsible for the audit within five days of their appointment and similarly firms should advise their auditor of the contact details of its senior examiner in the Central Bank within 5 days; and
  • Meetings between the Central Bank and auditors shall be governed by the principal of sharing information which will lead to higher quality audits and all communications between the Central Bank and auditors shall be deemed confidential under Section 33AK of the Central Bank Act 1942 (as amended).

In line with the proposals contained in the draft consultation paper (CP56), the Auditor Protocol highlights the need to identify and remove barriers to sharing information. As such, contractual agreements between auditors and firms should not hinder information sharing and provision should be made therein acknowledging that the Central Bank and firms' auditors can discuss issues relevant to their oversight of the firm and that such communication will not be determined to be a breach of duty by either party.

The framework provides a structure for bilateral meetings (i.e.between the Central Bank and auditors) which should take place at least twice a year at the pre-and-post audit stage and trilateral meetings (i.e. between the Central Bank, auditors and the audit committee or Independent Non-Executive Director).

The Auditor Protocol is subject to annual review and will be updated to reflect changes in legislation, auditing practice and other relevant developments.

The Auditor Protocol will in the first instance apply to those firms which are rated High Impact under the Central Bank's new regulatory risk model PRISM, and will become effective in 2012.

The Auditor Protocol can be found on the Central Bank's website at: www.centralbank.ie.

(iv) Revised Consumer Protection Code

On 19 October 2011, the Central Bank published a revised Consumer Protection Code (the "Code") which came into effect on 1 January 2012 for regulated entities operating in Ireland. The Code will also apply to EU/EEA authorised regulated entities when providing products or services in Ireland on a branch or cross-border basis.

The revised Code provides for the strengthening of consumer protection in a number of key areas, namely:

  • Arrears handling: A regulated entity is required to have written procedures in place for handling of arrears. In particular, the Code sets out the manner in which regulated entities must deal with personal consumers whose accounts fall into arrears. A personal consumer is defined in the Code as a natural person acting outside of his/her business/trade/profession.
  • Contact with consumers: Unsolicited personal or "doorstep" visits for the purpose of selling financial products to consumers are now banned.
  • Suitability: New prescriptive requirements will be introduced around the information which regulated entities must gather about a particular consumer for the purposes of assessing whether a product or service is suitable for that particular consumer.
  • Product Producers: Must give detailed information to intermediaries in relation to the investment products which the intermediaries sell on behalf of the product producers so that the intermediaries can assess the suitability of a particular product for a consumer.
  • Information to be provided: Prior to offering, recommending, arranging or providing a product, a regulated entity will be required to provide information in writing to a consumer about the main features and restrictions of the product to assist the consumer in understanding the product.
  • Advertising: More balanced information must be provided to consumers in advertisements. Where advertisements outline the benefits of a product or service, they must also outline the risks. Additionally, the Code requires that 'key information' on products and services must be made prominent in advertisements.
  • Vulnerable consumers: A regulated entity will be required to identify vulnerable consumers and to provide such consumers with such reasonable arrangements and/or assistance that may be necessary to facilitate the vulnerable consumer in his/her dealings with the regulated entity.
  • Errors and Complaints handling: a regulated entity will be required to resolve all errors speedily and no later than six months after the date upon which the error was first discovered. Up-to-date logs must be maintained of all errors and complaints.

The provisions of the Code are specifically stated not to apply to regulated entities providing services to persons outside of the State. Additionally the Code does not apply to the provision of MiFID services in Ireland nor does it apply in the context of reinsurance.

Whilst the Code is effective from 1 January 2012, the Central Bank has stated that it recognises that compliance with some of the new enhanced requirements under the Code will require regulated entities to introduce systems and procedural changes and to ensure staff are appropriately trained. As such, the Central Bank has confirmed that it will take account of this for the first six months of monitoring compliance with the provisions of the Code.

The Code and feedback document are both available on the Central Bank's website at: www.centralbank.ie.

(v) Draft Inquiry Guidelines- Consultation Paper 57 ("CP 57")

On 25 November 2011, the Central Bank issued CP 57 on Inquiry Guidelines to be prescribed pursuant to Section 33BD of the Central Bank Act 1942 (as amended) (the "Act"). Under Part IIIC of the Act, the Central Bank has the power to impose sanctions in respect of breaches of regulatory requirements by Regulated Firms and persons involved in the management of such firms.

In cases where breaches of regulatory requirements are being investigated, it may be necessary for the Central Bank to convene an Inquiry to determine whether or not a prescribed contravention has been or is being committed and to determine the relevant sanction. Consequently, in 2005 the Central Bank prescribed guidelines on the Inquiry process, the Administrative Sanctions Guidelines (the "2005 Guidelines"), pursuant to its powers under Section 33BD of the Act.

CP 57 proposes that the Inquiry Guidelines (once finalised) will replace the 2005 Guidelines to reflect both changes made to Part IIIC of the Act since 2004 (including proposed changes under the Central Bank (Supervision and Enforcement) Bill 2011) and the Central Bank's Enforcement Strategy 2011-2012.

The Draft-Inquiry Guidelines contained in CP 57 provide greater detail in terms of the practice and procedure to be adopted during an Inquiry and are divided into four sections:

  • Referral
  • Pre-Inquiry procedures
  • Hearing
  • Decision

Interested parties are asked to comment on the Draft Inquiry Guidelines by 13 January 2012. The Central Bank may publish any submissions received on: www.centralbank.ie.

(vi) Industry Funding Levy

The Central Bank Act 1942 (Section 32D) Regulations came into effect in September 2011. The Regulations apply to all entities subject to regulation by the Central Bank and oblige such entities to pay an annual levy.

The Central Bank has published a Guide to Industry Funding Regulations 2011, which provide levy calculation templates for each category of regulated entity.

The guidance may be found on the Central Bank's website at: www.centralbank.ie.

(vii) Risk-Based Supervision Framework (PRISM)

On 1 December 2011, the Central Bank launched its new risk-basked supervision framework, PRISM (Probability Risk and Impact SysteM).

Under PRISM, the Central Bank will:

  • Focus its supervisory activities towards those firms which pose the greatest threat to financial stability and consumers;
  • Use PRISM to categorise all regulated firms into four separate impact categories, which are based on the level of damage a firm could cause to the financial system, economy and consumers were it to fail. Firms will be categorised as high impact, medium-high impact, medium-low impact or low impact, which will determine the number of supervisors assigned and level of interaction with each firm;
  • Engage with firms at a level that corresponds to their impact category (i.e. the higher the impact, the higher the level of engagement). Engagement will involve reviews, inspections and meetings. The frequency and level of engagement will be associated with the firms' impact rating; and
  • Assess firms in the impact categories high, medium-high and medium-low across ten risk categories which include, credit risk, market risk, insurance risk and capital risk, operational risk, liquidity risk, governance risk, strategy/business model risk, environmental risk and conduct risk.

PRISM was implemented for all banks and insurance firms on 25 November 2011 and will be introduced to all supervised firms, including investment funds, by the end of June 2012. The Central Bank has published an information note on PRISM which can be found on the Central Bank's website at: www.centralbank.ie.

ANTI-MONEY LAUNDERING/COUNTER-TERRORISM FINANCING

(i) Central Bank Inspections

The Central Bank has conducted a series of thematic inspections of investment funds in recent months. The purpose of the inspections is to conduct an assessment of the investment fund's compliance with the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010, (the "CJA 2010").

Broadly speaking the inspections follow the same format and generally involve a presentation of the specified information by the directors and/or compliance officer or other relevant personnel on behalf of the investment fund to the authorised officers from the Central Bank. The inspection team asks questions of those people and also engages with the representative(s) from the fund administrator who are present at the meeting. Within a few weeks of the conclusion of the on-site inspection, the Central Bank issues a letter outlining its findings to the directors of the investment fund and specifying a date by which it requires the findings to be addressed.

A summary of the principal findings/recommendations from some of the recent Central Bank AML/CTF themed on-site inspections include:

  • Policies and Procedures to demonstrate compliance with the provisions of CJA 2010 must be properly documented and maintained by the fund;
  • AML/CTF Training must be provided to all persons involved in the conduct of the fund's business. In particular, it must be demonstrated that all of the directors of the fund have received adequate and appropriate training as regards the provisions of the CJA 2010. Records of training received and the relevant training material provided must be maintained by the fund;
  • Record-Keeping is crucial to demonstrate compliance with obligations under the CJA 2010;
  • Maintenance of Records in the State is required. A copy of the customer due diligence documentation obtained for the purposes of verifying the identity of customers is to be held in the State either in electronic or hard copy format; and
  • Verifying the identity of Nominees: The Central Bank has made it clear in its findings letters to funds that it does not consider a nominee company to be a "specified customer'" for the purposes of Section 34(5) of the CJA 2010. As such the Central Bank requires the identity of nominee companies to be verified in the usual way by reference to the provisions of the CJA 2010. Simplified Due Diligence cannot be applied on the basis of a parent company falling within the terms of Section 34.

(ii) Central Bank Instructions on EU Financial Sanctions

On 14 December 2011, the Central Bank, as the Competent Authority responsible for the administration and enforcement of EU Financial Sanctions, issued a financial sanctions notification to institutions, setting out the list of EU Regulations and domestic Statutory Instruments in force at present for the purposes of implementing restrictive measures in respect of governments, individuals and entities currently subject to EU Financial Sanctions and requiring them to adhere to the provisions of the EU Regulations specified therein.

Pursuant to EU Regulations, institutions are reminded that they are:

  1. prohibited from making funds available either directly or indirectly to or for the benefit of any natural/legal person, group or entity listed under the relevant EU Regulation;
  2. required to freeze all funds belonging to or held by such persons;
  3. obliged to immediately provide to the Central Bank with any information which would facilitate compliance with the EU Regulations; and
  4. required, with respect to Iran and North Korea, to exercise continuous vigilance in activities with credit and financial institutions domiciled in those countries and their branches and subsidiaries abroad, in order to prevent such activities contributing to proliferation-sensitive nuclear activities or to the development of nuclear weapon delivery systems.

Persons who fail to comply with an instruction issued by the Central Bank are liable on conviction to imprisonment and/or a fine.

All correspondence with the Central Bank in relation to the information requested above should be addressed to:

Financial Sanctions Unit,
Enforcement,
Central Bank of Ireland,
Block D,
Iveagh Court,
Harcourt Road, Dublin 2.

Email: sanctions@centralbank.ie

The Central Bank's Financial Sanctions Notification December 2011, which includes information on EU Regulations and domestic Statutory Instruments in force at present for the purposes of implementing restrictive measures in respect of governments, individuals and entities currently subject to EU Financial Sanctions, is available on the Central Bank's website at: www.centralbank.ie.

(iii) Department of Justice Anti-Money Laundering Compliance Unit Update

On 17 October 2011, the Minister for Justice, Equality and Defence (the "Minister") gave an update on the activities of his department's Anti-Money Laundering Compliance Unit (AMLCU). Sections 60 and 62 of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 ("the "CJA") designate the Minister as a Competent Authority and State Competent Authority for the purposes of securing compliance by certain categories of designated persons with statutory requirements to prevent money laundering or terrorist financing.

The objective of the AMLCU is to discharge the Minister's obligations to act as Competent Authority.

The AMCLU has been focusing on the AML/terrorist financing compliance of private member gaming clubs, trust and company service providers and tax advisors as these sectors have been identified as being potentially high-risk areas for AML/terrorist financing.

Under the Act, "designated persons" who provide trust or company services must be authorised by the Minister to provide such services. A total of 224 Trust or Company Service Providers have been authorised by the Minister to date.

Currently 27 Private Member Gambling Clubs are registered with the AMLCU.

To date, 300 inspections to check for compliance have been carried out and 37 Suspicious Transaction Reports have been processed by the Unit, mainly for failure to apply Customer Due Diligence.

(iv) European Commission Working Paper on Anti-Money Laundering Supervision and Reporting

The European Commission published on 7 October 2011, a working paper on Anti-Money Laundering supervision of, and reporting by, payment institutions in various cross border situations.

The purpose of the paper is to provide guidance on the interaction between the Payment Services Directive (2007/64/EC) and the Anti-Money Laundering Directive (2005/60/EC). The Paper discusses two scenarios, namely:

  • Where a Payment Institution authorised in Member State A (the 'home country') works with agents in Member State B (the 'host country'); and
  • Where a Payment Institution authorised in Member State A has a branch in Member State B.

The Paper reviews questions arising as to the legal rules to be applied to Payment Institutions agents and branches, the allocation of AML supervisory powers between the home and the host authorities and the national Financial Intelligence Units (FIU) competent for receiving the reporting of suspicious transactions.

The discussion paper (Document Number 15288/11) is available on the Commission's website at: http://ec.europa.eu.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.