17 May 2018 Speech
Derville Rowland – Director General, Financial Conduct: Speaking at the Irish Funds Global Annual Conference
Thank you to Irish Funds for the opportunity to address this conference.
Ireland’s investment funds sector plays a critical role in both the European and global financial services sector. Consequently, at events such as this, it is timely to take stock of the current domestic, European and international regulatory landscape and to set out the Central Bank’s approach to the funds industry and our expectations of the sector.
Ireland’s Global Funds Sector
Ireland’s funds industry has seen, and continues to see, strong growth in assets under management and administration. Assets in Irish domiciled investment funds now exceed €2.4 trillion and assets under administration in Ireland stand at €4.4 trillion. Ireland has €380 billion in UCITS Exchange Traded Funds and €500 billion in money market funds, making the sector a global leader on both fronts.1
As part of the regulatory framework, the gatekeeper role operated by the Central Bank is an effective and efficient way of ensuring the firms and funds operating within the industry adhere to high standards. The Central Bank is mindful of the importance of efficient turnaround times for investment funds and fund service providers. This is why we monitor performance against agreed turnaround times and publish details of this performance on a semi-annual basis.
The Central Bank continues to authorise a steady pipeline of new investment funds on an annual basis. This continued growth was evident over the last year with 307 net new investment funds authorised.2 The authorisation gateway operated by the Central Bank is an important feature of Ireland’s regulatory framework.
It is also important that the Central Bank’s regulatory approach takes account of the global nature of the industry.
European regulatory engagement has long been a feature of the financial services sector in Ireland. However, never has the importance of being a pro-active and constructive participant been so evident. The European System of Financial Supervision (ESFS) has continued to evolve, strengthen and develop closer cooperation. The European Commission has proposed changes to the structure, role and responsibility of the European Supervisory Authorities (ESAs) – namely the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).
Our key concern is that the solution provides a workable arrangement with clear accountability and frameworks that promote supervisory convergence.
As the ESAs mature in their role, the focus should move from rule writing to implementation and supervisory convergence. This progression has been at the forefront of our thinking when determining what role the Central Bank should play in European policy and supervisory fora. The path chosen is to be constructive actors in this engagement, seeking to build trust and inform the European regulatory approach. This requires a willingness to cooperate, compromise and to open up our regulatory approach to peer scrutiny. Sometimes forging our own path might appear more appealing. However, in the longer term, such an approach would be counterproductive. The sustainability of the single European market requires mutual trust and support among regulators. A cooperative and proactive approach will underpin a level of mutual confidence amongst regulatory authorities, which will make the EU single market resilient. A core aim is to safeguard against regulatory arbitrage in Europe.
Industry also plays a role by engaging directly with European authorities and other regulators. This is welcome and to be further encouraged if we are to continue to influence Europe’s legislative and regulatory agenda effectively.
This approach of seeking to build mutual confidence through building the single rulebook, supervisory convergence and shared risk analysis is not confined to European engagement. We are leading participants in the international discourse on Exchange Traded Funds (ETFs) and contribute to the thinking of the International Organization of Securities Commissions (IOSCO), particularly on investment funds liquidity.
Recognition that Ireland is an important hub for financial services activity places a responsibility on us to ensure that we are well represented abroad – influencing the international debates. For industry, it means developing and maintaining high standards and ensuring investors’ interests are at the centre of everything you do.
The Financial Conduct Pillar Vision
As Director-General Financial Conduct, my vision is for a financial services system underpinned by a strong culture of compliance and trust-worthiness, with firms and the people working in those firms acting in the best interests of their customers. Where we see outcomes, which fall below these standards, we will act decisively, making full use of the powers the Oireachtas has given us, through rigorous supervision supported by a credible threat of enforcement.
We have to remember that the financial services system is built on trust. Reliability, competence and integrity are the hallmarks of trust. Investors need to trust that their assets and information are secure. They need to trust that their assets are invested consistent with the mandate they have provided. Without trust, investors will not rely on the global distribution platforms for investment funds. They will not engage with a fund manager located outside of their home jurisdiction or conduct their personal portfolio management via online tools.
This trust needs to be developed and maintained regardless of the location of the investor. We are all guardians of Ireland’s global reputation. We are mindful in the Central Bank, as I know you are, of the importance of ensuring that our integrity in administering and managing the very large amounts of investors’ funds placed in our care is something which comes across in everything we all do.
Let me specifically turn to supervisory matters for a moment.
I believe that effective supervision at home is required in order to ensure confidence abroad. The cross border distribution of investment funds is built on a platform of multiple entry points underpinned by the operation of the same high standards at each location. In both a European and global context, where investment funds are established in Ireland and then distributed worldwide, it is important that Ireland’s funds industry operates to a high standard and that there are consequences for participants that breach those standards. Of course, given the size and scale of the industry, it is not possible or appropriate to have Central Bank supervisors watching over each entity on a daily basis. Nor would it be wise.
The Central Bank intends to continue to develop its approach based on a number of key priorities:
- A robust authorisation gateway where high standards are expected;
- A supervisory approach utilising regulatory reporting and data analytics to identify outliers for additional investigation;
- Thematic supervisory programmes highlighting good industry practices and ensuring these are the norm; and
- A well-developed policy framework where the requirements are clearly understood, supported by clear guidance so that compliance is ensured.
The policy pipeline is busy, the most pressing being Money Market Fund Regulation (MMFR) coming in to force in July 2018. Existing Money Market Funds have until January 2019 to be authorised under the new Regulation. Applications for authorisation must be submitted by 1 September 2018.3 In addition, there is extensive European engagement in relation to implementation issues. These include the potential implications of the view expressed by the European Commission on the legal implications of the MMF Regulation for established reverse distribution mechanisms; the development of detailed liquidity stress testing guidance at ESMA; and the roll out of regulatory reporting requirements. Central Bank staff are active in all of these discussions and feedback provided by industry has been useful in informing our contributions to these debates.
The Central Bank’s fund management company guidance (known as CP86) comes into full effect for fund management companies from 1 July 2018. It introduces important changes to the fund management landscape and imposes a number of key obligations, such as managerial functions, organisational effectiveness and retrievability of records. I think it is fair to say that the development of this guidance now looks prescient, in light of Brexit. We took our time to develop our perspective and then we advocated around that approach in the context of subsequent European debates. This is one of the success stories for our proactive, engaged and collaborative approach to managing our international regulatory relationships.
We have seen that one of the key topics addressed in the ESMA Brexit opinions relates to delegation arrangements where the service provider is outside the EU. ESMA’s chair Steven Maijoor has recently highlighted that the opinions were “not looking to question, undermine or put in doubt the delegation model”, what the opinions are seeking to address is “the risk of letterbox entities”. This matter has been considered extensively as part of fund management company governance. It is important to recognise that delegation arrangements to third countries are permitted under both the Alternative Investment Fund Managers Directive (AIFMD) and UCITS V. What is critical however is that there is effective oversight of any delegation arrangements and that ultimate responsibility is retained by the board of the management company. The Central Bank will likely consider potential supervisory initiatives after implementation of the fund management company guidance to assess how the guidance is being interpreted and whether additional clarifications may be helpful.
Amendments to Investment Limited Partnership legislation are being considered. From the Central Bank’s perspective, what is important is that we have a robust regulatory framework that ensures that a range of investment fund types can be authorised and supervised appropriately. The impact of any amendments on the regulatory framework are being considered. This may result in changes to the Central Bank’s AIF Rulebook.
Regarding Capital Markets Union, the Central Bank has consistently supported measures, which will increase the safety
and efficiency of Europe’s capital markets. The cross-border funds distribution proposal is clearly one of the most significant developments for the asset management industry in this regard. This proposal seeks to reduce regulatory barriers and streamline cross-border distribution in Europe. Amongst other things, it seeks to amend the UCITS Directive and the AIFMD to clarify provisions where a lack of clarity may have given rise to ‘gold plating,’ and to align the process under the UCITS Directive and AIFMD where AIFs are being marketed to retail investors. It also provides a definition of pre-marketing. The Central Bank is generally supportive, but we believe that legislators should go further than currently proposed.
The Central Bank will contribute to the Commission’s review of AIFMD, which has worked well since its introduction, but improvements can be made. The Commission’s review will inform potential legislative updates to the directive. I know Irish Funds have expressed views in relation to a number of areas including third country provisions, depositary liability and AIFM reporting requirements. The Central Bank’s intention is to highlight areas where additional clarification or amendment would be beneficial and bring this experience to bear in European discussions.
Funds Industry Engagement
The open, respectful and robust dialogue, which currently exists between industry and the Central Bank, should be maintained and fostered into the future. If managed appropriately, this dialogue can help to ensure appropriate regulatory outcomes and will inform the Central Bank’s contributions at regulatory forums.
Facilitating innovation within the sector is important. The Central Bank has recently announced the establishment of an Innovation Hub as part of a broader FinTech initiative. The intention is to engage with industry and applicants for authorisation in a way that is appropriate to the stage of development of their business initiatives. It is important that regulators are closely engaged with emerging developments in this field so that the benefits of innovation are realised promptly for consumers and the economy. We have also recently issued a survey to develop our understanding of the effect that Fintech and Regtech is having on Fund Service Providers. The results will help inform supervisory strategy and policy development in this area.
If I can leave you with one message, it would be that in order to retain international confidence in Ireland’s model of financial services, the need for high industry standards coupled with effective regulatory oversight is paramount. The need for mutual confidence, particularly amongst regulatory authorities, informs the Central Bank’s efforts in relation to our European and international engagement and our supervisory oversight domestically. This is very important in relation to the cross-border distribution of funds. Jurisdictional confidence must be maintained, supported and enhanced if the European passporting framework and global distribution of funds is to work effectively.
I hope that you enjoy the rest of your conference and that it is full of lively debate.
I would like to thank James O’Sullivan for his assistance with this speech.
1: Figures as of end Q4, 2017
2: 307 net new investment funds (including sub-funds) were authorised by the Central Bank from February 2017-February 2018
3: Letter dated 27 March 2018 from Head of Funds Authorisation, Securities and Markets Authorisation Division