Legal

Recent Legal and Regulatory DevelopmentsA. The European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (the “UCITS Regulations 2011”) became law in Ireland on 1 July 2011. The UCITS Regulations give effect to Directive 2009/65/EC (the “UCITS IV Directive”).

The period prior to July 1 was a very busy time for UCITS and their respective service providers to ensure business plans were UCITS IV compliant. While the waters have settled somewhat since that time however there are other aspects of UCITS IV that merit discussion, including the revised "outward marketing" requirements set out in the UCITS Regulations 2011.

Central Bank - UCITS Outward Marketing Requirements

Post UCITS IV, the process for the registration of UCITS in Member States outside its home Member State is now completed via communication between the respective Regulators.

The process is as follows:

  • Each Member State has its own form of Notification Letter which sets out the information and documentation which a foreign UCITS will need to provide in order to be approved for distribution in that Member State. Once all the ancillary documentation has been collated this is submitted to the Home State Regulator together with the Notification Letter (the "Notification File").
  • When an Irish UCITS makes an application to distribute in another Member State it submits a Notification File, in the format prescribed by the host Member State, to the Central Bank in Ireland which initiates the process of registration.
  • The Central Bank must verify the completeness of the Notification File and transmit it by email together with an attestation to the Host Regulator within 10 working days of receipt of the documentation from the UCITS.
  • Following the successful transmission of the Notification File, the Central Bank shall immediately notify the UCITS and the UCITS may access the market of the Host Regulator from the date of the notification.

In Ireland, the Central Bank has published its form of Notification Letter on its website as have many of the financial regulators in the various EU Member States.

Content of Notification Files

The Central Bank recently issued a letter of clarification to the Irish Funds Industry Association to assist UCITS when collating a Notification File. The main points raised were as follows:

  • Central Bank has asked that the Notification Letter is completed in typed print;
  • Details are only required in relation to those sub-funds the shares of which it is intended will be marketed in the foreign jurisdiction;
  • A UCITS should only attach those documents which specifically relate to the sub-funds to be marketed in the relevant foreign jurisdiction (this point relates to UCITS with a large number of sub-funds under one umbrella where it is not intended to market all of the sub-funds in the relevant jurisdiction;
  • The UCITS will need to deposit all those documents forming the Notification File on a dedicated website and a link must be provided to the Central Bank. It is not enough to give the Central Bank a generic link i.e. you must specify the exact web address where the documentation can be located; and
  • The Notification Letter must be signed and dated and the signatory's capacity must be set out.

B. Central Bank - Regulation and Standards of Fitness and Probity

On 1 September 2011, the Central Bank published its Regulations and Standards of Fitness and Probity (the "Regulations") under Part 3 of the Central Bank Reform Act 2010 (the "Act").

The Regulations (SI 437 of 2011) have been issued in accordance with the powers given to the Central Bank under Sections 20 and 22 of the Act. A separate Fitness and Probity Standards Code is issued under Section 50 of the Act. This has been supplemented by a draft Guidance Note which was circulated to the Funds industry for comment in mid September 2011.

Purpose

In the Central Bank's own words the purpose of this new Fitness and Probity Regime is to:

  • approve or veto the appointment of people to certain positions;
  • investigate and where appropriate remove or prohibit certain position holders; and
  • set statutory standards of fitness and probity across the financial services industry.

The Fitness and Probity requirements create the concept of two separate groupings of staff in regulated financial services providers depending on the level of responsibility attributed to particular roles.

The Regulations specify different levels of fitness and probity due diligence that will apply (on a risk assessed basis) depending on whether a person is deemed to be carrying out:-

  • Pre- Approval Controlled Functions; or
  • Controlled Functions

Pre-Approval Controlled Functions ("PCFs")

PCFs are deemed by the Central Bank to be those positions in regulated financial services providers which carry a high level of responsibility. The Central Bank will therefore need to assess and approve any proposed appointee to such a position before the candidate can be appointed. The relevant schedule to the Regulations identifies 42 PCFs.

From 1 December 2011, existing and new staff in PCFs will become subject to the Regulations. Those people already occupying the PCF in regulated financial services providers will not need to submit a new application for approval, however, all regulated financial services providers will be required to submit a list of all personnel carrying out PCFs to the Central Bank before 31 December 2011.

Controlled Functions ("CFs")

The Regulations also specify 11 categories of CFs. CFs are described in more generic language than PCFs.

The Central Bank's stated purpose in relation to CFs is to identify those persons occupying less senior positions that are "client facing". It is expected that a lot of the comment the Central Bank receives from its consultation process will point to the difficulties regulated financial services firms may experience in properly identifying who is carrying out a CF, or maybe more importantly, who is not carrying out a CF.

Changes to old regime

One of the biggest changes to the old regime is the level of responsibility that will be placed on regulated financial services firms to undertake and document their own due diligence on those persons they propose appointing to both PCF and CF positions. The ongoing nature of the requirements in terms of monitoring staff regarding their continuing professional development is a big change to the previous process.

The new rules will come into force for all relevant staff on 1 December 2012.

C. Central Bank (Supervision and Enforcement) Bill 2011

One of the consequences of the financial crisis is the increased focus by the Central Bank of Ireland (the "Central Bank") on the regulation of, and enforcement action against, financial services providers.  Financial regulatory reform is also a requirement of the EU-IMF programme of support for Ireland.

The Central Bank (Reform) Act 2010 was the first step in this process and it introduced, among other things, a more stringent fitness and probity regime for senior personnel in banks and financial service providers as discussed above. The Central Bank (Supervision and Enforcement) Bill 2011 (the "Bill") is the next step in this process. The Bill provides a platform to the Central Bank for the enforcement of existing financial services legislation against all regulated financial service providers together with the power to introduce additional financial services legislation.

Some of the key aspects of the Bill are as follows:-
  • enhanced powers to require financial service providers (or related undertakings) to commission reports from independent experts in relation to financial services matters being investigated by the Central Bank;
  • further provisions for the enforcement of financial services legislation - the Central Bank will have the power to make regulations on a wide range of issues.  It is envisaged that this power will be used to give legislative effect to many of the Central Bank's existing Codes e.g. consumer protection;
  • protection of persons reporting breaches of financial services legislation - a whistle-blower will be protected from civil liability and penalisation by their employer for making a protected disclosure; and
  • mandatory disclosure regime - persons performing pre-approved control functions must report a breach of financial services legislation unless that might incriminate them personally.  Failure to disclose may result in an investigation and action under the fitness and probity regime discussed above.

The Bill is currently progressing through the Oireachtas.

The material in this article is for general information only.  Professional legal advice should be sought in relation to any specific matter.  For further information, please contact Damien Barnaville or Ronan Cremin at LK Shields Solicitors.