The Central Bank of Ireland ("Central Bank") has released a consultation paper ("CP152") proposing changes to the own funds requirements for certain management companies. The current own funds requirements for UCITS management companies ("UCITS ManCos") and alternative investment fund managers ("AIFMs") (together, "Management Companies") are set out in Regulation 17 of S.I. No. 352 of 2011 (the "UCITS Regulations") and Regulation 10 of the S.I. No 257 of 2013 (the "AIFM Regulations"), respectively. Under these respective regulations, the level of own funds required to be held by such Management Companies is directly proportional to the level of collective portfolios managed, up to a prescribed limit.
In addition to the activity of collective portfolio management, Management Companies may be authorised to provide discretionary portfolio management services and additional non-core services. This is known as the "MiFID top-up". However, Management Companies are not, at an EU level, subject to own funds requirements related to the provision of such services. Currently, in respect of the top-up activities, the Central Bank imposes a requirement on such firms to hold capital in accordance with long-repealed capital requirements regulations from 2006 (which focus on credit and market risk, factors not all that meaningful for firms whose risks don't typically emanate from their own balance sheets).
This creates a divergence between portfolio managers authorised under S.I. No. 375 of 2017 ("MiFID"), whose capital requirements are provided for under Regulation (EU) 2019/2033 ("IFR") and those Management Companies operating under a top-up, each essentially fulfilling the same function, but with different application of capital rules.
Therefore, in the interest of maintaining a level playing field, the Central Bank is proposing to introduce bespoke own funds requirements for Management Companies using their top-up licences.
In its proposal, Management Companies authorised to provide discretionary portfolio management services and non-core services that do not meet conditions to be a “small and non-interconnected firm” (modelled on similar, but not identical, conditions under the IFR) will be required to apply the higher of:
- the own funds requirement under the UCITS Regulations / AIFM Regulations as applicable; or
- a risk-to-client k-factor own funds requirement largely modelled on the risk-to-client k-factor applicable to MiFID investment firms under the IFR.
Under the proposal, Management Companies using the top up will continue to be required to undertake an Internal Capital Adequacy Assessment Process ("ICAAP") in line with a similar requirement applicable to all MiFID investment firms, and this requirement will be codified.
Small and Non-Interconnected Firms
For investment firms (authorised under MiFID), whose capital requirements are determined under the IFR, certain of the requirements (the k-factors) are not applicable to "small and non-interconnected firms". CP152 proposes to mirror this approach by exempting Management Companies fitting into this category from the additional requirement. The concept of small and non-interconnected firm is defined slightly differently for each of UCITS ManCos and AIFMs. Both criteria include that, in order to qualify for the exemption, the Management Company must fulfil all of the following requirements:
- its AUM is less than €1.2bn;
- it does not safeguard client assets or hold client money;
- the value of its on and-off balance sheet assets does not exceed €100m; and
- its total revenue from individual portfolio management is less than €30m.
For AIFMs, client orders handled must also fall below certain thresholds (€100m per day for cash trades; €1bn per day for derivatives).
For small and non-interconnected Management Companies, their capital requirements will continue to be calculated in accordance with Regulation 17 of the UCITS Regulations and Regulation 10 of the AIFM Regulations respectively.
For in-scope firms, the proposed risk-to-client k-factor requirement is made up of the sum of the individual k-factors covering the business areas of Management Companies and – unlike own funds requirements applicable in the context of collective portfolio management – is not subject to any upper limit.
The overall governing formula is as follows:
Risk to Client Requirement = K-AUM + K-CMH + K-ASA + K-COH [AIFM ONLY]
Assets Under Management
AUM or assets under management refers to the value of assets that a Management Company manages on a discretionary portfolio basis and includes investment advice of an on-going nature.
Client Money Held
Client money held relates to the amount of money that a Management Company holds on behalf of a client.
Assets Safeguarded and Administered
Assets safeguarded or administered means the value of assets that a Management Company safeguards and administers for clients irrespective of whether assets appear on its own balance sheet or are in third party accounts.
Client Orders Handled [AIFM ONLY]
Client orders handled means the value of orders that an AIFM authorised for reception and transmission of orders in relation to financial instruments handles for clients through the reception and transmission of client orders. The measurement of COH should exclude transactions that are already included in the calculation of AUM.
Further details as to the calculation methodology for each of the above are set out in CP152. Each are assessed against the co-efficients in the following table:
|Assets under management under discretionary portfolio management||K-AUM||0.02%|
|Client money held||K-CMH (on segregated accounts)||0.4%|
|K-CMH (on non-segregated accounts)||0.5%|
|Assets safeguarded and administered K-ASA||K-ASA||0.04%|
|Client orders handled||K-COH cash trades|
Management Companies will be required to report on a quarterly basis on their own funds requirements and their compliance with the revised requirements.
The proposed transitional arrangements will provide a phased-in approach to the implementation of the revised own funds requirements, allowing Management Companies to adjust to the changes over a period of time. In this regard, the Central Bank proposes that Management Companies should also be able to limit the increase in their own funds requirement arising from the introduction of a k-factor requirement to twice their fixed overheads requirement for the period up to end June 2026.
CP152 includes a list of questions that stakeholders can respond to in order to provide feedback on the proposed changes. The Central Bank will consider all responses to the consultation before finalising the changes and publishing the revised regulations.
The Central Bank has invited all stakeholders to provide comments on the proposals outlined within this consultation paper. Responses should be submitted no later than 23 February 2023.
Should you have any queries in respect of the above, please do not hesitate to contact any member of Matheson LLP's Financial Institutions Group, Asset Management Division or your usual Matheson LLP contact.