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Investment Funds: Central Bank consults on removal of minimum activities regime and the introduction

AUTHOR(S): Anne-Marie Bohan
PRACTICE AREA GROUP: Asset Management and Investment Funds
DATE: 30.01.2011

Since 1995, the Central Bank has applied “minimum activity” rules to Irish domiciled investment funds. Pursuant to these regulatory requirements, it has been mandatory for core fund administration activities (such as the calculation of net asset value, the preparation of annual and semi-annual accounts, the keeping of fund books and records and the shareholders’ register) to be performed in Ireland.

Having carried out a review of the existing rules, in late 2010 the Central Bank launched a consultation to consider the proposed removal of the minimum activities regime for UCITS and non-UCITS. To coincide with this, it is intended to introduce new requirements governing the outsourcing of services by Irish regulated administrators.

Removal of Minimum Activities Regime

The stimulus for the review and proposed removal of the minimum activities regime has been two-fold: first, with the impending implementation of management company passport pursuant to the UCITS IV Directive, the location of a UCITS will soon no longer be linked to the locus of the operations of that UCITS. Therefore, the Central Bank will not have responsibility for the supervision of activities of a non-Irish management company, including the administration functions. As a corollary to this, the Central Bank will not impose minimum activities relating to an Irish UCITS to be adhered to by an Irish resident entity. Second, developments which have occurred within the fund administration industry have been taken into consideration, for example fund accounting systems that operate on a global basis across group companies, which make it possible for specific activities to be carried out in another country whilst the Irish administrator retains control of these systems and processes. For consistency, the proposals seek to remove the minimum activities requirements for both UCITS and non-UCITS funds.

Outsourcing Requirements

In terms of the introduction of a regulatory framework to govern the outsourcing of fund administration services, the component parts of the proposed new system are set out CP 38,  the Central Bank’s consultation paper. Within the consultation, the Central Bank also raised  36 specific questions for consideration by respondents and interested stakeholders from all parts of the industry. The consultation noted the intention that the proposed new requirements incorporate and are consistent with both the rules on outsourcing contained in MiFID and the Committee of European Banking Supervisors’ 2006 Guidelines on Outsourcing (the “CEBS Guidelines”), and that the introduction of the new framework is required for the Central Bank to properly exercise its supervisory responsibilities with regard to Irish authorised administration firms.

The consultation paper indicated that the obligation for administrators to comply with the new requirements will be incorporated within the Central Bank’s UCITS and non-UCITS Notices and it is intended that the new rules will be imposed as conditions under section 14 of the Investment Intermediaries Act 1995. Although the proposed new rules are directed at fund administrators, an over-arching observation made by the Central Bank in the consultation paper refers to the fact that, as administration firms are appointed by fund boards or their management companies, these boards retain responsibility for any delegated functions and will continue to be obliged to ensure that the appropriate regulatory requirements applicable are complied with on an ongoing basis. The Central Bank highlights also that administrators outsourcing any part of their activity must ensure adequate control and oversight over the process in order to comply with the Central Bank’s rules.

Some of the key points regarding the proposed new outsourcing rules include the following:

  • The administrator’s obligation to comply with the new outsourcing requirements will apply to all collective investment funds which it administers, ie Irish and non-Irish domiciled investment funds
  • Administrators will not be permitted to outsource core administration activities (defined as the final checking and release of net asset value calculation for dealing purposes and the maintenance of the shareholder register). Where the net asset value calculation is released by the outsourcing service provider, the final check must be completed by the administrator on the following day
  • Responsibility for the proper management of the risks associated with outsourcing or the outsourced activities lies with the administrator’s senior management. These risks must be appropriately managed and outsourcing arrangements can never result in the delegation of senior management’s responsibility
  • Outsourcing shall not affect the administrator’s full and unrestricted responsibilities under fund legislation and the Central Bank’s requirements;
  • The administrator must inform the Central Bank in writing of any activity to be outsourced. A formal notification and approval process will apply
  • The administrator must put in place a policy that covers all aspects of outsourcing. Amongst other matters, this should address due diligence checks of the outsourcing service provider  (pre-contractual and ongoing)
  • The outsourcing service provider must have the ability and capacity to perform the outsourced functions reliably and professionally. It must have the appropriate authorisation to carry out the outsourced services and activities if required by the relevant national legal framework
  • Outsourcing relationships must be fully documented by a formal contract or service level agreement between the parties. The consultation paper directs on the specific content which must be covered by the written agreement
  • The outsourcing service provider must be evaluated on an ongoing basis. The Central Bank also requires that the administrator’s internal auditors must examine the operation of the outsourcing arrangement within the first 12 months of its operation and provide this report to the Central Bank
  • Where an outsourcing is entered into on an intra-group basis, the new rules will apply, although the Central Bank will take into account specific circumstances, including the control or influence of the administrator over the service provider
  • The issue of “sub” or “chain” outsourcing is also dealt with in the consultation. This will be permitted where the sub complies with the obligations existing between the administrator and the outsourcing service provider, including the obligations and commitments to the Central Bank; and
  • Existing clients of the administrator must be made aware of the outsourcing arrangements and new clients must be notified in advance.



The Central Bank has targeted the first quarter of 2011 for the introduction of the new provisions, in respect of which the consultation period closed on 31 December 2010. It is unclear at this stage whether there will be a transitional period with regard to existing outsourcings which may not be fully compliant with the proposed rules. It should also be noted that while the rules are broadly in line with requirements of both MiFID and the CEBS Guidelines, eschewing an overly prescriptive approach to the specifics of the due diligence, management and contractual requirements, and arguably reflecting prudent commercial practices, the introduction of materiality thresholds in respect of notification obligations and with respect to defining the services which can be outsourced (consistent with favouring a “management and control” approach rather than reserving defined “core” activities), would more closely align with MiFID and the CEBS Guidelines and would be welcome. 

Given the range of new provisions which are proposed, it will be important for administrators to plan, as appropriate, for the implementation of the outsourcing requirements when these emerge in final form. While outsourcing of elements of administration services has been a commercial reality for a number of years, and has been approved by the Central Bank on an ad hoc basis, the consultation process presents a welcome opportunity to obtain certainty and transparency as to the applicable regulatory requirements, and should facilitate administrators in the greater flexibility anticipated with respect to the nature and scope of the services which can be outsourced.

For further information please contact Anne-Marie Bohan, Partner, or Elizabeth Grace, Consultant, Asset Management and Investment Funds Group at Matheson.



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