3. The regulatory and supervisory framework

Introduction

Regulation of investment funds and their service providers gives investors the confidence that their money is being invested by managers who are subject to regulatory scrutiny and who must adhere not only to rules in relation to the investments made by the fund but to risk limits and standards of conduct and probity. However, since the global financial crisis, the regulatory framework has evolved and expanded beyond investor protection to cover a range of other issues including financial stability and market integrity.

The Central Bank of Ireland is responsible for the authorisation and supervision of investment funds established in Ireland. The Central Bank’s mandate, which is founded on the Central Bank Act 1942, requires the proper and effective regulation of the financial sector in Ireland while ensuring overall financial stability and that investors and consumers are protected. In respect of the regulated funds sector, the regulatory and supervisory framework under which the Central Bank exercises this mandate primarily derives from the EU. The Central Bank’s regulatory priorities are risk-based and reflect the evolving nature of the broader environment in which it operates.

The focus of the Central Bank’s regulatory intervention in the funds sector is:

• to protect investors (which includes promoting and safeguarding the integrity of funds markets and maintaining confidence in the funds industry among potential investors and the public generally); and
• to identify and mitigate systemic risks that may arise from the activity of the industry.

Regulatory interventions in the market based finance sector range from the monitoring of financial activities to, in certain circumstances, the resolution of distressed firms. Supervision is conducted through rules and guidance (including through rule-making powers provided to National Competent Authorities in EU legislation), gatekeeping, supervision and regulatory actions including the use of enforcement powers.   

In an increasingly globalised world market, national and international authorities have to work together to develop effective policies for regulating and supervising financial markets. As such, Ireland’s regulatory and supervisory framework primarily derives from the EU. Since the global financial crisis, there has been an emphasis on the need to develop an increasingly harmonised regulatory approach across the EU. This harmonisation objective has been brought into greater focus by ongoing work on the Capital Markets Union (CMU) project.

The legislative requirements instituted at an EU level are supplemented by technical standards, guidelines and recommendations from European Supervisory Authorities (ESAs), primarily the European Securities and Markets Authority (ESMA) and National Competent Authorities such as the Central Bank. International agencies such as the Financial Stability Board, the IMF, the OECD and the International Organization of Securities Commissions (IOSCO) also have a role in assessing financial resilience and developing policy principles to enhance financial stability. 

Relevant Terms of Reference

Key aspects of the regulatory and supervisory framework

THE SPECTRUM OF REGULATORY ENGAGEMENT

FUND LEGAL STRUCTURES

There are six separate structures that an Irish investment fund can take - outlined in the table below. Of these, five can only be used if the investment fund is regulated by the Central Bank. One structure, the Limited Partnership, is unregulated and is neither authorised nor supervised by the Central Bank.

The first four legal structures, established under Irish Company, Partnership or Trust law, have evolved to reflect the legal features required by an investment fund. As such, the requirements and rules relating to the structure vary according to the legislation under which it was conceived. With the exception of the Limited Partnership, the legislation related to the remaining legal structures is the responsibility of the Minister for Finance.^[8]

With the exception of the Investment Company, the Central Bank is the Registrar for the regulated structures (1 to 5 in Table 2) and is required under legislation to maintain and update the register as required.

Table 2. Investment Funds (Regulated and Unregulated ) - Irish Legal Structures
	Legal Structure	Legislation	Registrar
1	Unit Trust	Unit Trusts Act 1990	Central Bank of Ireland
2	Investment Company	Companies Act 2014	Companies Registration Office
3	Common Contractual Fund (CCF)	Investment Funds, Companies and Miscellaneous Provisions Act 2005[9]	Central Bank of Ireland
4	Investment Limited Partnership (ILP)	Investment Limited Partnership Act 1994 (as amended)	Central Bank of Ireland
5	Irish collective asset-management vehicle (ICAV)	Irish Collective Asset-management Vehicles Act 2015	Central Bank of Ireland
6	Limited Partnership	Limited Partnership Act 1907	Companies Registration Office
Source: Department of Finance

The table below details the number of regulated investments authorised from 2015 to 2022.

Table 3. Regulated Investment Funds by Legal Structures Authorised in Ireland

2015 2016 2017 2018 2019 2020 2021 2022 ICAV 248 320 354 615 428 390 511 424 Investment Companies 540 353 361 385 311 254 276 248 Unit Trusts 146 75 89 70 31 47 40 39 CCFs 13 26 26 48 32 28 9 18 ILPs 2 1         8 17 Total 949 775 830 1118 802 719 844 746 ICAV % 26% 41% 43% 55% 53% 54% 61% 57%

Source: Central Bank of Ireland

Unit Trusts were one of the original forms for establishing an investment fund in Ireland. They are established by a trust deed with a trustee appointed as the legal owner of the assets and a management company to act for the trust. They do not have their own legal identity and investors are unit-holders as they hold a unit in the trust representing their entitlement to a portion of the fund’s assets.

The Investment Company, previously one of the most common fund vehicles in Ireland, is subject to company law. It has a separate legal personality and may enter into legal agreements in its own name. An Investment Company is managed and controlled by a Board of Directors and issues shares to investors. It is not required to appoint an external manager but generally, certain functions are delegated to third party service providers.

A CCF is established under contract through a deed of constitution. Investors are co-owners of the fund’s assets. This allows investors to pool their resources under common management for investment purposes. A management company must be appointed and investors cannot be individuals in accordance with the relevant tax legal provisions.

The ILP was first established in 1994. It is only available for AIFs as a structure for professional investors. An ILP is created by a partnership agreement between the general partner and investors who participate as limited partners with the general partner acting for the fund. Unlike other fund types, it does not typically issue units or shares but, for regulatory purposes, partnership interests are equated to units or shares.

The Irish Collective Asset-management Vehicles (ICAV) Act 2015  was a bespoke piece of legislation that established a legal structure specifically for investment funds. One of the primary advantages of the ICAV structure is that it has been specifically designed to be distinguishable from a typical trading company and does not have to comply with the parts of the Companies Acts that are not relevant to investment funds. ICAVs can be used by both UCITs and AIFs. It has a distinct legal personality under an instrument of incorporation. The ICAV is managed by its Board of Directors with investors issued shares in the fund. It is not required to appoint an external manager but generally certain functions are delegated to third party service providers. Existing Irish investment companies or certain foreign funds can also convert to an ICAV. A significant proportion of all new funds have been set up as ICAVs since the structure was established in 2015.

Unregulated Vehicles

In addition to these vehicles, a number of investment funds use a Limited Partnership structure provided for by the Limited Partnership Act 1907 which falls under the responsibility of the Minister for Enterprise, Trade and Employment. The Limited Partnership is not a regulated fund structure and is neither authorised nor registered with the Central Bank. Where a Limited Partnership is categorised as an AIF, it must have a manager (AIFM) who must either be authorised or registered. However, this does not bring the Limited Partnership, as a vehicle, within the regulatory purview.

Fund Service Providers

Funds service providers is the collective term used to describe the parties providing services to an investment fund. 

Table 4. Irish Fund Service Providers
1	Fund administrators	Fund Administrators provide services, including transfer agency, net asset valuations (NAVs) and fund accounting in respect of Irish authorised funds, both UCITS and AIFs. Fund Administrators can also provide these services to non-Irish authorised funds. Fund administration firms are authorised under Section 10 of the Investment Intermediaries Act.
2	Fund depositaries	Depositaries provide trustee and custodial services in respect of Irish authorised funds. In addition, Irish-authorised Depositaries may also provide services to non-Irish authorised funds. Depositaries are cleared to act for Irish-authorised investment funds by the Central Bank and then an approval is granted on each appointment to an investment fund.
3	Fund managers – UCITS management companies and AIFMs	A UCITS Management Company is a company whose regular business is collective portfolio management of UCITS funds and is authorised under the Irish UCITS Regulation[10] to engage in the management of UCITS and other collective investment schemes in the form of either Unit Trusts, Common Contractual Funds or Investment Companies or any combination thereof. AIFM means legal persons whose regular business is managing one or more AIF schemes. An AIFM is authorised under the Irish AIFM Regulations[11] to engage in Portfolio Management and Risk Management services of AIFs.
Source: Central Bank of Ireland

Regulatory Focus

Irish-authorised investment funds and fund service providers are supervised by the Central Bank through a combination of proactive and reactive supervision, thematic reviews and inspections in accordance with PRISM™- Probability Risk and Impact SysteM™. PRISM is the Central Bank’s risk-based framework for the supervision of regulated firms and provides supervisors with guidance on the level of required engagement with a particular firm and a means to document their actions and judgements.

Authorisations / Gatekeeping

The Central Bank is responsible for a range of authorisation / gatekeeping activity associated with the funds sector. This includes product authorisation (of authorised investment funds); approval of any post authorisation amendments to authorised fund documentation; and authorisation of fund service providers operating in the sector (such as fund managers, fund administrators and fund depositaries). 

Investor Protection

Under the Central Bank Act 1942, the Central Bank is charged with the regulation of financial firms and ensuring that the best interests of consumers are protected in a way that is consistent with the orderly and proper functioning of financial markets.

The Irish consumer protection framework, comprised of a range of EU and domestic legislation aligned with the OECD Principles, is designed to ensure individual firms are stable and resilient to shocks. More specifically, the EU and domestic retail conduct frameworks, together with various Central Bank codes and regulations, as well as firm guidance and supervisory expectations, provide the foundations for the Irish consumer protection framework. 

Financial Stability/Resilience

A topic of increasing importance in international regulatory fora is that of the potential systemic risk posed by the funds sector. The Financial Stability Board (FSB), the European Systemic Risk Board (ESRB), the European Central Bank (ECB) and others have highlighted systemic risks in the funds sector in recent years. 

The collective action of elements of the funds sector can generate systemic risk by amplifying the effects of a shock to the rest of the financial system and the real economy. The key vulnerabilities are leverage and liquidity mismatch within the funds sector, as well as its interconnectedness to other parts of the financial system and real economy. This was evident in the difficulties experienced in the short-term funding market at the outset of COVID-19 in March 2020^[12] and the UK gilt market stress in 2022.

The funds sector, as measured by total assets, is the largest single component of Ireland’s international financial sector. This means that it is important that the funds sector based in Ireland is resilient and that it does not, through collective action, spread or amplify shocks elsewhere. This is important for the smooth functioning of the rest of the financial system as well as the protection of fund investors (and investors more broadly).

Reducing the potential systemic risk from the funds sector is a key priority for the Central Bank. The Central Bank is active internationally in the relevant regulatory fora and, last year, announced new domestic macro prudential measures for Irish property funds. These measures were introduced due to the relatively high levels of leverage in these funds, as well as their significant role in the Irish commercial real estate (CRE) sector. Beyond the focus on property funds, a forthcoming Central Bank Discussion Paper will examine a number of issues with regard to the development and operationalisation of a macro prudential framework for investment funds.

Fitness & Probity

The Central Bank’s Fitness and Probity (F&P) regime applies to funds and funds service providers. The regime’s purpose is to ensure that individuals performing senior roles (referred to in the legislation as Controlled Functions (CFs) and Pre-Approval Controlled Functions (PCFs)) are competent and capable, honest, ethical and of integrity and also financially sound. Before a person can be appointed to a PCF role, an individual questionnaire must be completed and submitted to the Central Bank for approval. The Central Bank has published the Fitness and Probity Standards 2014, and guidance documents to assist firms, CFs and PCFs to comply with their F&P obligations.

Anti-Money Laundering

The Central Bank’s strategy is to appropriately supervise and monitor financial institutions for compliance with Anti-Money Laundering / Counter Terrorism Financing (AML/CFT) requirements commensurate with their money laundering / terrorist financing risks. The Central Bank’s supervisory approach applies a risk-based approach based on the residual risk profile of each individual firm / fund, with a focus on those with increased risk due to their scale and AUM. The funds sector is categorised into three distinct sub-sectors:

• Fund Administrators
• Funds / Fund Management Companies
• Depositaries 

The AML/CFT frameworks and consequent actions undertaken to ensure compliance with the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) are typically delegated by the Fund/Fund Management Companies to the Fund Administrators. The National Money Laundering and Terrorist Financing Risk Assessment has designated the funds sector as a Medium High risk.^[13]

While the Central Bank has a comprehensive AML/CFT supervisory framework, unregulated vehicles can pose a heightened risk from an AML/CFT perspective if there is a lack of transparency or data regarding the ultimate owners in the structure. Additional measures may be necessary to better understand and address potential risks posed by non-residents and cross-border activities in the unregulated sector to inform further policy development and supervisory work in this area.

Reporting

Data is critical to the Central Bank’s effective supervision of the funds sector and the accuracy of reporting and data submissions by funds and fund services providers is of paramount importance. Approximately 80 per cent of all data received by the Central Bank relates to investment funds. Investment funds are subject to statutory reporting requirements as well as reporting requirements imposed under conditions of authorisation such as the requirements set out in the AIF Rulebook (for example AIF Monthly Returns, Survey of Collective Investment Undertakings, a Funds’ Annual Survey of Liabilities).

Certain investment funds, depending on their authorisation status, are subject to additional reporting requirements. In addition to the above, investment funds are also required to report information relating to liquidity flows and the profile of each individual sub-fund. As part of the Central Bank’s supervisory mandate, additional data and reporting requests may arise.

Fees and levies

Central Bank levies are paid annually and calculated based on the cost of regulatory activities. In 2021, investment funds authorised by the Central Bank paid a minimum levy of €7,165. Umbrella funds pay a contribution per sub-fund of €475 up to a maximum of twenty sub-funds, resulting in a maximum contribution for umbrella funds of €16,665.  An investment fund service provider that has been authorised by the Central Bank pays a levy contribution corresponding to its impact category ranging from a minimum of €20,951 up to €1,648,902. 

Capital Markets Union

The European Council Conclusions from April 2022 set a useful backdrop to the future strategic direction of financial services in the EU. They noted that:

the EU needs to continue pursuing an appropriate balance between both objectives, striving to achieve its economic and financial autonomy, while maintaining its openness, global cooperation with like-minded partners and competitiveness, and reap the potential benefits thereof. Achieving these objectives is important for safeguarding the EU’s legitimate economic interests, as well as the economic and financial stability of the EU and beyond

The Conclusions reflect the EU’s concerns about potential vulnerabilities where it relies on third countries for the supply chain of critical goods and services. The increasing influence of geopolitics and efforts to build the resilience of Europe’s internal markets are important issues for Ireland, given our position as a small open economy and as the home to a large funds sector that itself is a significant part of the globally interconnected financial system.

Enhancing the robustness of the EU’s financial sector will support broader financial stability. It is important that potential vulnerabilities are addressed while underpinning and respecting the EU Single Market as well as maintaining Europe’s openness to outside capital, expertise and innovation. Delivery of the EU’s strategy will require:

• Securing a stronger international role of the euro including through a stronger and deeper Economic and Monetary Union;
• Ensuring the resilience of the financial sector so as to serve the real economy including through the completion of the Banking Union and the deepening of the Capital Markets Union (CMU), while reducing excessive reliance on third-country financial institutions and infrastructures where it could be expected to create financial stability risks; and
• Protecting the EU economic and financial system against the effects of the extra-territorial application of third country sanctions and other harmful practices, in addition to maintaining a well-functioning own EU sanctions regime.

The CMU initiative was launched in 2015. It is designed to build a single capital market in Europe and mobilise European savings and investments to benefit consumers, investors and companies. It aims to provide greater business financing, support economic growth, offer new opportunities for savers and create a more inclusive and resilient economy while reinforcing Europe’s global competitiveness and autonomy.  In 2020 the EU Commission adopted a second CMU Action Plan which proposed 16 legislative and non-legislative actions. A number of these proposals, including those detailed below, could significantly impact the funds and asset management sector. 

Table 5. Capital Markets Union Legislative Proposals
	Action	Purpose	Status
1	Revised European Long-Term Investment Funds (ELTIF) Regulation	To make ELTIFs more appealing to investors as a fund available for long-term investments in the real economy	Formally adopted on 7 March 2023
2	Establishing a European Single Access Point (ESAP)	To create a single point of access to public information about EU companies and EU investment products	Provisional agreement reached between the Council and European Parliament on 23 May 2023.
3	Amending the Alternative Investment Fund Managers Directive (AIFMD) and Directive relating to Undertakings for Collective Investment in Transferable Securities (UCITS)	To improve the effectiveness and functioning of the AIFMD, to ensure overall financial stability and investor protection and to further AIF market integration	Trilogue negotiations between the European Commission, Council of the EU and European Parliament are ongoing.
4	Reviewing the Markets in Financial Instruments Regulation (MiFIR)	To ensure greater transparency by facilitating market data consolidation (i.e. an EU-wide consolidated tape for financial markets instruments)	Trilogue negotiations between the European Commission, Council of the EU and European Parliament are ongoing.
5	Listing Act Package	To simplify and improve listing rules for companies, in particular for SMEs, wanting to raise funds on public markets without jeopardising investor protection and market integrity	Commission proposal published in December 2022.
6	Developing a Retail Investment Strategy	To promote more transparency, simplicity, fairness and cost-efficiency for retail investment products across the internal market	Retail investment package published by the Commission on 24 May 2023.
7	Harmonising targeted aspects of the corporate insolvency framework and procedures	To address the differences in national insolvency regimes which pose a significant obstacle to the single market for capital in the EU	Commission proposal published in December 2022.
8	Open Finance framework	To allow data to be shared and re-used by financial institutions for the creation of new service	Commission consultation completed in August 2022.
Source: Department of Finance