Brexit related developments
March saw the passing into law of the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act of Ireland which is an omnibus piece of legislation crossing the remit of nine different Irish government departments. The legislation, which is intended to reduce the possibility of a serious disturbance to the Irish economy and in the sound functioning of a number of markets in the event of a hard Brexit, will only take effect in the event of a hard Brexit. In the financial services sphere, this legislation is intended to temporarily allow Irish participants continued access to designated UK payment and settlement systems (including CREST which is the settlement system for Irish equities listed on Euronext, Ireland’s stock exchange).
Regulation 5(4) of the European Union (Markets in Financial Instruments) Regulations, 2017 provides that a third country investment firm can provide investment services and ancillary services to, and can engage in investment activities with, per se professional clients and eligible counterparties in Ireland without having to seek regulatory authorisation in Ireland provided that certain conditions are met. Included in those conditions is a requirement that there must be co-operation arrangements that include provisions regulating the exchange of information for the purpose of preserving the integrity of the market and protecting investors are in place between the Central Bank of Ireland and the regulator where the third-country firm is established. The Central Bank of Ireland has confirmed that this requirement can be met by third countries which are signatories to an IOSCO memorandum of understanding (which includes the UK).
Irish fund rules impose on Irish fund management companies (comprising UCITS management companies, AIFMs, internally managed AIFs and self-managed UCITS) minimum requirements as regards the residency of their Directors and/or “Designated Persons” (i.e. persons designated by the firm as having responsibility for specific managerial functions), depending on what risk rating the Central Bank has assigned to the management company under the Central Bank’s “PRISM” impact system. This rule relates only to the location of Directors and Designated Persons, and not staff generally. Management companies with a rating of ‘Low’ are required to have
- at least two Irish resident directors
- at least two thirds of its directors in the EEA or such other country as the Central Bank determines
- at least two thirds of designated persons in the EEA or such other country as the Central Bank determines.
A management company which has a PRISM impact rating of Medium Low or above will be required to have
- have at least three Irish resident directors or at least two Irish resident directors and one designated person based in Ireland
- have at least two thirds of its directors in the EEA or such other country as the Central Bank determines
- have at least two thirds of designated persons in the EEA or such other country as the Central Bank determines.
The Central Bank has confirmed that, for the time being, it would consider that these requirements continue to be met by UK resident Directors or UK resident Designated Persons if the UK leaves the European Union, but that it reserves the right to re-examine this issue.
In March the Central Bank provided clarity on its approach to certain of the UCITS and retail AIF investment restrictions that will be impacted in the event of a hard Brexit, including confirmation that UK AIFs will continue to be treated as eligible investments for Irish UCITS and retail AIFs and that UK investment firms authorised under MIFID will continue to constitute “eligible financial counterparties” under Irish fund rules.
Following on from a consultation process in 2018, in June 2019 the Central Bank published a revised set of domestic rules governing the operation of Irish UCITS and their management companies (the Central Bank UCITS Regulations). The most significant change introduced under the revised regime has been to place what was previously Central Bank “guidance” in the areas of performance fees and share class hedging onto a statutory footing. The revised Central Bank UCITS Regulations also introduce a requirement that all performance fees be subject to an annual crystallisation period with existing UCITS being given a transitional period of 18 months within which to comply.
April saw the Central Bank publish a “Dear CEO” letter to all Irish regulated entities reminding them of their obligations under the Central Bank’s fitness and probity regime as regards the appointment of “controlled functions” and “pre-approval controlled functions”. The letter highlighted some of the main areas of compliance that firms should focus on and required firms to conduct a review of their fitness and probity policies, procedures and practices to address any shortcomings and to ensure that those staff members who are subject to the regime remain “fit and proper” on an ongoing basis.
This period also saw the publication of regulations governing the beneficial ownership of trusts and the existing regulations governing the beneficial ownership of corporate entities being revised to require all corporate entities to file information on their beneficial owners with the Central Register by November 22, 2019.
In a welcome development, the Central Bank has also confirmed that Irish domiciled funds could acquire Chinese bonds using the Bond Connect infrastructure provided that certain conditions were satisfied by the depositary.