On 1 December 2022, the Central Bank of Ireland (the “Central Bank”) published its consultation paper CP152 on own funds requirements for UCITS management companies and AIFMs authorised for discretionary portfolio management (the “Consultation”).
We have set out the key points of the Consultation below.
Current Position
The current own funds requirements for UCITS management companies (“UCITS ManCos”) and AIFMs are set out in Regulation 17 of the UCITS Regulations and Regulation 10 of the AIFM Regulations, respectively. These own funds requirements take into account the value of the portfolios for which UCITS ManCos and AIFMs perform collective portfolio management.
Additionally, the Central Bank imposes a condition of authorisation requiring UCITS ManCos and AIFMs performing discretionary portfolio management and additional non-core services for which they may be authorised under Regulation 16(2) of the UCITS Regulations or Regulation 7(4) of the AIFM Regulations, respectively to comply with the own fund requirements applicable under Regulation 18(2) of the EC (Capital Adequacy of Investment Firms) Regulation 2006 (the “Capital Adequacy of Investment Firms Regulations”). Any additional capital required is included in the Internal Capital Adequacy Assessment Process (“ICAAP”), which is updated on at least an annual basis.
The Central Bank thereby sought to align the own fund requirements applicable to UCITS ManCos and AIFMs with MiFID investment firms that provide similar services (“MiFID Portfolio Managers”). However, MiFID Portfolio Managers are now subject to the own funds requirements set out in Regulation (EU) 2019/2033 on the Prudential Requirements for Investment Firms (the “IFR”). UCITS ManCos and AIFMs are not subject to own funds requirements at an EU level related to the provision of discretionary portfolio management services and additional non-core services and accordingly they do not take into account the discretionary portfolio management and additional non-core services in calculating own funds requirements. Therefore, the current condition of authorisation no longer imposes an analogous prudential regime on UCITS ManCos and AIFMs to that currently applied on MiFID Portfolio Managers.
Proposal
Consequently to allow for continued alignment between the own funds requirement applicable to firms providing similar services the Central Bank is proposing to introduce, via Central Bank regulations and a condition of authorisation, bespoke own funds requirements for UCITS ManCos and AIFMs authorised to provide discretionary portfolio management and additional non-core services.
UCITS ManCos and AIFMs authorised to provide discretionary portfolio management services and non-core services that do not meet conditions to be a ‘small and non-interconnected firm’1 (modelled on similar conditions under the IFR) will be required to apply the higher of the own funds requirement under the UCITS Regulations or AIFM Regulations, as applicable, or, a ‘Risk to Client K-factor own fund requirement’.
In summary, the Central Bank proposes that:
a. a UCITS ManCo or AIFM that meets all of the conditions to be a small and non-interconnected firm will be subject to the own funds requirement set out in Regulation 17 of the UCITS Regulations and Regulation 10 of the AIFM Regulations respectively.
b. a UCITS ManCo or AIFM that is not a small and non-interconnected firm will be required to have own funds of at least the highest of:
- the total amount of initial capital and own funds which the UCITS ManCo or AIFM is required to hold pursuant to the UCITS Regulations or the AIFM Regulations, as applicable; or
- a new ‘Risk to Client K-Factor’ requirement amount calculated in accordance with the proposed new Regulation 100A of the Central Bank UCITS Regulations; or, a proposed amendment to Chapter 3 of the Central Bank AIF Rulebook, which will be imposed as a condition on the authorisation of each AIFM, as relevant.
The proposed ‘Risk to Client K Factor’ requirement is modelled on a similar requirement applicable to MiFID Portfolio Managers under the IFR and is made up of the sum of the individual K-factors covering the business areas of UCITS Mancos and AIFMs. The ‘Risk to Client K Factor’ is not subject to any limit.
‘Risk to Client K factor’ requirement = K-AUM + K-CMH + K-ASA + K-COH, where:
- ‘K-AUM’ refers to the value of assets that a UCITS ManCo or AIFM, respectively, manages on a discretionary portfolio basis and includes investment advice of an on-going nature;
- ‘K-CMH’ refers to the amount of money that a UCITS ManCo or AIFM, respectively, holds on behalf of a client;
- ‘K-ASA’ refers to the value of assets that a UCITS ManCo or AIFM safeguards and administers for clients; and
- ‘K-COH’ refers to the value of orders that an AIFM handles for clients through the reception and transmission of client orders in relation to financial instruments (excluding transactions that are already included in the calculation of assets under management).
In proceeding with this proposal, the Central Bank notes that:
a. the capital requirements for UCITS ManCos and AIFMs that would be classified as ‘small and non-interconnected’ firms would be simplified - such firms would no longer be required to calculate the own funds requirement under Regulation 18(2) of the Capital Adequacy of Investment Firms Regulations; and
b. the majority of UCITS ManCos and AIFMs that may be required to calculate a K-Factor requirement would only be required to calculate K-AUM (i.e. assets under management under discretionary portfolio management). This calculation is likely to represent a more appropriate and simplified own funds requirement calculation relative to that required under Regulation 18(2) of the Capital Adequacy of Investment Firms Regulations, thereby reducing administrative and regulatory costs for impacted firms.
Reporting format and reporting frequency
The Central Bank proposes to amend the minimum capital requirement report (the “MCRR”) to allow for reporting of compliance with the updated own funds requirement under a proposed Regulation 100A of the Central Bank UCITS Regulations or under the proposed revised Chapter 3 of the AIF Rulebook.
1 As the term is defined in Annex I and Annex II of the Consultation respectively by the proposed Regulation 100A of the Central Bank UCITS Regulations and the proposed revised Chapter 3 of the AIF Rulebook. A UCITS Management Company or AIFM must meet all of the conditions laid down in the definition in order to be deemed a small and non-interconnected firm.
Pending further developments, UCITS ManCos and AIFMs would retain the current reporting frequency and continue to submit the MCRR on a biannual basis in line with the reporting intervals specified in Regulation 98 of the Central Bank UCITS Regulations or Chapter 3 of the AIF Rulebook, as relevant.
ICAAP
UCITS ManCos and AIFMs authorised to provide discretionary portfolio management services will continue to be required to have in place sound, effective and comprehensive arrangements, strategies and processes to assess and maintain an adequate level of internal capital on an ongoing basis and to submit an ICAAP questionnaire to the Central Bank on an annual basis. It is proposed that this requirement will now be set out on a legislative basis.
Proposed Amendments
In the interest of consistency of application of supervisory requirements, the Central Bank is proposing to set out this requirement on a legislative basis for UCITS ManCos through an addition to Part 11 of the Central Bank UCITS Regulations (set out in Annex I to the Consultation) and, as a condition of authorisation for AIFMs, as an amendment to Chapter 3 of the Central Bank AIF Rulebook (set out in Annex II to the Consultation). These measures are intended to ensure that current and future UCITS ManCos and AIFMs will be required to undertake this assessment of their internal capital in a consistent and comparable manner.
Transitional arrangements
In the interests of consistency of application with MiFID Portfolio Managers under IFR, the Central Bank proposes that UCITS ManCos and AIFMs 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 the end of June 2026.
Next steps
The Central Bank invites stakeholders to provide comments on the proposals outlined within this Consultation. The consultation period ends on 23 February 2023.
