Central Bank Launches Its Consultation Paper CP152: Own Funds Requirements For UCITS Management Companies And AIFMs Authorised For Discretionary Portfolio Management – Fund Finance

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:

1. 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.




2. 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:
   

   1. 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

   
   

   2. 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:

1. 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




2. 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.

Footnote

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.

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