Fund Managers, Corporate Governance and the Role of the INED

The corporate governance of fund management companies has been a key area of focus for the Central Bank of Ireland over the past number of years. In a recent speech, Michael Hodson, Director of Asset Management and Investment Banking at the Central Bank, considered some of Central Bank’s key expectations of the board and directors, with particular reference to Fund Management Companies (“FMCs”), the role of INEDs, regulatory developments and Brexit.

Fund Management Companies (FMCs)

As is the case in other sectors, the board is responsible for ensuring that a fund management company is being run properly. While a fund management company can delegate the carrying out of certain activities, it remains responsible for those activities. Consequently, the board must ensure that all the necessary processes, policies, procedures and resources are in place within the fund management company to allow the firm to carry out its obligations and that they are operating as expected and delivering their intended outcomes.

The Role of the INED

An INED that is part of a well-functioning board can bring objectivity to discussions and offer fresh ideas while also availing of his or her wide breadth of experience and knowledge to ensure a firm is effectively governed and operating a sustainable business model with a client-centric focus.

To fulfil this role effectively, an INED must be able to demonstrate that he or she can:

  • challenge the board and management and ask the hard questions including concerning the quality of information or reporting to the board, the strategic direction of the firm, the culture that prevails, and the emerging risks to the business model;

  • maintain his or her independence and avoid straying into executive territory;

  • contribute to board diversity, for example, in terms of thought, experience or background.

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The Central Bank’s focus on corporate governance is at least partially attributable to the fact that the success of the Irish funds industry is heavily dependent on the delegation model of fund management, whereby self-managed investment vehicles or their management companies appoint third party investment managers and advisors to undertake key fund management tasks, such as portfolio management and fund administration.

According to Mr Hodson, Ireland must be in a position to demonstrate that the FMC model works effectively and in order to do this:

it is necessary to show that any delegation, including the delegation to an investment manager, can be carried out in such a way that the management company is able to robustly oversee the activities of the delegate and challenge if any deviation from the requirements emerge.

The Central Bank’s Fund Management Company Guidance (the “Guidance”), has applied to all firms since July 2018. In early 2019, the Central Bank commenced a thematic review of the Guidance, partially to see how it is being implemented and partially because of the uplift in authorisation cases as a consequent of Brexit. According to Mr Hodson, reviewing these applications for authorisation against the backdrop of a funds sector that continues to grow in nature, scale and complexity, has given the Central Bank a more detailed insight as to what is required of Designated Persons and boards under the Guidelines. This has in turn accelerated the need to undertake the thematic review this year.

In the first phase of the thematic review, the Central Bank issued a questionnaire to over 300 FMCs in scope firms, including UCITS management companies, AIFMS, self-managed UCITS and self-managed AIFs. Following its analysis of the questionnaire responses, the Central Bank then progressed to the desk-based review phase and it expects to commence a series of onsite inspections in November 2019. According to Mr. Hodson, this body of work is likely to be completed in H1 2020 and he expects that the Central Bank will be communicating with industry in some form in the second half of next year. As with any thematic review undertaken by the Central Bank, this could include further consultations in terms of the domestic regulatory framework and the issuance of an industry letter outlining good or poor practices identified in the review. There may also be firm specific Risk Mitigation Programmes should the Central Bank identify critical risks that require mitigation action.

Regulatory Developments

Mr Hodson referenced a number of live industry topics that directors need to consider. According to Mr Hodson, a number of these topics will be the subject of regular supervisory engagement over the coming months.

  • Sustainable Finance: directors must be aware of developments in the area of sustainable finance, where things are moving at a pace. Directors must consider the implications of these developments in the performance of their roles and the steps that a firm needs to take to contribute to the development of a more sustainable financial system.

  • Cyber Security: cybersecurity risk management is a practice that remains underdeveloped in the asset management industry and firms must give more consideration and support to identifying and managing the different threats that they are exposed to, whilst recognising that the inherent risks of IT are continuously increasing. Following on from the Central Bank’s recent thematic inspection on cybersecurity risk, the Central Bank will issue an industry letter shortly. A firm should consider the findings identified against its own cybersecurity risk management practices and, where necessary, remediate any issues or weaknesses identified.

  • Compliance, Risk and Internal Audit: following on from a thematic review conducted by the Central Bank to evaluate the approaches in use regarding compliance, risk and internal audit services, the Central Bank has found that board and senior management are not spending enough time reviewing the control frameworks in place. Directors must ensure that the risk framework document is reviewed on an annual basis and that it reflects not only the risk environment in which the firm operates but also has a clear outline on how these risks will be managed in line with the firm’s risk appetite. According to Mr Hodson, it is envisaged that an industry letter will be issued in the coming months and firms should consider what actions need to be taken consequent to the issues raised in that letter.

  • Liquidity Management: the board and the relevant designated person are responsible for liquidity risk management, including compliance with all legislative and regulatory obligations, of each fund under management. In August 2019, the Central Bank wrote to all external fund management companies and internally managed funds regarding the importance of ongoing, effective liquidity management and ensuring compliance with relevant legislation and regulatory obligations of UCITS and AIFs.

  • Outsourcing: INEDs must not lose sight of their obligation to challenge management on the suitability of any outsourcing arrangements in place.

  • Benchmarks: firms impacted by the transition from IBOR to alternative reference rates should have clearly identified their transition strategy and begun work on the necessary changes. Firms can expect to be queried by the Central Bank as to the level of progress and each firm’s readiness for transition.


Brexit is likely to be one of the main topics discussed at board meetings this month and when engaging with the executive team. Such discussions should be underpinned by a clear focus on the material risks presented by a hard Brexit, business continuity post-Brexit and the duty of care that the firm has to its clients and investors.


As is clear from Mr Hodson’s comments in the speech, as well as other Central Bank publications, the Central Bank views effective corporate governance as front and centre to a well-functioning funds industry. While in the speech Mr Hodson focused on the tasks and responsibilities of the board and its directors, in practice the Central Bank is also heavily focused on assessing board dynamics and on evaluating how the board operates in practice. In this regard, it is of vital importance that each board keeps accurate written records evidencing the issues it has considered and demonstrating robust challenge from individual directors on all aspects of the firm’s business.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

Mark White is Head of the Investment Management Group. He advises a wide variety of clients who are engaged in the promotion and management of all types of investment funds, including UCITS funds, money market funds, ETFs, hedge funds, real estate funds, infrastructure/real assets and private equity funds.

Iain Ferguson has significant expertise in structuring, establishing and advising on a wide range of UCITS/AIFs including structured products, hedge funds, ETFs, loan/credit funds, real estate funds, private equity funds and infrastructure funds. Iain has also practiced in a leading international asset management and investment banking business. He chairs the Irish Funds’ Front Office Steering Group and is a member of the Irish Funds’ ETF Working Group and Real Estate Working Group.

Tony Spratt advises clients on the structuring and establishment of every type of Irish fund, particularly in the alternative fund sector. He provides advice on the regulatory and structural issues related to the establishment process of investment funds, including alternative investment funds, UCITS (using both traditional and alternative strategies) and structured products.

Darragh Murphy specialises in advising on regulatory and commercial matters relevant to financial services businesses, including insurance undertakings, investment management operations, fund promoters, banking entities and payment service providers.

Hugh Beattie is the lead partner in our London office. He is one of Ireland’s most experienced Funds, Debt Capital Markets, Structured Finance and Financial Regulation lawyers. He has been involved in the sector since Ireland’s development as a financial services centre.

Anna Moran has specific expertise in advising domestic and international fund promoters, asset managers and fund service providers on Irish law, financial services regulation and practice related to investment funds. She has recent experience in the structuring, establishment authorisation and ongoing management of a wide range of investment funds, including UCITS funds, AIFs, hedge funds, feeder funds, real estate funds and money market funds.

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