The Asset Management Review: Ireland
Overview of recent activity
The covid-19 pandemic has of course been the defining event of 2020 and may yet be the defining event of this new decade. There is little doubt that the global impact of the pandemic is unprecedented in modern times, leaving a devastating human cost and shaking the very foundations of our societies and economies as well as changing the way we think about communication and travel.
As the spread of covid-19 and the magnitude of the risk to health of national populations has become contained in many countries across the world, focus is shifting to the economic cost of the pandemic and programmes that will aid the recovery of these economies in a post-pandemic era. At the time of writing, this is certainly the case in Ireland. In May 2020 the Irish government outlined further measures to support business impacted by covid-19 in its 'Roadmap for Reopening Society & Business'. These measures include grants for small businesses, commercial rates waivers, credit guarantee schemes, provision for 'warehousing' of tax liabilities and the establishment of a Pandemic Stabilisation and Recovery Fund, which will make capital available for medium and large enterprises in Ireland on commercial terms. It is hoped these measures will help assist businesses in Ireland as they deal with loss of revenue and cashflow. At an EU level, a €750 billion covid-19 recovery fund was announced in late June 2020, which will be used to provide loans and grants to those countries hit hardest by the virus.
In the financial sector, the pandemic has had a huge negative impact on global markets in terms of valuations and liquidity. Managers have had to deal with these challenges while facing unprecedented shifts in working practices as firms have moved to implement business continuity plans on a prolonged basis. Despite all these challenges, the Irish financial services sector generally and the funds sector in particular have shown remarkable and encouraging resilience. The Irish funds industry has demonstrated its ability to adapt work practices while maintaining operations and service levels for its global client base and thereby re-emphasising Ireland's positioning as a dynamic and global leading jurisdiction in fund service provision.
While the global economy continues to move into uncertain and challenging times, the Irish financial services sector has demonstrated that it is ready and able to adapt and support its international client base in meeting these challenges.
General introduction to the regulatory framework
The Central Bank of Ireland (Central Bank) is responsible for the authorisation and supervision of regulated financial service providers in Ireland, including regulated investment funds, investment managers, and insurance and reinsurance undertakings. The powers delegated to the Central Bank are set out in the laws and regulations applicable to the relevant financial services sector. In addition, the Central Bank issues guidance in relation to various aspects of the authorisation and ongoing requirements applicable to financial service providers. In general terms, the Central Bank expects that best practice be adopted by an authorised entity, and requires that financial services providers have systems, procedures and policies in place to ensure that regulatory requirements are met and to mitigate risk.
The regulation of pension schemes is a matter for the Pensions Authority, the statutory body for the pensions industry in Ireland.2
Common asset management structures
Ireland as a domicile provides a variety of potential asset management structures (structures), which can be broadly categorised as regulated by the Central Bank or unregulated.
i Regulated structures
There are four main types of regulated fund structure in Ireland: Irish collective asset management vehicles, variable capital investment companies, unit trusts and common contractual funds. Each of these regulated fund structures may be established as UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended (UCITS Regulations)3 or as an alternative investment fund (AIF) pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (AIFM Regulations).4
A regulated investment limited partnership (established pursuant to the Investment Limited Partnership Act 1994) is also available as a structure for AIFs (see Section VI.iv, 'Recent developments – funds and private equity').
These structures may be organised in the form of umbrella schemes with segregated liability between compartments (sub-funds).
Irish collective asset management vehicle
An Irish collective asset management vehicle (ICAV) is an Irish corporate investment fund vehicle that has been specifically tailored to the needs of the global funds industry. Since its introduction in 2015, the ICAV has proven to be the most popular structure for new funds established in Ireland. One of the main reasons for the popularity of the ICAV is that, unlike investment companies established in Ireland as public limited companies, an ICAV that is structured as an umbrella fund is only required to produce financial accounts at a sub-fund level while a public limited company must produce financial accounts at the umbrella level (resulting in investors in a sub-fund receiving financial accounts for all of the sub-funds in the umbrella). In addition, there is no requirement for an ICAV to hold an annual general meeting of shareholders, and non-material changes can be made to the ICAV's by-laws without shareholder approval. The ICAV may also be eligible to elect to be treated as a transparent entity for US federal income tax purposes, unlike an investment company established as a public limited company, which is not eligible to make such an election.5
Variable capital investment companies
A variable capital investment company must be incorporated as a public limited company pursuant to the Irish Companies Act 2014, as amended. The day-to-day management and control of the investment company are undertaken by a board of directors (although this can be delegated to a management company), with ultimate control resting with the shareholders. Provided that this day-to-day management and control of the investment company take place in Ireland, an investment company can obtain a certificate of Irish tax residency from the Irish tax authorities and is not liable for Irish tax on its income or gains.
A unit trust is a contractual arrangement constituted by a trust deed entered into between an Irish management company and a trustee. The assets of the trust are held by the trustee, but the beneficial ownership of the assets remains with the unit trust's unitholders. Unlike an investment company or ICAV, a unit trust does not have a separate legal personality, and contracts in relation to the trust are entered into by the management company on behalf of the trust, or a particular sub-fund of the trust, as provided for in the trust deed.
Common contractual funds
The common contractual fund (CCF) is a tax-transparent structure first established in Ireland in 2003. It was specifically developed to facilitate the pooling of pension fund assets in a tax-efficient manner so that the investing pension funds would be treated from a tax perspective in the same way as if they made the underlying investments directly rather than through the CCF.
The CCF is an unincorporated body established by an Irish management company pursuant to which investors participate and share in the property of the CCF as co-owners. As a co-owner, each investor in a CCF is deemed to hold an undivided co-ownership interest as a tenant in common with other investors. CCFs are constituted under contract law by the execution of a deed of constitution between a management company and a depositary. As an unincorporated body, a CCF does not have separate legal personality.
ii Unregulated structures – limited partnerships
The limited partnership established pursuant to the Limited Partnership Act 1907 is the most favoured structure for unregulated investment funds in Ireland.
A limited partnership is a partnership between one or more general partners and one or more limited partners, and is constituted by a partnership agreement. To have the benefit of limited liability, the limited partners are not permitted to engage in the management of the business of the partnership or to contractually bind the partnership: these functions are carried out by the general partner. There is a general limit of 20 partners in a limited partnership, although this limit can be raised to 50 where the limited partnership is formed 'for the purpose of, and whose main business consists of, the provision of investment and loan finance and ancillary facilities and services to persons engaged in industrial or commercial activities'.6
Fund structures regulated by the Central Bank may be open-ended with liquidity, closed-ended with no liquidity or have limited liquidity, which means they are open to redemption at least one or more times during the life of the fund. One exception is where the regulated structure is authorised by the Central Bank pursuant to the UCITS Regulations, in which case the structure is required to be open-ended with at least two redemption dates per month.
Closed-ended schemes are generally subject to the Prospectus Regulation7 unless otherwise exempted (qualifying investor AIFs are generally able to avail of an exemption). In addition, closed-ended schemes may, in certain circumstances, be subject to other European regulations (e.g., the Transparency Directive8 and Takeovers Directive9).
Main sources of investment
i Regulated investment funds
Ireland's success as an onshore domicile for investment funds is well known, and the development of Ireland's funds industry continues to be an area of strategic importance for the Irish economy.
Statistics show that Irish-domiciled investment funds had over €2.91 trillion in net assets in April 2020 (up from €2.64 trillion at the end of March 2019). While this figure reflects a drop in net assets from the all time industry high of almost €3.05 trillion at year end 2019, the April 2020 figures show a resilience in the Irish funds industry in the face of the global market turmoil brought on by the covid-19 pandemic. While the majority of assets under management are held in UCITS funds, Irish-domiciled AIFs had in excess of €738 billion in net assets in April 2020.10 The majority of the investment in these regulated investment funds comes from non-Irish institutional investors.
ii Insurance and reinsurance
As of July 2020, there were 40 life insurers, 93 non-life insurers and 62 reinsurers (including captives and special purpose reinsurance vehicles) with head offices in Ireland. There were a further 15 life insurers and 31 non-life insurers with branches in Ireland. In addition, 166 life insurers and 833 non-life insurers operate in Ireland on a freedom-of-services basis pursuant to the relevant EU Directives.11 In 'Insurance Corporations Statistics for Q1 2020', the Central Bank of Ireland indicated that Irish (re)insurers hold €133.892 billion worth of investment fund shares including €43.024 billion in equity fund shares, €36.142 billion in bond fund shares, €1.986 billion in real estate with the remaining €52.74 billion invested in mixed and other funds.12
iii Pension schemes
The Irish Association of Pension Funds estimates the total assets of Irish pension funds exceeds €147.6 billion (figure at the end of 2017), but no precise details are available on how these assets are invested or what proportion of assets are under the management of Irish authorised investment managers. The Pensions Authority has, however, published the results of its defined benefit scheme review of 2018 statistics (based on the annual actuarial data returns submitted to it by 31 March 2019). The asset allocation of the 582 active and frozen defined benefit schemes in Ireland (with assets of €65.6 billion) is as follows:
- 24.5 per cent in equities;
- 34.8 per cent in EU sovereign bonds;
- 9.6 per cent in other bonds;
- 4.8 per cent in property;
- 3.6 per cent in cash;
- zero per cent in net current assets;
- zero per cent in with profit insurance policies; and
- 22.7 per cent in 'other' (which includes absolute return funds, alternative assets, hedge funds, commodities, derivatives, global absolute return strategies and annuities).
In terms of insurance and reinsurance, there are significant international and domestic (re)insurers headquartered in Ireland. In 2016, the introduction of a new prudential regime under Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II) forced (re)insurers established outside the European Economic Area (EEA) to assess whether to redomicile their global operations in a European centre such as Ireland. Since 2017, this trend continued with UK based (re)insurers looking to relocate within the EEA as a Brexit contingency solution. Ireland has remained one of the most sought-after European countries for (re)insurers looking to redomicile.
With regard to asset management and investment funds, Ireland has emerged as a favoured EU hub for UK investment firms seeking a European base post-Brexit because of the relative advantages it has over a number of other EU countries across a number of metrics including tax, legal system, labour laws and regulation. This continues to be an observable trend with many Irish management companies and AIFMs now topping up of existing licences to facilitate the undertaking of additional MiFID activities from their Irish base.
The principal regulations governing insurers and reinsurers are the European Union (Insurance and Reinsurance) Regulations 2015 (the 2015 Regulations), which transposed Solvency II into Irish law and entered into force on 1 January 2016. They are supplemented by the Insurance Acts 1909 to 2018 and the regulations made under those Acts. The Solvency II legal framework applying to Irish (re)insurers also includes the European Commission delegated regulations and implementing regulations, and relevant Level 3 European Insurance and Occupational Pensions Authority guidance on interpreting Solvency II requirements. (Re)insurers must limit their activities to those for which they are specifically authorised, to the exclusion of all other business activity. The Central Bank imposes strict rules on (re)insurers to formalise appropriate internal policies and procedures to ensure that investment risks relating to assets used for regulated capital purposes are adequately managed. The rules in relation to asset management activity by (re)insurers are governed by the rules set out in Solvency II.
Solvency II codified and harmonised insurance regulation throughout the EEA, and set new standards for the amount of capital that (re)insurers must hold based on their individual risk profile, as well as new standards for governance, risk management and supervision, and reporting and transparency. Under Solvency II, asset managers need to provide insurance clients with greater levels of detail in relation to the assets underlying their investments than was previously required. The implementation of Solvency II has been the most substantial regulatory change affecting Irish and European (re)insurers in many years, as it provided for a new risk-based capital adequacy regime.
Solvency II also involved significant changes for asset management by (re)insurers. Solvency II has introduced across EEA Member States, for the first time, a solvency calculation based on an economic and prospective approach to the risks inherent to the business conducted (re)insurers both on the asset and liability side As a result, a key factor in the calculation of a (re)insurer's regulatory capital requirements is market risk. Under Solvency II, (re)insurers are able to invest in any asset (in the interests of policyholders and beneficiaries), including high-risk and volatile assets, provided they are willing to hold the necessary extra capital for this risk.
Provisions in relation to asset allocation affect which funds insurers can choose to invest in because of the prescribed methods for the valuation of assets and liabilities. Solvency II requires that (re)insurers diversify their asset portfolios, which will affect a (re)insurer's choices in investment funds. Asset managers should be aware of the different capital charges that are applied to assets and liabilities. Of particular interest is the market risk module, which is split into the following sub-modules: interest rate risk, equity risk, property risk, spread risk, concentration risk and currency risk. Different categories of assets and liabilities will be subject to different rules depending on how they are classified. For example, structure debt and equity investments are subject to favourable capital charges.
(Re)insurers must have processes in place to ensure the appropriateness, accuracy and completeness of the data that they use to calculate their capital requirements. To comply with this requirement, (re)insurers are likely to demand assurances from asset managers that the data they have received meets these standards, and that there are appropriate governance and control procedures in place to ensure these standards are met. Under Solvency II, there must be a higher level of transparency in the funds in which insurers invest. This includes complying with the 'look-through' approach, which states that (re)insurers must base their risk assessment of a fund on the assets that underlie the fund. Asset managers of funds will be obliged to provide details of these underlying assets to (re)insurers or risk losing (re)insurers' business.
Under Solvency II, (re)insurers must have close relationships with their asset managers owing to the increased pressure to provide detailed data within tight time frames. Asset managers must ensure they have product strategies that reflect the requirements of Solvency II in relation to asset allocation to ensure that their portfolios remain attractive to (re)insurers.
Recent developments in the insurance sector
Regulation (EU) No. 1286/2014 on key information documents for packaged retail investment and insurance-based investment products (PRIIPs Regulation) introduced, on a pan-European level, a standardised pre-contractual disclosure document (key information document (KID)) for the benefit of retail investors purchasing certain packaged retail investment products or insurance-based products that, following the postponement of the initial application date, came into effect on 1 January 2018. Products within the scope of the PRIIPs Regulation, include:
- life assurance-based investment products;
- investment funds;
- structured term deposits; and
There are a number of products explicitly excluded from the PRIIPs Regulation, including notably non-life insurance products, pension products and annuities not recognised in national law. However, any product that falls under the definition of PRIIPs must also be sold to retail investors to fall within the scope of the PRIIPs Regulation. The KID is required to include information under certain prescribed headings, including:
- information on the product manufacturer;
- a description of the main features of the product as well as costs borne by the investor;
- the risk–reward profile of the product;
- performance information, including future performance scenarios and expected returns;
- a comprehension alert highlighting that the product may be difficult to understand;
- how complaints can be made; and
- certain other relevant information that may be necessary for understanding the features of the product.
The European Union (Insurance Distribution) Regulations 2018, which transpose Directive (EU) 2016/97 on insurance distribution (Insurance Distribution Directive) (IDD) in Ireland came into effect on 1 October 2018. The IDD represents a noteworthy departure from the manner in which insurance and reinsurance distribution is regulated. In particular, the IDD aims to enhance EU regulation of the insurance market by ensuring a level playing field for all participants involved in the sale of insurance products to strengthen policyholder protection, promote cross-sectoral consistency and make it easier for firms to trade on a cross-border basis. One of the most significant changes introduced by the IDD involves additional requirements that apply to (re)insurers and insurance intermediaries when they carry on insurance distribution relating to the sale of investment-based insurance products.
Regulation (EU) No. 2019/2088 on sustainability-related disclosures in the financial services sector (the Disclosure Regulation) entered into force on 29 December 2019 but will only apply from 10 March 2021. It requires any person selling an investment-based insurance product to disclose 'sustainability risks' in respect of that product to investors. 'Sustainability risk' is defined as being 'an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment'. If an investment-based insurance product promotes environmental and social characteristics, further disclosures as to how those characteristics are met must be provided at the pre-contractual stage. The purpose of the Disclosure Regulation is to make finance flows consistent with the European Union's commitment to lowering emissions and ensuring climate-resilient development.
The trustees of a pension scheme are constrained in the investment choices they may make by the governing documents of the scheme (or, if no investment powers are contained in the pensions scheme, by the Trustee Act, 1893 and the associated Trustee (Authorised Investment) Orders, and by statute). The Pensions Acts 1990 to 2018 impose a duty on the trustees of pension schemes to provide for the proper investment of the resources of the scheme.
In general, the trustees of a pension scheme will be given the power to appoint one or more investment managers under the scheme's governing documents. An investment manager appointed to pension scheme assets will be bound by any restrictions on investment in the scheme's governing documents and by the relevant statutory restrictions. These restrictions will generally be referred to in the investment management agreement. Ultimately, trustees cannot delegate their primary responsibility to invest, and trustees remain under a continuing obligation to supervise the investment manager.
Irish pension schemes must comply with domestic legislation transposing Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (IORP), which established a common basis for the operation and supervision of pension funds in EU Member States. The main requirements of IORP were transposed in Ireland through the Investment Regulations,13 which require trustees to invest in accordance with the prudent person rule in addition to their obligation to invest assets in the interests of beneficiaries. The IORP standard will continue in force in Ireland until the introduction of domestic legislation to transpose the IORP II Directive,14 which is now overdue (transposition of the directive was required before 14 January 2019). Transposition of IORP II had been delayed by judicial review proceedings relating to single member pension schemes. The proceedings were not successful as the High Court found it did not have the power to review legislation not yet enacted. It is now open to the Irish government to proceed with implementing legislation. However, unless the government excludes small schemes from the full remit of IORP II, it seems likely that any legislation will be challenged. While the Irish government has indicated that it is working towards transposition as soon as possible, at the time of writing no definitive timeline has been confirmed.
The Investment Regulations require that the assets of the scheme must:
- be invested in a manner designed to ensure 'the security, quality, liquidity and profitability of the portfolio as a whole so far as is appropriate having regard to the nature and duration of the expected liabilities of the scheme';
- be invested predominantly on regulated markets as defined in the Investment Regulations;
- be properly diversified to avoid excessive reliance on any particular asset, issuer or group of undertakings, and as to avoid accumulations of risk in the portfolio as a whole; and
- not be invested in derivative instruments except insofar as they contribute to a reduction of investment risks or facilitate efficient portfolio management.
The Investment Regulations also state that:
- the trustees of a scheme (other than a one-person scheme) may not borrow money except for liquidity purposes and on a temporary basis; and
- investment in the sponsoring employer of the pension scheme (which is viewed as self-investment) shall not exceed 5 per cent, while total self-investment in the sponsoring employer group shall not exceed 10 per cent of the resources of the scheme. An exception is provided in respect of small member-controlled schemes where the investment restriction is raised to 20 per cent.
IORP II requires that trustees take account of environmental, social and governance factors when investing scheme assets. Disclosure of these factors will be required where they are considered in investment management decisions. The directive notes that IORPs are long-term investors with low-liquidity risks, and as such are in a position to invest in non-liquid assets and other instruments that have a long-term economic profile. IORP II encourages cross-border activity by permitting IORPs to invest in other Member States in accordance with certain legislative requirements of the home Member State.
Recent developments in pensions asset management
The European Market Infrastructure Regulation (EMIR),15 which entered into force on 16 August 2012, seeks to ensure greater transparency in the financial system by, inter alia, regulating transactions in over-the-counter derivatives (OTCs) in the EU. Pension schemes that use OTCs fall within the scope of EMIR, albeit with some exemptions from the full force of the Regulation, and the trustees of a pension scheme are responsible for compliance with EMIR. Under EMIR, pension schemes are classified as 'financial counterparties' along with financial institutions (such as banks, hedge funds and custodians), but pension funds have been exempted from compliance with some aspects of EMIR for a period of time.
Since 12 February 2014, financial counterparties, including trustees of pension funds, have to report any new OTCs that they enter into with the trade repository within one business day of entering the contract. Any amendments to the terms of OTC transactions and any early terminations of OTC transactions must also be reported from 12 February 2014 onwards. Any OTC transactions that were entered into on or after 16 August 2012 and that remained outstanding on 12 February 2014 also had to be reported on 12 February 2014. All counterparties to a transaction, including the trustees of pension funds, must maintain a record of concluded or modified OTC transactions for at least five years after they have been concluded or modified. Pension funds were granted an exemption from the EMIR clearing requirements for certain OTC trades. The last such exemption was granted in February 2019 when it was agreed that the exemption from the requirement would continue until 18 June 2021, with the possibility of two one-year extensions if insufficient progress is deemed to have been made on solutions to deal with outstanding issues regarding 'the cash collateral problem'.
New reporting requirements for pension schemes have been introduced by the European Insurance and Occupational Pensions Authority (EIOPA) and the European Central Bank, by regulation published in the Official Journal of the European Union on 26 January 2018. This regulation came into force on 15 February 2018 and the first annual reporting deadline set by the Pensions Authority was 31 December 2019 but it has since deferred this until 31 December 2020. This regulation requires certain pension funds to report, on a quarterly and annual basis, detailed data on assets, liabilities and members.
There are reduced reporting requirements for pension funds based on their assets or size of membership. The Central Bank of Ireland is responsible for the collection, compilation and transmission of this statistical data.
With effect from 29 January 2019, all occupational pension schemes established under trust were required to comply with the European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2019 (the Beneficial Ownership Regulations). Trustees of a pension scheme are now required to (amongst other things) take 'all reasonable steps' to gather and hold certain information on the pension scheme's beneficial owners and to set up a 'beneficial ownership register' for the pension scheme and the submission of that information to a 'central beneficial ownership register', which will be accessible by certain permitted persons and bodies. The full implementation of these requirements has been delayed as Ireland has not met the deadline of 10 March 2020 to set up a central beneficial ownership register. Further, the Irish government is currently looking at whether certain entities might be made exempt from the Beneficial Ownership Regulations, and it is anticipated that occupational pension schemes will be included in the list of exempted entities.
The Second Shareholders' Rights Directive has been transposed into Irish law by the European Union (Shareholders' Rights) Regulations 2020 (the SRD Regulations). The SRD Regulations aim to increase transparency and shareholder engagement in corporate governance.
The SRD Regulations apply to 'relevant institutional investors', which includes a pension scheme where the scheme is (1) an occupational pension scheme regulated in Ireland, and (2) invests directly, or through an asset manager, in shares traded on an EU regulated market. If a pension scheme meets these criteria, it must publicly disclose an engagement policy, its investment strategy and any arrangements that it holds with asset managers. Public disclosure means publishing the information to make the matter available 'free of charge on the website of the relevant institutional investor'. Guidance is awaited as to how this requirement should be interpreted in a context where the trustees of most occupational pension schemes regulated in Ireland do not host a scheme website. It should be noted that the new requirement pursuant to the SRD Regulations to disclose an investment strategy, including information on how the main elements of the strategy are consistent with the profile and duration of its liabilities and contribute to the medium to long term performance of its assets, is similar (but not identical) to the pre-existing requirement under the Investment Regulations to prepare a statement of investment policy principles.
iii Alternative investment funds
Regulated investment fund structures in Ireland may be established as UCITS (authorised by the Central Bank pursuant to the UCITS Regulations) or AIFs (authorised by the Central Bank pursuant to the AIFM Regulations that implement the Alternative Investment Funds Managers Directive (AIFMD)).
UCITS are subject to various liquidity requirements, investment restrictions (both in terms of permitted investments and required diversification), and borrowing and leverage limits. The UCITS III Product Directive16 and the Eligible Assets Directive17 significantly increased the range of permissible investments for UCITS, which enabled alternative investment fund managers to adapt their investment approach to the UCITS model, giving the market access to liquid alternative UCITS funds. However, because of the various leverage and counterparty exposure restrictions that apply to UCITS and the fact that a UCITS may not appoint prime brokers to rehypothecate fund assets, there are limits on the type of alternative or hedge fund strategies that can be used by a UCITS. The limits on a UCITS being able to pursue an alternative fund strategy needs to be balanced against the fact that some institutional investors and pension funds are able to invest a higher percentage of their assets in a UCITS than into unregulated funds or even regulated non-UCITS funds. However, if the strategy does not fit within a UCITS framework, managers will establish the product as an AIF.
AIFs are regulated by the Central Bank pursuant to the AIFMD Regulations, which are supplemented by the Central Bank's AIF Rulebook.18 The AIFMD Regulations implement the AIFMD into Irish law.19 AIFs encompass all non-UCITS or alternative funds, not just hedge funds. Whether a particular AIFM is within the scope of the AIFMD depends on its location and that of the AIFs it manages, as well as the countries into which the AIFs are marketed. In summary, the AIFMD applies to all EU AIFMs that manage one or more EU or non-EU AIFs; all non-EU AIFMs that manage one or more EU AIFs; and all non-EU AIFMs that market one or more EU or non-EU AIFs in the EU.
The AIFM can be either an external manager of the AIF or the AIF itself, where the legal form of the AIF permits internal management (e.g., the Irish variable capital investment company and ICAV) and the AIF chooses not to appoint an external AIFM (an internally managed AIF). If an internally managed AIF is authorised as an AIFM and is permitted to delegate this function to a non-EU manager, that manager does not have to be authorised as an AIFM under the AIFMD. This point is of particular importance as it allows non-EU managers to access European markets without having to become authorised as AIFMs.
Irish AIFs may be established as retail investor AIFs (RIAIFs) or qualifying investor AIFs (QIAIFs) under the rules as set out in the AIF Rulebook. The AIF Rulebook also specifically provides for the establishment of particular AIF structures: for example, real estate and private equity RIAIFs and QIAIFs (see Section VI.iv) and loan origination QIAIFs (LO-QIAIFS), the latter representing the first dedicated regulatory regime in the EU for loan origination funds. AIFMs that meet the additional conditions relating to LO-QIAIFs are able to manage the LO-QIAIF and market it within the EU using the AIFMD passport.20
iv Private equity and real property
As stated above, the AIF Rulebook specifically provides for the establishment of real estate and private equity RIAIFs and QIAIFs.
A key element in the development of private equity funds and real estate funds as QIAIFs has been the use of special purpose vehicles, one of the benefits of which is enhanced access to Ireland's extensive double taxation treaty network. QIAIFs are permitted to establish multilayered special purpose vehicles, typically wholly owned subsidiaries established pursuant to Section 110 of the Taxes Consolidation Act 1997. The Section 110 subsidiary can, therefore, be used as the investment vehicle for the QIAIF, provides access to Ireland's double taxation treaty network.
Real estate investment trusts (REITs) were established in Ireland in recent years. Irish REITs must be incorporated under the Irish Companies Act 2014, be resident in Ireland, have their shares listed on the main market of a recognised stock exchange, and meet a number of conditions and restrictions in terms of borrowing, permitted investments, sources of income and risk spreading. Although the Central Bank has not determined that all REITs established in Ireland are AIFs for the purpose of the AIFMD, it has indicated that the onus would be on a REIT to demonstrate otherwise. Furthermore, it has advised that REITs that are structured as unauthorised AIFs must comply with the Central Bank AIF Rulebook for retail AIFs.
v Recent developments – funds and private equity
Responses to covid-19
As stated in Section I, covid-19 has had a huge impact on markets and business operations globally. The focus of the Central Bank in observing the potential impact of covid-19 on the funds sector in Ireland was set out in a number of industry letters issued during the pandemic. These letters set out the Central Bank's expectations with regard to issues such as, for example, liquidity management (discussed further below) and reporting as well as business continuity and integrity of outsourced arrangements. While the industry has faced obvious challenges in light of covid-19, it is fair to say that the Irish funds industry has reacted well to these challenges as demonstrated by the industry's ability to continue to deliver on service standards to clients and investors alike.
Even before the covid-19 pandemic, it was clear that liquidity risk management would be a key supervisory priority in 2020 for ESMA and national regulators in the EU, including the Central Bank. In an industry letter issued 7 August 2019, the Central Bank highlighted the importance of liquidity risk management and liquidity stress testing in investment funds. Separately at an EU level, ESMA published its final guidelines on liquidity stress testing (the Guidelines) in UCITS and AIFs. The Guidelines, which apply to fund managers from 30 September 2020, provide guidance on how managers should carry out liquidity stress tests on the individual funds that they manage and how depositaries should fulfil their obligations regarding these stress tests. The Guidelines are supplementary to the requirements on liquidity stress testing in AIFMD and the UCITS Directive and may be applied proportionately, having regard to the nature, scale and complexity of each fund. The Guidelines apply to all UCITS and AIFs, with ESMA clarifying that this includes those funds established as money market funds, ETFs, and leveraged closed-ended AIFs. The Guidelines require fund managers to stress test the assets and liabilities of the funds they manage, which includes redemption requests by investors. Managers should be aware of the liquidity risk of the funds they manage and use stress testing as a tool to mitigate this risk.
Following the publication of the Guidelines, ESMA announced on 30 January that it would be undertaking a common supervisory action, essentially a coordinated themed review, with national regulators throughout 2020 in respect of liquidity risk management in UCITS. This thematic review is a two-stage process that is being conducted by national regulators so, in Ireland, the Central Bank. In stage one of the review regulators have requested quantitative data from a large majority of the UCITS managers (based in their respective Member States) to get an overview of the supervisory risks faced. In the second stage, regulators will focus on a sample of UCITS managers and UCITS to carry out more in-depth supervisory analysis.
Investment limited partnerships
In June 2019, the Irish government approved the publication of the Investment Limited Partnership (Amendment) Bill 2019 (ILP Bill). The Bill, which was on the government's priority legislation list and a key deliverable in the government's IFS 2025 Strategy,21 is an important part of Ireland's strategy to develop its international financial services sector and to take advantage of the growth in non-banking finance in Europe. The aim of the ILP Bill is to enhance Ireland's attractiveness as domicile for private equity funds. The existing legislation governing private equity funds in Ireland is over 25 years old and the proposed amendments provide the opportunity to update the legislation to reflect the developments at a European level in investment funds regulation. Some of the enhancements proposed include: (1) alignment of ILP structures with other Irish fund structures, including provision for the establishment of umbrella ILPs with the possibility of having separate compartments or sub-funds with segregated liability; (2) extension of safe harbour permissions for limited partners to act without affecting their limited liability; and (3) measures intended to ease administrative burdens around the operation of ILPs and clarification around rights and obligations of limited partners.
The second stage of the legislative process for the enactment of the Bill was completed in September 2019. However, the Bill lapsed in March 2020 following the dissolution of the Irish parliament prior to the national elections in February 2020 and delays in forming a government due, in no small part, to the impact of the covid-19 pandemic. Following the formation of government and return to the usual business of parliament, it is hoped that the Bill can be enacted during the course of 2020.
Potential changes to AIFMD
Under Article 69 of the AIFMD the European Commission is required to review the scope and application of AIFMD to establish its impact on investors, AIFs and both EU and non-EU AIFMs, and to determine the extent to which the AIFMD's objectives have been achieved. The Commission is also mandated to propose legislative amendments following this review. The Commission began its review in 2018 with a general survey about the functioning of the AIFMD. The results of that survey were published in January 2019. The Commission noted that most of the AIFMD provisions were assessed as having achieved their objectives, but also identified areas requiring further analysis, including in respect of: (1) diverging interpretations of the rules by national regulators, including different approaches about which activities constitute 'marketing'; (2) overlaps in reporting requirements and with other EU disclosure rules; (3) the harmonisation of the calculation methodologies for leverage across the AIFMD, the UCITS Directive and other relevant legislation; (4) valuation rules; and (5) investor disclosure requirements. Building on the results of the survey, the Commission continued with its review of AIFMD and on 10 June 2020 published its report. The report includes a number of key findings in the foregoing areas which will likely form the basis of any future legislative proposals. With specific reference to the private equity sector, the report noted that private equity fund managers encounter significant barriers to marketing their funds in other EU Member States. Therefore, it is possible that any further amendment of AIFMD would include provisions to better accommodate the private equity sector by removing unnecessary charges and seeking more effective ways to protect non-listed companies or issuers. The Commission is expected to issue a consultation on the AIFMD in the third quarter of 2020, and any subsequent legislative proposals are likely to follow in mid-2021.
Developments in relation to sustainable finance
Sustainable finance is becoming an area of significant focus for investors and as managers react to demand, so the EU has begun to develop a regulatory framework around the integration of ESG into the investment process and investment products. Set out below is a summary of recent regulatory developments in this area.
ESAs consultation on ESG disclosures
On 23 April 2020, the European Supervisory Authorities (ESMA, EBA and EIOPA) published a joint consultation on the level two measures (RTS) in respect of required ESG disclosures under the Disclosures Regulation. The Disclosures Regulation applies to financial market participants (FMPs), which includes AIFMs, UCITS management companies and self-managed UCITS. It imposes disclosure and transparency requirements on FMPs and requires them (amongst other requirements) to: (1) publish information on their websites regarding their policies on the integration of sustainability risks in their investment decision making process; (2) make pre-contractual disclosures on how they incorporate sustainability risks in their business; and (3) comply with pre-contractual transparency rules on sustainable investments. The consultation closes on 1 September 2020. The Disclosures Regulation will apply from 10 March 2021, with the requirement for the annual accounts disclosure applying from 1 January 2022.
Consultations on integrating sustainability factors into AIFMD and the UCITS Directive
Separately on 8 June 2020, the European Commission published draft texts of the delegated acts to integrate sustainability risks and factors into the AIFMD and the UCITS legislative frameworks. The Commission requested stakeholder feedback on the proposals and this consultation period closed on 6 July 2020. The proposals will require UCITS management companies and AIFMs to: (1) take sustainability risks into account when complying with organisational requirements and environmental, social and governance considerations should be integrated into organisational requirements; (2) have expertise for the effective integration of sustainability risks and senior management's responsibility includes the integration of sustainability risks; (3) include sustainability risks in the identification of any conflicts of interest; (4) consider the principle adverse impacts of investment decisions on sustainability factors; (5) integrate sustainability risks into the investment due diligence process; and (6) include procedures relating to sustainability risks in their risk management policies.
Publication of Taxonomy Regulation
On 18 June 2020, the European Parliament adopted a regulation setting out an EU-wide classification system, or taxonomy, which will provide businesses and investors with a common language to identify those economic activities that are considered environmentally sustainable (the Taxonomy Regulation). The Taxonomy Regulation sets out six environmental objectives and allows economic activity to be labelled as environmentally sustainable if it contributes to at least one of the objectives without significantly harming any of the others. The Taxonomy Regulation was published in the Official Journal of the EU on 22 June 2022 and entered into force on 12 July 2020. The taxonomy should prove very helpful for investment funds pursue ESG-related strategies.
While the covid-19 pandemic gripped the focus of national governments across the EU in the earlier part of 2020, Brexit has now again started to come into sharper focus with re-engagement on negotiations between the EU and UK in June 2020. At the time of writing, it is not clear whether these negotiations can have the effect of breaking what appears to be a gridlocked process as both sides seem entrenched on a number of key areas, leaving a no-deal Brexit scenario as a real possibility. Refer to the eighth edition of this publication for discussion on regulatory preparations for a no-deal Brexit scenario.
i Irish investment undertakings and non-Irish resident investors
Where an Irish authorised fund qualifies as an investment undertaking for Irish tax purposes, it is generally not chargeable to Irish tax on its income and gains.22 However, the fund may be required to account for Irish tax (known as investment undertaking tax or exit tax) on the occurrence of a chargeable event in respect of its investors. In practice, this charge is limited to payments in respect of certain Irish-resident taxable investors. Separate rules apply to Irish real estate funds (IREFs) (see Section VII.vii).
A chargeable event includes payments of any form made by a fund to an investor and on the transfer or sale of units in a fund. An investor is also deemed for Irish tax purposes to dispose of its holding in an Irish fund every eight years (deemed a chargeable event), giving rise to a rolling eight-year tax charge until such time as the holding is disposed of. If the fund becomes liable to account for exit tax on a chargeable event, it is entitled to deduct an amount equal to the appropriate tax (currently 41 per cent) from the relevant payment and, where applicable, to repurchase and cancel such number of units held by the investor as is required to satisfy the amount of tax. Importantly, however, no Irish tax arises in respect of a chargeable event where the investor is neither resident nor ordinarily resident in Ireland, or an exempt Irish resident such as another Irish authorised fund, a Section 110 company, a pension fund or a charity. In each case, the fund must be in possession of an appropriate declaration confirming the status of the investor, although the requirement for declarations in respect of non-resident investors may be relaxed on application by a fund to the Irish Revenue where certain conditions are met.
Non-Irish resident investors are thus generally not liable to Irish exit tax by deduction by the fund or on assessment in respect of their investment in Irish authorised funds. The one exception is where a non-resident investor has a branch or agency in Ireland, and invests in an Irish fund through or in connection with the branch or agency. Although no Irish tax will be accounted for by the fund, the investor will be liable to Irish corporation tax in respect of income and capital distributions it receives from the fund.
ii Investment limited partnerships
Investment limited partnerships authorised by the Central Bank after 13 February 2013 are no longer deemed investment undertakings under Irish tax law, and are not therefore subject to the exit tax rules that apply under the investment undertaking tax regime. Subject to certain reporting requirements, investment limited partnerships authorised after 13 February 2013 are tax-transparent, consistent with the tax treatment of investment limited partnerships internationally.
A separate regime applies to Irish authorised CCFs, being funds that permit pension assets to be pooled in a tax-transparent structure.23 A CCF is treated as tax-transparent for Irish tax purposes provided the unitholders are institutional investors and certain reporting requirements are met. As a consequence, a CCF can facilitate pooling while ensuring that the double taxation treaty benefits normally enjoyed by pension funds are not affected by investing through a CCF.
iv Taxation of investment managers
An Irish resident investment manager would normally be taxed on its trading profits at the corporation tax trading rate of 12.5 per cent. Ireland's low corporation tax rate on trading profits compares favourably with corporation tax rates in other EU and OECD countries. Management services provided by an investment manager to an authorised fund are generally exempt from VAT. In addition, the use of an Irish investment manager by a foreign UCITS will not of itself bring the foreign UCITS within the charge to Irish tax where certain conditions are met.24
v Private equity
Private equity investors that choose not to invest through an Irish authorised fund could invest through a standard Irish company, in which case profits would be taxed at either 12.5 or 25 per cent. Tax-neutrality at the entity level could be achieved, if appropriately structured, by the use of a company qualifying for the Irish Section 110 regime, or a tax-transparent partnership or limited partnership, to invest.
REITs offer a modern collective ownership structure for Irish and international investors in real property. Provided that various conditions as to diversification, leverage restrictions and income distributions are met, an Irish REIT is exempt from Irish corporation tax on income and gains arising from its property rental business. Investors in a REIT are liable to Irish tax on distributions from the REIT. In the case of non-Irish resident investors, income distributions from the REIT are subject to dividend withholding tax (currently 20 per cent), although certain non-residents may be entitled to recover some of the tax withheld or otherwise should be entitled to claim credit against taxes in their home jurisdictions. Non-resident pension funds may also be eligible for exemption.
With effect from 1 January 2017 a new tax regime apples to regulated funds that invest in Irish real estate and related assets. Where a regulated fund derives at least 25 per cent of its value from assets that are Irish real estate, shares in unquoted real estate companies, Irish REITs and certain debt securities issued by Irish securitisation companies, then the fund will be considered to be an IREF. An IREF may be required to impose a 20 per cent withholding tax on a percentage of the amount paid on events such as the making of a distribution to investors or the redemption of its units. There are certain classes of investors that are exempt from the withholding tax, primarily Irish-taxable investors.
There are also specific rules, introduced in 2019, that can give rise to an income tax charge for an IREF that has shareholder debt and whose debt and finance costs exceed certain thresholds. The exact impact of the new rules may be different for each IREF, depending on its finance costs, property costs and other factors.
The introduction the ICAV was a welcome development in expanding the attractiveness of Ireland's authorised fund offering. Unlike the preceding Irish corporate regulated fund, the variable capital investment company, the ICAV as a private limited company allows US-taxable investors to treat the fund as a 'check-the-box' vehicle for US tax purposes. In so doing, the ICAV may avoid certain adverse tax consequences for US-taxable investors who invest in structures that may be deemed as a passive foreign investment company for US federal income tax purposes.
Ireland was one of the first countries to enter into an intergovernmental agreement (IGA) with the United States with respect to the Foreign Account Tax Compliance Act (FATCA) provisions of the US Hiring Incentives to Restore Employment Act 2010 in December 2012. Under the IGA, FATCA compliance is enforced under Irish tax legislation, including the Financial Accounts Reporting (United States of America) Regulations 2014, and reporting rules and practices. Subject to certain exceptions, Irish authorised funds are generally reporting financial institutions for FATCA purposes, and are subject to FATCA due diligence and reporting requirements. Irish financial institutions that are within its scope are required to register and obtain a global intermediary identification number to avoid a 30 per cent withholding on their US-sourced income and proceeds from the sale of certain US income-producing assets. The Irish Revenue Commissioners receive similar information from the Internal Revenue Service regarding Irish taxpayers. Ireland has also adopted the common reporting standard (CRS), which is the new global standard on the automatic exchange of information designed to combat tax evasion. The CRS regime requires certain investment entities (including Irish investment funds) to report certain information relating to investors to their local tax authority.
In terms of the financial services industry in Ireland, the covid-19 pandemic has caused the biggest challenge faced by the industry in over a decade since the 2008 financial crisis. However, the challenges now are very different. While the net assets of Irish funds saw a significant reduction in overall percentage terms in 2008, the drop in net assets in percentage terms has been significantly less in 2020. Perhaps the unique challenge caused by the pandemic has been on the operations side as firms have needed to implement business continuity plan on a prolonged basis. In this regard the financial services sector in Ireland has reacted well, demonstrating operational resilience, robust IT infrastructure and ability to adapt work practices. So while the impact of the covid-19 pandemic is something we continue to live with, the Irish financial services sector has continued to provide market-leading solutions for its international client base.
While Brexit also looms large in the background, Ireland has seen a significant amount of UK-based investment banks, insurance companies and investment firms relocate some or all of their business here in order to ensure continued access to European markets post-Brexit. However, while Brexit may likely be challenging for the Irish economy as a whole, the regulatory measures adopted in Ireland, should help shield the Irish financial services sector from some of the worst effects of the potential disruption caused by Brexit.
Despite all these challenges and with the continued support of the Irish government for the financial services sector, Ireland can still remain optimistic with regard to the continued development of the sector.
1 Kevin Murphy, Jennifer McCarthy and David Kilty are partners, David O'Shea and Sarah McCague are of counsel and Michael Shovlin and Niall Guinan are associates at Arthur Cox.
2 Established under the Pensions Act 1990 (as amended).
3 The UCITS Regulations implement the UCITS Directive in Ireland.
4 The AIFM Regulations implement the Alternative Investment Fund Managers Directive in Ireland.
5 For further information on this point, see Section VII.vii.
6 Companies (Amendment) Act 1982 (Section 13(2)) Order 2004.
7 Regulation (EU) 2017/1129 of the European Parliament and the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and Repealing. Directive 2003/71/EC.
8 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, as amended by Directive 2013/50/EU.
9 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids.
10 Irish Funds Statistics – 2020.
11 Central Bank of Ireland industry Registers.
12 Central Bank of Ireland Insurance Corporations Statistics, Q1 2020.
13 The investment Occupational Pension Schemes (Investment) Regulations 2006 (as amended by Occupational Pension Schemes (Investment) (Amendment) Regulations 2007, Occupational Pension Schemes (Investment) (Amendment) Regulations 2010 and European Union (Occupational Pension Schemes Investment) (Amendment) Regulations 2016).
14 Directive 2016/2341/EU.
15 Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.
16 Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to UCITS, with regard to investment in UCITS.
17 Commission Directive 2007/110/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to UCITS as regards clarification of certain definitions.
18 AIF Rulebook (March 2018).
19 The AIFMD is the European legislation that governs managers of AIFs (AIFMs), and in the first instance requires that all AIFMs be appropriately authorised to manage AIFs that are established or marketed in the EU.
20 Enhancements in the LO-QIAIF regime allowing managers of AIFs more flexibility to manage broader credit strategies within a LO-QIAIF structure are discussed in the Irish chapter of the seventh edition (2018) of this publication.
21 'Ireland for Finance' strategy (IFS 2025) for the further development of the financial services sector in Ireland to 2025 issued on 26 April 2019 by the Irish government.
22 Section 739B of the Taxes Consolidation Act 1997 (TCA) applying in respect of Irish authorised funds established on or after 1 April 2000, and certain pre-31 March 2000 International Financial Services Centre funds.
23 Section 739I of the TCA.
24 Section 1035A of the TCA.