Guidance on Investor Money Regulations Consultation Paper CP 60. For Fund Service Providers. March 2015

Transcription

1 March Consultation on implementation of Alternative Investment Fund Managers Directive Guidance on Investor Money Regulations Consultation Paper CP 60 For Fund Service Providers

2 Revision History Date Version Description 30 March Final

3 Contents 1. Purpose and Effect of the Guidance 1 2. Structure and Scope of the Guidance 2 3. Principle of Segregation 6 4. Principle of Designation Principle of Reconciliation Principle of Daily Calculation Principle of Risk Management Principle of Investor Money Examination Appendix I Definitions Appendix II Illustrative Examples 73 i

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5 Section 1: Purpose and Effect of the Guidance Purpose and Effect of the Guidance The primary purpose of this document (the Guidance ) is to assist Fund Service Providers ( FSP ) in complying with the Investor Money Regulations (SI No 105 of 2015) (the Regulations ) issued pursuant to Section 48 of the Central Bank (Supervision and Enforcement) Act 2013 in relation to the holding of investor money. A FSP (as defined in the Regulations) holding investor money in a collection account must do so in accordance with the Regulations. Nothing in this Guidance may be construed so as to constrain the Central Bank of Ireland ( Central Bank ) from taking action, where it deems to be appropriate, in respect of any suspected prescribed contravention which comes to its attention. It is not the policy of the Central Bank to provide legal advice on matters arising pursuant to the Regulations. Information provided herein should not be construed as legal advice or a legal interpretation of the Regulations. It is a matter for any FSP who may fall within the scope of the Regulations to seek legal advice regarding the application or otherwise of the Regulations to their particular set of circumstances. The Central Bank has the power to administer sanctions for a contravention of the Regulations, under Part IIIC of the Central Bank Act, The Central Bank may update or amend this Guidance from time to time, as appropriate. 1

6 Section 2: Structure and Scope of the Guidance Structure of the Guidance This Guidance is provided only where it is considered it may assist in the interpretation of the Regulations; it is not provided for all the Regulations. The Guidance document should be read in a two page format with the relevant excerpted Regulations on the left hand side of the Guidance document and the related Guidance where warranted in the corresponding right hand side of the Guidance document. The Guidance is not comprehensive and does not replace or preempt any legislative provisions. The Regulations are transposed into this document for convenience. If any inconsistencies occur as a result of errant transposition, or otherwise, the Regulations as published prevail. The Regulations are set out under the following six headings which the Central Bank regards as the six core Investor Money Principles of an investor money regime. For ease of reference, this Guidance document is also set out on the same basis, but for ease of interpretation it is provided in a Q&A format: 1. Segregation A FSP should physically hold or arrange for the physical holding of investor money separate from non-investor money. It should maintain accounting segregation between the FSP s money and investor money. For the avoidance of doubt this principle applies to investor money that may be held by any nominee of the FSP. 2. Designation A FSP should ensure that investor money is clearly identified in its internal records and in the records of third parties. The investor money must be identifiable and separate from all noninvestor money. 3. Reconciliation A FSP should keep accurate books and records to enable it, at any time and without delay, to provide an accurate record of the investor money held by a FSP for each investor and the total held in the collection account. A FSP should conduct, on a daily basis, a reconciliation between its internal records and those external records of any third party with whom investor money is held as provided for in Regulation 5. An illustrative form of a bank reconciliation is included at Appendix II of this Guidance document. 2

7 Section 2: Structure and Scope of the Guidance 4. Daily Calculation Each working day a FSP should ensure that the aggregate balance of all collection accounts (investor money resource) as at the close of business on the previous working day is equal to the amount it should be holding on behalf of investors (investor money requirement). An illustrative example of a daily calculation is included at Appendix II this Guidance document. 5. Risk Management A FSP should ensure it applies systems and controls that are appropriate to identify risks in relation to investor money and should put in place mitigants to counteract these risks. 6. Investor Money Examination A FSP should engage an external auditor to report at least annually on the FSP s safeguarding of investor money. Throughout the Guidance, reference is made to certain reporting obligations to the Central Bank by the FSP under the Regulations. Where possible, any obligation to report information in this regard should be completed by the FSP using the Central Bank s Online Reporting System ( ONR ). 3

8 Section 2: Structure and Scope of the Guidance Scope of the Guidance To whom does the Investor Money Regulations apply? G1 (1) The Regulations are issued pursuant to Section 48 of the Central Bank (Supervision and Enforcement) Act 2013 and apply to FSPs as defined in the Regulations when holding investor money. G1 (2) Definitions in the Regulations have the same meaning in the Guidance. What is investor money? G1 (3) Investor money is defined in the Regulations and includes money owed to or held on behalf of investors including, for example, cash, cheques, electronic transfers or other payable orders. Examples of circumstances in which money is investor money G2 (1) Cheques and other payable orders received from investors will be investor money from the time of receipt of the cheque or other payable order by the FSP. Money sent to an investor by way of cheque or other payable order does not cease to be investor money until the cheque or other payable order is presented and paid by the credit institution. G2 (2) If a FSP has agreed in writing to pay interest to investors, such interest is investor money when the interest is paid into the collection account. Payment of accrued interest to investors prior to its receipt should not be paid from the collection account unless funded prior to distribution. These examples are not exhaustive and if in doubt a FSP should be prudent in its approach and act in the best interests of the investors. Examples of circumstances in which money is not investor money G2 (3) If the collection account is an asset of the Investment Fund, the Regulations do not apply. G2 (4) Money that is due and payable to a FSP itself or to a third party is not investor money, where it is due and payable in accordance with the following provisions: 4

9 Section 2: Structure and Scope of the Guidance the amount is in accordance with a formula or basis previously disclosed to the investor by the FSP; or a statement showing the amount of fees and commissions has issued to the investor and a number of working days as determined by the FSP and recorded in its Investor Money Management Plan 1 ( IMMP ) has elapsed, and the investor has not raised any queries. The Central Bank expects the FSP to allow at least ten working days to elapse; or the precise amount of fees or commissions has been agreed by the investor in writing, or has been finally determined by a court of competent jurisdiction. Examples of money, once known, which may be due to a third party include, but are not limited to, the following: Commission; Transaction Charges; Performance Fees; Management Fees; Contingent Deferred Sales Charge. G2 (5) G2 (6) A cheque or other payable order received from an investor is not honoured by the paying credit institution. Investor money ceases to be investor money where the money is paid, or transferred, from the collection account to: a) a bank account in the name of the investor (not being an account which is also in the name of the FSP); b) a third party upon the written instructions of the investor and are no longer under the control of the FSP. These examples are not exhaustive and if in doubt a FSP should be prudent in its approach and act in the best interests of the investors. 1 Refer to Regulation 7(3) 5

10 Section 3: Principle of Segregation Regulations Principle of Segregation When is a FSP deemed to hold investor money? Regulation 3(1) For the purposes of these Regulations, a fund service provider is deemed to hold investor money where: (a) it has been lodged into a collection account in any of the credit institutions listed in Regulation 3(9); (b) is held in the name of the fund service provider or any nominee of the fund service provider; and (c) the fund service provider has the capacity to effect transactions on that collection account. What does segregation mean? Regulation 3(2) A fund service provider shall act honestly, fairly and professionally in accordance with the best interests of investors. Regulation 3(3) A fund service provider shall keep investor money separate from all noninvestor money and take all steps as may be necessary to ensure that investor money is held by it in trust for the benefit of the investor on behalf of whom such investor money is being held. Regulation 3(4) Without prejudice to Regulation 3(11), a fund service provider shall not place in a collection account any money other than investor money except in accordance with Regulation 6(3). Regulation 3(5) Except in accordance with a legally enforceable agreement, a fund service provider shall not use the money of an investor for any purpose other than for the sole account of that investor. 6

11 Section 3: Principle of Segregation Guidance Principle of Segregation When is a FSP deemed to hold investor money? G3 (1) A FSP is deemed to hold investor money as provided for in the Regulations. Note, money received prior to the cash transfer cut off time on the dealing date is considered investor money. On the cash transfer cut off time on the dealing date, this money should be transferred to the Investment Fund. Where money is received from an investor on/after the cut off time on the dealing date, this money should not be held in a collection account. This money is not investor money and should be dealt with in accordance with the legal arrangement between the FSP and the Investment Fund. The FSP cannot hold such money as it is an asset of the Investment Fund and, in accordance with Investment Fund legislation, must be entrusted to the depositary 2. A FSP will also be deemed to hold investor money when money is received by the FSP from the Investment Fund and is deposited into a collection account for onward transmission to the investor. This would apply in the case of the redemption of the Investment Fund or where an Investment Fund pays a dividend. Please note, where an Investment Fund is investing money in its capacity as an investor into another Investment Fund and it lodges this money into a collection account held by a FSP, the Investment Fund for that activity will fall under the definition of investor under the Regulations. What does segregation mean? G3 (2) Segregation also applies to investor money that is held by any nominee of the FSP. G3 (3) A FSP should understand and take steps to recognise the implications and requirements of Regulations 3(3) and 3(4) when completing a FSP s daily calculation. 2 In accordance with Regulations 33 and 46 of the UCITS Regulations (S.I. No 352 of 2011), and Regulation 22(8) of AIFM Regulations (S.I. No 257 of 2013), all assets of an Investment Fund must be entrusted to a trustee/depositary for safekeeping. 7

12 Section 3: Principle of Segregation Regulations Principle of Segregation Investor money shall only be used in accordance with the investor s instructions Regulation 3(6) A fund service provider shall not use, or transfer investor money otherwise than in accordance with an instruction relating to that investor money received by the fund service provider from the investor for whom that investor money is held or as required by law or by order of any court of competent jurisdiction. Regulation 3(7) Without prejudice to the generality of Regulation 3(4) and Regulation 3(11), a fund service provider is not required to pay into a collection account such investor money that it receives on behalf of an investor where to do so would result in the fund service provider breaching any law or order of any court of competent jurisdiction. Regulation 3(8) Where, in accordance with an instruction from the relevant investor, investor money is transferred to a third party, the fund service provider shall ensure that such transfer is overseen and approved by a member of staff other than the staff member who conducts the transfer. 8

13 Section 3: Principle of Segregation Guidance Principle of Segregation Investor money shall only be used in accordance with the investor s instructions G3 (4) An instruction from an investor may be set out in a signed document or other format that is capable of being reproduced, e.g., the Investment Fund s Subscription Application Form or recorded telephone line. 9

14 Section 3: Principle of Segregation Regulations Principle of Segregation How should a FSP hold investor money? Regulation 3(9) Investor money may only be held by a fund service provider in a collection account maintained by the fund service provider at any of the following: (a) a credit institution authorised in the EEA; (b) a credit institution authorised within a signatory state, other than a Member State of the EEA, to the Basle Capital Convergence Agreement of July 1988; (c) a credit institution authorised in Jersey, Guernsey, the Isle of Man, Australia or New Zealand. Regulation 3(10) Any investor money received shall be deposited into a collection account without delay and in any event not later than one working day after the receipt of such money. Regulation 3(11) Without prejudice to Regulation 3(12), where a fund service provider receives money that is comprised of a mixture of investor money and other money, the fund service provider shall first pay all of that money into a collection account of that fund service provider and, thereafter shall, without delay, transfer out of or withdraw from the collection account such money as is not investor money. Regulation 3(12) If a fund service provider receives investor money where: a) it is not clear which investor owns such money; or b) there is insufficient documentation to identify the investor who owns such money; the fund service provider, having due regard to other legislation, shall first pay the investor money into a collection account and, thereafter, shall within 5 working days of the initial receipt of such money, either identify the investor concerned or return the money. 10

15 Section 3: Principle of Segregation Guidance Principle of Segregation How should a FSP hold investor money? G3 (5) The Central Bank expects a FSP to receive money into a collection account from the investor in the currency of the transaction as instructed by the investor or in the base currency of the Investment Fund. Where the FSP has no collection account denominated in that currency and it would be unduly burdensome for it to open such an account, the FSP may convert investor money on receipt and hold it in a collection account in a different currency. G3 (6) A FSP should set out in its IMMP the procedures it will follow as regards handling mixed remittances (i.e., an amount received which is a mixture of investor money and other money) ensuring that the process complies with Regulation 3(11). A FSP is only permitted to hold the exact amount of money in its collection account to meet the investor money requirement (refer to Regulation 6(1)). This will have timing implications for the handling of mixed remittances. Examples of such mixed remittances include but are not limited to the following: Commission; Transaction Charges; Performance Fees; Management Fees; Contingent Deferred Sales Charge. 11

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17 Section 3: Principle of Segregation Guidance Principle of Segregation How should a FSP hold investor money (cont d)? G3 (7) As part of the process provided for in Regulation 3(12), the Central Bank expects a FSP to set out in its IMMP the steps a FSP would follow in assessing how to deal with the receipt of investor money in this manner. Consideration of other regulations/legislation should be taken into account, e.g., anti-money laundering obligations. A FSP should consider adopting cut-off time limits for the collection of the missing investor documents. The timeframe adopted should be reflective of the importance of the level of documents omitted by the investor, ensuring the adoption of such timeframes will not result in the FSP breaching any other regulations/legislation; a FSP should seek legal advice if it is in any doubt. Such assessment should be made without delay, but in any event, a FSP should ensure it takes action in order to act in accordance with Regulation 3(12). A FSP should have clear procedures in place to ensure that the unallocated money is monitored and reconciled each working day. All such investor money should be included in the FSP s daily reconciliation and daily calculation. G3 (8) Without prejudice to any subsequent regulatory action which might follow for a breach of the Regulations, if an investor pays investor money into an incorrect bank account in error (e.g., the FSP s own firm bank account), the FSP should transfer that investor s money into a collection account without delay but in any event no later than one working day in accordance with Regulation 3(10). A FSP should not ignore such an occurrence and, if such an exception occurs, the FSP should: a) investigate as to why an investor s money was lodged into the incorrect bank account; b) put in place a procedure to prevent such an event from re-occurring; and c) reflect this procedure in the FSP s IMMP. 13

18 Section 3: Principle of Segregation Regulations Principle of Segregation What should a FSP do in relation to depositing investor money with a third party? Regulation 3(13) Investor money shall only be deposited with any one of the credit institutions listed in Regulation 3(9) where the fund service provider: (a) is satisfied that the legal, jurisdictional, regulatory requirements and market practices relevant to the holding of investor money with that credit institution in the manner proposed do not adversely affect investor rights; and (b) has exercised due skill, care and diligence in the selection and appointment of that entity. Regulation 3(14) Where investor money is deposited with any of the credit institutions listed in Regulation 3(9), the fund service provider shall, at least every 6 months, review the arrangements for the holding of investor money with that credit institution as against the criteria set out in Regulation 3(13) and such review shall be approved by the Head of Investor Money Oversight. What type of records is a FSP required to maintain to segregate investor money for each investor? Regulation 3(15) A fund service provider shall keep an accurate record of each transaction on a collection account in such a manner and form that: (a) the investor for, or in respect of, whom the transaction was conducted is identified; (b) the transaction is accounted for by the fund service provider separate from all other transactions of the fund service provider. Regulation 3(16) A fund service provider shall keep the records required under Regulation 3(15) separate from records relating to transactions which are not related to the collection account. 14

19 Section 3: Principle of Segregation Guidance Principle of Segregation What should a FSP do in relation to depositing investor money with a third party? G3 (9) As part of the assessment provided for in Regulation 3(13), the Central Bank expects a FSP to take into account how investor rights would be affected in the event of the insolvency of the FSP or the third party or both. G3 (10) The Central Bank expects a FSP to clearly document in its IMMP the procedures it would follow to carry out the review required by Regulations 3(13) and 3(14). What type of records is a FSP required to maintain to segregate investor money for each investor? G3 (11) A FSP may hold investor money in an individually designated collection account e.g., XYZ Ltd collection account a/c Investment Fund A or a pooled designated collection account(s) for all Investment Funds e.g., XYZ Ltd collection account. G3 (12) Where a FSP holds investor money in a pooled collection account, accounting segregation should be maintained. In its internal records, a FSP should maintain detailed accurate records in order to identify how much each investor holds in that pooled collection account and movements in that balance. 15

20 Section 3: Principle of Segregation Regulations Principle of Segregation What is the length of time a FSP should maintain records to demonstrate compliance with these Regulations? Regulation 3(17) A fund service provider shall retain for 6 years such records as are required by these Regulations and such records as are necessary to demonstrate compliance with these Regulations. Regulation 3(18) Where, under or in relation to these Regulations, a fund service provider holds a record or another party holds a record on behalf of a fund service provider electronically, the fund service provider shall ensure that it can produce such records without delay. When is a FSP required to report matters pertaining to these Regulations to the Central Bank? Regulation 3(19) A fund service provider shall report such matters to the Bank, pertaining to these Regulations, as may be determined by the Bank from time to time. Such a determination may be in respect of: (a) (b) fund service providers generally, fund service providers sharing any particular characteristic or a particular fund service provider; and any one or more Regulations, or all of the Regulations, of these Regulations. 16

21 Section 3: Principle of Segregation Guidance Principle of Segregation What is the length of time a FSP should maintain records to demonstrate compliance with these Regulations? No guidance deemed necessary. When is a FSP required to report matters pertaining to these Regulations to the Central Bank? G3 (13) A FSP is required to report breaches of the Regulations (refer to Regulation 7(1)(c)). The Central Bank may request a FSP to report, where necessary, other information in respect of its compliance with any aspect of the Regulations, e.g., material reconciliation differences arising from the investor money reconciliations (refer to Principle of Reconciliation (Regulation 5)). All notifications in this respect should be provided by the FSP to the Central Bank through the ONR. 17

22 Section 4: Principle of Designation Regulations Principle of Designation How should a collection account be designated in a FSP s internal financial records? Regulation 4(1) In advance of opening a collection account with a third party, a fund service provider shall designate in its own financial records, each collection account it will hold with any third party as a collection account in the account name. How should a collection account be designated in the financial records of a third party? Regulation 4(2) In advance of opening a collection account with a third party, a fund service provider shall ensure that the third party will designate in the financial records of the third party, each collection account as a collection account in the account name. Regulation 4(3) Prior to or within one working day of the initial lodgement of investor money in a collection account with a third party, a fund service provider shall verify that the money is held in an account which is designated as a collection account and keep a record of such verification and if the third party does not, in its external financial records, make a designation in accordance with Regulation 4(2), the fund service provider shall withdraw the money without delay, and in any event within 3 working days of the carrying out the verification assessment. 18

23 Section 4: Principle of Designation Guidance Principle of Designation How should a collection account be designated in a FSP s internal financial records? G4 (1) The designation in respect of a collection account requires specific designation to be used with no variation permitted and it should be in the name field of the collection account and not in the address field. How should a collection account be designated in the financial records of a third party? G4 (2) The designation should be in the name field of the collection account and not in the address field or any other field within the third party s financial records. If a third party has limited capacity to record the full title, an abbreviation such as Coll a/c is acceptable. The Central Bank expects the verification to take the form of a bank statement or other electronic form. A FSP may hold this verification electronically. For clarity, this verification process should be followed each time a collection account is opened and not each time investor money is deposited in that particular collection account. In effect, the FSP has up to four working days after the initial lodgement of the money to withdraw the money if the collection account is not correctly designated. This process of designation verification is a separate process to what is required under Regulation 4(6), which relates to ensuring that the collection account is set up in accordance with the provisions of the Investor Money Facilities Letter. 19

24 Section 4: Principle of Designation Regulations Principle of Designation What should a FSP obtain from a third party in advance of opening a collection account with a third party? Regulation 4(4) In advance of opening a collection account with a third party, a fund service provider shall enter into an agreement with the third party (in these Regulations to be known as an Investor Money Facilities Letter ) and the terms of such Investor Money Facilities Letter shall state that: (a) the parties acknowledge that money in the collection account is held by the fund service provider in trust for the relevant investors; (b) the third party shall hold and record the money in the collection account separate from the fund service provider s own money and the money of the third party; (c) the third party will designate the name of the collection account in its records as a collection account to make it clear that the investor money does not belong to the fund service provider; (d) the third party is not entitled to combine the collection account with any other account and the third party is not entitled to exercise any right of set-off or counterclaim against investor money in that collection account in respect of any sum owed to it by any person, including any other account of the fund service provider; (e) the third party will provide the fund service provider with a statement as often as is required to enable the fund service provider to comply with Regulation 5(1) and such statement shall specify all investor money held by the third party for the fund service provider; (f) the third party will not make withdrawals from the collection account other than by instruction from an authorised person of the fund service provider. 20

25 Section 4: Principle of Designation Guidance Principle of Designation What should a FSP obtain from a third party in advance of opening a collection account with a third party? G4 (3) The Investor Money Facilities Letter (refer to Regulation 4(4) for detail of letter content) should be regarded as the master letter obtained at the outset of the business relationship with the third party, if such a relationship changes, the letter may need to be reviewed and amended accordingly. Where a FSP prints these letters on its own headed paper and provides these letters to the relevant third party for signature, it should ensure that the third party clearly signs, dates and stamps these letters with its official stamp. The letters should be signed by an individual who has the necessary authority to sign on behalf of the third party. 21

26 Section 4: Principle of Designation Regulations Principle of Designation How should a FSP maintain the Investor Money Facilities Letter? Regulation 4(5) A fund service provider shall: (a) (b) (c) arrange for a review of every Investor Money Facilities Letter by the Head of Investor Money Oversight to ensure that every such letter adheres to the requirements in Regulation 4(4); retain evidence of the review provided for in paragraph (a) for 6 years; retain every Investor Money Facilities Letter between the fund service provider and a third party for 6 years. What should a FSP obtain from a third party prior to or after the initial deposit of investor money with a third party? Regulation 4(6) Prior to or within 3 working days of receipt of the initial deposit of investor money in a collection account, a fund service provider shall obtain, in writing, from the third party: (a) confirmation of the details of the collection account, including the account number; and (b) confirmation that the conditions applicable to the collection account are as documented in the Investor Money Facilities Letter. What should a FSP do when a collection account is closed? Regulation 4(7) A fund service provider shall without delay, obtain confirmation in writing, from the third party with whom the collection account was opened, when a collection account is closed and confirmation that it had a nil balance on the date it was closed. 22