The issue of substance has received much attention in the fund management space in the EU in recent times.
In an opinion issued by ESMA, national competent authorities have been cautioned against the authorisation of “letter-box entities” in a post Brexit scenario. The Central Bank of Ireland (the “Central Bank”) has addressed substance requirements in their final rules and guidance on fund management company effectiveness issued in December 2016, effective for all fund management companies from 1 July 2018. In a further development, the CSSF has introduced similar substance requirements in Luxembourg, based on a circular issued in August 2018.
The Central Bank’s final rules and guidance on the effectiveness of a fund management company (UCITS Managers and AIFMs including self-managed UCITS/AIF) or “CP86” as it is known within the industry, amalgamates previous guidance on delegate oversight, organisational effectiveness and directors’ time commitments with the new guidance on the performance of managerial functions, various operational issues and procedural matters. Governance, compliance and supervisability are the three core aspects of effectiveness, set out by the Central Bank in CP86. The Central Bank has expressed the view that a fund management company that can demonstrate its strength in these key areas indicates both substance and the ability of the company to better protect investors.