Investment funds based in Ireland will no longer have to hire Irish residents as directors under a central bank plan to improve oversight of one of the global fund industry’s biggest hubs.

Thousands of funds worth an estimated €1.5 trillion are based in Ireland because of the country’s low tax rates but this also means the funds’ promoters - usually fund managers in London or New York - have to hire two Irish residents as directors of the management companies that oversee the funds.

The number of funds has almost doubled to 5,665 since 2001, creating a windfall for Irish residents selling their services as directors. But there is also now a skills gap as tougher European rules brought in after the financial crisis require them to be more vigilant about a wider range of risks.

"In relation to risk management and to some extent investment management, there is a limited pool of skills within the country to sit on boards," Martin Moloney, head of markets policy at the Central Bank, said in an interview.

“We relaxed requirements in order to allow management companies to go outside the country to get those experts if they feel they can’t get them here.”

The guidelines are expected to be rolled out next year following a three-month consultation with industry. Fund managers such as BlackRock, Pimco and Invesco have funds based in Dublin.

Oversight

Ireland’s funds industry emerged unscathed from the country’s financial crisis but the Central Bank is stepping up its oversight of the sector as part of a wider international focus on so-called shadow banks, financial intermediaries, including funds, that handle an estimated $60 trillion of transactions a year.

Under the central bank proposals, due to be published later on Friday, a fund would need to have at least one director who is in Ireland for at least 110 working days a year. A second director, if he or she were not in Ireland for that period of time, would have to be able to engage with central bank supervisors within any 24 hour working day period.

The Central Bank also wants fund management companies to spell out who is responsible for what on the board and it will require such companies to document, before they get approval to start operating, that their board has sufficient expertise.

“We have to ensure that funds in Ireland are complying with the best standards and can be seen internationally as complying with the best standards,” Mr Moloney said.

Shadow banking

Ireland’s shadow banking sector, anchored by the country’s pro-business legal arrangements and tax exemptions, dwarfs the domestic banks whose debt-fuelled property binge forced Dublin into an international bailout in 2010.

This sector, made up of investment funds, money market funds and special purpose-style vehicles, have around €2 trillion of assets, more than ten times the size of the domestic economy and nearly three times the size of the banks catering to the domestic Irish market, according to central bank data.

When the funds industry first took off in Ireland in the 1990s, retired lawyers or accountants took on directorships as a sideline, clocking up multiple boardroom roles.

But now tougher regulation from Europe has engendered a professional class of director, including people who specialise solely in being funds’ directors.

“The reputation it had of being a cosy little sector is not true anymore,” Moloney said. “But there is room for improvement.”

With no limit on the number of directorships a person can hold and an annual income of around €20,000 and up per boardroom role, some now have a sizeable portfolio of positions, according to a Reuters report last year.

Interviews

The Central Bank is currently interviewing funds directors about how they meet all their boardroom commitments as part of a separate review of the industry’s voluntary corporate governance code. Mr Moloney said things had improved since last year.

“You are seeing fewer people with very large numbers of directorships. You are seeing greater spread of directors and that is only to be welcomed because it implies that people can spend more time on the job,” he said.

Lawyers are a popular choice for funds directorships in Ireland, with fund promoters often hiring a lawyer from the Dublin-based law firm that represents their fund.

The Central Bank said that a fund management company did not need to appoint a lawyer to its board if it already had a law firm providing it with legal services.

“We believe that there may be an assumption, particularly among fund sponsors located abroad, that the central bank has an implied preference for the appointment of lawyers to fund management company boards,” said Mr Moloney.

“We just want people to understand that it doesn’t make any difference to us in terms of authorising applications as to whether you have a lawyer on the board,” he said. “What matters to us is that you have assessed what skills you need and you have put together a package of directors who can meet those requirements.”

Reuters