Investor Money or Fund AssetsWhat is the optimum model for your business?

With approximately four months to go before the Investor Money Regulations come into effect, Fund Services Providers are assessing their business and operating models to determine the best fit for their organisation with regard to managing investor money and fund assets. As a result, a number of operating models are emerging across the industry. The most notable are as follows:

Fund Assets The collection account is an asset of the Investment Fund and the Investor Money Regulations do not apply.

IMR The collection account is an investor money account, through which all investor money flows on the way in and out of the Investment Fund.

Hybrid Subscriptions and redemptions generally flow through a Fund Asset Account, but exceptions are lodged to an IMR Account for longer term safeguarding. A summary of the key characteristics of each model is set out below.

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Fund Assets

On the 4th of November, the Central Bank of Ireland issued its seventeenth edition of an AIFMD Q&A, within which it confirmed that there is no regulatory obstacle to holding subscription and redemption monies due to an individual sub-fund, as fund assets, in a single account in the name of the Umbrella. The CBI also advised that appropriate guidance will be issued shortly. This will help firms to determine the controls and safeguards that should be in place around a collection account that is as asset of the Investment Fund, to which the Investor Money Regulations do not apply.

In advance of the appropriate guidance, firms will benefit from assessing the subscription and redemption cash flows and supported settlement cycles, and other types of payments made to and from the funds that they service to determine if a fund asset account is suitable for their business.

It is likely that both the Fund and the Depositary will need to agree to this model.

IMR

Where firms have begun to implement an Investor Money regime, they will have identified a Head of Investor Money Oversight, and will have started to document an Investor Money Management Plan. They will be looking at all transaction types and settlement cycles and cash flows with a view to determining the circumstances under which they are likely to hold investor money, and they will have started to identify the necessary controls and procedures that will need to be put in place by the firm to safeguard the investor money held.

It is likely that they will also have started to talk to their banking service provider about the content of a Facilities Letter.

Hybrid

Some firms, having assessed their transaction types, settlement cycles and cash flows, are considering implementing a hybrid model, which is effectively a combination of a Fund Asset regime and an Investor Money regime, allowing for fund assets to be received into a fund asset account at Umbrella level, but also making provision for investor money to be protected in an investor money account in the event that it cannot be paid to the investor on the date that it is due to be paid. The firm’s policy in this regard will need to be clear with regard to the scenarios that might determine whether money should be moved to an investor money account or remain as a fund asset. The firm will be required to appoint a Head of Investor Money Oversight and maintain an Investor Money Management Plan, but it will also need to obtain the agreement of the Fund and its Depositary for the operation of an Umbrella level fund asset account if one does not already exist.

“If the collection account is an asset of the Investment Fund, the Regulations do not apply”

Achieving Success ?

With an effective date of 1 April 2016, firms must start to get a strong sense of the model that is most suited to their business and begin planning accordingly. A key part of that planning is an assessment of the current operating model, and ideally that would be performed before year end 2015, with a conclusion drawn as to the preferred model to facilitate implementation.

When applying the IMR, the Head of Investor Money Oversight Role must be approved in early 2016, and procedures and controls must be updated and documented before the effective date. When applying the fund asset regime, it may be necessary update the fund’s prospectus and/or subscription application form before the effective date. Three months after the effective date the Investor Money Management Plan must be produced and approved by the Board of Directors in advance of the first annual audit.

An FSP’s timeline for 2016 may look something like this:

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Risk Assessment

Performing a detailed risk assessment should be the first step in determining the most suitable operating model. When rationalising the business decision to apply the investor money regime, or the fund asset regime, or a combination of the two, a firm should first document and assess the different transaction types, settlement cycles and cash flows supported by the firm. This should allow the firm to draw a natural conclusion with regard to the model that best fits its business and to determine an action plan to implement the model.

For instance, where the firm offers a contractual settlement model, where almost all subscription money is received after dealing day, which effectively means that all money received is likely to be fund assets (as per the Investor Money Regulations), it may make sense to operate a fund asset account for the collection of subscription monies. Similarly, where the firm operates of policy of upfront CDD, thereby generally avoiding a situation whereby an investor cannot be paid redemption proceeds due to insufficient CDD documentation, it may make sense to operate a Fund Asset model in isolation. However, if that same firm does not operate collection accounts at the level of the fund today, significant work could be required to amend the settlement instructions of each fund serviced. An update to the prospectus of each fund may be required, and the risk of investor’s paying to the old account initially would need to be managed (particularly where the old account is in effect a collection account within the meaning of the Investor Money Regulations).

Contacts

Sean Smith PartnerRisk AdvisoryDublin, Ireland T: +353 (1) 417 2306 E: seansmith1@deloitte.ie

Laura Wadding Senior ManagerRisk AdvisoryDublin, Ireland T: +353 (1) 417 E: lwadding@deloitte.ie

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How can we help?

Deloitte is engaged with a number of firms to provide support for the implementation of the chosen regime by those firms. As such, we are developing an in-depth knowledge of the risks and complexities, or otherwise, of each regime in the context of the relevant business models and can leverage this knowledge to advise and support your firm.

We can help your firm in the following ways:

• Perform a high level risk assessment of transactiontypes, settlement cycles and cash flows in thecontext of both investor money and fund assets.

• Assess your firm’s current business model in moredetail to determine if it already lends itself to eitheran investor money regime or a fund asset regime,or a combination of both.

• Help you to determine which model is the mostappropriate for your business and your client basewith due consideration to the potential impact onthe following:

o Current operating modelo Contractual arrangementso Risk management

• Should your business model, or even part of it, bewithin the scope of the Investor Money Regulationsin their entirety, we can help you to meet yourobligations in the following ways:

o Defining the role of the Head of InvestorMoney Oversight

o IMMP production / reviewo Senior Management Training (HIMO &

Board of Directors)

Whichever model you choose, we will help you to develop procedures and processes, design and deliver training programs, and implement your model of choice.