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FUNDS

REVIEW IRELAND LEADER’S VIEW

An Taoiseach on the funds industry’s crucial role in economic recovery

DOMICILE BLISS? Industry experts on Ireland’s attraction as a fund domicile

THE FUNDS SUPREMACY Ireland continues to lead the way in the global funds industry


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2011 09:5 09:59 59 59

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FUNDS REVIEW

IRELAND

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INSIDE THIS ISSUE

Where we are now PG 30 Domicile bliss

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Editorial from John Bruton, President IFSC Ireland, former Irish Prime Minister and EU Ambassador to the US An Taoiseach, (Irish Prime Minister) Enda Kenny shows his support for the Irish funds industry in this special article penned by the Irish leader The roll call of who's who in the Irish funds industry then and now

10 The International Financial Services Centre Ireland (IFSC Ireland) from vision to reality - how it all started almost 25 years ago

12 Kieran Donoghue, IDA Ireland, speaks about the new partnership with the Irish Funds Industry Association (IFIA) and how the IDA is supporting the industry

14 Investec Treasury Solutions Criona Fitzgerald reflects on the importance of effectively managing hedging strategies

18 Interview Ken Owens, Chairperson of the Irish Funds Industry Association, reveals how the industry has changed in the past 20 years - and how some things have stayed the same

20 Gary Palmer, Chief Executive of the Irish Funds Industry Association (IFIA), answers some of the tough questions

22 Dr Dan McLaughlin, Group Chief Economist at Bank of Ireland, discusses Ireland's remarkable turnaround in a year

24 Government's Green IFSC initiative takes root to provide the types of financial services that will experience significant growth in the coming years

26 Now is the time to turn Ireland into a Cleantech Champion, writes Barry O'Flynn from E&Y

28 PWC's Ken O’Brien shows 16 Competition What are the jurisdictions competing with Ireland and what do they offer?

how Ireland has become home to mutual and alternative fund products alike

30 Patrick Freyne quizzes industry experts about the attraction of Ireland as a funds domicile - and the dangers of complacency

EDITOR

angela madden

32 Where are the promoters of Irish regulated funds from and where are they distributing their funds? Asks Brian Dillon from Dillon Eustace

34 Catharine Dwyer from William Fry explains that fund managers are seeking to 'future proof' their products against the forthcoming challenges of AIFMD

36 Asset managers will be forced to make changes in the way they operate, says Eoin McManus from E&Y

39 John Ahern from KPMG explains why sovereign credit ratings are not linked to UCITS funds

41 Deloitte Deirdre Power and Patrick Rooney from Deloitte check out regulation and the opportunities and threats it presents for Ireland

42 Sean Pairceir, Brown Brothers Harriam, asks if Ireland's domestic woes are leading to a regulatory backlash

Angela has close to 20 years' experience in journalism and public relations in Ireland, the UK and the USA. During her career, which she started at FT Business, she has held the roles of Reporter, Editor, Group Editor, General Manager and New York-based business Correspondent for a number of leading national and local titles. She is also a PR and media relations expert having worked with some of the world's leading financial services companies, Irish companies and national and local authorities. Angela is Marketing and Communications Manager at the Irish Funds Industry Association (IFIA). "I hope you enjoy this inaugural Funds Review Ireland and discover just what it is that Ireland has to offer as a funds domicile, why it is the domicile of choice for all types of internationally distributed investment funds and what the future may hold." N FUNDS REVIEW IRELAND

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JOHN BRUTON

FUNDS INDUSTRY thriving in ireland John Bruton, President IFSC Ireland, former Taoiseach (Irish Prime Minister) and EU Ambassador to the US, discusses the funds industry in Ireland. efore looking at Ireland’s enviable international financial services sector and, particularly, the funds industry I would like to make a few points about the Irish economy – and address some of those questions I get asked on my trade missions around the world. In Ireland’s case, the credit of the state itself has unfortunately become entangled with that of the banks. It would be no solution to anything to enhance the credit of the banks, by diminishing the credit of the state.

B

Where does responsibility lie? It is spread widely. The Irish banking problem was influenced by failure to prepare for the possible consequences of the free movement of capital within Europe since 1990, and the deep interdependence that that has created, with all its good and bad aspects. The main responsibility for Ireland's plight rests with Irish institutions. Private sector institutions were first and foremost responsible, especially the property development industry for its reckless borrowing, and estate agency community for encouraging the bubble. The boards and managements of banks for the reckless lending share responsibility, as do the media, with their reliance on property advertising, for encouraging people to climb the so called property ladder, as if one's place on this ladder was a measure of one’s place in society. The Irish economics profession has a responsibility for, generally speaking, not calling attention to the obvious unsustainability of the borrowing, and of the level of con-

ABOUT IFSC IRELAND IFSC Ireland has been formed by the leading representative and professional bodies associated with International Financial Services (IFS) in Ireland to provide a common marketing platform to promote Ireland, both at home and abroad, as a world class centre for internationally traded financial services. In discharging its role, IFSC Ireland works in close co-operation and partnership with key stakeholders, existing representative bodies such as the IFIA who are the founding members and IDA Ireland which has the primary responsibility for attracting foreign direct investment into Ireland. struction activity, which could not possibly have been maintained. It is obvious that the Irish Central Bank, the Financial regulator and Government made major errors. There is a European, as well as an Irish dimension, to Ireland’s current problems The ECB had a Treaty based responsibility to

"contribute to the smooth conduct of policies pursued by the competent authorities relating to prudential supervision of credit institutions, and the stability of the financial system". It could have issued instructions to the Irish Central Bank in respect of its supervision of Irish banks when it saw the explosion of credit in Ireland and the imprudent concentration of that credit in one volatile sector, construction. It could also have issued instructions to the central banks of the other euro area countries, whose banks were availing of the free movement of capital to lend imprudently to the Irish banks in a way that fed the Irish property bubble. Under any reading of Article 3.3, these things were the ECB's business as well as, of course, being the business of the Irish authorities and the authorities of the countries whose banks lent irresponsibly into the Irish property bubble. So, if we are to overcome the crisis and avoid a new one, everybody must be self critical, including the ECB and other European institutions. To make that point is not to argue for Irish institutions trying to avoid their financial responsibilities. A bond is a promise, and promises should not be broken, especially if one’s economy is based on the provision of international services, in which trust is vital. Trust plays an important role in the fact our international financial services centre is flourishing – people who do business here can do so with certainty. The same goes for our 12.5 per cent rate of Corporation Tax. This has been a cornerstone of the Irish economy since the 1950s. It provides certainty.

Our international financial services business has never been stronger perhaps demonstrating there is a dual economy at work in Ireland – the domestic versus the international.

Exports are at an all time high. Fund managers and promoters continue to chose Ireland as their domicile of choice because of our people and their expertise, our product innovation and out international outlook and reach. Today more than 30,000 people are employed in international financial services in Ireland 12,000 of those exclusively in funds and growing. More than 400 net new jobs were created in 2010 and more than 1,200 during 2011. These new jobs are being created as funds under administration here grow. Today Ireland administers close to EUR 2 trillion assets from all around the globe. Irish fund administrators service assets from almost 170 countries and Ireland’s funds industry supports some 852 promoters. 388 fund promoters from over 50 countries use Ireland to distribute UCITS and other funds to more than 70 countries across the globe. Almost all the world’s major fund service providers have a presence in Ireland and nearly 30 languages are supported. Since the Incorporation of IFSC Ireland in September 2010, I have participated in trade missions to over 10 foreign jurisdictions to cities and countries as diverse as Abu-Dhabi, Doha, Saudi Arabia, Dubai, Chile, Chicago, Boston, New York, London, Frankfurt, Paris, Hong Kong and Singapore and I look forward to continuing to support the efforts of my colleagues in international financial services and the funds industry. Perhaps somewhat ironically, while Ireland has always had the expertise, innovation and reach demanded by international managers, as costs continue to fall in Ireland there has never been a better time to do business here. Next year IFSC Ireland celebrates its 25th year – it just goes to show that when Ireland puts its mind to something anything is possible. N FUNDS REVIEW IRELAND

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AN TAOISEACH he government, that I lead, has taken Office at a very difficult time for our country. Hard decisions have to be made to get Ireland back to work and on the road to recovery. However, we have made a start. When we came to Office, we faced extraordinary challenges and we met them head on. • Repairing our broken banking system • Restore our public finances • Resuscitating our damaged international reputation. Eight months later, despite deplorable international conditions, we’ve made good progress. We’ve stabilised the banking sector. We’ve secured lower interest rates under the EU/IMF Programme. And even now, international market sentiment is improving. Obviously, there’s huge work still ahead. After three years of contraction, the economy is returning to growth. Our exports continue to perform strongly - up 4% in the first seven months of the year, with a similar increase forecast for the year overall. Crucially, our balance-of-payments is now in surplus: a key indicator of economic sustainability. Our competitiveness has improved and is improving. The cost of doing business has fallen across the economy. Productivity grew last year at the highest rate since 2002. Despite the difficulties still facing us, the Irish Government is determined to see through the next round of adjustments needed for the path to recovery.

T

International Financial Services Centre The International Financial Services Centre in Ireland (IFSC) has been one of the main Irish success stories. Celebrating 25 years since its establishment in 2012, an important aspect of the growth in international business here is as a direct result our international financial services and its largest stakeholder – the funds industry. With close to 25 years expertise and experience, Ireland is proud to be one of the world’s leading locations for interna-

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tional investment funds. We value its excellent reputation and recognise its hardworking and dedicated workforce of more than 12,000 professionals whose knowledge is recognised worldwide. All these factors contribute to the continued increase in the number of funds and assets being domiciled and serviced by the industry in Ireland.

Growth in the funds industry During 2010 the industry grew by over 30% with the value of funds administered rising to €1.88 trillion. 2011 has also proved a strong year for the Irish funds industry with Ireland

Statistics from EFAMA show that Ireland was also the domicile of choice for UCITS in 2011 attracting the highest inflow of net assets of any domicile for the year so far. In fact, the gains made by Ireland - some €41.5 billion - were almost two and half times that of the next domicile at €17 billion.

Job creation Job creation is the top priority for the Irish government. Even in a difficult economic climate the funds industry has continued to see a 5% growth in jobs in 2010 with the creation of 432 net new positions. It is now expected that it will go on to create more than

developments present opportunities for the European industry, where global players and largely those in the United States seek to use a European base for their international business. Government agencies such as IDA Ireland and Enterprise Ireland, stakeholders and the industry are now working more closely together than ever before to promote and support the Irish funds industry – at home and abroad. The fruit of such co-operation is apparent in the new partnership between the Irish Funds Industry Association and IDA Ireland which has resulted in the Irish funds industry opening

AN TAOISEACH supports irish funds industry

The funds industry is playing a crucial role in aiding the Irish economic recovery. So says Irish Prime Minister, An Taoiseach Enda Kenny. clearly the managers’ choice for both UCITS and alternative investments. The robust regulation of this industry has set us apart from the others and meant that Ireland as a domicile already has solutions which comply with new legislation sweeping across Europe and beyond. On the alternative side, managers gearing up for AIFMD are rapidly turning their sights to Ireland with figures for its AIFMD ready Qualifying Investor Fund (QIF) performing extremely well. Recent figures from the Central Bank of Ireland show that the number of QIFs is at an all time high of 1,273 with assets also reaching a peak of €159 billion. Ireland, which already administers more than 40% of the world’s alternative investments, has seen QIF assets grow some 18% in the last year. Equally successful is Ireland’s gains in 2011 on the retail side.

1,200 new valuable knowledge economy jobs by the end of 2011. I have made my commitment to the funds industry very clear – We must ensure that the environment for the development of international financial services and, in particular, investment funds, continues to offer significant opportunity. This potential can be achieved as Ireland continues to provide solutions and opportunities to the international funds industry. The government will continue to promote Ireland's attractiveness as a leading funds domicile with specific legislative framework and developments in the tax and regulatory environments all areas for consideration.

Co-operation An important feature of the funds industry has been the significant engagement of government with our European counterparts. Recent EU legislative

representative offices throughout the US in Chicago, Boston and Atlanta, the UK in London and throughout Asia in Tokyo and Singapore.

Islamic Finance Building upon the success of the IFSC, significant inroads are being made into Islamic Finance. Ireland has recognised its importance in the global financial system through adapting our tax system and financial regulatory system to ensure a level playing field between Islamic Finance and conventional measures. The IFSC has the potential to become a Centre of Excellence for Islamic Finance and the changes in recent Finance Acts will support its development. In addition, Ireland has been active in concluding double taxation agreements with important Islamic States, including recently Saudi Arabia, Bahrain, Kuwait


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AFTER THREE YEARS OF CONTRACTION, THE ECONOMY IS RETURNING TO GROWTH. OUR EXPORTS CONTINUE TO PERFORM STRONGLY - UP 4% IN THE FIRST SEVEN MONTHS OF THE YEAR, WITH A SIMILAR INCREASE FORECAST FOR THE YEAR OVERALL.

An Taoiseach Enda Kenny with Gary Palmer, Chief Executive of IFIA, at the IFIA Annual Conference held in the Convention Centre Dublin.

and the UAE. The Central Bank of Ireland has also said that it is open to the establishment of Islamic Finance institutions in Ireland and it has already authorised a number of Sharia compliant funds. When examining key fund domiciles outside the Middle East, Ireland now accounts for 20% of the market.

Green finance Another area there is significant potential for growth for the Irish funds industry is in the area of the ever-growing green economy. The global economy is transitioning towards a low-carbon, more sustainable model – which in turn means investment. The Government is actively looking at establishing a ‘Green’

financial services centre to provide the types of financial services that will experience significant growth in the coming years. Green finance is not a niche market but one that is growing every day; the Carbon market is estimate to reach $2.4 trillion pa by 2020; Europe needs to invest €2.9 trillion to meet its targets in the next decade and Cleantech is

estimated to reach $630 million per annum by 2030. Building on Ireland’s expertise in international finance and green enterprise combined with supportive tax and regulatory regimes, Green IFSC can position Ireland as a world leader in green finance. And to ensure we have the skills required into the future to sustain growth in this market, Green IFSC has helped launch a series of new courses in sustainable finance at some of Ireland’s leading universities and set itself the target to up skill some 10 per cent of those already working in international financial services and funds in the next few years alone.

Conclusion Through its continued growth, the funds industry is playing a crucial role in aiding the Irish economic recovery. Attracting international investment, creating jobs, and focusing on future potential are central to Irish economic recovery and to the continued success of the international funds industry alike. Working together, we can ensure that Ireland remains the number one location for all internationally distributed investment funds. N FUNDS REVIEW IRELAND

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WHO’S WHO

WHO’S WHO in irish funds Funds Review Ireland honours some of the key players who shaped the IFSC - then and now.

DERMOT DESMOND “The man with the Midas touch� (as he’s known by some) first muted the idea of developing Dublin as a hub for financial services at a meeting convened by the then Minister for Labour, Ruairi Quinn. He also put together the report on which the initial plans were based. “I get a kick every time I come down here [the IFSC],� he said in interview a few years ago, and elsewhere he’s referred to it as his greatest achievements. Ireland’s sixth richest man (with an estimated worth is of E1.45 billion) he probably doesn’t say these things lightly

KEN OWENS Ken Owens, the current Chairman of the IFIA, is a partner at Price Waterhouse Coopers and he specialises in the asset management industry. He knows his stuff, then. Indeed, while in his day job he advises his clients on complex financial issues, while as IFIA Chairman he has, in the past year, been in the fortunate position to be announcing new jobs and funds coming to these shores. Long may this continue. He is now at the helm of an industry which bucked the trend and created more than 400 net new jobs in 2010 and in excess of 1,200 in 2011. Long may this continue.

MATTHEW ELDERFIELD Matthew Elderfield is the Man from Delmonte, the person who says “yes� or “no� as far as this financial sector is concerned. Appointed Head of Financial Regulation at the restructured Central Bank in 2010, he came to the position with a raft of hard

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won experience. He’s a Cambridge graduate who has written widely on complex monetary issues. He’s also a veteran of the UK Financial Services Authority and, more recently, Chief Executive of the Bermuda Monetary Authority.

WILLIE SLATTERY Willie Slattery first became involved in the IFSC and funds industry in his capacity as a Central Bank employee in the late eighties and spent the next few years immersed in the development of the project. A private sector stalwart for the past decade-and-a-half, he is currently head of the State Street’s Irish operation. In all this time he’s been a shrewd manager, a passionate, outspoken voice for the sector and a respected elderstatesman. He is Chairman of the Council of IFSC Ireland. For some he’s the unofficial IFSC Tsar and represents the spirit of the industry in this country.

GARY PALMER Current Chief Executive of the Irish Funds Industry Association, Palmer is an ear and voice for the organisation’s many members and associate members throughout the industry (taken together they’re responsible for over 10,000 funds). He is a UCD graduate (with an MBS) and former Director of Development with the Institute of Bankers. He is, as part of his current role, a member of a dizzying array of governmental and business committees, both domestic and international, and he continuously acts to push the industry’s interests in Irish halls of power.

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A b co JOHN BRUTON John Bruton is the official IFSC Tsar, or, more correctly, he’s the IFSC’s President. When the role was created in 2010, he seemed like a perfect candidate to fill it. A former Taoiseach and Finance Minister, Bruton has, in more recent years, been the European Union Ambassador to the America and this year he disappointed many in Fine Gael by not standing as a candidate in the presidential elections. He’s an internationally focused Europhile with a sound understanding of business and a lot of experience getting things done. Fine Gael’s loss would appear to be the financial sector’s gain. N

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HISTORY

mart ideas often take shape in hard times. Three decades ago, the notion that Ireland, then seen as a recessionary backwater, could be any sort of financial hub was the stuff of science fiction. The idea that became the IFSC was first proposed at a dinner at the Shelbourne Hotel in the mid-eighties at which then Minister for Labour Ruairi Quinn was seeking solutions to Ireland’s seemingly intransigent unemployment problem. The dinner included a number of prominent business leaders of the day, Pat O’Mahony then of AIB, John Fanning from McConnell’s Advertising and, of course, Dermot Desmond, and many ideas were thrown about (most left to the dustbin of history). Desmond proposed the idea of developing a financial hub in Dublin and before the party adjourned to Kitty O’Shea’s pub, he promised Quinn’s advisor Greg Sparks that he would write up a more detailed proposal. That could have been the end of that. Desmond’s proposal ended up on a department shelf

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ONCE upon a time in the 80s Patrick Freyne explores the origins and the history of the IFSC. as the Fine Gael/Labour coalition focused on other strategies. But Desmond ended up telling Charles Haughey about the idea and the report and the Fianna Fail leader was intrigued. With the advice and assistance of Desmond, he put the basic outline

into Fianna Fail’s 1987 election manifesto, and the rest, according to business lore, is history. It wasn’t so simple at the time. “When the manifesto was published, commentators generally derided the concept,” Desmond later wrote, and Willie Slattery,

the Irish head of State Street Bank, also recalls the naysayers. “Nearly everyone thought it wouldn’t work,” he says. “Obviously the people involved were committed to it and would have expressed confidence that it would have worked, but others would have been very sceptical as to whether anything would come of it.” Nonetheless, despite the criticism, the Haughey government went ahead with it. They quickly established a committee of potential stakeholders to oversee the enactment of the plan and an outline of the project was subsequently included in the Finance Bill. Slattery, a Central Bank employee at the time, was on this committee. “I had a very open mind,” he says. “Anything that could attract business and jobs seemed good from my perspective so I was all for it.” But it was slow. “We had to develop various types of infrastructure - regulatory infrastructure, tax infrastructure, legal infrastructure – all to support the different types of companies that might have had interest in settling in the IFSC,” he says. “In fact, for the first three years there


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was no regulatory law. Regulation was by agreement and, by the way, every company agreed to be regulated. No one could get a tax certificate if they weren’t approved by a certification advisory committee chaired by the Department of Finance. Compliance with the Central Bank’s regulatory requirements was put in as a condition on their tax certificates.” The first companies to arrive, according to Slattery, were “an eclectic set of banking and lending type activities attracted by the 10% tax rate” but progress was slow at first. “One well known UK bank had 700 employees in Jersey alone,” he says. “That was more than everyone down in the IFSC at the time. Some people were disheartened by this, saying ‘well we’re not that substantial’, but I never shared that opinion. I always thought we were making progress.” Nowadays the attraction of the region is clear (a good taxation and regulatory regime coupled with a cluster of companies and a skilled work force creates its own momentum) but for the first companies to arrive down to the empty dockland, it was a bit of a gamble. According to Slattery the original pioneers came largely due to a compelling sales pitch from a trio of ambassadors. “The troika, the ‘three wise men’ as they were called. We sent them out to convince people internationally that Ireland was a good place to do business and they did that job very well. Dublin was not then the exciting place it’s become. It was regarded as quite a poor city. So we didn’t have a lot of natural attraction at the time. It was only when people came in and discovered that they could do good business here that we slowly established real scale and we started to become one of the most important jurisdictions in the world. Back then Dublin really had to be sold to people.” Slattery also notes that Irish America had a part to play in the early days. “Some of the individuals who committed early on had strong affiliations with Ireland,” he says. “When no-one has anything, when you don’t have any obvious reason to be an outlier

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from the herd and persuade an organisation to put a business in a new jurisdiction without a track record you’d have to have some very strong convictions. It was noticeable that some of the people who did so were Irish Americans who had strong affiliation with Ireland, who were, to use the fashionable term, of the diaspora.” There were, of course, other attractions once people got to know us. Ireland had a highly educated, cost-effective work force, business-friendly policy makers and regulators and it was an ever flexible environment in which to work. This flexibility even manifested in how the vision for the IFSC itself changed. In the early days many had envisioned the area could become a front-office style operation for the financial sector, but it soon became clear that it was much more attractive as a backoffice location (“Traders wanted to be in a big city like London,” notes Slattery). The first funds industry outliers arrived in 1989 and by the early to mid-nineties, the industry started to gravitate towards the city in earnest. Rachel Turner, BNY Melon’s Head of Irish Funds, began working for LGT Asset Management as a graduate in 1992 and experienced first-hand the development of a generation of skilled fund industry professionals. “For a business graduate in the early 90s it was fantastic,” she says. “There were very few jobs available and there weren’t previously any real industries for finance graduates to earn their trade in. LGT was one of the first fund administration companies to relocate their business from the UK to Ireland and I was one of 25 graduates that they took in. You could see strong finance graduates learning a craft from scratch and gaining a very strong understanding of the industry.” Turner maintains that it was this early and hard won knowledge that enabled the industry to attract and facilitate more complex financial products. “Having that core operational knowledge has ultimately served Ireland really well,” says

“NEARLY EVERYONE THOUGHT IT WOULDN’T WORK,” HE SAYS. “OBVIOUSLY THE PEOPLE INVOLVED WERE COMMITTED TO IT AND WOULD HAVE EXPRESSED CONFIDENCE THAT IT WOULD HAVE WORKED, BUT OTHERS WOULD HAVE BEEN VERY SCEPTICAL AS TO WHETHER ANYTHING WOULD COME OF IT.”

Turner. “We learned and understood the core of how a fund was constructed. We learned about funds at a fundamental level. It made it really easy for the Irish industry to deal with more complex structures and to branch into alternatives and hedge funds.” By the late nineties, this increasingly more skilled workforce began to service the hedge fund industry in Ireland for the first time. Furthermore, the country was also, at this point, in the midst of a major economic boom. “The boom was a mixed blessing, really,” says Slattery. “The fact that the city was growing and that there was a buzz around the place was certainly an attraction for some businesses. But it also hurt us in terms of cost competitiveness and that was a very big drawback.” The special 10% tax rate also came to an end in 2002, but over the past couple of years with costs being reigned in and a steady stream of good news stories about jobs in the sector, Slattery feels that the industry is still in a good place. He worries, however, about how kneejerk regulatory policies might affect the sector in the future and hopes that policy makers will stay true to the businessfriendly vision set in place over nearly 25 years ago. “The wrong sort of regulation is a very real danger,” he says. “We can’t lose sight of why this industry was so successful here in the first place.” All in all, the level of this success is something that even Slattery, open-minded as he was, didn’t envision at the outset. “The proof of the pudding was definitely in the eating and every sceptic was eventually forced to change his or her mind because of the amount of really good jobs that were coming into the country,” he says. “I wasn’t a sceptic. I was optimistic, but even I never envisioned that we’d end up with 5000 firms and 30,000 people employed in international financial services around Ireland. I did not expect that level of success. It’s been a superb achievement.” N FUNDS REVIEW IRELAND

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IDA IRELAND

WORKING

hand in hand for jobs IDA Ireland and the Irish funds industry are working together to create new jobs, explains Kieran Donoghue. ver the past 40 years IDA Ireland has built a successful track record bringing foreign direct investment to Ireland and 2011 has been no different with the organisation set to achieve its ambitious investment targets for the year, with over 130 new investments secured. A large factor in IDA’s success over the years has been its strong international presence; as an international promotion agency, with offices across the globe, IDA brings its international knowledge back home to ensure investor requirements can be met from Ireland. Collaboration and partnership are key requirements for overseas companies and IDA has become a trusted partner for investors, acting as a liaison between the Irish government and industry. It is this ability to bring government and industry together, for their mutual benefit, which makes IDA such a valuable asset to Ireland in the marketplace. The international financial services sector also relies on collaborations and partnerships to grow and thrive. More than 250 of the leading global financial institutions have established operations in Ireland with many located in Dublin’s International Financial Services Centre (IFSC). The IFSC was created by the Irish government in 1987 and promoted by IDA Ireland worldwide to drive the development of the sector and today it houses many of the world’s leading financial institutions along with a sophisticated support network including accountancy, legal, actuarial, taxation, regulatory,

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telecommunications and other service providers. The vibrant international financial services sector in Ireland carries out a wide range of activities within the banking, insurance and the investment and funds industries. In September 2010, Ireland’s international financial services industry in a novel private sector initiative created a new role, President of IFSC Ireland, and former Taoiseach (Prime Minister) John Bruton, who has proved to be a great ambassador, was appointed to the position. IFSC Ireland has been developed and is wholly funded by a number of industry stakeholders including the Irish Funds Industry Association and the President is supported in his role by IDA Ireland. The funds industry in Ireland has remained resilient throughout the global downturn and continues to act as a source of well-paid employment creating more than 400 net new jobs in 2010 and an estimated 1,200 in 2011. By working closely with the Irish Funds Industry Association (IFIA) IDA is anxious to ensure and even accelerate the continued growth of the funds industry sharing the belief that this industry will play a significant role in Ireland’s economic recovery. Ireland now administers more than 40 per cent of the world’s alternative investment funds and is the European domicile of choice, home to 63 per cent of all European Hedge Funds. Ireland also attracted more net assets of UCITS than any other domicile in 2011 (according to EFAMA) proving it has the expertise to attract retail and alter-

IDA IRELAND WILL WORK HAND IN HAND WITH THE IFIA IN 2012 AND BEYOND TO ENSURE THAT IRELAND REMAINS THE DOMICILE OF CHOICE FOR INTERNATIONALLY DISTRIBUTED INVESTMENT FUNDS.

native investment funds equally. Earlier this year, IDA and IFIA collaborated on an international media event, the inaugural Irish Funds Media Summit, where both organisations actively engaged with key European financial media on Ireland’s advantages as a location for funds investment. Importantly this event brought together all relevant agencies and stakeholders to ensure joined up thinking in the promotion of Ireland as a funds domicile and an end-to-end solution for international financial media queries. In a further collaboration, June

2011 saw the IFIA announce at its annual conference that it planned to open representative offices in the US and the UK in a joint venture with IDA Ireland. The move means that the Irish funds industry now has representatives on the ground in New York, Boston, Chicago, Atlanta and London for the first time. In November, the roll out of new offices continued when representatives from IFIA and IDA travelled to Singapore and Japan IFSC Ireland President, John Bruton, to oversee the opening of funds industry representative offices there, utilising IDA Ireland’s presence in those markets. But this is just the start with further new representative offices being planned throughout Europe in the coming months. The success of the Irish funds industry can be seen in some of the key investments that have been made in Ireland in the past year. Leading global hedge fund administrator, HedgeServ, announced a substantial expansion in October of this year with plans to create 300 new jobs. Deutche Bank revealed that it is to establish its European hedge fund administration centre in Ireland with the creation of up to 100 jobs. Apex announced plans for some 60 jobs, and Citi is expanding it Dublin and Waterford sites creating 250 new jobs . These are only a few examples and by no means an exhaustive list. And, showing the impact the funds industry is having in the creation of jobs and Ireland's economic recovery, domestically PWC revealed it is to hire 600 new people. IDA Ireland will work hand in hand with the IFIA in 2012 and beyond to ensure that Ireland remains the domicile of choice for internationally distributed investment funds, ensure our newly established funds team are meeting with the managers and promoters locally in the countries in which they are based - and create further new jobs for Ireland in the process. Kieran Donoghue is Head of International Financial Services at IDA Ireland N

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in association association with

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INVESTEC

ONE WORLD

many strategies Críona Fitzgerald on effectively managed hedging strategies.

subscriptions which need to be hedged a spot rate is used to convert the currency and it is rolled forward with the maturing contract. With redemption requests, investors are required to give a period of notice which allows the fund manager enough time to manage the rollover of their forward contracts and resulting cash flows.

Hedging and the prospectus edge fund assets are now worth over $1.9 trillion according to Hedge Fund Research. There are over 15,000 hedge funds worldwide with over 45% of them located outside of London and New York, with significant growth in European based hedge funds in recent years. However, hedge funds are still predominantly denominated in US Dollars and these funds may have share classes denominated in currencies such as Euro or Sterling. Therefore, currency risk is very real and currency fluctuations can have a significant impact on returns for investors. Foreign exchange (FX) volatility has been high in recent years. When managing funds, it is important to factor in currency exposures when the base currency of the fund differs from the investors currency of choice. For example, if the fund is dollar denominated it may be difficult to attract UK or European investors, due to the related FX risk. Some investors in a particular fund want exposure to the assets and don’t necessarily consider the related FX risks. However, swings in exchange rates may be a specific risk that investors may want to avoid.

tection, while allowing them to benefit to favourable exchange rate movements for a portion of their exposure. An unhedged fund could deter some investors. Funds need to ensure they are dealing with specialist FX providers in managing their hedging requirements. There is a widespread practice of letting a custodian quote for FX and manage the currency hedging. However, specialist FX providers who are independent to the custodian can help save money. It is up to the fund manager to be aware of the costs they are charged when executing their FX hedging requirements. With investors putting pressure on managers to reduce fees, funds are paying a lot more attention to the various costs involved.

H

What hedging strategies are available? Hedging can help mitigate against adverse currency moves and aims to remove fluctuations between investors’ currencies and those of the funds base currency. Investec Treasury Solutions specialise in providing hedging solutions to funds. Funds have a choice of a number of currency hedging solutions the more popular being the use of fx forward contracts. Forward FX contracts are the

14

How does hedging work?

CURRENCY RISK IS VERY REAL AND CURRENCY FLUCTUATIONS CAN HAVE A SIGNIFICANT IMPACT ON RETURNS FOR INVESTORS. most widely used hedging instrument because of their relatively low cost and large liquid market for quick and efficient execution. Option product solutions are an alternative hedging solution to the more traditional method of utilising forward contracts, especially for longer periods. Some funds use products like participating forwards in managing their FX exposures, which give them 100% pro-

The fund manager decides how much to hedge and how far forward. Generally, contracts are rolled monthly but can be rolled to any time period. Some funds may roll certain percentages to different expiry dates, e.g. 60% within the month, 20% two months and 20% quarterly, which gives the fund greater flexibility to manage cash flows in and out of the fund. If utilising forward contracts to manage the exposure, the initial hedge is put in place. Upon maturity date, the existing forward contract is closed out and a new contract put in place to a new maturity date. This can be done on the maturity day or two days prior to expiry, depending on the currency pair involved. This rolling process is called “Mark to market”, i.e. a profit or loss is realised on the rollover so the bank either pays the client funds or vice versa. New subscriptions or redemptions can be dealt with when rolling the forward contract or during the life of the hedge. For

The prospectus must clearly describe the general currency hedging strategies of the fund and individual share classes. If the fund invests in currencies other than those of the base currency, the prospectus must state if it is the intention of the fund to hedge these currency exposures back into the base currency. If the fund is unhedged, then the prospectus should address what happens with subscriptions, redemptions, such as will they be converted at prevailing exchange rates. The prospectus should clearly disclose the hedging policy, including how the fund intends to hedge against FX movements, what happens if the fund is over or under hedged or if the NAV is exceeded? Is over hedging allowed for a period of time? The hedging strategy needs to be managed to ensure efficiency to reduce risk and exposures. Investec Treasury Solutions help clients decide a clearly defined hedging strategy. It is important that the fund manager clarifies the NAV at each rollover. Daily or weekly reports are provided to help the fund manage their exposures. Systems are in place to enable daily mark-to-market reports which give accurate valuations on fx positions and also provides an audit trail. Attracting investors is a key challenge for investment managers. Managers pay particular attention to the need for specialist skills and FX trading expertise when deciding on who should hedge their exposures and take into account risks and costs. Investec Treasury Solutions are specialist FX providers with key knowledge who offer a relationship driven service and most important of all have relevant experience when dealing with fund hedging solutions. N

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Accounting • Brokerage • Foreign Exchange • Fund Administration • Fund Distribution Support Global Custody • Infomediary® • Offshore Fund Services • Securities Lending • Transfer Agency

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COMPETITION

AT A GLANCE

the best of the rest Some Domiciles Next Door (and further away). Luxembourg Like Ireland, Luxembourg is a well-regulated European base in which to sell funds across multiple jurisdictions. Its financial sector is well established, accounting for over a quarter of its GDP and it has as stable an economy and political culture as you could hope to find. Also, like Ireland, the local policy makers are relatively nimble when it comes to responding to changes in the industry but unlike Ireland they haven’t faced a raft of reputation damaging domestic issues. Luxembourg’s biggest problem, it would seem, is a rising cost-base which might put a brake on growth.

Hong Kong and Singapore Despite the existence of those renowned Asian hubs, Hong Kong and Singapore, both filled with financial infrastructure and expertise, Asia-managed funds are typically located in foreign jurisdictions such as Ireland and Luxembourg. The game-changing potential of a strong Asian fund domicile is often discussed in hushed tones in Irish and Luxembourgian corridors. As yet, however, Asian locations do not benefit from the type of cohesive legislative environment that can be found in Europe and so they haven’t come up with their own version of a passportable fund… yet. But never say never.

Dubai Just as the city itself rose from nothing, Dubai’s financial centre has been the fastest growing financial hub in the world (it didn’t even exist before 2004). Well-placed to benefit from

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FUNDS REVIEW IRELAND

The Isle of Man is relatively politically and economically secure but has, in recent years, faced a slightly more prickly attitude from the big powerful island next door (it’s a Royal Dependency of the UK). Indeed, the UK has cut its funding over the past few years and increasingly looks at its financial sector nervously. The island’s relative stability should see it powering on for the foreseeable future, however.

Cayman

Bermuda Historically Bermuda is one of the wealthiest off-shore fund domiciles, but even this British colony is not immune to either the effects of recession or the increased scrutiny of international bureaucrats and populist politicians (many see it, like the Bermuda Triangle, as a place taxes disappear). Its political system is generally considered to be calm and stable, but in the face of its economic woes, some commentators have niggling worries about the possibility of civil unrest (this is an issue historically, if not so much in recent years). Notwithstanding this, Bermuda remains a major location for the funds industry.

Canada is increasingly pitching itself as a centre for financial services and funds. Positioned, as it is, in a relatively untroubled and well regulated economy with a highly educated talent pool, they have some advantages. The geographical proximity to New York and the fact offices in Halifax open an hour before the New York Stock Exchange is also a strong selling point.

The Isle of Man

being in a time zone between London and Hong Kong, it has attracted major international players, has a zero per-cent tax on profits and a plethora of doubletaxation treaties. It has also been benefiting from a new trend: Middle Eastern wealth, typically invested abroad, has been returning to the region.

Cayman is a long established lowtax fund domicile, which, like many others is in danger of being compromised by legislation from the EU and the US encouraging fund managers to seek more thoroughly regulated bases (like Ireland). Furthermore, taxes are also set to increase in response to its wider economic problems, and the Obama administration’s antipathy to off-shore tax-havens (and in one speech the president singled out the Caymans in particular), while not necessarily having a practical effect on its funds industry, does have an effect on general attitudes to it as a financial centre.

Nova Scotia

The Channel Islands (Jersey and Guernsey)

DUBAI HAS A ZERO PER-CENT TAX ON PROFITS AND A PLETHORA OF DOUBLE-TAXATION TREATIES. IT HAS ALSO BEEN BENEFITING FROM MIDDLE EASTERN WEALTH.

More UK Dependents acting as offshore centres, both Jersey and Guernsey have stable political systems and well established and sophisticated financial infrastructure. But they, like many other offshore islands, are facing increased scrutiny from the US, the EU and the G20, not to mention increased oversight from UK itself. While the UK benefits from its proximity to these offshore islands (arguably they attract business to the City of London), it increasingly fears reputational damage and a bailout bill should either of them suffer financial collapse or regulatory failure.

Somewhere else This is a fast moving space (Dubai didn’t even exist as a financial centre seven years ago). Regulations at home and abroad are always changing; the markets are ever volatile and even as we speak policy makers somewhere are devising schemes to suck funds and money their way. Complacency is not an option for those in the Irish funds industry. N


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KEN OWENS he name Ken Owens is synonymous with the Irish funds industry. It is almost impossible to think of one without the other. Ken started his career just as funds were emerging in Ireland and over the past 20 or so years the two have grown together in stature on the global stage. Today Ken is Chairperson of the Irish Funds Industry Association and a Partner at PwC Ireland, but he admits that back then he – or no-one else – knew much about funds. He recalls that the “large black computer” that was stored in a cupboard and only able to help prepare the most basic of spreadsheets was the only electronic equipment available at the time in the funds industry. In a world of Internet news tickers, with up to the second trade information and pricing, that image shows just how much things have changed. However, Ken was quick to point out that while the developments in technology have been remarkable, what today and then has most in common is that hunger for those in the industry to market Ireland all around the world. “I remember 20 years ago that there was a core group who spent most of their time on planes going all around the world marketing Ireland – the ‘Fathers’ of the industry.” If anything the desire to promote Ireland globally is again at the forefront of the industry because of Ireland’s domestic economic situation. “We in the funds industry and in Ireland in general had become a little complacent,” explained Ken as business just continued to grow. Now we see the need to continue this marketing work, he said and emphasised that one of the consequences of the financial crisis has been an increase in the competitiveness of the industry in Ireland from a cost perspective. “As a result there has never been a better time to set up a new business or expand a business in Ireland. Once again we are working together as a team to promote Ireland,” he said, “and leaving our own company interests to one side for the greater good.” He also said that beyond the funds industry all agencies,

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KEN OWENS and the Irish funds industry – two sides of the one coin.

stakeholders and Government were working much more closely together to maximise growth and ensure joined up thinking and consistent messaging of Ireland Inc abroad. He cited the relationship forged with IDA Ireland which, in a joint initiative, saw IFIA representative offices opening in a number of key locations in London, Atlanta, Chicago, Boston,

Singapore and Tokyo as an example of this new level of co-operation. Emigration is another shared experience then and now but, while Ken admitted that no-one likes to be in the position where they are forced to emigrate, in many cases they return home after developing a wealth of experience. He also cited Farmleigh has an

example of how some of those who emigrated and excelled in the sphere of work have special ties to Ireland and do all they can to support and promote Ireland as a place to do business – giving Ireland a real edge over other countries and domiciles. On top of that the fact that so many worked in other countries and domiciles and returned to Ire-


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“Green IFSC will put Ireland at the forefront of providing solutions for green financing around the world building upon the expertise which already exists in the funds industry and international financial services.” Essentially, Green IFSC is an initiative of the Department of the Irish Prime Minister and tasked with ensuring the optimum busi-

ISLAMIC FINANCE WILL ALSO BE AN IMPORTANT MARKET FOR IRELAND, SAID KEN. AFTER ALL, ACCORDING TO FIGURES FROM PWC, WHEN EXAMINING KEY ISLAMIC FUND DOMICILES OUTSIDE OF THE MIDDLE EAST, CAYMAN HAS 40 PER CENT WITH IRELAND ACCOUNTING FOR AN IMPRESSIVE 20 PER CENT.

land meant that Ireland has a depth of talent and experience envied the world over. It is the experience of the people in the industry which is its greatest asset, he said. Speaking of his own firm Ken explained that when it hit audit time in the US they sent out up to 40 people from Ireland to help out. “The fact that these people are still being requested from Ireland, and not from other countries, over the past few years demonstrates the value the people in the industry in Ireland add.” Looking ahead Ken feels that the UK and the US, Ireland’s two key markets will continue to play a key role in the growth of the Irish funds industry but also is looking during his Chairmanship to further build business in Asia, Latin America and MENA. Asia is an increasingly important market for funds, especially UCITS funds based in Ireland. Historically the funds have been set up by US and UK promoters for sale into Asia. More recently however we have seen a steady stream of promoters from Asia also looking to establish funds in

Ireland for sale globally or back into Asia. The Irish funds industry has been visiting Asia for many years and the marketing trip at the end of November visited Singapore, Tokyo and Malaysia for the first time. Islamic finance will also be an important market for Ireland, said Ken. After all, according to figures from PwC, when examining key Islamic fund domiciles outside of the Middle East, Cayman has 40 per cent with Ireland accounting for an impressive 20 per cent. The other 40 per cent is made up of a combination of other domiciles. Also, Ireland already has a significant double tax treaty network and the Irish Government has undertaken to increase the number of double tax treaties in force, particularly with countries in the Middle East and North Africa. To date Ireland has double tax treaties with more than 60 counties including Bahrain and Morocco. Treaties have also been signed with Malaysia, Pakistan and Turkey. “The Irish funds industry is always evolving and looking for new markets to excel,” said Ken.

ness environment for green finance to flourish. According to Ken, Ireland has been at the forefront of innovation in the asset management industry over the years. “The Industry here was the first to see the opportunities in the areas of Money Market Funds and Exchange Traded Funds (ETF’s) and now has a market leading position in both of those industry sectors and there is no reason why we cannot repeat this success in the future.” One area where Ken sees enormous opportunity is in providing solutions to the growing global pensions’ crisis where companies and countries struggle to provide adequate pensions for retirees. Ireland has already developed a very efficient structure to service pension funds assets called the Common Contractual Fund (the CCF) Ireland’s AIFMD ready Qualifying Investor Fund (QIF) is also proving increasingly popular he explained, as the 2012 deadline for implementation of the new Directive draws ever near. Statistics from the Central Bank of Ireland showed that the number of QIFs was at an all time high of 1,273 with assets also reaching a peak of €159 billion with QIF assets growing some 18 per cent in the past 12 months. While Ireland is regarded as the alternative centre of excellence Ken says that he wants to high-

light the fact that it is also the centre of excellence for retail UCITS funds. “On the retail UCITS side, statistics from EFAMA showed that Ireland was also the domicile of choice for UCITS in 2011, attracting the highest inflow of net assets of any domicile for the year so far. In fact, the statistics show that the gains made by Ireland were almost two and half times that of the next most successful domicile,” he shared. In fact, the data from EFAMA demonstrated that Ireland attracted €41.5 billion in net assets of UCITS in the year to date. The largest inflows experienced by any other jurisdiction was only €17 billion. In fact, most jurisdictions saw significant losses - some of more than €40 billion. In conclusion Ken again stressed that a key strength of Ireland over any other jurisdiction was its people and their exceptional experience and pointed out that it was a career offering great potential for those considering what to study in university. “The industry has grown to include more than 12,000 people over the past 25 years. Even 2010 which was a year of domestic challenges, saw more than 400 net new jobs and some 1,200 net new jobs created by the end of 2011. “It is international in its outlook. More than 850 fund promoters from over 50 countries have chosen Ireland as their international hub. Irish fund administrators service assets from almost 170 countries and offer support capabilities in 28 languages and 23 currencies.” These figures are from an IFIA Transfer Agency Survey conducted in 2011. “There is opportunity in the Irish funds industry at home and abroad and it is this international experience which makes Ireland special – and able to continually offer the service and solutions on the global stage. “It is not a co-incidence, or the so-called luck of the Irish, that the Irish funds industry is the fastest growing of all the major UCITS domiciles and is the number one alternative investment fund centre in the world.” N IFIA IYUVHV

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GARY PALMER

Q: What attracted you to the funds industry? The ambition, enthusiasm and energy of the industry and those working in it.

Q: When did you first become involved in the funds industry? I first became involved in the industry in 1995 during the development of the Certificate in Investment Services, the industry education programme. At that stage I was working with the Institute of Bankers, the partner organisation and awarding body for the industry's education programmes and I joined the then Dublin Funds Industry Association in 1999.

Q: What is the single biggest thing you have learned over that time? The potential that Ireland has to become the premium regulated jurisdiction for internationally distributed investment funds, and the requirement and benefit of all stakeholders; industry, authorities and agencies working together despite our different mandates.

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FUNDS REVIEW IRELAND

FACE TO FACE

what next for funds? Angela Madden goes Face to Face with Irish Funds Industry Association’s Chief Executive Gary Palmer. Q: What have been and what are the biggest challenges facing the Irish funds industry then and now? The industry in Ireland is a partner to the international investment funds industry and in all partnerships, each partner must be contributing to the partnership. Both then and now and into the future, the success of the industry in Ireland is dependent on our ability to continue to offer product solutions, operating efficiencies and distribution opportunities to the international industry.

Q: How is the Irish funds

industry facing up to those challenges? Through excellence, innovation and global reach, Ireland as a fund jurisdiction continues to respond to and anticipate the requirements of the international industry. Continuing to deliver experience, expertise and thought leadership will ensure our future significance and relevance.

Q: What is the benefit of an association like the IFIA? How does it promote the industry? The IFIA is simply or significantly an industry facilitator, a forum whereby all parts of the industry can work together to

achieve our common objective of making Ireland the premium regulated jurisdiction for internationally distributed investment funds. With input from the widest of industry constituencies, the industry agenda can be determined and with the collective efforts of the industry and through engagement with the authorities and agencies, that agenda can be pursued and delivered.

Q: Ireland has traditional been seen as the home for the domiciling and servicing of alternative investments. Is that perception changing?


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Ireland has an unrivalled expertise in the establishment and servicing the widest range of investment fund structures and while we have a particular and unique expertise in alternative investment funds, this is in addition to our significance as a UCITS jurisdiction of choice. This breath and depth, unique to the Irish industry, has allowed and provides investment managers with consistency and certainty as products develop and evolve.

Q: Given the focus on Ireland's regulation of domestic banks why do you think it is that the funds industry has always been so robustly regulated? Unlike other industry sectors and even other financial products the fundamentals and principles of the funds industry is legislation and regulation. The catalyst for the establishment of the industry was legislation and associated regulation ie the UCITS Directive and the opportunities it provided for a regulated investment fund to be distributed in a number of jurisdictions. Openness, transparency and regulation were the pillars on which the funds industry in Ireland was established and and these are the fundamentals with which the industry continues to develop.

Q: As a result of this robust regulation is Ireland now in a position of advantage to cash in on the raft of regulation sweeping the industry in general? Yes, events and market developments over the last few years have highlighted the virtues and values of governance, transparency and openness. The industry in Ireland having been built on these pillars can now provide the benefits of robust regulation with pragmatism, efficiency and effectiveness.

Q: What then are your views of onshore versus offshore? In the last number of years there has been a significant trend towards regulated investment funds. This drift has been encouraged by investors who now place a premium on regulation and the associated safeguards being demanded by the

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authorities. Responding, promoters are preparing and providing regulated funds.

Q: How supportive is Government of the Irish funds industry? Very; right from the commencement of the international financial services industry in Ireland and the funds industry in particular the Government, their departments and the authorities were active and involved industry stakeholder. This involvement is obvious through the established industry/authority standing committees and working groups led by and responsible to the Taoiseach's own department.

Q: How important is that support? Critical; legislation and regulation are the bricks and mortar with which the industry builds its products and provides its services. To ensure the development and relevance of those products and services requires a facilitating and evolving legislative process, and as the legislative framework is the preserve of the Government, the Government's involvement and support is critical.

Q: Why do you think 2010 and 2011 were such successful years for the Irish funds industry? 2010 and 2011 were very successful years and the industry figures highlight this. However, throughout the industry's 25 years there has been continued and sustained growth and development. Why? Well it goes back to the excellence and expertise of the industry and the provision of product solutions, operating efficiencies and distribution opportunities to the international industry.

Q: What next? What are the big plans for the funds industry for 2012 and beyond? Off a very firm foundation the industry needs to continue what it has done; to anticipate and respond to the requirements of the industry. Enhancing the legislative framework to facilitate efficiencies and evolution of product development, regulatory considerations to anticipate and

THE IFIA IS SIMPLY OR SIGNIFICANTLY AN INDUSTRY FACILITATOR, A FORUM WHEREBY ALL PARTS OF THE INDUSTRY CAN WORK TOGETHER TO ACHIEVE OUR COMMON OBJECTIVE OF MAKING IRELAND THE PREMIUM REGULATED JURISDICTION FOR INTERNATIONALLY DISTRIBUTED INVESTMENT FUNDS. WITH INPUT FROM THE WIDEST OF INDUSTRY CONSTITUENCIES, THE INDUSTRY AGENDA CAN BE DETERMINED AND WITH THE COLLECTIVE EFFORTS OF THE INDUSTRY AND THROUGH ENGAGEMENT WITH THE AUTHORITIES AND AGENCIES, THAT AGENDA CAN BE PURSUED AND DELIVERED.

facilitate those products and industry thought leadership to drive and deliver efficiencies and effectiveness.

Q: Is the industry 24/7 or do you have time for other interests? Working in a such a fast growing, dynamic and world leading industry has been a significant privilege; however, it does become all encompassing and somewhat of an enemy of time, with little for much else.

Q: What advice would you give someone of thinking of a career in the funds industry? Why would you recommend it as a career? To enjoy and continue the industry tradition of excellence and thought leadership. Being part of an industry which provides huge opportunities and significant rewards is something we all hoped for in our careers and which the funds industry provides. Couple that with the satisfaction of being involved in a global industry where Ireland excels, the privilege of the industry is obvious.

Q: How would you sum up the Irish funds industry from inception to today and why would Ireland be the preferred

location for the domiciliation and servicing of assets? Vision, dedication and good luck. The inception of Ireland's international financial services centre co-incided with the original UCITS directive and these two developments coming together provided the opportunity for the funds industry. From this beginning and the establishment of the required legal, tax and regulatory environments the industry commenced. Through vision and dedication a reputation as a centre of excellence was soon established.

Q: Can it continue to grow? Where and how? Yes, without doubt and as I said off a very firm foundation the industry simply needs to continue what it has done; to anticipate and respond to the requirements of the international industry. The international industry needs and wants a centre of excellence for the manufacturing, management and servicing of investment funds where their business can be organised and structured to leverage off their global specialisations and with the right product range and control oversight environment Ireland can be that centre. N FUNDS REVIEW IRELAND

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BANK OF IRELAND

REMARKABLE transformation Dr Dan McLaughlin, Group Chief Economist at Bank of Ireland, discusses Ireland’s remarkable turnaround in a year. wo questions come to mind when contemplating any country saddled with a heavy debt burden – does the social and political will exist to repay the debt, and if so, can the economy generate the additional income required. For some time now the market has decided the answer to both questions for Greece is a qualified ‘no’, while the official line from the EU is a qualified ‘yes’, hence the plan to provide additional finance in a second bail-out. The funds required will be more than initially expected given a sharper than anticipated recession in Greece and that has thrown up other issues which in turn are unsettling investors and reinforcing a sense of crisis – who pays, how can any contagion from Greece be contained and what about the impact on the holders of euro sovereign debt, particularly the major European banks? The EU had brokered a deal in July involving a voluntary 21% haircut on Greek debt taken by private investors, with shortterm debt rolled over into longer maturities. That agreement now looks inadequate, and most EU leaders believe that the private sector contribution should be much higher with a haircut nearer the current market price for Greek bonds. Securing agreement on that issue has proved difficult, so prolonging the uncertainty gripping markets. The July agreement also sought to dampen any conta-

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gion from Greece by expanding the fire power and flexibility of the European Financial Stability Facility (EFSF) and that has been achieved, although the ratification process has taken some time, much to the chagrin of US and UK policymakers who see the euro crisis as the major threat to global growth. In the event the effective size of the facility, €440bn, is now thought by many to be inadequate and the debate has switched to the issue of leveraging the EFSF. Some argued that the ECB could simply lend to it but the Bank shot that down and the most likely development now

IRELAND STILL FACES MANY CHALLENGES, BOTH IN TERMS OF THE ECONOMY AND IN TERMS OF INVESTOR SENTIMENT. is that the EFSF may act as an insurance fund, agreeing to compensate bond buyers for (say) the first 20% of any losses, which in effect would substantially increase its spending power. A larger haircut on Greek debt has prompted the market to focus on those banks with exposures to the sovereign debt of the peripheral economies. Political leaders in France and Germany initially resisted the idea that their banks needed additional capital to absorb any potential losses but

have now swung behind it, although the question of who provides this capital is still unresolved. Indeed, this has set up a fresh round of sovereign debt selling by investors, this time encompassing France, on the basis that the respective States will have to step in to recapitalise their banks. This sounds very familiar to Irish ears – the State stepping in to support its banks, and paying a heavy price – but the substantial fall in Irish yields over the summer months, only partially reversed of late, implies that investors are now much more willing to accept that Ireland can come through the crisis and repay its loans. Commentary on Ireland from foreign analysts and media alike has also turned positive, overly so in some cases, a remarkable turnaround from the situation a year ago.

What has changed? A key factor for Ireland is that the fiscal deficit is on target, against a general slippage in many other euro countries; if the recent pattern is maintained to end-year – revenue is ahead of profile and spending is running behind – the underlying deficit could emerge well below the target, although November, 2011 is a huge tax month and can render any forecasts redundant. Non-tax revenue has already hit the full-year target, largely because of much higher receipts than projected from the deposit guarantee scheme. The initial projections for the interest cost on Irish official borrowing is also now too high, and if the recent proposals by the

European Commission are implemented, Ireland could save 2.92% a year on up to €40bn of EU loans, equivalent to €1.2bn per annum. The total package agreed by Ireland with the troika last November also envisaged up to €35bn for the banking sector, with the Central Bank subsequently deciding that €24bn was required by the guaranteed banks in additional capital. In the event, the State’s share was lower than expected (thanks to burden sharing by bond holders and a private sector equity contribution to Bank of Ireland) with the direct cost to the exchequer put at €7.8bn. All this helped investor sentiment but economic developments were significant too, in that GDP growth has surprised to the upside in the first half of the year, prompting a substantial upward revision to the consensus growth forecast for 2011, which is now seen around 1.5%. Ireland still faces many challenges, nonetheless, both in terms of the economy (consumer spending is still falling on an annual basis and unemployment is over 14%) and in terms of investor sentiment (despite the recent rally, the cost of insuring against an Irish bond default implies a 40% probability of default within 5 years). Risks abound and some are beyond Ireland’s control, including the path of global growth and the market response to the detail of the latest EU plan to contain the sovereign debt issue, when (and if) it emerges in the coming weeks. N


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Client focused. Results driven. At William Fry, we are client focused. We understand what our clients expect of their legal partners. A results driven law firm, providing practical and innovative solutions to the highest standards. That is what we deliver. It is why we are a leader in the Irish investment funds market.

For further information, please contact: dan.morrissey@williamfry.ie tara.oreilly@williamfry.ie cormac.commins@williamfry.ie

5FM tXXXXJMMJBNGSZJF %VCMJOt/FX:PSLt$BMJGPSOJBt*O"TTPDJBUJPOXJUI5VHIBOT


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GREEN IFSC

t took a financial crisis more than 20 years ago to spawn the concept of an International Financial Services Centre in Ireland (IFSC Ireland). Back in 1989, it may have seemed liked an unlikely and ambitious plan – to turn the rundown docklands area of the city of Dublin into a thriving, international financial zone but, today it is a tangible reality. Today, IFSC Ireland encompasses investment funds, international banking, stock exchange listings, insurance and aircraft leasing and is lauded as a world leader. More than 32,000 people are directly employed in IFSC Ireland, which accounts for 10 per cent of multi-national employment in Ireland and some 36 per cent of corporation tax receipts. From this past experience, we can understand that when the Irish Government creates an initiative to make Ireland a world leader in green finance and carbon management we know there is intent behind the rhetoric – and in many ways the Green IFSC initiative is merely an extension of what is already there. Even in this issue of Funds Review Ireland, Irish Prime Minister, Enda Kenny has made it clear that the green economy

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GREEN IFSC takes root Ireland’s expertise and leadership in international finance is now taken for granted the world over - but it wasn’t always so, writes Stephen Nolan, Executive Co-ordinator, Green IFSC. is a key area where he sees real opportunity for Ireland. In his article he says: "The Government is actively looking at establishing a ‘Green’ financial services centre to provide the types of financial services that will experience significant growth in the coming years." He also pointed out that green finance is not a niche market but one that is growing every day; the Carbon market is estimate to reach $2.4 trillion pa by 2020; Europe needs to invest €2.9 trillion to meet its targets in the next decade and Cleantech is estimated to reach $630 million per

annum by 2030. "And to ensure we have the skills required into the future to sustain growth in this market, Green IFSC has helped launch a series of new courses in sustainable finance at some of Ireland’s leading universities and set itself the target to up skill some 10 per cent of those already working in international financial services and funds in the next few years alone," he said earlier in this publication. And so, Ireland has made its ambitions clear in the area of sustainability and sustainable finance but it is not merely talk.

The Green IFSC has already achieved much. Education In terms of education and ensuring the skills are there in the sustainable sector in the years to come Green IFSC in partnership with Summit Finuas has been instrumental in establishing a new PostGraduate course in DCU. This particular Sustainable Finance course is aimed at upskilling financial professionals and part of the Green IFSC’s plan to target 10 per cent of those professionals already working in the IFSC.


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GREEN IFSC JOE DUFFY, COUNTRY EXECUTIVE FOR BNY MELLON IN IRELAND EXPLAINED: "WITH ENVIRONMENTAL ISSUES TAKING CENTRE STAGE THE GREEN IFSC IS GIVING IRELAND THE OPPORTUNITY TO DEVELOP A CENTRE OF EXCELLENCE IN SERVICING THE FUTURE GREEN ECONOMY. THROUGH ITS EDUCATION AND SKILLS INITIATIVES WE HAVE THE OPPORTUNITY TO EMERGE AS A LEADER IN THIS VIBRANT AREA OF FINANCE ATTRACTING GLOBAL ATTENTION IN PUBLIC AND PRIVATE SECTORS."

A new Masters in Energy & Environmental Finance by UCD Smurfit Business School is also being planned as well as the introduction of specialist modules in existing University business courses up and down the country. Joe Duffy, Country Executive for BNY Mellon in Ireland explained: "With environmental issues taking centre stage the Green IFSC is giving Ireland the opportunity to develop a centre of excellence in servicing the future Green Economy. "Through its education and skills initiatives we have the opportunity to emerge as a leader in this vibrant area of finance attracting global attention in public and private sectors."

Finance changes The Programme for Government makes its plans clear and states that "Ireland will be developed as a centre of excellence in green finance and carbon management, through the creation of an enabling, coordinated and supportive environment". In support of promoting Ireland as a centre for carbon management, last year's Finance Act 2011 extended Section 110 and opened Ireland’s securitisation regime up to new markets including carbon offsets. This extension supports the possibilities for using Ire-

land’s securitisation regime to support the growth and success of the domestic and global lowcarbon economy.

Public and private support and collaboration Importantly, funding and support has been forthcoming from private companies and associations. And, of course positioning and promoting Ireland as a leader in this space can only be possible with the collaborative approach of Green IFSC working alongside Government agencies such as the IDA Ireland, Enterprise Ireland and the Sustainable Energy Authority of Ireland. John Tierney, Dublin City Manager, said: "The Green IFSC is an excellent initiative. We all have challenging targets to meet in terms of sustainability and so such a Government project which recognises, supports and accelerates that transition is a huge plus. "We have already seen the results from Green IFSC in terms of tax changes and education and working closely with the team we know that 2012 will be the busiest year yet now the framework and foundations have been laid. "Green IFSC is also an example of how Government, agencies, Dublin City Council, stakeholders and public and private sector can unite in a single cause and come together to ensure we offer the optimum business environ-

ment for sustainable finance and enterprise and promote Dublin abroad with consistent messaging." Similarly Colum Diamond from Aon in Dublin said: “The Green IFSC is a tremendous opportunity for Ireland to further enhance its position as a centre for international financial services and renewable energy projects." And, he should know. From his offices in Dublin Aon has a long track record in providing insurance broking, risk management and finance consulting services to indigenous Irish green enterprise companies.

The platform Now that business is ratcheting up a full Green IFSC team is being put in place with a global marketing plan kicking off in 2012. Essentially, the purpose of the Green IFSC - which is an initiative of the IFSC Clearing House Group, under the aegis of the Department of the Prime Minister - is to target environmentally related financial services as a means of generating high-value employment and revenue growth in Ireland and in the process become the leading green financial services centre in the world. Ireland has the experience already. The Green IFSC initiative is really about coordinating, promoting and accelerating the growth of this business – in a way centralising the expertise so others know where to go for advice, products and services. Critically, Ireland is a world leader in funds. More than 850 fund promoters from over 50 countries have chosen Ireland as their international hub. Irish fund administrators service assets from almost 170 countries. The industry experienced all time highs in 2010 with funds under administration growing from €1.4 trillion to record highs of almost €1.9 trillion. And 'green' funds are growing. Statistics compiled for Responsible Investor by Lipper FMI, assets in European Green Funds was just under EUR 20bn as of October 2009 - a small but growing sector of the asset management industry and one which Ireland has a world-class reputation.

That research also showed that alternative energy a popular theme, with at least three of the top 10 European Green Funds focused on this area. Let's face it, this is only set to increase when Europe has agreed to targets of a 20% boost in renewable fuel use by 2020. Another big theme was water, the second largest Green Fund in Europe is aimed at this sector. On top of its international financial and funds expertise Ireland is also home to a number of indigenous companies regarded as global pioneers in the green space. At the most fundamental level Ireland also has the advantage of having supportive tax, regulatory and legislative regimes, envied the world over. As an Taoiseach (Prime Minister) Enda Kenny himself said in his article: "Building on Ireland’s expertise in international finance and green enterprise combined with supportive tax and regulatory regimes Green IFSC can position Ireland as a world leader in green finance." This Green IFSC initiative is about creating jobs utilising the skills that we have as a nation and building upon recent arrivals such as US firm Blackrock Asset Management which, in partnership with NTR, established its renewable power investment front-office capability in Ireland. By coordinating Ireland’s existing strengths, we are well placed to support and service the needs of companies and investors operating in the sector throughout the world. Ireland has all the building blocks to become the global hub for green business activity and create high value employment and revenue growth for the country. In fact, the Department of an Taoiseach's Green IFSC initiative’s impact to the economy is set to be impressive with research suggesting it has the potential to create more than 7,000 new jobs and generate €6bn in revenue over the next five to seven years alone. Ambitious yes - but it has been done before in IFSC Ireland and last time we started from nothing. N FUNDS REVIEW IRELAND

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CLEANTECH

he global population has just reached 7 billion people, up from 6 billion in 2001. Projections are that the population will increase by a further 25% by 2035, to reach 8.8 billion. This growth combined with increased industrialisation has resulted in global energy demand increasing by 25% over the last decade. Looking ahead, energy demand is expected to increase by more than 30% by 2035. This escalating growth in demand has had a dramatic effort on fuel prices, given their increasing scarcity. In the past decade, oil prices have risen by 300%, natural gas prices have doubled and electricity prices across Europe have increased by almost 50%. Future energy demand can only continue this upward trajectory. The impact of this population growth on other scarce resources that are fundamental to the survival of any economy – water, food and other raw materials – have been significant. Global food prices have more than doubled over the past decade.

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Commodities have trebled The seemingly endless demand for energy, food, water and commodities is likely to require radical changes in technology, behaviour and government policies for each and every economy to adapt

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AMBITION policy and focus Turning Ireland into a Cleantech Champion, writes Barry O'Flynn, Director, Sustainability and Cleantech Solutions Ireland, Ernst & Young. to this new reality of increasingly scarce resources. As a consequence, and in parallel to this continual growth in demand, the global environment is taking a beating. 2010 was the second warmest year on record. The average global sea surface temperature was the third warmest on record. Antarctic sea ice grew to record levels while Arctic sea ice shrank to its third smallest area on record. Global greenhouse gas emissions are on an unsustainable upward trajectory, as governments continue to grapple with some form of global deal to reduce these emissions. In the meantime, poorer countries are battening down the hatches and preparing for the

worst, being the most vulnerable economies to any sort of fundamental change in climate. The opportunity has never been greater to find solutions to the two great global challenges of resource scarcity and environmental degradation. Every country in the world is facing these issues, albeit in different guises. Europe and North America are focussing on energy independence and energy security as important long-term goals, given their over-dependence on energy imports. In the USA, individual states have taken it upon themselves to set a combination of long-term energy efficiency, oil-reduction and

renewable energy targets. In parallel, Europe has been leading the global drive to reduce longterm emissions and manage scarce resources more efficiently, setting ambitious regional goals and regulations, while promoting specific technologies and solutions. The Middle East is starting to diversify its energy mix to favour renewable energy and nuclear power, so as to have less reliance on indigenous oil and gas for domestic energy needs, thus allowing the respective markets to either export more or move these fuels downstream to generate more valueadded products. China, which has been going through a remarkable and continual


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CLEANTECH economic growth period over the past 30 years, has recently put energy efficiency, renewable energy and electric transportation into the heart of its 5-year industrialisation and economic strategy. Australia is in the process of passing Clean Energy legislation, to put a price on carbon emissions and mitigate future emissions. The response by the private sector to these changing policies, goals and regulations has been formidable. In the midst of a global financial crisis, $211 Billion was invested in the global clean energy sector in 2010, a 30% increase on 2009. This level of investment is expected to increase exponentially as countries, governments, companies and individuals start to finally address the long-term uncertainty and risk they are exposed to with regards to resource scarcity and environmental consequences. As long as the rules, regulations and objectives are sufficiently clear and commercially acceptable, the private sector will find a way to finance and deliver solutions to meet these two challenges. Ireland is uniquely positioned to become a global leader in cleantech sector, if the right long-term ambition, policies and focus are applied. With the appropriate highly co-ordinated approach, Ireland’s resource challenges and the related environmental consequences can be turned into a catalyst for economic growth. These challenges can be turned into opportunities, looking beyond mere short and medium term energy and emission obligations set by others and making Ireland a global champion in the cleantech sector. The country has all the ingredients. The well established talent pool in the ICT and engineering sectors; the abundant wind, wave and land resources; the ability to quickly turn ideas into policies; European Union membership and a highly competitive, open and English-speaking business environment. Dozens of established Irish private sector and state champions in the energy and environment sectors are playing leading roles this sector domestically and on the global stage. Ireland also has a world-leading international financial services centre, 40% of the world’s alternative investments administered here.

It is also matter of long-term economic necessity for Ireland to address resource scarcity and environmental degradation. The country has the fourth-highest dependency on fuel imports, after Malta, Cyprus and Luxembourg. On this basis, it is one of the most exposed countries in Europe, on a per capita basis, to future price rises and volatilities in oil, gas and carbon prices. While the country is becoming increasingly competitive, this overly high exposure to international fuel prices could very quickly undermine any progress in this regard.

implementation and marketing of a plan to make Ireland a global testbed and launch-pad for indigenous and international cleantech companies while at the same time ensuring that such a plan will reduce the country’s dependence on fossil fuel imports and addressing the ongoing challenges of waste management, water management and greenhouse gas emissions. This will be a complex process that will need political leadership and will also need to deeply involve the private sector. The willingness to rapidly optimise the regulatory environment to make it

CURRENT PROJECTIONS INDICATE THAT IRELAND WILL MISS ITS CURRENT 2020 EMISSION REDUCTION EUROPEAN OBLIGATIONS, AT A SIGNIFICANT COST TO THE ECONOMY. Current projections indicate that Ireland will miss its current 2020 emission reduction European obligations, at a significant cost to the economy. Further reduction obligations are being drafted for 2030 and beyond, likely to make Ireland’s case even more challenging. Ongoing waste and water treatment and management obligations will increase this pressure on Ireland to manage all resources more efficiently. The key with ingredients is not only their quality but also how well they are put together. The importance of government leadership, ownership and accountability is critical for the cleantech sector. The cleantech sector covers a very wide range of activities and opportunities but with two critical and interdependent issues binding them all together - managing resource scarcity and mitigating environmental degradation. These activities include implementing domestic and commercial energy efficiency schemes, making Ireland a renewable energy exporter, attracting green funds to operate out of Ireland, facilitating indigenous cleantech companies and focussing on key pieces of green infrastructure and initiatives that can be delivered, to fully and rapidly avail of all the abundant natural resources that Ireland has. Ownership of the cleantech sector needs to include the design,

commercially appropriate and attractive to allow investors to invest and help deliver any stated goals and targets will be critical, assuming that this will be little or no cost to the consumer or the taxpayer. The prize for Ireland is enormous. Fewer energy imports, better resource management, significant increases in exports, a more competitive economy, the creation of global champions in the cleantech sector and thousands of jobs. Clear co-ordination and accountability across the public and private sectors will both be critical to ensure everybody is working together. Aligning innovators, developers, funders, corporates and policy makers is no easy matter. However, this has been done before by other small countries and Ireland is no exception. Israel has more technology companies listed on NASDAQ than the whole of Europe combined. Denmark took on renewable energy over a decade ago and created international champions that are now leading the global wind energy turbine manufacturing market. Considering where Ireland is starting from with most if not all of the ingredients here already, achieving a global position in this sector is fully achievable. The opportunity is real. The Irish Wind Energy Association is predict-

ing 28,000 new jobs over the coming decade, if the rules and regulations are streamlined and exports are enabled. The Green IFSC is actively devising plans to attract institutional capital for green infrastructure to operate out of Ireland as well as evaluating the possibility to make Ireland the hub of the global carbon trading market. A number of world-class renewable energy project developers already operate out of Ireland. A number of cities across the island are exploring becoming hubs or clusters for the cleantech sector. The UK has already indicated its willingness to purchase renewable energy from Ireland to help meet its own targets. Institutional capital is ready and willing to invest in green infrastructure in Ireland, given the right regulatory environment. Numerous start-ups and established cleantech companies are actively operating in and out of Ireland. Ireland is already a player in the electric vehicle industry, with charging stations being rolled out across the country.

Joining up all these initiatives and taking a leadership role is critical. Ireland has already set itself a target of 20% energy efficiency savings and to have 40% of all energy consumed to come from renewable sources by 2020. Tying together existing Government energy and emission targets with future objectives and likely European obligations and combining these with all the current cleantech private and public-sector initiatives across all sectors is vital. A cohesive and achievable long-term roadmap to address resource scarcity and environmental degradation as a nation is critical. Planning how these two global challenges can be turned into an opportunity for the country is even more important. Combining both of these issues and with the right leadership and ambition, launching Ireland as a global cleantech champion is entirely possible. The opportunity and timing for Ireland has never been so good.N FUNDS REVIEW IRELAND

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PwC

VARIETY

is the spice of.. Various products from the mutual fund space and the alternatives space have chosen Ireland as their home. writes Ken O’Brien, Partner, Asset Management, PwC.

ith more than 20 years of experience and expertise, Ireland offers fund promoters a unique level of specialist skills for variety of different fund types including hedge funds, Exchange Traded Funds (ETFs) and UCITS to name but a few. The below charts outline the growth of these products over the last five years‌

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Mutual Funds UCITS

Growth of Irish UCITS - Assets USD Bn 1200 1000 800 600 400 200 6

0 20

07 20

8

0 20

9

0 20

10 20

Source: Irish Funds Industry Association (IFIA) Ireland is renowned as a centre of excellence for UCITS products. According to the Irish Funds Industry Association (IFIA), 80% of Irish domiciled funds fall under the UCITS regime. Distribution is paramount to the success of the UCITS product. Irish domiciled funds are distributed to a large number of countries across Europe, the Americas, Asia and the Pacific, the Middle East and Africa. The chart outlines the growth of Irish UCITS of the last five years. This category of funds has had strong growth throughout with the exception of a dip in 2008 due to the financial crisis from which it swiftly recovered with assets climbing steadily every year since then, surpassing pre-crisis levels.

Exchange Traded Funds (ETFs) Ireland is the leading European fund domicile for internationally distributed ETFs. ETFs domiciled in Ireland have assets under management in excess of EUR 64 billion in just under 400 funds, represent-

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PwC Growth of Irish EFT’s - Assets USD Bn

Growth of Irish Hedge Funds Assets USD Bn

70

70

60 50

50

40 30

30

years. This is one area where the industry sees great potential. The IFIA, with the 'Green IFSC', is working on submissions to enhance the legal framework for such funds in Ireland.

Niche markets

20 10

10 07 20

6

0 20

9

8

6

0 20

10 20

0 20

0 20

07 20

8

0 20

9

0 20

10 20

Source: Lipper Fund Encyclopaedia 2010/2011

Source: Lipper Fund Encyclopaedia 2010/2011

ing 32% of the European market. Ireland was an early mover as an ETF domicile and the Irish industry now has an invaluable knowledge base of the specific requirements in establishing and servicing a successful ETF platform. According to data collated from Lipper, Irish ETFs have been on a steep growth curve since 2006 and have remained unaffected by the global financial crisis.

After all, more than 40% of global hedge funds are serviced in Ireland, making it the largest hedge fund administration centre in the world and Europe’s leading hedge fund domicile. Ireland was the first regulated jurisdiction to provide a regulatory framework specifically for the hedge fund industry and remains at the forefront in preparing for, and reacting to, regulatory and market developments. Irish hedge funds experienced a sharp decline in 2009 due to the financial crisis but assets have risen rapidly between 2009 and 2010 and have recovered the ground lost and are now back on track to pre-crisis levels.

Money Market Funds (MMFs)

Growth of Irish MMF - Assets USD Bn 450 350

Private Equity & Venture Capital

250 150

Growth of Irish Private Equity Assets USD M

50 6

0 20

07 20

8

0 20

9

0 20

10 20

Source: Irish Fund Industry Association (IFIA) Money market funds are the dominant asset type in the Irish market place - 46% of Irish domiciled funds are classified as money market funds. Ireland is a leading domicile for money market funds in Europe. The chart shows the growth of these types of funds over the last number of years. The impact of the financial crisis was felt in 2008 but was quickly rectified and Irish MMFs now surpassed the pre-crisis level of 2007 with assets under management of USD469Bn.

Alternatives Hedge funds Ireland is a jurisdiction that is synonymous with hedge funds.

3,000

Islamic Finance

Growth of Irish Islamic Funds Asset USD M 450 350 250 150 50 6

0 20

07 20

8

0 20

9

0 20

10 20

Source: Lipper Fund Encyclopaedia 2010/201 Ireland is an ideal location for domiciling and managing Shariah compliant funds due to its vast experience in the conventional space. Ireland as a domicile has been extremely proactive in the Islamic finance space from a tax, regulatory and service provider perspective by working on ensuring that it is an attractive location for Islamic funds. Irish Islamic funds had exceptional growth between 2006 and 2007 and have had continuous growth in the subsequent years.

Socially Responsible Investment (SRI) /Green

2,500 2,000 1,500

Growth of Irish Green SRI funds - Assets SD M

1,000 500

3,000 06 20

07 20

08 20

09 20

10 20

Source: Lipper Fund Encyclopaedia 2010/2011 Ireland, as a domicile for private equity funds, offers a variety of potential fund structures both regulated and unregulated, with differing levels of investment flexibility, minimum subscription requirements, differing tax regimes and regulatory requirements for service providers depending on which structure is chosen as the appropriate vehicle for a particular project. Irish private equity funds have grown steadily over the last five

2,500 2,000 1,500 1,000 500 6

0 20

07 20

8

0 20

9

0 20

10 20

Source: Lipper Fund Encyclopaedia 2010/201 At the beginning of 2011, Ireland launched the ‘Green IFSC’ seeking to establish Ireland as a hub of green finance, by building on the country’s existing financial services industry and expertise. A central strand of the proposal is the establishment of an international carbon standard and an

associated international voluntary offset registry for Ireland. The Irish Government had agreed “in principle” to provide seed funding of €6.8 million over three years to develop the plan. The Green IFSC has the potential to create about 7,000 new jobs over the next five years and could generate revenues of €6 billion for the country. SRI/Green funds have already established themselves in Ireland and were on steep growth curve between 2006 and 2008. The global crisis resulted in a sharp decline in 2009 but assets are climbing again as of 2010.

The proof is in the numbers … Ireland knows funds Despite some dips as a result of the global financial crisis, Irish mutual and alternative fund products have grown steadily over the last five years. This emphasizes the confidence fund promoters have in Ireland as they continue to place product in this domicile year after year. Ireland’s has proven itself as domicile which is suitable for all types of investment funds. In order to maintain and capitalise on this success Ireland cannot become complacent. Competition from other international fund jurisdictions is fierce. These are challenging times and Ireland must continue with initiatives such as the recently launched joint venture between IDA Ireland and the IFIA. The IFIA has opened representative offices throughout the US, Asia and the UK with IDA Ireland. The move means that the Irish Funds Industry will now have representatives on the ground in New York, Boston, Chicago, Atlanta, Malaysia, Singapore, Tokyo and London for the first time. There are plans to continue roll out a series of other representative offices in key locations around the globe over the coming months. Government support and a highly regarded regulator are also highly important to Irish Funds Industry’s future. Ireland cannot rest on the success of the past five years but must continue to strive to have the same success or better over the next five years. N FUNDS REVIEW IRELAND

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WHERE WE ARE NOW

DOMICILE BLISS? where we are now Patrick Freyne quizzes industry experts about the attraction of Ireland as a fund domicile and the dangers of complacency. e’re here because we’re here because we’re here,” sang British Tommies during WWI. At this point, the funds industry has been so long a presence in Ireland it could sing likewise. But we can’t be complacent. While the legacy of two decades of that sector being “here” has led to an enviable concentration of intellectual capital and skills in Ireland, but international funds originally came “here” because of farsighted policy decisions made in the 1980s. Just as an industry grew and thrived on the back of those decisions, future jobs will be created on the back of good strategic thinking now.

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How did we get this far? “Ireland really did benefit from early mover advantage,” recalls Carin Bryans, Managing Director J.P. Morgan Ireland. “Ireland is a well-established jurisdiction now and one of the two main options [the other being Luxembourg] when a promoter is looking at setting up a European fund to sell across multiple jurisdictions. Ireland adopted the UCITS directive very early on in 1989. This directive created the ability to passport a fund domiciled in one country in Europe to the rest of the European Union. Ireland then built up a very strong expertise in servicing funds of all types, but became the dominant location for domiciling ETFs [exchange traded funds], money market funds and also

funds that have invested in the more alternative types of assets – like hedge funds and property funds. The experience in servicing alternative funds has led to Ireland now providing administration and accounting services to more than 40% of the world’s hedge funds.” This clustering of businesses, funds and skilled workers in the country has led to a batch of increasingly influential homegrown leaders. “Over the last fifteen years we've developed a lot of home-grown talent at senior levels in the funds industry and many of these people have responsibilities which extend beyond Ireland,” says Paul Kilcullen, Managing Director, EMEA Funds Services with Citi. “I am

responsible for our Luxembourg operation as well as the Dublin operation and that wouldn't be unusual among my senior colleagues in the industry. Irish management have risen to key influential positions - and that's obviously going to have some positive effect on the industry in the future.” This suggests that Irish managers may have a role in deciding the future of the industry internationally. Furthermore, as Paul Daly Managing Director of BNP Paribas Securities Services notes, being English speaking hasn’t hurt. “It’s no surprise that from a cultural perspective we have an advantage,” he says. “Of the $2 trillion of assets serviced in Ireland about 90% relate


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WHERE WE ARE NOW

Carin Bryans Managing Director J.P. Morgan Ireland

Paul Daly Managing Director of BNP Paribas Securities Services

Paul Kilcullen Managing Director EMEA Funds Services with Citi

Willie Slattery, Managing Director, State Street International

to investment managers who are based in either the United States the United Kingdom.” These are all compelling reasons for the industry to continue here. However, there are a number of other traditional attractions more dependent on policy whims, which industry experts are very keen to retain. The first is our competitive and transparent tax system. When it comes to this there are a couple of issues. “The 12.5% tax-rate is very important consideration for firms and I would not expect for this to change,” says Paul Daly. “And when it comes to domestic

tory backlash on foot of problems in the domestic banking industry. Willie Slattery, Managing Director, State Street International fears “pro-cyclicality”. “In good times people forget about the problem of regulation and allow too much credit growth and loose standards and then in the bad times they go the other way and reinforce the downturn,” he says. “Regulation is not a problem if we just adopt what people are doing internationally, but if we go beyond it for reasons of our own that puts us at a competitive disadvantage.” Carin Bryans says that many of her customers are being impacted

who would historically have funds in places like the Caribbean Islands might now be seeking a more regulated jurisdiction. And Ireland, a place with a core of regulated hedge funds and huge capability is an obvious candidate in this context.” Loosely connected to the regulatory issues are the country’s reputational issues. For Paul Kilcullen having Ireland negatively featured in the international press does potentially “affect the perception of Ireland as a regulatory regime to launch products. It is vitally important for the long term success of this industry, that the message that Ireland has always been a strongly regulated environment for international funds is well understood. The people we are targeting, investment managers and promoters fully understand the benefits of doing business in Ireland.” Paul Daly is optimistic: “Our clients are sophisticated and understand what’s involved in servicing funds in Ireland. If BNP Paribas acts as a custodian for a fund in Ireland our clients understand how the assets are held within our global sub custodian network. I believe that our clients understand that the country’s domestic problems are a separate issue.” Another problem that rose to the fore in the inflationary boom era was the rising cost-base. Midway through the last decade, spiralling salaries and rental costs were beginning to make things look unsustainable, but since then we’ve become competitive once more (“it’s an ill wind blows nobody no good,” jokes one expert). But “we need to keep an eye on it,” says Willie Slattery. And with this in mind, competition from abroad is always a potential issue. “Other jurisdic-

tions trying to mirror what we do is always a concern,” says Carin Bryans. “For example, there’s long been talk of Asia coming up with its own version of a pass-portable fund. In the European Union we have a cohesive legislative environment which doesn’t exist as yet in Asia, and creates significant efficiencies in authorisation and distribution.” While things look relatively bright for Ireland’s funds sector at present, nobody is taking this for granted. “We can’t be complacent,” says Paul Daly. “We need to continuously market ourselves and ensure that the world understands what we have to offer, an example of this is the joint initiative between the IFIA and the IDA in opening up representative offices in the United Kingdom, in the United States and in November throughout Asia in Tokyo and Singapore. It’s really important that we continue selling Ireland as a premier location for servicing Irish and non Irish funds.” Carin Bryans agrees and stresses the importance of remaining adaptable. “It’s a fast moving space,” she says. “It’s healthy right now. It’s continued to grow despite what we’ve experienced in the domestic economy as evidenced by the number of funds coming into Ireland and also the inflows into those funds. But the industry here is very dependent on the global economy. When markets are doing well, the funds industry does well, and you see more fund launches and product investment as a result. All we can do is make this country the most attractive place in which to do that. It is constantly changing.” She laughs. “But you can’t let that keep you up at night.” N

IN GOOD TIMES PEOPLE FORGET ABOUT THE PROBLEM OF REGULATION AND ALLOW TOO MUCH CREDIT GROWTH AND LOOSE STANDARDS AND THEN IN THE BAD TIMES THEY GO THE OTHER WAY AND REINFORCE THE DOWNTURN.

taxation it’s important that the government keep this in check to ensure that we can remain competitive.” Paul Kilcullen is also worried about this. “This specialised area is based upon skilled individuals,” he says. “Attracting those individuals to this country and retaining them is important and there is no doubt that the personal taxation environment could act as a potential disincentive. That said, the introduction of SARP (Special Assignment Relief Programme) could mitigate against this.” Then there is our robust but adaptive regulatory regime. Almost everyone interviewed worries about a domestic regula-

by significant volumes of regulation from both the EU and the US. “This can create quite a bit of uncertainty in terms of product development. The challenge for us is to stay very nimble to ensure the service we provide is fit for purpose and works in whatever regulatory environment we exist in.” She also notes, however, that some of the international regulation is working in Ireland’s favour. “Some of the international regulations are driving funds to get into a more regulated domicile and Ireland is a good option for that,” she says. “We’re seeing funds that were formerly unregulated now coming into the jurisdiction of regulators. So managers

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DILLON EUSTACE

PROMOTERS where and who? Brian Dillon looks at where the promoters of Irish Regulated Funds are from and where they are distributing their Funds? ince its establishment, almost a quarter of a century ago, there has never been such focus on and optimism surrounding the Irish funds industry. Funds industry stakeholders have worked since its inception to develop the sector and there has been a recent wider acknowledgement that the funds industry can, if properly resourced and supported, be an engine to drive the Irish economy. The 2010 appointment of Mr John Bruton as IFSC Chairman (now President), the publication of the Strategy for the International Financial Services Industry in Ireland 2011-2016 by the Department of the Taoiseach, the 'Green IFSC' initiative, and the opening of multiple overseas offices by the Irish Funds Industry Association (IFIA) in partnership with the Industrial Development Authority (IDA Ireland) are four tangible examples of the effort being made to harness the potential of the industry. The government is targeting the creation of in excess of 10,000 jobs in the financial sector over the next 5 years. Currently some of Ireland’s largest employers are in the funds sector and if the jobs target is to be achieved a significant proportion of these new jobs will have to be created within the funds sector. In order for this to materialise asset managers will need to select Ireland as the domicile for their regulated fund products thereby creating jobs servicing the funds.

S

Promoters of Irish Funds There are 850 promoters from over 50 countries in Ireland with

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70 new fund promoters having established Irish funds during the past year. You can see from figure 1 below that the majority of the funds domiciled in Ireland are promoted by asset managers who are regulated in the United States or the United Kingdom .The similarities of culture, legal structure and language allied to the strengths mentioned below continue to attract the asset managers from these two markets. The IFIA nurtures the markets providing regular information seminars in both countries. The continued activity at our New York representative office and the recent establishment of an Irish presence by the US Fund administrator SS&C Fund Services to support their US clients would indicate that US promoters continue to favour Ireland. Figures available show that as at the end of June 2011, there were almost 5,000 funds administered here in Ireland with total assets closing on €2 trillion. The principle Irish regulated fund products are the Qualifying Investor Fund (QIF) and the UCITS. These Irish products account for approximately half the total assets administered here. Foreign asset managers have been attracted to Ireland because

Figure 1. 2%

2% 8%

8% 32% Germany Ireland

53%

Italy Others USA UK

of the competitive cost, selection of and expertise offered by service providers, innovative fund product offering and the distribution channels open to Irish funds. Looking closely at figure 1 “Others” represent only 8% of the funds here. “Others” include promoters from Japan, Australia, Canada, Singapore, China, Hong Kong, South Africa, India, Russia, Brazil and the Middle East. Industry members continue to travel to develop our share of these markets. In addition, nascent markets such as Vietnam, Malaysia, Taiwan and closer to home Poland, need to be cultivated. The primary focus of our own Tokyo and Hong Kong representative offices is to assist Asian promoters with their Irish fund ranges. Ireland needs to continue competing aggressively with other EU Member States such as Luxembourg and Malta to develop our market share in these countries.

promoters selling in many Asian countries. The familiarity of many Asian regulators with Irish regulated funds continues to assist the registration process. Amendments to the criteria applicable to QIFs have greatly enhanced the attraction of the QIF. The minimum initial subscription has been reduced from €250,000 to €100,000 and the criteria in order to be considered a “qualifying investor” have been relaxed. These amendments represent a very significant development in the context of Ireland’s fund offering not least because there had been a view that distribution to some institutional investors, pension funds, family wealth offices, corporate and individuals being professionally advised were excluded from the QIF product because of the high net worth requirements in particular.

Distribution of Irish Fund

Conclusion

Ireland is also a platform from which to distribute funds internationally. Promoters distribute Irish funds to over 70 countries around the world. Ireland’s ever expanding tax treaty network, includes 66 countries is one of the most developed and favourable tax treaty networks in the world. Ireland has also signed bilateral memoranda of understanding with 20 jurisdictions, including China, with a view to extending the countries in which funds domiciled and serviced out of Ireland may be distributed. Irish UCITS are registered for retail sale in every EU Member State and in the continued absence of a pan Asian retail product are the product offering of choice for

Ireland’s fund industry needs to maintain its share of its exiting markets, grow its share in the “Others” market and expand into new markets while maintaining and where possible improving the jurisdiction’s core competencies. We need to anticipate and adapt to the ever changing needs and requirements of global fund promoters and investors to ensure that Ireland continues to successfully develop as the leading service centre for the international funds market. Brian Dillon is a partner at Irish law firm Dillon Eustace which has representative offices in New York, Tokyo and Hong Kong. N

© an of w (“ Al

FUNDS REVIEW IRELAND

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Outstanding support in Ireland. From mutual and hedge funds to private equity and alternative investment funds, KPMG’s Investment Management team delivers outstanding support, timely advice and quality service. To find out more about how we can help your business, contact Darina Barrett or Seamus Hand at +353 (1) 410 1000 or darina.barrett@kpmg.ie or seamus.hand@kpmg.ie kpmg.ie

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WILLIAM FRY

REGULATION and funds industry Ireland is one of the most attractive jurisdictions in which investment funds can be established writes Catharine Dwyer, William Fry. ith its robust, transparent and efficient regulatory environment and a pragmatic and approachable regulator, Ireland is one of the most attractive jurisdictions in which investment funds can be established. This backdrop is a definite advantage to industry given the recent level of new regulation. Asset managers will have recently experienced the entry into force of the UCITS IV Directive and are currently engaged in the forthcoming introduction of the Alternative Investment Fund Mangers Directive (AIFMD) into national law. The Irish regulatory environment ensures Ireland is well poised to take advantage of the considerable opportunities presented by regulatory developments and that the Irish reputation as a leading domicile is maintained.

ment funds give Ireland significant advantages.

W

Fitness and Probity regime

FUND MANAGERS ARE SEEKING TO “FUTURE-PROOF” THEIR PRODUCTS.

adapted to broaden the scope of investment possibilities for UCITS, particularly in the sphere of derivative usage. The UCITS IV Directive (implemented in Ireland on July 1, 2011) brought further refinements, including those relating to the UCITS IV establishment of a centralised manUndertakings for Collective agement company and introduced Investment in Transferable Securi- three key features (the simplificaties (UCITS) are investment funds tion of cross-border registrations, with their origins in pan-European the ability to establish master-feeder legislation. The original UCITS UCITS and the ability to merge Directive aimed to establish a UCITS on a cross-border basis). regime where a European investThese features, together with the ment fund could, once authorised management company “passport” in one EU member state, be sold in which permit a management comall other member states without pany to provide services on a passthe requirement to undergo a furported basis, will enable managether authorisation process in the ment companies to be centralised, target jurisdiction. To achieve this, thereby obviating the need for mulcommon basic rules for the autho- tiple management companies in difrisation, supervision, structure and ferent jurisdictions within the same activities of UCITS were formuasset management house. lated. These new structuring capabiliUnder the UCITS III Directive ties together with a highly skilled the initial achievement of the servicing industry and an attractive UCITS product was ultimately tax efficient environment for invest-

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The revised Fitness and Probity regime which will apply to most Central Bank regulated financial services providers (including authorised investment fund companies, fund management companies, fund administrators and custodians) is a Central Bank priority and an opportunity for industry to demonstrate the importance it places on strong and comprehensive corporate governance standards. The revised regime applies to all persons occupying what are described as "pre-approval controlled functions" (PCFs) or "controlled functions" (CFs) in a services provider who must agree to abide by the Fitness and Probity Standards. The revised regime creates an offence where a services provider permits a person to perform a PCF or a CF function unless it is satisfied, on reasonable grounds, that the person complies with the Fitness and Probity Standards. In addition, new powers of investigation, suspension, removal or prohibition of individuals from PCF/CF positions and the creation of an offence and attraction of penalties for both the services provider and the PCF/CF are established. The revised Fitness and Probity regime is being introduced on a phased basis from December 1, 2011 and will apply to all categories of PCFs/CFS by December 2012,demonstrating the re-focused market appetite on jurisdictions with high levels of corporate governance and investor protection characteristics.

AIFMD The re-emphasis on investor protection is clear following the recent global financial crisis. AIFMD seeks to harmonise the regulatory structure throughout the EU for all non UCITS funds and to regulate alternative investment fund managers (AIFM) established in the EU, along with AIFM of alternative investment funds (AIF) established outside the EU (to the extent that they wish to market AIF within the EU). AIFMD gives EU-domiciled AIFM a “passport” to market AIF to sophisticated investors throughout the EU immediately upon its implementation (by July 22, 2013). This has the potential to deliver a significant boost to the hedge fund industry in Ireland (where more than 43% of global hedge funds are already administered), particularly so given that Irish (non-UCITS) laws for alternative funds are already aligned with many of the key features of AIFMD. It is clear that fund managers are seeking to “future-proof” their products against the challenges of AIFMD. One option is the redomiciling of a fund to Ireland which is straightforward from an Irish perspective. In Ireland, the product choice for a redomiciliation is essentially between a UCITS and a Qualifying Investor Fund (QIF). While certain hedge fund strategies are compatible with a UCITS product, highly leveraged strategies and illiquid instruments are not. QIFs, on the other hand, are Irish regulated funds designed for sophisticated investors and ideal hosts for a redomiciled hedge fund product.

Conclusion Ireland has a solid legal, regulatory and taxation framework for attracting fund “business” in the first place, as well as service providers who really understand the business. Active engagement between the Central Bank, Government bodies and industry stakeholders in relation to regulatory developments is the cornerstone upon which the fund industry in Ireland has achieved its success and one reason why Ireland will continue to be a jurisdiction of choice for fund promoters. N


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Tel: Tel: +353 +353 1 792 792 6551 6551


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1001884.0

ERNST & YOUNG

UNDER THE

holders or suffer penal withholding taxes. The obligation to report information is with the FFI closest to the end investor. However, the intermediary nature of asset management distribution can mean the fund or fund manager may not know who the ultimate investor is. The impact on funds and their managers will be that they will need to maintain extensive client information to comply with FATCA’s requirements and be a fund is. able to report to other FFI’s in the Managers run a potential missupply chain. Developing the selling risk should this SRRI be calinfrastructure and reporting tools culated incorrectly. While most is posing huge operational chalfirms offering UCITS products are at lenges to asset managers and relatively advanced stages in their service providers. preparation in issuing this two-page AIFMD’s current proposals KIID, several large firms have have softened since 2009/10. reported serious concerns about While there are questions over how to compile their SRRIs, mindful depository liability and thirdof the need to avoid the risk of mis- country restrictions still subject to selling. clarifications, many other reportGiven the rapid onset of Solvency ing and servicing requirements II, asset managers owned by insurhave changed very little. ers or indeed invested in by insurAsset managers and service ance companies are busy working providers are now undertaking a out how to achieve detailed compre- gap analysis to determine what hensive analysis of asset data and changes they need to make an ability to extract additional across their organisations and underlying information in order to supporting systems infrastrucprovide clients with valuable inforture to comply with this direcmation as they seek to deal with tive. Ensuring that appropriate their own capital adequacy require- organisational frameworks and ments. reporting structures are in place The data requirements behind is a key priority. Developing sysSolvency II mean an increase in the tem fixes which combine AIFMD level of granularity and governance reporting requirements together around data and asset managers with those required the SEC and service providers are looking to under the Dodd Frank Act is the retool their data structures to meet holy grail - and a work in the requirements. It is likely this progress. reporting capability will be an Given the amount of fire-fightabsolutely necessary reporting add- ing done already, it is clear that on for asset managers and service the need to stay ahead and providers alike. abreast of regulatory measures is The introduction of the Foreign of fundamental importance to Account Tax Compliance Act retain competitive advantage. (FATCA) and the increasingly comMany organisations are hard plex nature of tax legislation in at work ensuring their systems many countries require that the tax remain fit for purpose. However, risk management capability with with such a variety of regulatory asset managers and service measures being applied nationproviders alike be enhanced in line ally and internationally, organisawith other general risk management tions should consider the merits practices such as the management of “digging up the road” as little and monitoring of market and port- as possible i.e. managing changes folio risk, liquidity risk, and transto business, finance, operaparency and reporting risks. tions/IT systems and processes Basically, FATCA will require cer- with regulatory convergence in tain foreign (i.e. non-US) financial mind. institutions (FFIs) to report detailed Those that do so best will disinformation on their US account rupt their businesses the least. N

regulatory spotlight Eoin McManus Financial Services Partner Ernst & Young. s a result of the ongoing financial crisis asset managers have been the subject of increased regulatory scrutiny which will ultimately force through changes in the way they currently operate. An ever-growing list of regulatory measures need to be anticipated, understood and managed, as the potential effects of “getting it wrong” may be significant. New regulatory measures, such as UCITS IV, Solvency II, FATCA, the AIFM Directive and Dodd-Franks require intelligent and integrated approaches toward mitigating the cost impacts and for asset servicers create an opportunity to develop commercial offerings, including increased data transparency, assistance with numerous reporting challenges and risk monitoring. Careful thought and project management about future developments will be extremely valuable in the asset management sector, as well as to parties who service them specifically - fund administrators, outsourcing providers, transfer agents and platform providers. Managing change used to be primarily about managing people, processes and systems. Given the virtual nature of investment funds and the outsourcing arrangements implicit in servicing these types of vehicles, including administration, accounting, transfer agency services, and custody arrangements asset managers are busily engaged in a review of each existing outsourcing and service level arrangement (SLA). They are looking to ensure that these agreements cover, capture and assign responsibility for all manners of regulatory developments impacting upon their businesses and where they don’t are looking to assign that responsibility elsewhere.

A

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As market turbulence continues, it is little surprise that investors remain risk-averse and many of the revised regulations are aimed at protecting this type of investor. When it comes to reporting, the old attitude of “trust me” has given way to a reversal of the burden-ofproof back onto clients who now must say “show me.” Where traditional risk management/compliance frameworks covered intra-day risk reporting on market risk, position sizes and liquidity, more emphasis may now focus on whether such risk management frameworks in place are aligned with how clients have been sold products in the first instance. An area of concern has emerged around the ‘key investor information document’ (KIID) emanating from UCIT’S IV and in particular the operation and computation of the synthetic risk/reward indicator (SRRI) – the risk measurement assigned to demonstrate how ‘safe’

AS MARKET TURBULENCE CONTINUES, IT IS LITTLE SURPRISE THAT INVESTORS CONTINUE TO REMAIN RISK-AVERSE.

Priva

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KPMG

CREDIT RATINGS

not linked to UCITS Sovereign credit ratings not linked to UCITS funds explains John Ahern, Senior Director with KPMG Financial Services. he recent decision by Chile’s Risk Classification Commission (CCR) to reclassify Irish domiciled UCITS as restricted investments rather that general investments has highlighted the importance of continuing to communicate the clear distinction between the status of UCITS funds and a host country’s sovereign credit rating. The CCR reclassified Irish UCITS after Ireland failed to comply with a unique provision set out by the Chilean watchdog that states the rating of the country in which the fund, its manager or holding company are registered should not fall below AA-. This decision does not reflect the clear distinction between the Irish sovereign credit rating and the credit rating of Irish domiciled funds. Due to the strict measures in place with respect to the safeguarding of assets and the independence of a fund’s investment strategy from the host country’s domestic economy, the credit rating of the Irish sovereign may have no bearing on the credit rating of funds domiciled in Ireland. The recent assignment of AAA ratings to two Irish domiciled money markets funds by international credit rating agencies is a clear example of this.

T

Strict rules on safekeeping of assets UCITS investment funds are authorised in Ireland in accordance with the strict requirements of the EU Directives which apply across all Member States. The Irish government has fully implemented the require-

ments of the EU Directives which impose strict measures to protect unitholders. One of the fundamental requirements of UCITS regulations is the appointment of an independent custodian who is responsible for the safekeeping of the assets of the fund. The assets of the fund are required to be segregated and belong exclusively to the fund. In practice, the assets of Irish domiciled funds are held in international custodian networks managed by international custodian banks. The safekeeping of the fund’s assets is therefore dependent on the health of the international custodian bank and not on the credit rating of the Irish sovereign. The Central Bank of Ireland is responsible for the regulation and supervision of Irish domiciled funds and related service providers in accordance with the requirements of the EU Directives. The Central Bank of Ireland has issued detailed regulatory notices and guidelines in relation to the duties and conditions imposed on Irish domiciled funds and their service providers. The notices and guidelines set out clearly the obligations of the custodian in relation to the safe-keeping of assets and their supervisory and reporting duties. The notices require that the Irish domiciled fund’s assets are separate to, and segregated from, the custodian’s assets and those of any sub-custodian appointed by the custodian and that such assets can be safely returned to the Irish fund’s investors. The custodian may not also act as a management company and must act independently and solely in the interests of the unitholders.

Investment strategy not linked to host country’s economy The investment fund industry in Ireland is an international industry. While Irish domiciled funds are administered and regulated in Ireland, the funds are distributed globally and the investment management function may be outsourced to internationally based investment managers, who manage the investment fund in accordance with the fund’s investment strategy and the rules set out in the fund’s prospectus. Therefore, unless the investment strategy includes investments directly or indirectly in Irish assets, the fund’s credit rating is not affected by the domestic economic conditions in Ireland and related downgrading of the Irish sovereign credit rating.

Impact of reclassification

IT IS ESTIMATED THAT €2.9BILLION (0.36% OF IRISH UCITS FUNDS) OF CHILEAN PENSION FUND ASSETS ARE INVESTED IRISH DOMICILED FUNDS. The Central Bank of Ireland imposes strict requirements for entities that act as custodian to Irish domiciled funds. Custodians are required to be subject to proper and adequate prudential regulation and supervision in their own right. They must implement the necessary procedures and controls in order to ensure the segregation and safekeeping of the Irish domiciled fund’s assets. As a result of these strict safekeeping requirements of the EU directives, the status of a UCITS fund’s assets is not dependent on the sovereign credit rating of the host country.

The CCR decision to reclassify Irish funds as a restricted investment does not result in a prohibition on Chilean pension funds investing in Irish UCITS. Chilean pension funds can continue to invest in restricted investments but are subject to special investment limits. It is estimated that €2.9billion (0.36% of Irish UCITS funds) of Chilean pension fund assets are invested Irish domiciled funds. Total assets in Irish domiciled funds at 31 July, 2011 were €989billon of which €789billion were in invested in UCITS funds. The decision to reclassify by the CCR was driven by the specific requirements of Chilean regulations and it is not expected to have a significant impact on the Irish funds industry. However, the decision does highlight the importance for the European fund industry of continuing to clearly communicate the distinction between the status of UCITS funds and the economic performance of the European host country, particularly in light of the recent credit rating downgrading of a number of European countries. It is, perhaps, interesting to note that, according to EFAMA, Ireland attracted the largest net inflows of UCITS this year so far. N FUNDS REVIEW IRELAND

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DELOITTE

REGULATI O N what does it mean for Ireland? Deirdre Power, Partner – Investment Management Advisory, Deloitte and Patrick Rooney, Manager – Investment Management Advisory, Deloitte discuss. egulatory change is now the single biggest issue facing fund administrators according to the Deloitte Fourth Annual Global Fund Administration Survey. While the origins of the Irish funds industry lay in sweeping regulatory change that took place over twenty years ago, today we are in the midst of an entirely different regulatory wave. With this in mind, we discuss some of the key regulatory changes impacting the Irish funds industry. AIFMD - a golden opportunity or compliance burden? The final text of the Alternative Investment Fund Managers Directive (AIFMD) is more workable than earlier drafts but challenges remain, particularly for asset managers selling offshore funds in Europe. Non-EU managers seeking to distribute in the EU will need a member state of reference and an Irish self-managed QIF could provide the ideal compliance solution. The AIFMD Passport could emerge as a strong brand to mirror UCITS in the alternatives world and the phasing out of private placement from 2018 points to the imminent re-evaluation of distribution strategies. Ireland, as the global leader in the servicing of alternative investment funds, is the obvious choice for onshore hedge fund platforms. On the compliance side, depositaries will face increased liability leading to reviews of existing sub-custody arrangements and a reappraisal of costs and fees. While the European Securities and Markets Authority (ESMA) recently clarified that a third party providing the net

R

asset value calculation is not the valuation agent, asset managers may look to fund administrators to take on this role which carries a new burden of liability. As managers seek to outsource complex, operationally intensive processes under AIFMD there is clearly an opportunity for third party administrators to provide more value-added services to their clients. Fund administrators may need to invest in additional resources, expertise and technology to provide these services and are also likely to face additional scrutiny under new requirements and increased outsourcing.

UCITS IV – living up to expectations? UCITS IV aims to enhance cross border efficiencies and was initially estimated to yield cost saving benefits of more than €6 billion. However, with compliance costs recently estimated at €1 billion and little sign of fund consolidation, has UCITS IV become a false dawn? Originally an industry inspired directive, UCITS IV became subject to increasing mandatory requirements which are still being digested. While simplistic in concept, the two page Key Investor Information Document (KIID) has necessitated a complex solution involving data preparation, track-

ing/updating, production and distribution. KIID support is a highly specialised area and may offer little margin for many fund administrators relative to cost. Other new requirements such as organisational rules, the code of conduct and VaR model validation have also added costs. Looking at the key efficiency enhancing provisions, several impediments remain. Firstly, the majority of EU member states have yet to implement UCITS IV and although ESMA recently issued guidance to deal with these situations, there is no perceived first mover advantage and asset managers are waiting for the dust to settle before making any strategic decisions. Both the Management Company Passport and the master-feeder structure should generate savings from lower operational, distribution and marketing costs. While Ireland is well positioned with its tax framework, complex tax implications in other countries remain a barrier to cross jurisdictional reorganisations and mergers. UCITS IV does present asset managers with genuine efficiency opportunities but these must be carefully explored. This requires a detailed cost-benefit analysis and such strategic reviews are likely to happen over the longer term. With a highly favourable tax and regula-

tory environment and an abundance of local expertise, Ireland is well positioned to win UCITS IV business when the opportunities arise.

FATCA – time to prepare The far reaching scope and onerous nature of the Foreign Account Tax Compliance Act (FATCA) provisions have caused much consternation across the industry. FATCA enforces reporting of US held foreign accounts by mandating 30% withholding on US source income (including gross sales proceeds) should any Foreign Financial Institution or account holder not comply. Unlike AIFMD, the provisions of FATCA have not been softened to any great extent since its original publication. The focus is now firmly on implementation with asset managers looking to their service providers for assistance. FATCA implementation will require a cross functional approach involving tax, legal and compliance, operations, IT, investor services and distribution. Significant costs will be incurred in developing systems and processes to identify customer accounts, obtain customer details, report account activity, track US payments and support withholding on ‘recalcitrant’ account holders and non-compliant entities. The heavily intermediated nature of the European funds industry and the sheer number of parties involved adds a further layer of complexity. Now is the time to begin comprehensive planning and project management in order to ensure FATCA readiness by 2013.

The regulatory horizon These are just some of the regulatory measures that will affect the funds industry in the years to come – others include UCITS V, Solvency II, corporate governance, FIN 48, MiFID II and Dodd Frank. The ways in which fund administrators navigate all this regulatory change will ultimately impact their market positioning and client perceptions. Fund administrators can gain a genuine competitive advantage from this regulatory wave by anticipating client needs and developing bespoke service offerings. N FUNDS REVIEW IRELAND

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L`] Afkl ¡*

BROWN BROTHERS HARRIMAN

BACKLASH IN

the industry? Are Ireland’s domestic woes leading to a regulatory backlash in the industry? Seán Páircéir investigates. here is an immediacy and energy in the descriptive nouns used in the press to describe the financial markets in the last few years: “Crisis,” “Meltdown,” “Destruction,” “Panic.” Subeditors have already exhausted their lexicon. Economic historians tend to be more measured in their terminology if only, perhaps, by applying those terms to periods measured in years, not days. In January 2009, during a trip to Tokyo, I was visiting a client who, earlier in the day, had met with an official Irish delegation, which included the Taoiseach. When I politely inquired into what they had spoken about, the client said that he had reminded the delegation that recessions can last 12 years as well as 12 months. That longer-term perspective is a critical factor in determining how to manage and lead through this time.

T

Investor Compensation Schemes Directive (ICSD) with the Capital Requirements Directives (CRD), MIFID 2 and the Securities Law Directive (SLD). This regulatory shorthand is opaque and complex. Given the complexity, there is an opening for the Irish industry to put the expertise, that has been developed over the course of the last 25 years, to work and to create new opportunities. Ireland’s participation in this regulatory shift cannot be myopically viewed through the lens of a narrow domestic agenda. This publication is a timely and pertinent reminder that the Irish funds industry measures the assets that it services and manages in increments of trillions of dollars. Ireland remains one of a handful of credible and attractive options for global asset managers who are constructing investment platforms for global distribution. Therefore, Ireland must be an active and meaningful participant in the debate over regulation. This is imperative for two reasons: The navigation and translation of the impact of this shift for Irish clients, and to retain and build on the position that Ireland has already achieved. The next phase of this conversation will clearly be in Europe. Will it be global in nature? Ireland possesses the vocabulary and expertise required to provide leadership and create the framework of this shift.

IRELAND REMAINS ONE OF A HANDFUL OF CREDIBLE AND ATTRACTIVE OPTIONS FOR GLOBAL ASSET MANAGERS.

ited with contributing to and intensifying the financial crises: a lack of coordination between the various EU agencies and national regulators that created a gap in oversight of A complex debate systemic issues at the EU level; an In this context, to me, regulatory inconsistent approach to the applibacklash therefore seems too swift, cation of EU regulation between sharp and complete a term. It can various EU countries. perhaps be better said that a perThe ESFS created three new ceptible seismic shift of the interEuropean Supervisory Authorities national regulatory tectonic plates (ESAs). The three ESAs coordinate is underway. While “Burn the the work of the national supervisors bondholders” and “Protect the in the areas of banking, pensions small investor” are now popular and financial markets. The goal of public house discussion points, the coordination is to create a harthey also demonstrate the commonised set of rules across the EU plexity of the debate over the and to reduce the opportunity of appropriate allocation of risks Increased regulatory oversight regulatory arbitrage. The ESAs are between market participants. After A significant event, though little dis- responsible for: drafting specific all, bondholders are also small cussed or analysed in the general rules and guidelines for the national investors and taxpayers. In media, is the creation of the Euroregulatory authorities to follow Europe, the debate is more compean System of Financial Superviwhen they implement EU legislaplexly articulated in the tensions sors (ESFS) at the start of 2011. The tion, ensuring that the rules are between the Alternative InvestESFS was established to address being enforced and consistently ment Fund Management Directive perceived flaws in the previous EU applied by national regulatory (AIFMD), UCITS V, and the regulatory regime, which were cred- authorities and to act as an arbitra-

42

FUNDS REVIEW IRELAND

tor in any dispute between national regulators, in relation to interpretation of EU law. In real terms, this means that significant authority has transferred from national regulators that function within a guidance framework under the Committee of European Securities Regulators (CESR) to a centralized and binding framework within the EFSF. Basically, we have moved from a diversified model of policy making to a centralised one. It is vital that the Irish industry recognises and understands this move and creates the proper infrastructure to manage to this shift and align with the interests of its clients. This is not a brief period of disruption followed by a reversion to previous approach. The fund industry, globally, is having to adjust to ever-faster regulatory cycles. The development stage of regulatory change is shorter and involves a political dimension that was generally absent in the past. The rulemaking stage is now governed through processes defined by the European Securities and Market Authority (ESMA – one of the three ESAs under EFSF) and involves the perspective of many jurisdictions and stakeholders. The implementation stage, where rules are finalized and introduced into guidance, is too late an entry point if the intention is to effect change.

Ireland ready for mainstream participant role Given the relative scale of the industry in the global context, Ireland can – and should – be a thought leader in framing this new approach; not as an exiled leader of an intransigent resistance, willfully blind to the mistakes made in the domestic context, but as an articulate participant in the mainstream, where we can align ourselves more effectively with the trajectory of international change and influence regulatory process, providing informed comment and meaningful perspective. The performance of the international sector during this time period has proven that Ireland is capable of adapting quickly. Without wishing to resuscitate an old cliché, Ireland needs to be closer to Boston AND Berlin. Seán Páircéir, Partner, Brown Brothers Harriman N


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State Street in Ireland State Street is one of the world’s leading providers of financial services to institutional investors. Since first establishing our presence in Ireland in 1996, we have become a recognized administrator and custodian, responsible for servicing more than $650 billion* of assets under administration in Ireland. State Street also provides asset management services to institutional investors. With offices in Dublin, Drogheda, Kilkenny and Naas, and more than 2,000 local employees, State Street has the resources and expertise to meet your complex, global investment needs. For more information, please visit www.statestreet.com/ie * As of June 2011

©2011 STATE STREET CORPORATION 11-07849-1011

· A leading provider of fund services in Ireland · More than 2,000 experienced local professionals · A wide range of funds and structures serviced · Active in more than 100 markets worldwide

Funds Review Ireland Irish Edition  

The IFSC celebrates its 25th year in 2012 as one of the world's leading financial services hubs, contributing 7.4% of GDP in Ireland

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