Irish funds industry could come under increased scrutiny

Ireland's funds industry could face increased scrutiny under new proposals unveiled by the European Commission yesterday, which aim to increase the regulation of the so-called "shadow banking" industry.

The proposals, which were signed off by all 28 EU Commissioners yesterday in Brussels, focus particularly on money market funds – financial entities which provide short-term financing to banks and corporations, but do not fall under the same regulatory framework as regular banks.

After France, Ireland is the second-largest home for money market funds in Europe. The value of Irish-domiciled money market funds at the end of 2012 was approximately €295 billion – representing about a quarter of total Irish-domiciled assets.

The new proposals, which need European Parliament and European Council approval, introduce a number of changes to the way in which money market funds are regulated.

New liquidity rules require that 10 per cent of a fund’s total portfolio must be made up of assets that mature within a day, with a further 20 per cent maturing within a week, to allow for the repayment of funds to investors at short notice. The proposals also include regulations on portfolio diversity.

However, the proposed requirement on capital buffers is likely to prove controversial. The new rules will oblige a certain class of MMFs – constant net asset value (CNAV) funds – to hold a cash MMFs to cash buffer equivalent to 3 per cent of their assets.

EU internal markets commissioner Michel Barnier said in Brussels yesterday it was vital to supervise what he called the trillion-euro "parallel banking sector", in light of the strong interconnectedness between the shadow banking system and the rest of the financial sector.

Chief executive of the Irish Funds Industry Association Pat Lardner told The Irish Times there were concerns that some aspects of the proposals could hit the competitiveness of European-domiciled MMFs. "Given that they are used by investors all over the world, it would make sense that there is some level of co-ordination and cohesions between the US and the EU in terms of regulation," he said, a view also expressed by the Irish Central Bank's head of policy and risk, Patrick Brady, at a conference in June.

Tara Doyle, a partner at Matheson, said that while many of the proposals contained in the commission document were "sensible", the introduction of a capital buffer could be problematic, particularly in light of the current low-yield environment.

“The introduction of a 3 per cent capital buffer means, for example, that for every €1 billion in assets, €30 million would have to be set aside. The cost will be pushed on to investors or the fund promoters. Ultimately it could raise questions about the viability of common net asset value funds.”

The proposals could be significantly amended as they pass through the European Parliament and European Council ratification process.