JOINT COMMITTEE ON EUROPEAN SCRUTINY díospóireacht -
Tuesday, 14 Jul 2009

Proposal re Directive on Alternative Investment Fund Managers: Discussion.

Chairman

The next item on the agenda is the scrutiny of EU legislative proposal Com (2009) 207. This is a proposal for a directive of the European Parliament and the Council on the alternative investment fund managers. A number of witnesses are in attendance to assist the committee in its scrutiny, Mr. Colm Breslin, from the Department of Finance, Mr. Michael Deasy, senior adviser with overall responsibility for the supervision of securities investment businesses in Ireland at the Office of the Financial Regulator, Ms Martina Kelly, head of policy for the investment funds within the financial institutions and fund authorisation department, Mr. Gary Palmer chief executive of the Irish Funds Industry Association, Ms Carin Bryans, vice-chairperson of the same association who is also the managing director of JP Morgan bank.

Before we begin I draw witnesses' attention to the fact that members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I invite Mr. Breslin to make his presentation.

Mr. Colm Breslin

I thank the committee for the invitation to be here today to discuss the proposal for a directive on alternative investment fund managers, AIFM, which the Commission published in early May and which makes very important recommendations for the future regulation of this sector.

The AIFM proposal covers the management of hedge funds and private equity funds which accounted for approximately €2 trillion in assets at end 2008. It also covers other but relatively less significant activities such as commodity funds, real estate funds and infrastructure funds. The proposal is essentially defined as any investment funds not coming within the coverage of the Undertakings for Collective Investments in Transferable Securities, UCITS, Directive and not including sovereign wealth funds.

The aim of the proposal is to create a comprehensive and effective regulatory and supervisory framework for AIFM across the European Union. It will require all AIFM within its scope to be authorised and to be subject to harmonised EU regulatory standards. It will establish a regulatory regime that is equivalent, in fact even more onerous in some respects, to the retail investor oriented UCITS product and will also require that key service providers, including depositories comply with regulatory standards.

The directive will apply only to those AIFM managing a portfolio of more than €100 million. A higher threshold of €500 million applies to AIFM not using leverage and having a five-year lock-in period for their investors. However, AIFM below this threshold may decide to opt in, and some may do so in order to gain the right to "passport" into other member states.

All EU-domiciled AIFM coming within the scope of the Directive will be required to show that they are suitably qualified to provide AIF management services and to provide detailed information on the planned activity of the AIF, arrangements for the delegation of management services, arrangements for the valuation and safekeeping of assets etc. AIFM will also be required to hold and maintain a minimum level of capital of €125,000 and to have a liquidity risk management system. If the assets under management exceed €250 million, additional capital would be required.

The Department of Finance has not yet finalised its position with regard to the proposal due to the fact that the Commission needs to provide a lot more clarity on various aspects of the proposal before we can come to an informed view on it. Accordingly, our initial reaction, while welcoming the proposal, is to raise some questions on issues such as its scope.

Various commentators, including de Laroisiere in his recent report, have said that hedge funds were not a major factor leading to the global financial crisis. The crisis, however, has certainly had a very significant impact on the asset management sector, especially on hedge funds, and there has been a very significant fall in the amount of funds under management by the sector. Some of the actions that hedge fund managers had to take once the crisis unfolded, such as the abrupt unwinding of leveraged positions in the wake of tightening credit conditions and investor redemption requests, had a systemic impact, thus showing them to be "systemically important institutions", even if the industry itself is not systemically important in size.

In its November 2008 statement, the G20 recommended that there should be appropriate regulation and oversight of systemically important institutions and they mentioned hedge funds in this context. In April 2009, the G20 said hedge funds or their managers would be registered and would be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of systemic risks they pose individually or collectively.

The proposal must also be seen against the back-drop of significant regulatory reform at European level aimed at ensuring that the recent economic and financial turmoil is not repeated.

Hedge funds cover a wide range of investment objectives, strategies, styles, techniques and assets, offering a wide spectrum of risk-return profiles. Probably the main characteristic of hedge funds is that they are more flexible in terms of investment options than traditional investments. Their managers tend to have few restrictions on their use of active investment strategies to achieve positive absolute returns. They may also use financial leverage — borrowing — to magnify their investment returns. Overall, therefore, it could be held that hedge funds are similar to other investment funds, investing in similar asset classes such as equities, bonds, FX and so on, but they tend to have a more robust or sophisticated trading strategy and more recourse to leverage.

It is important to bear in mind that in Ireland and most other member states, retail investors are prohibited from investing directly in hedge funds. Many hedge funds are legally domiciled in offshore financial centres and thus cannot be subject to mandatory disclosure requirements, but many of the investment managers and prime brokers associated with hedge funds are based in EU countries and are subject to authorisation and supervision by national regulators in those member states. At least 80% of hedge funds based in the EU are managed by managers based in Britain.

On transparency, EU rules on the disclosure of significant stakes in companies are now in place. The transparency directive provides for the mandatory reporting of major holdings of voting rights once 5% of voting rights are acquired. Some member states apply even lower notification thresholds. Other regulatory safeguards also apply. EU rules on market abuse and insider trading — the market abuse directive — apply fully to EU hedge fund managers.

In Ireland, investment funds are authorised by the Financial Regulator and many Irish authorised funds engage in hedge fund-type strategies, leveraged positions, extensive use of derivatives and so on. As they are a more risky investment than traditional funds, they are reserved for wealthy individuals and institutional investors. They cannot be sold to retail clients, although such clients might have some exposure through funds of hedge funds and through pension funds. In both of these cases, however, professional intermediaries would be likely to be involved. These funds have generally delegated investment fund management to overseas entities, including those based in Britain. We also have a significant fund administration industry here, which services non-EU hedge funds.

As regards the risk to financial stability from hedge funds, exposures to hedge funds by banks are monitored by EU banking regulators and the ECB. The capital requirements directive regulates the buffer of capital that banks and investment firms must hold against banking-book and trading-book exposures to all counter-parties, including hedge funds and aggregate data in this regard is collected on a regular basis.

Not to lose sight of the private equity element of this proposal, it might just be mentioned that private equity is essentially about investing in and restructuring private businesses to grow and be more competitive. Hedge fund investment, however, is generally more accessible to affluent investors than private equity.

Ireland believes the Commission's proposal is a good starting point for the discussions which are now under way. Many member states, like Ireland, are looking for clarification from the Commission as to the implications of various aspects of its proposal. The Commission is endeavouring to provide the clarifications sought.

Among the areas to be clarified is the requirement that all custodians of EU-based AIFs must be EU credit institutions. We see no need for such a restriction. Under Irish investment fund legislation, entities providing depository services are not required to have a banking licence. They are, however, required to be wholly owned by a credit institution or by an equivalent institution with their liabilities guaranteed by the parent institution. We also need clarity as to how the various asset thresholds are to be calculated. One clarification which has been given by the Commission lately relates to the apparent exclusion of banks. This exclusion will only apply where banks are operating on own account.

Discussions at EU level on this proposal for a directive are expected to progress quite quickly. The Commission has indicated that if there is political approval of its proposal by end 2009, then the proposal could come into force by 2011. While this seems somewhat optimistic at this time, there is a certain political will to finalise this proposal as a matter of priority.

I understand my colleagues from the Financial Regulator will also be making a brief statement. In the wake of that, we would then be happy to take questions from the committee.

Mr. Michael Deasy

I am responsible for overall supervision of the securities and investment businesses in Ireland. My colleague, Ms Martina Kelly, is head of policy on investment funds. She is heavily involved in EU negotiations relating to the funds and she represents us at the EU meetings on the proposed directive.

Ms Martina Kelly

I thank the Chairman and members of the committee for the invitation to discuss the proposed directive on alternative investment fund managers. In broad terms we welcome many aspects of this directive but we have reservations about some of the proposals contained therein. In particular we agree that enhanced regulatory co-operation in the context of gathering information on hedge funds is necessary.

Before discussing the proposed directive it might be useful to give a very broad outline of the current Irish investment funds regime. There are two broad categories of funds in Ireland, UCITS and non-UCITS. UCITS are targeted at the retail market and accordingly are subject to a prescriptive authorisation regime. The UCITS are based on European law and once authorised in one member state can be marketed throughout the Community without further authorisation.

Non-UCITS funds, which must also be authorised by the Financial Regulator, can range from those targeted at the retail market to those targeted at the institutional or professional investor market although many would fall into the latter category and are authorised as qualifying investor funds.

At end March 2009, the value of Irish authorised investment funds amounted to about €632 billion, while the value of funds not authorised in Ireland but administered by Irish authorised administration firms, amounted to another €720 billion approximately. The Irish funds industry employs significant numbers of people and it is for these reasons that any European Union legislation dealing with funds is important for Ireland.

There are many questions about the scope of the directive. It refers to managers of alternative investment funds. AIF refers to investment funds other than those authorised as UCITS, whether established within the European Union or in third countries. However "manager" in the context of an investment fund can have many meanings. It can include an investment manager and the board of directors in the case of a corporate investment fund. The proposed text indicates that manager could also include a fund administrator, appointed by the manager or by the AIF to provide fund administration services.

The extent to which this proposal could be regarded as minimum or maximum harmonisation is unclear. On the one hand, it provides in recital 8 that the directive does not regulate AIF and therefore does not prevent member states from adopting or from continuing to apply additional requirements in respect of AIF established on their territory. On the other hand, later text — Article 25 (4) — provides that member states may only impose additional limits to the level of leverage that an AIFM can employ in exceptional circumstances. Most member states authorise and regulate AIF and impose a regulatory regime based on the nature of the AIF and its investors. It will be important to clarify therefore the extent to which these regimes may continue to apply.

The directive provides that a manager will be able to provide services in other member states without further authorisation but as AIF are not regulated under the directive it is not clear how a manager in one member state could establish an AIF in another member state under national legislation. The requirement that each AIF must have a depositary is reasonable but the necessity for the depositary to be an EU credit institution is of concern. Irish AIF are required to have an independent depositary but this entity may be established as a subsidiary of an EU or non-EU credit institution, provided the liabilities are guaranteed by the parent. This is a stricter requirement then for UCITS and we believe that it is inappropriate to have a stricter standard of liability for AIF than for UCITS.

The European Commission recently launched a public consultation on the UCITS' depositary function. The Committee of European Securities Regulators is also considering similar issues. This proposal should await the outcome of both initiatives. Irish authorised qualifying investor funds, QIF, are not subject to any regulatorily imposed investment restrictions. The Irish QIF regime works well and QIFs are recognised as avoiding many of the problems associated with hedge funds worldwide, due in part to the requirement to have an independent depositary and services provided by Irish fund administrators. Under the proposal, a limit on leverage may be imposed. There is no evidence that such a restriction is necessary and it would in any event be difficult to implement in practice, not least because leverage can be employed in various ways, for example, through borrowings and through the use of derivatives.

It is proposed that each AIF under management must have appointed a valuator, independent of the manager. While it is important that an AIF is subject to independent valuation, in particular where assets cannot be valued by reference to market pricing, responsibility for valuation must rest with the manager and not a third party which is not subject to prudential regulation. The directive proposals are based on a concern that many hedge funds did not have appropriate valuation policies and invested in assets for which transparent pricing was not available. This is a valid concern, particularly in the context of unregulated AIF, but the proposal should focus on the valuation process, perhaps by reference to the principles set out by the International Organisation of Securities Commissions, IOSCO, in this area.

These are some of our principal concerns although there are others including the disclosure requirements which will apply to private equity funds, the overlap with other EU directives and the restrictive rules on delegation, which in the latter case go beyond delegation rules which apply to UCITS management companies. We also believe that the proposed capital requirements are unnecessary and will impose significant additional costs to Irish AIFM. Notwithstanding the significant concerns I have outlined we continue to believe that it should be possible to introduce a regulatory framework for AIF which builds on the existing regulatory regimes within the EU and which provides a sound basis for the enhanced monitoring of macro-prudential risks which may arise within alternative investment funds. To this end we will provide as much assistance as possible to the Department of Finance during Council negotiations. We will be glad to answer any questions the committee might have.

Mr. Gary Palmer

Chairman, members of the committee, we thank you for the invitation to participate in today's meeting, and for your interest in this directive, which could have a significant impact on, and serious implications for, the investment funds industry here in Ireland. The Irish Funds Industry Association, IFIA, is the representative organisation for those companies involved in the international investment funds industry in Ireland. We are a membership organisation and our members include the industry companies, the fund administrators and custodians as well as the legal and auditing advisory firms involved in the industry. Given the external, international focus of our industry, where Ireland has developed into a significant domicile and administration centre for internationally distributed investment fund products, the legal and regulatory environment as promulgated by European directives provides the business framework within which the industry operates. The UCITS Directive, transposed into Irish legislation exactly 20 years ago, is recognised as providing the opportunity for the commencement of an internationally focussed investment funds industry here in Ireland. The UCITS Directive provided a European passport for retail investments, and this passport opened the European marketplace offering scale and specialism opportunities for the manufacture and administration of investment funds. Through the successful development of an environment, which is widely recognised as well-regulated and supported by an industry that demonstrated excellence and expertise, Ireland has gained, and enjoys, a reputation as an investment fund jurisdiction of some repute and is now an acknowledged leading international domicile and administration centre for investment funds. With 42 fund administration companies, 19 trustee and custodians, together with the significant proportions of those working in the legal and auditing advisory companies, the investment funds industry now includes 12,500 professional employees working throughout 11 counties in Ireland.

The directive under consideration today, the Alternative Investment Fund Managers Directive, brings several welcome considerations, particularly with respect to the proposed European passport and the recognition of the importance of using specialist service providers to perform the often under estimated administration activities, which are extremely important to the orderly functioning of an investment fund. The directive also includes, however, several provisions that will negatively affect the trend towards internationalisation and will add a regulatory burden that will have a disproportionate effect on certain function providers, specifically those providing administrative and oversight support, which includes the industry companies in Ireland.

This directive has generated a considerable reaction throughout and beyond the European Union. One strong view is that because of the disproportionate burden associated with the directive, funds that do not require a European footprint will operate entirely outside the European Union and given the support nature of our industry such a development would have serious consequences. To highlight one of the potential impacts on our industry, in addition to the 5,000 funds and sub-funds domiciled and administered here, the industry companies also provide services to an additional 5,700 funds and sub-funds domiciled elsewhere, mainly outside the European Union. Many of these 5,700 funds simply use the industry companies for their servicing capabilities. By virtue of the requirements of the Directive, however, these funds may decide on a non-EU servicing facility, which will negatively impact on the business and employment opportunities of the industry here. As the excellence and expertise of the industry companies encouraged this activity to Ireland, and with no issues to address, the disproportionate burden of the directive could in effect discourage what it is trying to achieve.

While we are concerned about specific proposals included in the Directive, we also share the widespread concerns that have been expressed by others, about the scope of the proposals, to include a very wide range of fund types which are not homogeneous, and the absence of any consultation on the directive, but even more the likely impact the directive will have on regionalising a global industry. As an open, transparent and well-regulated international jurisdiction Ireland has benefited from the manufacturing and cross-border distribution opportunities presented by the global nature of the investment funds industry. The limitations inherent in the directive, however, will reduce the investment choices available to investors. Representatives of UK and Dutch institutional investors wrote to Commissioner McCreevy highlighting its consequences. Institutional investors, for example, in pension funds, are in effect the end users and consumers of these funds, and while they welcomed the harmonising elements of the directive they went on to express the risk that the directive "would effectively limit their access to third country funds" and "would encompass and limit a range of funds and investment opportunities". Notwithstanding the inefficiency of this reduced choice, any perceived regionalisation could also lead to reciprocal restrictions, thus distorting the operation of a truly international industry. It should also be noted that the directive includes several other proposals that will limit the available choices, for example, article 18 includes proposals that relate to delegation or limitations on delegation; the practical effect of which is that the expertise of a significant proportion of regulated, established and expert investment managers will be unavailable to EU funds, again restricting the choices and expertise available to investors.

In addition to the potential impact and consequences of the directive on the industry in its widest context, the directive, as drafted, includes proposals that will have serious implications for the industry's companies here. In the short time available I would like to highlight two of these proposals, article 16 and article 17, those referring to the valuator and the depositary. These two provisions assign responsibilities and levels of proposals that, in some cases, are inappropriate for the identified parties and that, in other cases, will challenge the ability and desire of companies to assume the responsibilities and liabilities included.

Article 16 of the directive introduces a new concept, that of a valuator. While the industry's companies in Ireland perform the functions akin to those proposed for the valuator, the challenge arises in the fact that the directive proposes that the valuator assumes management responsibility for the valuation of a fund. At present, it is widely recognised that this management responsibility, as referenced by IOSCO, the International Organisation of Securities Commissioners, which has stated that "ultimate accountability for the proper valuation of a fund's investment portfolio rests with the Governing Body of the fund", and in most cases this would be the board of the fund and its directors. In addition, and quite surprisingly, article 16 does not require that the entity undertaking the administration activity be a regulated institution, and this we consider to be a significant shortcoming.

Probably the issue of most concern to the industry are the proposals regarding the depositary, as included in article 17 of the directive. The depositary, which is better known as the trustee or custodian, exercises oversight on many of the functions of a fund and provides safekeeping and custody of the fund's assets. Included in article 17 are several proposals relating to the roles and responsibilities of the depositary, among them the requirement that institutions that perform the depositary function will be limited to European credit institutions, that is, a bank, and also that the depositary will assume a level of liability which is in effect the inversion of the burden of proof.

To date, institutions which perform the role of a depositary have to operate to a level of liability recognised as unjustifiable failure, as in the highest of standards with respect of their own activities and responsibilities. However, article 17 introduces a level of liability on depositaries which is not defined and requires them to assume liability for the activities not only of themselves, but also of those that have been delegated to, effectively requiring the depositary to insure the assets of the fund. Such a level of liability will have significant consequences not only for the depositary but also for the future of the fund as an investment vehicle. These consequences were well articulated by Mr. Dan Waters of the FSA in a recent speech where he noted that this strict liability will have several damaging and unjustified consequences. He remarked that the number of institutions providing depositary services is likely to reduce as existing providers will be reluctant or not able to assume this higher level of liability. Also depositaries are likely to become increasingly reluctant to assume liability by delegating outside their own group, therefore restricting investment opportunities for funds and their investors. He also noted that the imposition of strict liability will sharply increase costs, which will be borne by investors. Concluding his remarks, Mr. Waters highlighted the other activities currently under way at a European level to assess the roles and responsibilities of depositaries noting that a more involved oversight and diligence requirements could achieve a similar outcome without the significant consequences.

As mentioned, article 17 proposes that the depositary should be authorised as a European credit institution, that is, a bank. Currently, depositaries are authorised and regulated by the Financial Regulator with respect to their roles and responsibilities. This specific authorisation and regulation, which is well regarded internationally, ensures the depositary is established for its purpose. To require this function to be brought into the banking environment does not appear to have any benefit either to the investor, who will no doubt see an increase in the cost of services, or to the banking industry as a whole, which is focused primarily on domestic lending issues.

We again thank the committee for the opportunity to participate at today's meeting and highlight the concerns with respect to the issues included in the directive, but we again emphasise the significant concerns, challenges and consequences around the proposed roles and responsibilities of the valuator and the depositary.

Chairman

Before we proceed to questions, with regard to the concerns the Department has about unanswered questions, I listened to what Mr. Palmer said about the impact the directive will have. He said that for every action there will be long-term reaction from the financial industry, which would have an impact on the retention of financial services in Dublin. That is what he clearly indicated. With regard to the Department and the ongoing meetings taking place in Europe on the directive, what is Department's view on the directive? Mr. Breslin stated that there are unanswered questions. How does he envisage this proposal will progress? What will be the outcome of it?

Mr. Colm Breslin

All the member states have submitted comments to the Commission on the proposal and these now run to several hundred pages. They all have many questions about what large chunks of it mean. It lumps together different types of managers, which raises the question of what the term "manager" means in the proposal. Even at that basic level, there is not clarity in the proposal.

The Swedish Presidency has committed itself over the month of August — which is a quiet month as far as Brussels is concerned — to try to resolve many of the difficulties members states have with this proposed measure that have been expressed by the working group. That seems to be a formidable task. The Swedish Presidency has adopted an open and pragmatic approach towards resolving the difficulties. There are so many problems identified by most member states that it is difficult to envisage this proposal will achieve its first reading by the end of this year and therefore its consideration might be carried over into the term of the Spanish Presidency. We would prefer to see the Swedish Presidency trying to resolve the outstanding difficulties, but we recognise it will be a formidable task.

Chairman

In simple language how would Mr. Breslin define a hedge fund?

Mr. Colm Breslin

There is no definition of a hedge fund as such. There are investment funds that are exclusive to high net worth individuals and to professional institutions such as pension funds and the like. They would have all types of different strategies. They are all essentially investment funds and some people regard some of these investment funds as hedge funds by virtue of the fact that it is promised that they will achieve positive returns regardless of which direction the market is moving, either up or down. They also tend to take a somewhat more risky options than the more conservative funds. There is no definition of a hedge fund, but funds with the characteristics that would be described as hedge funds are funds that engage in riskier investment options to try at all times to achieve a positive return for their investors.

Chairman

Mr. Palmer made a point about the regulation of the large amounts of money that goes through the non-banking institutions dealing with derivatives and hedge funds and their return on investment. Having regard to the current global economic crisis, billions have been lost through properties, hedge funds, shares and the whole portfolio of investments that would be dealt with by the Irish investment funds industry. There are 12,500 jobs in this industry and its level of investment is €760 billion. Is that the figure that was mentioned?

Ms Martina Kelly

I gave two figures, €630 billion for Irish authorised investments and an additional €720 billion administered by Irish fund administration. In the latter case, the firm and not the fund is authorised by the Financial Regulator.

Chairman

It is a considerable amount of money in a confined marketplace, approximately 2% or 3% of the overall market, that is normally open to institutionalised bidders but not banking clients. Do mainstream banks get involved financially?

Mr. Colm Breslin

Yes. As Ms Kelly stated and while she or Mr. Palmer would be able to explain it better, there is a great deal of money, but a good portion of it is also in UCITS funds, which are open to retail investors and are not at the hedge fund end of the investment spectrum. Mr. Palmer can provide a figure for the money involved in, for example, retail-oriented UCITS funds.

Mr. Gary Palmer

Of the €630 billion in assets in Irish authorised funds, 80% is in UCITS structures.

Chairman

What is UCITS?

Mr. Gary Palmer

UCITS is a retail investment fund vehicle. It was established under a regulatory framework that requires diversification, limited leverage and——

Chairman

What type of client does it involve?

Mr. Gary Palmer

An ordinary investor like the Chairman or me.

Chairman

Mr. Palmer should exclude me from that category.

Mr. Gary Palmer

It would be for simple savings products. Of the €700 billion——

Chairman

Regarding the management of those funds and, without making a comparison, given the losses in every investment, would any UCITS funds be covered in the €100 billion of the proposed NAMA fund?

Mr. Gary Palmer

UCITS funds invest themselves in a relatively wide range of assets — equities, bonds, cash products and the like. During 2008, the value of Irish domiciled funds fell by 20%. One could conclude that, on average, there was a 20% fall in the value of UCITS funds. Each fund has diversification limits and restrictions on what it can investment in and the level of exposure that it can take to an asset class. By virtue of the regulations, no fund can take a particular high-level exposure to any asset class. Within a UCITS structure, it is not possible for a fund to invest more than a small proportion of its assets into one asset class, such as the example given of property.

Chairman

Or toxic debt.

Mr. Gary Palmer

There is a detailed list of eligible assets into which UCITS funds can invest. They are at the conservative end of the spectrum. A limitation on the value that can be invested and significant restrictions on the eligibility of assets apply to UCITS funds.

Chairman

There are exacting criteria on the types of fund in which a UCITS fund can invest.

Mr. Gary Palmer

UCITS is a European product. Due to the nature of the regulatory environment and the appropriateness for the retail investor, it is now a significant international product that is sold outside the EU's member states. It is probably the most prolific retail investment product in Asia and other jurisdictions. This emphasises the international marketplace for the investment fund business.

Deputy Joe Costello

I thank our guests for attending and trying to inform us about this complicated matter. The basic starting point is the global operation and lack of regulation of hedge funds, which contributed to the economic crisis. I do not know whether our guests agree with me or, if they do, to what degree. The banking and financial systems contributed to the crisis through, as many would claim, the manner in which they operated — bonus schemes, greed and so on. There was an internal flaw in the manner in which they operated. Does the hedge fund system have an internal flaw that requires regulation? For example, is short selling the major problem? If hedge funds have been major contributors to the economic crisis, we must seek to determine why and to regulate so as that the situation cannot recur. The EU and G20 are concerned and seeking regulation. Across the board, however, our guests seem to claim that there is adequate regulation and that we do not need external regulation. Although the operation in question is a global one, they do not see a great reason for the EU to have a major role in regulation other than in ensuring transparency. According to them, the EU's involvement would cause regional problems even though the operation is a cross-border one.

The amount of €2 trillion is considerable. Even the €632 billion in Irish authorised investments and €720 billion in investments administered in Ireland are colossal amounts. What percentage of the €2 trillion comprise Irish administered or Irish authorised hedge funds? While the industry contributes to employment to the tune of 12,500 people, the hub of which is undoubtedly the IFSC, to what extent does it create tremors in the banking system and the economy in terms of whether it loans to pension funds, are there risky investments or is it primarily operating for international clients? What are its national and international impacts?

According to this morning's The Irish Times, we are major borrowers from the European Central Bank. Of the €630 billion being borrowed by member states, Ireland with its population comprising 1% of the EU’s population accounts for 15%. Is part of this money going into hedge funds or is it going into the bank’s coffers to try to keep them afloat? The rate of 1% is cheap. Are the borrowings going into the IFSC and becoming part and parcel of the hedge and pension funds and international wealthy investment operations?

Private financial institutions have been found to have been irresponsible in recent times. We must find a way to ensure their responsibility. The only way is probably overarching regulation, not just national regulation. They operate across borders and are the ultimate in globalisation. What is our guests' response to my points?

Mr. Colm Breslin

I will deal with some of them. We are not against the regulation of alternative investment funds. They are authorised by the Financial Regulator, who also regulates the managers and depositories. Therefore, we support a harmonised approach to the regulation of managers across the EU, as it would be a positive step. Instead of having a patchwork of different approaches across the European Union it would be positive to have a harmonised approach. This directive was drafted in great haste, is very confusing on many fronts and is not the solution that most member states desired.

My colleagues, and those present from the private sector, said that while a substantial amount of funds are administered here, 80% of the investment decisions and management activity of these funds is in London. Europe has approximately 20% of the global total. There are one or two entities here that engage in a degree of investment management but compared with the London level we are at a low decimal point. We should not confuse administration with investment management.

Although the Irish population is a small percentage of that of the European Union, since 1987 we have managed to punch far above our weight as an international financial services centre. The City of London publishes a survey every year of global international financial centres. In the last survey Ireland ranked tenth. The Irish-based entities' borrowing from the European Central Bank, ECB, covers not only Irish authorised banks but also those in the Irish Financial Services Centre, IFSC. The degree of borrowing can be partly explained by Ireland's standing as an international financial services centre.

There are other sources of finance that are closed not just to Irish banks but to banks generally, for example, securitisation is dead in the water. In so far as banks are raising funds they raise them through whatever sources they can and the ECB is being very accommodating. As banks have bonds that might need to be rolled over but which they cannot roll over in the market they can self-issue instruments and bring them to the ECB to get money. That is also an element of the figure for ECB borrowing.

Mr. Gary Palmer

With respect to Deputy Costello's question on the national impact of the €2 trillion and the administration of hedge funds in Ireland, it is nothing other than the creation of employment opportunities for those who service these funds. The funds are domiciled and managed elsewhere but a reputation for providing important, independent services to these international funds was established here through the expertise and experience of industry companies. Over the past 20 years but particularly the past 15 years, Ireland has established a significant reputation for servicing international funds. That is why we enjoy the opportunity to service 30% of global hedge funds.

Ireland's reputation as a centre of excellence for investment funds has been built on the pillars of openness, transparency and regulation. Ireland has led the international industry in providing regulatory solutions for investment vehicles. Ms Kelly referred to the qualifying investor fund which is in effect a regulated, authorised structure that allows flexibility of investment strategies, recognising the importance of all parties to the fund being themselves authorised, supervised and regulated institutions. With respect to regulation it is extremely important that it is appropriate and commensurate with its objective. I hope that in our opening statement we highlighted some of the areas where we felt the required regulatory environment was disproportionate to its objective.

Mr. Michael Deasy

Deputy Costello asked how much of Irish authorised funds would be in the form of sophisticated or institutional investors. We reckon the amount at approximately €100 billion of the €632 billion that we authorised.

Ms Martina Kelly

We support the regulation of these activities. Our principal concern, however, is that today we regulate AIF and our regulatory regime works well. The proposed directive goes beyond much of what we do and introduces restrictions which are not justified. We raised the point about leverage and we considered it appropriate to impose a specific restriction. We agree that excessive leverage contributes to systemic risk. This directive will impose specific reporting obligations and will give powers to regulators to intervene but it is difficult to take the approach introduced in this blunt instrument to deal with funds based in the European Union and in the Cayman Islands and other such places.

Chairman

Who is initiating this approach? Who is the main mover at the meetings that witnesses attend in Brussels?

Mr. Colm Breslin

There has been a debate in some quarters for some time that has achieved momentum now that we are in a global financial crisis. People have preconceived ideas that hedge funds had a crucial role in the crisis. There is a view in the industry and among more dispassionate commentators, shared even by Jacques de Larosière, that the hedge funds were neither the cause of nor a major factor in the crisis. To some extent they received collateral damage from the crisis. When Lehman Brothers collapsed on 15 September 2008 and banks stopped lending to one another people needed to get their hands on money. Where hedge funds had borrowed money from their prime brokers, banks, and could not roll it over because the banks were no longer lending money they had to dispose of some of their investments at very short notice and at distressed prices, in order to meet calls for redemption. This drove down the market price of various instruments. It could be argued that to an extent the hedge funds suffered a great deal because of rather than caused the financial crisis. Liquidity dried up after the collapse of Lehman Brothers on 15 September 2009. There are misconceived notions about the role of hedge funds that have driven the current agenda that are not borne out by the facts.

Chairman

Can hedge funds expose financial institutions to risks? Looking at the massive losses that have taken place, will more regulation minimise the amounts that can be lost by financial institutions that invest in them? Will regulation make them safer?

Mr. Colm Breslin

Not necessarily. Institutions invest money in hedge funds. The hedge funds, to boost return, often borrow money from banks, which are the prime brokers and which provide services to hedge funds — apart from lending money, they might also provide depository services and trading facilities. There are other directives that look at that risk and regulate it. The capital requirements directive would regulate the exposure of credit institutions and banks to institutions like hedge funds in terms of lending. There are already checks and balances in place in other directives. There are further checks on managers through the market and financial instruments directive.

Chairman

In light of the massive damage done, when people cannot even define hedge funds, and given the number of people who have lost money with the global banking collapse, would the regulation coming in now have been seen then as over-regulation? Billions were lost in Europe and the United States and perhaps regulation in member states now reflects the sense of fear of what might happen in light of the failure of regulators to deal with the banking crisis until now.

Mr. Colm Breslin

There is a need for regulation of these funds, everyone accepts that and they are regulated to some extent already, certainly across the European Union, and the Americans have their own regulations. There was a variety of reasons for the global financial crisis. Initially, toxic investments went sour then there were liquidity problems in the banking system. It is a complex area. The blame does not all lie with hedge funds. Hedge funds over time, given their risky nature, come up with bad bets, and some have gone out of business, with others being squeezed because investors wanted to withdraw money. Overall, the hedge funds did not cause the systemic crisis that happened.

Investments are accruing all the time because more and more people are putting money into pension funds. That money must find an investment home somewhere to earn the return that will give people a pension in their old age. The savings industry needs investment so it will happen one way or another. If we drive the investment out of Europe, it will happen somewhere else, in Hong Kong, America, Singapore or wherever. There must be a balanced approach so there is an appropriate degree of regulation relative to the risk involved. We must not throw the baby out with the bathwater by destroying and industry in pursuit of some over-arching objective of regulation.

Deputy Seán Connick

I thank the delegates for their presentations.

Is the proposal seen in the industry as a knee-jerk reaction to what has happened in the financial sector over the last 18 months? The haste with which it was introduced was important because the majority of investors lost confidence to a large degree in the financial system. A timeframe of 2011 was mentioned but I would prefer the timeframe for new regulations to be shorter than that to encourage people back into the market.

I was also surprised at the comments on hedge funds not playing a huge role in the financial meltdown while comments later suggested they had a systemic impact because so many people withdrew their funds from them. Since hedge funds cannot be defined are they adverse to regulation by their very nature? They are high risk so do they sit easy with regulation?

These days, we can see the financial markets on the news channels 24 hours a day. People react to share values going up and down. Does this relate to currency? Should we operate with one currency?

Many of those doing the ground work are junior auditors, with senior auditors checking their work. Should the role of auditors be strengthened?

Is there any stress testing of products for private equity funds? Where do they fit into the scheme in terms of regulation? A figure of €100 million was mentioned but many small investors, putting €100,000 into a bond, would not be aware that the money is then invested in some of these schemes. Is there monitoring of that? Does the small investor have any recourse when these losses are incurred. Everything is fine when people are making a profit but when losses are incurred, people are not aware that they were exposed through a hedge fund that was not stress tested. The investor may not have been aware of the risk that products could fall as well as rise.

I read in the newspapers that we are seeing falls of around 20%. Most people who had money invested are looking at losses of 50% to 90% in some cases. I do not know any fund or share that has not fallen at least 50% if not 80% in recent times.

In terms of regulation of the different bonds and the very risky investment strategies used by some of the banks here, I point to Rabobank, which is not one of the Irish banks, but whose representatives came before this committee. I do not know if the representatives are familiar with the back to back bond where, through a cold call to investors, it would put €100,000 or €1 million on deposit, if the investor was good for it, the person would pay the interest on that and it would invest it by virtue of the fact that he or she would get a return at the end of the three, eleven months or five year period. I understand many of those bonds will mature in the coming months. Is there anything within the regulation that deals with that type of high risk banking?

Mr. Colm Breslin

I will begin and then hand over to my colleagues in the Financial Regulator's office to deal with some of the other points.

First, in regard to the small investor with €10,000, there is no way that investor will be let anywhere near the hedge fund end of the market. The small investor will go for the retail products that Gary Palmer spoke about earlier, UCITS, and they are very heavily and tightly regulated. They are not in the same risk strategy end of the spectrum as the non-UCITS funds, which would include the hedge funds.

Second, as regards the non-UCITS, which are the alternative investment funds we are talking about, the alternative investment funds, AIF, which are the non-UCITS, are authorised by the financial regulator and it is on that point I will hand over to my colleagues in the Financial Regulator's office and ask them to set out the steps a fund must go through before it can be authorised, that might reassure the committee as to the way they are regulated currently.

Ms Martina Kelly

Before I do as Mr. Breslin has suggested, I would mention again that the problem with this directive is that it deals with non-UCITS or AIF, which are based within the European Union and would include our non-UCITS that are authorised here but also hedge funds based in third countries, particularly in places like Cayman Islands. It is difficult, therefore, for a single directive to deal with what are currently regulated funds and unregulated funds.

Many of these proposals, which will apply to the non-regulated funds, are welcome. We welcome the idea that a hedge fund should have an independent depository and a manager who is subject to regulation. The problem is that the scope of this directive is so broad it is causing us great difficulty in the way we can implement it based on our current mandate under collective investment scheme legislation.

A non-UCITS is authorised in a similar manner to a UCITS. The entities involved — the promoter, the manager and the depository, which we would call a trustee — must all be approved by our office. We then have specific legislation under which an application is made and we examine it and require that the fund rules meet our requirements, the prospectus is reviewed and all the safeguards apply regarding disclosure to investors — the prospectus, periodic reports, and full audit because the auditor must comply with Irish company law standards.

I must make one point clear. We allow our non-UCITS retail investors to have access to hedge funds through funds of hedge funds. They cannot invest directly because they would not meet the minimum subscription requirement but they can invest through a fund of hedge funds. We focus very much on the regulation of the manager of that fund of hedge funds and their expertise in selecting underline investments.

On the point made about the auditor, as mentioned, once the fund is regulated and if it is regulated within the European Union, in Ireland or in another member state, the auditing rules are the same as if it were a UCITS fund. There were concerns, where funds were not regulated, that the standard may not have applied. If there are other points I will come back to them.

Mr. Gary Palmer

I would like to pick up on the point with respect to the performance of the investment funds. Everything that has been spoken about by Mr. Breslin and Ms Kelly with respect to regulation is to highlight and demonstrate the strict regulatory regime in place with respect to investment funds in Ireland where the fund itself is a regulated and supervised entity and all of the parties to the fund individually are authorised and supervised by the Financial Regulator. However, the return or the performance of a fund depends upon its investment strategy.

Mention was made of hedge funds and the lack of a definition but what is being referenced is the characteristics a hedge fund would demonstrate and one of them would be as an active investment strategy where an investment manager believes, through research or other ways, that they have a sense as to which way the value of different assets will go. If someone subscribes to that thinking and invests in that particular fund and the investment manager has been insightful and seen the way asset prices will rise, a positive return will come from the fund. However, if the investment manager did not know what the future would bring and the asset price moved in an opposite direction, the fund will lose. With respect to the return and the performance of a fund, therefore, it is down to the investment strategy of the fund. Notwithstanding the regulation, the openness and transparency of all aspects to the fund, the return is based on the investment strategy.

The Deputy referred to the funds of which he would be aware, the fact that asset classes change as do equities and the sharp dip. If someone had a fund that was tracking the Irish Stock Exchange index, it would have declined in the exact same way as the value of the Irish Stock Exchange index declined over the particular period we are examining. However, most funds have diversification inclusions, for example, the ISEQ, but some other aspects as well. We would also have a large population in Ireland of money market funds and in the main they would be constant value funds where the value of the fund does not deteriorate. The assets included in those funds are short-term, very secure Government bonds, short-term dated paper, overnight deposits and the likes. When one looks at the 20%, it is an aggregate of 20% over some of those funds that would have exposure to equity markets and others that would be in very secure investments. Over the average of the Irish domiciled funds it is aggregated out at 20% but those that pursued an investment strategy in assets which, regrettably and unfortunately, declined by a significant amount, the return on their investment would reflect that activity.

Chairman

Mr. Palmer referred to 30% of the global market with regard to the incentives given to his staff. Is it similar to the banks? Do the incentives given to people who make sales and deals pertain in the Irish funds industry through the International Financial Services Centre and so on?

Mr. Gary Palmer

No. I apologise if I did not make it clear in our opening statement but the activity of the industry here is in terms of support, administration, the accounting, the financial reporting, the valuation, the shareholder services, the transfer agency, the custody of assets, the oversight responsibility. Ms Bryans might want to——

Chairman

Are the staff in the industry paid on commission? Is there an element of remuneration for them for extra work? In the United States traders are incentivised to sell products and they would get a bonus.

Ms Carin Bryans

Primarily, the individuals within our industry are doing operational type services. They are not actively selling funds.

Chairman

I do not mean the people in Irish funds industry, but are people working at the coalface in this trade incentivised by bonuses?

Mr. Gary Palmer

While a categoric statement is often dangerous I will make one in this instance. The answer in this respect is "no".

Chairman

It is good to hear that.

Ms Carin Bryans

I echo what Mr. Palmer said. They are not sales incentives for the industry here. The sales tend to happen outside Ireland. A large proportion of people within our industry are paid a basic salary and that is their compensation.

Chairman

Deputy Connick referred to corporate governance. It has been a major issue, Enron being a case in point. Major difficulties prevailed in terms of corporate governance and audit controls. Is the Department satisfied with the level of corporate governance within the remit of the Irish jurisdiction, having regard to the important validation, which was very much disputed in the case of many of the financial institutions where insider dealings were taking place? Has that problem been addressed?

Mr. Colm Breslin

There is an EU directive on market abuse which deals with insider dealings, which is rigorously enforced by the Financial Regulator. There have been few instances of such abuse here. I do not believe it is a problem here. The Minister for Enterprise, Trade and Employment brought in some proposals on corporate governance recently. The directors' loans issue was a feature in one or two institutions and a proposal to deal with that was brought forward. That issue was addressed recently by the introduction of legislation in the Oireachtas.

Chairman

The directive we are considering is an important one. I listened carefully to what Mr. Breslin said. The directive has been discussed and the Department has given its view on it. We intend to prepare a report on it that would contain a consensus view. Mr. Breslin might indicate if there has been much discussion between the Department and the Financial Regulator on this proposed measure? Has there been much discussion between the Department and the Irish funds industry and the Irish Funds Industry Association on it? I appreciate there is a consensus view on the directive among the representatives. It is good to note there is such agreement among the representatives from the Department down to the Financial Regulator to the Irish Funds Industry Association. Is is possible to prepare a consensus document outlining what the representatives consider would be the ideal position for Ireland in terms of the proposed measure? This committee could prepare a report on that and, if necessary, we could meet the representatives again to work on that.

Negotiations on it are taking place in Brussels. I come from a business background and I am conscious of the level of investments and jobs in the Irish funds industry. It is important to distinguish between that industry from the Irish banking industry. There are significant differences between the two industries and, clearly, considerable interpretation in that respect has been wrong. Reports in the mass media have indicated that there has been a lack of clarity, transparency and regulation which has caused the massive debacle in our banking industry. From the presentations by the representatives, it appears that the Irish funds industry has not been affected to that extent. It has been extraordinarily successful in the maintenance of jobs. Investment funds have not been eroded in the industry and dealings in funds are ongoing throughout the industry. From the point of view of clarity, is it possible to distinguish the differences between the two industries, to establish the remit of the Irish funds industry, the fact that it does not include banks and to prepare a clear and simple document on what we are talking about. I hope the committee will compile a report that would copper fasten the Irish position and help Ms Kelly in her negotiating position. Is that possible?

Mr. Gary Palmer

I hope I explained our industry well enough to allow the Chairman come to the conclusion he did because it is relevant and pertinent. With respect to our issues and concerns, we have been engaging with the Financial Regulator and the Department of Finance, particularly given that the discussions at European Level are taking place through the Council working group. Consideration of this measure is happening at that level. We have been engaged with Mr. Breslin and his colleagues in that respect.

Chairman

I listened carefully to what has been stated and there appears to be considerable consensus on this measure. While it is good to have engagement and discussions and for Ms Kelly to obtain clarification on this in Brussels and with the Department, it is important for us to have a strong position on it. Having regard to the level of investments in Ireland, the level of job retention in the funds industry and future investment in it, it is important the report published by this committee would give a direction that will very much fall into the context of the subsidiary appraisal by other member states. We want to have a balanced view on this measure and that the Oireachtas view on it would be in agreement with that of the Department of Finance, the Financial Regulator and the Irish financial services industry.

That industry can be clearly distinguished from the Irish banking industry. This industry has a different remit and a considerable number of people are employed in it. Can the representatives advise us on preparing and bringing forward a consensus document from this meeting such that we can say that we had a considered view of this proposed measure at this meeting, we had a follow-on meeting and that this document outlines the ideal situation for Ireland in terms of this proposed measure, irrespective of whether that would involve a heavy or a light stroke? It is possible that such a document could be prepared in the next two weeks, in light of the concerns the representatives expressed, the difference between the banking industry and the financial funds industry and how best we can move forward in terms of our negotiating position. We could prepare a report for the relevant Minister and, if necessary, debate this proposed measure in parliament in October.

It is important to distinguish between the two industries. I admit I am only a rookie in this area, but having regard to the need for regulation and all that has been lost and difficulties encountered by banks and by their customers in terms of deposits and borrowings, the funds industry is a different marketplace from that of the banking industry and that is why it could be very much affected by the perception of the banking industry, which could result in the over-regulation of this industry which may not necessarily be what is required.

Mr. Colm Breslin

To put some of this in perspective, when the first UCITS directive was passed in 1986 and effectively came into operation around 1989, we had a head start because the people in the IFSC were examining what could be done to get the financial services centre up and running. They spotted the UCITS directive and the potential it offered for providing administration services to funds. We were one of the early movers, if not the first mover, when the UCITS directive came into operation. We were also an early mover in terms of the Luxembourg measure to some extent as well. We got into this market before other people woke up to the potential of providing administration services for funds and now we are well established in this area. We have got a head start on many other people in this field and we have considerable expertise in it. We have a good regulatory system here and we now have world class administration available to people here. Being an early mover in this field is what got us to where we are today. That is why we are very concerned that we could lose some of what we have achieved. It would threaten jobs in this industry if the administration of such investments were lost to us. We are not investment managers. We provide the back office facilities and we do that very well. Approximately 11,000 or 12,000 people gain good, well-paid employment in this industry not only in the IFSC as the funds administration industry is based throughout the country. It is also based in Navan, Cork and in various other places. It is a well integrated activity.

As regards the Irish position, basically the directive, as it stands, is a rather confused document. It brings all sorts of concepts together in a rather confused way. Many people are trying to make sense of it. They are asking the Commission to make sense of their document because, the way it is at the moment, it does not make sense in many areas. In our various presentations today we have set out some of our concerns. We could synthesise some of those concerns into a document for the committee if it so wishes, drawing upon the presentations that were made here today. Pending further clarification by the Commission — and a clarification document is promised by the Commission — all we can really do is express concerns. The document it has produced needs radical surgery to make it coherent and workable. It is not workable as it is.

Chairman

In light of the fact that the initiative was taken 20 years ago, I congratulate everybody for the extraordinary success of the financial services sector. There would be no ambiguity in giving an overview of the Irish position even without answers to the questions being asked at the moment. If there was a clear marker from this scrutiny document, we would be happy to promote the current initiatives. What we have here, however, is quite different to the banking industry. We are dealing with derivatives and hedge funds. We should state categorically in a submission document the importance of what has been acheived taking into consideration the further incentives and benefits achieved over 20 years and put down a clear marker that we feel this should not be touched, as to do so would be detrimental to us. While a certain level of regulation is needed, perhaps Mr. Breslin can suggest the ideal situation from an Irish viewpoint. That would be a major consideration for this committee in furnishing a report that will be sent to Brussels on foot of an inquiry into this directive. We are one of the few parliaments apart from the UK, that has done an in-depth study on this. We should put down an agreed marker based on the advice of our own advisers, and we can certainly send Mr. Breslin our recommendations before the report is signed off. I think that clearly reflects what has been stated and there is a consensus that it would be of considerable help to have a document that we can embody in the report. It would clearly establish the lead the financial industry has, as well as distinguishing — for the big debate in the Dáil — the difference between the banking industry and the financial services sector.

Mr. Colm Breslin

The Chairman will appreciate that at this stage discussions are at a technical and unofficial level.

Chairman

Yes.

Mr. Colm Breslin

The Council of Ministers has not yet discussed this directive proposal. Therefore, at this stage, we are just seeking clarification from the Commission. We do not have a policy line that has been approved by the Minister because the proposal has not yet got up to the Council of Ministers level. Therefore, we are not really in a position to give the joint committee an official Irish line. I could draw upon the contributions made by the Financial Regulator and our colleagues in the industry here today to give an overview. However, it would not be a fully endorsed, official Irish line from a policy perspective.

Chairman

It would be beneficial for doing the initial report.

Mr. Colm Breslin

Yes, but it would not be an official Irish policy response in so far as that would be premature now. We are not in a position to give that at this time because we are still exploring what the directive means.

Chairman

Before we conclude, does anyone else wish to contribute?

Mr. Gary Palmer

Notwithstanding the concerns and restrictions to which Mr. Breslin has referred, the idea of attempting to look forward from an industry perspective at what this activity and other similar activities could do to further cement the business activity of fund administration here in Ireland, is welcome. It is something that we as an industry, and industry companies, are attempting to do on a regular basis. Notwithstanding those restrictions, however, we would certainly support the suggestion made by the Chairman.

Chairman

Would Mr. Deasy be happy for the Financial Regulator to act on that point? It may not be a definitive viewpoint, but in light of the documents before us and without the Government taking a definitive view, we are doing an exploratory check on this. It would give us the basis to form a viewpoint that would be discussed by Members of the Oireachtas. I fully respect Mr. Breslin's point that the Government has not taken a definitive decision. However, it would help us to form a viewpoint for our report — which will be done in the coming weeks — that would concur with all the opinions expressed here today.

Mr. Michael Deasy

Certainly we would be happy to jot down our concerns about the proposed directive as it is currently drafted.

Chairman

Very good. If we had that within two weeks it would be much appreciated.

Mr. Michael Deasy

No problem.

Deputy Seán Connick

May I ask Mr. Palmer about Article 16 and the valuator? Can he explain what that means and the current situation on how values are determined?

Mr. Gary Palmer

Certainly. Included in Article 16 is the introduction of a new concept, referred to as a valuator. It proposes within Article 16 that the valuator assumes management responsibility for the valuation of the portfolio of assets. At present, and as represented by organisations like IOSCO, the International Organisation of Securities Commissions, and international accounting standards boards, the appropriate management responsibility for the valuation of a portfolio of assets is the governing body of the entity, the board of a fund and its directors.

Deputy Seán Connick

Is it a self-evaluation?

Mr. Gary Palmer

It is more a case that the activity is undertaken by a service provider.

Deputy Seán Connick

Is it signed off by the board?

Mr. Gary Palmer

It is signed off by the board. Therefore, the responsibility for management of the fund, including the valuation of the assets and all the management activities are with the board, and rightly so. However, this provision suggests that the responsibility for signing off on this activity could be included in the valuator's activities, which from a governance perspective is at variance with best practice. It is something we would be somewhat concerned about.

Chairman

I thank Mr. Breslin from the Department of Finance, as well as Mr. Michael Deasy and Ms Martina Kelly from the Office of the Financial Regulator, for their submissions. I also thank Mr. Gary Palmer and Ms Carin Bryans from the Irish Funds Industry Association for attending. It has been an important learning curve for the meeting. I look forward to receiving whatever the witnesses can submit for the overall report. I thank everyone for having attended this meeting of the joint committee.

The joint committee adjourned at 1.58 p.m. until 11.30 a.m. on Tuesday, 28 July 2009.