investment management regulatory horizon...8 investment management – regulatory horizon © 2014...

Investment Management –

Regulatory horizon

Leading Business Advisors

The five key questions you need to ask 5

3 Investment Management – Regulatory horizon © 2014 Deloitte & Touche

Contents

LOREM IPSUM DOLOR

Companies Bill

Audit reform

Base Erosion Profit Shifting (BEPS)

AML Inspections

Client Asset Regime for Fund Service Providers

Irish Collective Asset-management Vehicle

Common Reporting Standard (“CRS”)

Features of the loan origination fund

New Financial Reporting Framework


Deloitte produces a range of thought leadership examining significant regulatory topics and key business impacts to help keep you informed.

We provide knowledge sharing through a variety of channels including events briefings, newsletters, teleconferencing and our Link’n Learn

series of webcasts.

Below is some of our latest thinking which you can access on our website : www.deloitte.com/ie/im

Join us on LinkedIn at: www.linkedin.com/groups/Deloitte-Ireland-Investment-Management-Practice-4195468

Thought Leadership

http://www.deloitte.com/ie/im

http://www.linkedin.com/groups/Deloitte-Ireland-Investment-Management-Practice-4195468











http://www2.deloitte.com/ie/en/pages/financial-services/articles/ifia-corporate-governance-code-for-fund-service-providers.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/loan-originating-funds-10-key-features.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/funds-bulletin-november-2014.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/ucits-v-depositary-update.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/performance-september-issue-15.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/link-n-learn-webinar.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/seismic-shifts-in-investment-management.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/market-abuse-directive-regulation.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/icav-irish-collective-asset-management-vechicle.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/consultation-on-loan-originating-qualifying-investor-aif-cp85.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/aml-guidance-for-the-funds-industry.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/otc-derivatives.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/aifmd-implementation-update.html

http://www2.deloitte.com/ie/en/pages/financial-services/articles/consultation-on-fund-management-company-effectiveness-cp86.html

http://www2.deloitte.com/ie/en/pages/tax/articles/OECD-common-reporting-standard.html

Audit reform

Mike Hartwell


Four categories of PIES

PIE definition

Companies with transferable securities

listed on EU regulated markets (see

http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri

=OJ:C:2011:209:0021:0028:EN:PDF, as

opposed to all markets in the EU) and

governed by the law of an EU Member

State;

(= identical to same category under current

Statutory Audit Directive)

Credit institutions authorized by EU

Member States authorities (i.e., banks

whose business is to receive deposits or

other repayable funds from the public and

to grant credit); (broadly same as current

Statutory Audit Directive but latter allows

Member States to exempt non-listed PIEs

from its requirements, unlike new

directive/regulation)

Insurance undertakings authorized by EU

Member State authorities; (= broadly

same as current Statutory Audit Directive

but latter allows Member States to exempt

non-listed PIEs from its requirements,

unlike new directive/regulation)

Other entities that a Member State may

choose to designate as a PIE (= same as

Statutory Audit Directive)

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:209:0021:0028:EN:PDF






Explanation

Mandatory audit firm rotation

• Audit firm appointments for statutory audits of PIEs to last for at least one-year term which is

renewable

• Maximum duration of audit engagement not to exceed 10 years,* unless a Member State

decides to extend rotation period to:

• Maximum 20 years in case of tendering, or

• Maximum 24 years in case of joint audit

• Competent Member State authority (for instance audit oversight authority and/or securities

regulator) may extend auditor appointment on an exceptional basis for a further two-year term

• Four year cooling off period after the end of the statutory audit services before audit firm can

undertake the audit of the entity again

• PIE to perform a transparent audit tendering process with close involvement of audit committee

when a tender does occur

*Member State option to set a maximum duration of less than 10 years


Timeline for transitional measures - (current interpretation)

Mandatory audit firm rotation

17 June

2020

Entry into

force

10 Years

17 June

2016 *

17 June

2023

17 June 2026^

2 Years

9 Years

Mandate in

place 20

years at entry

into force

Mandate in place

11 years < 20

years at entry

into force

Mandate in place < 11

years at entry into

force transition when

10 years reached

Effective

Date But may be

extended if Member

State opts for

extension

End End End?

6 Years

16 June

2014

End?


Non-audit services (NAS)

Scope and timing of restrictions on non-audit services

• Audit firms and network members prohibited from providing certain NAS

− such NAS not to be directly or indirectly provided by the audit firm or network members to the

audited PIE, its parent undertaking in the EU or its controlled undertakings in the EU.

− during a period covered by audited financial statements and until issuing of the audit report and

prior FY cooling- in period for one category of services: financial information internal control or

risk management procedures or financial information technology systems.

• No transitional measures for NAS prohibitions: apply as from 17 June 2016 (EC September FAQs:

accounting period commencing on or after 17 June 2016 ?). Unclear what the impact is for cooling-in

period – but general principle of non-retroactivity of EU legislation.


List of prohibited non-audit services

» preparation of tax forms

» payroll tax

» customs duties

» identification of public subsidies and tax incentives unless support from the statutory auditor or audit firm in respect of such

services is required by law

» support regarding tax inspections by tax authorities unless support from the statutory auditor or audit firm in respect of such

inspections is required by law

» calculation of direct and indirect tax and deferred tax

» provision of tax advice

Provision of tax services relating to:

Services that involve playing any part in the management or decision-making of the audited entity

Bookkeeping and preparing accounting records and financial statements

Payroll services

Designing and implementing internal control or risk management procedures related to the

preparation and/or control of financial information or financial information technology systems

Valuation services, including valuations performed in connection with actuarial services or

litigation support services

1

2

3

4

5

6


List of prohibited non-audit services

Services related to the audit client’s internal audit function

Services linked to the financing, capital structure and allocation, and investment strategy of the

audit client, except providing assurance services in relation to the financial statements, such as

the issuing of comfort letters in connection with prospectuses issued by the audit client

Promoting, dealing in, or underwriting shares in the audited entity

» management in a position to exert significant influence over the preparation of the accounting records or financial

statements which are the subject of the statutory audit, where such services involve:

− searching for or seeking out candidates for such positions or

− undertaking reference checks of candidates for such positions

» structuring the organisation design and

» cost control

Human resources services with respect to:

8

9

10

11

» the provision of general counsel

» negotiating on behalf of the audit client

» acting in an advocacy role in the resolution of litigation

Legal services, with respect to: 7


Explanation

Non-audit services (NAS)

Restrictions on non-audit services

• Other NAS permitted to be provided to the audited PIE subject to audit committee approval (and application

general principles of independence)

• Member States may prohibit additional non-audit services and establish stricter rules for NAS which are not

prohibited

• Member States may adopt legislation allowing valuation services and certain tax services (= preparation tax

forms; identification subsidies and tax incentives; support re tax inspections; calculation of direct and indirect

tax and deferred tax and tax advice) providing that these services have no direct effect, or have an immaterial

effect, on the audited financial statements

• Fees for permissible NAS provided by the audit firm to the audited entity, its parent undertaking or its

controlled undertakings for three consecutive financial years not to exceed 70% of the average fees paid in

the last three consecutive financial years for statutory audits of the PIE and, where applicable, its parent or

controlled undertakings, and of the group consolidated financial statements. Services required by EU or

national legislation are excluded. Competent authorities may exempt audit firm from cap “on an exceptional

basis” for maximum of two financial years

• Cooling-in period for the design and implementation of internal control or risk management procedures related

to the preparation and/or control of financial information or financial information technology systems applies

during the fiscal year prior to the period covered by the audited financial statements


5 key questions

1 Will audit reform impact the funds I govern?

2 Will it impact the audit and/or other services provided?

3 When will audit reform impact the funds I govern?

4 Have I considered transition arrangements?

5 How will the directive and regulation be implemented in

Ireland?

The Companies

Bill 2012

Mary Shier


When will the new legislation be enacted and commenced?

• Consolidation of the Companies Acts 1963 to 2013 and Statutory

Instruments into one Bill.

• The new Bill is easier to navigate:-

LTD in parts 1-15 (volume 1)

DAC in part 16 (volume 2 together with volume 1)

PLC in part 17 (volume 2 together with volume 1)

Investment Companies part 24, (volume 2 together with part 17

and volume 1)

Save those parts that have been dis-applied, modified or

supplemented

Impact

All private limited companies

85% of companies currently registered in Ireland.

Enactment

31 December 2014

Commencement

June 2015


What do directors need to consider?

Private Limited

Company

LTD v DAC No action taken will

become an LTD

LTD DAC

Lodge form N1 at the

Companies Registration Office

(CRO) with Members Resolution

(Special) / Directors Resolution

and new Constitution

Lodge form N2 at the

CRO with Members

Resolution (Ordinary) /

Directors Resolution and new

Constitution (M&A)

?

Take

Action

Action Action


Some Practical Features

LTD

• Must be a private limited company

• No objects clause - full and unlimited

capacity

• One document Constitution

• Name will end with Limited, LTD or Teo.

• Can eliminate authorised share capital

• Can have a minimum of one member

• Can have one director

• Must have a Company Secretary, who

cannot be the single director

• Can dispense with holding the AGM – both

single and multi-member company

• Cannot offer shares to the public or list

debt securities

DAC

• May either be a private limited company or

a company limited by guarantee with share

capital

• Will have an objects clause

• One document Constitution with two parts

• Name must end with Designated Activity

Company, DAC or its Irish equivalent

(unless exempt)

• Must state authorised share capital

• Must have a minimum of two directors

• Must have a company secretary who can

be one of the directors

• May dispense with the AGM if it is a single

member company. A multi member

company must continue to hold an AGM

• Cannot offer shares to the public but will be

able to list debt securities.


Sample Timeline based on Enactment from 1 June 2015

What do I have to do?

Private limited

companies treated as

DAC unless:-

1. They convert to LTD

(N1)

2. They convert to a

DAC (N2)

1 June 2015 to

31 August 2016

Final period for Private

Limited Companies to

convert to a LTD

1 September 2016 to

30 November 2016

• All Private Limited

Companies will

automatically be

converted to LTD

• All Guarantee and

unlimited Co.’s must

change name (N3)

30 November 2016

CRO will enforce name

change for Guarantee

and unlimited Co’s

Thereafter


After Conversion – Administrative Requirements

For a DAC

stationery will need to be altered

a new seal obtained

overseas registers, statutory registers and share certificates updated

website and signage updated

provide the members and directors with an updated Constitution

advise utility companies

notify the Registrar of business names that the company which owns the business name

has changed its name.

if the company has intellectual property rights such as trademarks, patents, these

registrations should be updated.

notify auditors, bankers, solicitors, accountants and regulatory authorities of the name

change.

For an Investment Company

No action needed


Duties now codified and contained in the Bill – S.229

What are the main changes that directors need to be aware of?

• Act in good faith

• Act honestly and responsibly

• Act in accordance with the Company’s constitution

• Use the company’s property, information or opportunities only for the interests of the company

• Not agree to restrict his/her power to exercise independent judgement

• Avoid conflict of interests unless authorised

• Exercise care, skill and diligence

• Have regard to the interests of the members and employees


Other miscellaneous changes

01 CHANGED

02 CHANGED

03 CHANGED

04 CHANGED

05 CHANGED

06 CHANGED

Directors no longer need to disclose interests <1% or non-voting interests

Director must be 18 years of age or over.

Retirement of Directors by rotation no longer required except for PLC’s and / or where specifically referred to in constitution

Loans from a director to a company – changes in case of civil proceedings

No longer a five year limit on the timeline for directors power to allot shares

New merger provisions introduced for private companies


Other miscellaneous changes

07 CHANGED

08 CHANGED

09 CHANGED

10 CHANGED

11 CHANGED

EGM for serious loss of capital is required for a PLC only, but not for investment companies

Changes to the General Meetings – single member companies can dispense with AGM’s, changes to signing resolutions

Changes to the process for registering charges

Changes to the rules relating to Company Secretaries

Introduction of Registered Person


Offences put into 4 categories – Category 1 the most serious

Categories of Offences

Category 1 • On Summary Conviction - class A fine*/12 months imprisonment OR both

• On Indictment - fine not exceeding €500,000/10 years imprisonment OR both


• On Indictment - fine not exceeding €50,000/5 years imprisonment OR both


Category 4 • On Summary Conviction - class A fine*

*Class A fine is defined in the Fines Act 2010 as greater than €4,000 but less than €5,000 for offences committed from 1997 onwards.

Chapter 1 & 4

Part 23 • Public offer of securities and transparency offence –

€1,000,000 fine and / or 5 years imprisonment

Chapter 2 • Market abuse – fine €10,000,000 and / or up to 10 years imprisonment


Summary Approval Procedure

• Financial Assistance for Acquisition of Company’s own shares (currently s.60 CA 1963)

• Loans (or loan type finance) to Directors or ‘Connected Persons’ (currently s.31 CA 1990)

• Distributing Pre-Acquisition profits or losses in holding company “dividend traps”

• Reduction in company capital or variation in capital on re-organisation

• Mergers

• Members Voluntary Windup

One Streamlined validation procedure (with variations) for each of the following


Are there changes to the Financial Statements?

Part 6

Companies Bill

2012

New

terminology

Notification

of change of

year end to

CRO


Part 6 The Companies Bill 2012 New

terminology

• Accounts now financial statements

• Books of accounts now accounting records

Terminology change

• Proper books of account now adequate accounting records (s282/283)

• Non compliance – generally a category 2 offence but..

• Persistent or material breach or one in the context of a winding up a category 1

offence

Accounting records


Part 6 The Companies Bill 2012

Change in Financial Year must be notified

to CRO - Can only be done once every 5

years

Notification

of change of

year end to

CRO


Category 2 offence

Directors’ Report - New auditor statement required from Directors

Statement that all relevant information has been

disclosed to the auditors

Each director has taken all necessary steps to make him/herself aware of all

relevant audit information

Must list the names of all persons who were directors at

any time during the year

Single director companies only: provision made for single director sign off of directors report; profit and loss

account and balance sheet.


Audit Committees

Obligatory for large companies / groups where Balance Sheet

Total >€25m AND Turnover >€50m

Must confirm in Directors Report and Audit Committee

has been appointed or provide reasons why not

Must have at least one independent director with

competence in accounting or auditing on the Committee


Revision of defective Statutory Financial Statements

Financial Statements


Increase in threshold for medium sized companies

• Turnover <€20m (currently: € 15.24m)

• Balance Sheet Total <€10m (currently: € 7.62m)

• Average number of employees <250 (no change)

Not consistent with changes to 4th and 7th directives (Directive 2013/34/EU) due to be

enacted by 20th July 2015:

Increase in threshold

Small - max Medium

Turnover €8 - 12m €40m

Balance sheet total €4 - 6m €20m

Average employee number 50 250


Audit Exemption

Small Groups will be able to avail of Audit Exemption IF:-

• All companies in the group have filed their returns on time

AND

the group taken as a whole meets 2 or more of the following (in current and previous year):-

• Turnover <€8.8m

• Balance Sheet Total <€4.4m

• Average number of employees <50

• Provided members holding 10% or more of the voting rights do not object

• Extended to parent company and subsidiaries

• Special exemption for dormant companies


What are the changes for Part 13 companies?

Constitution Minimum of

one member

Can dispense with

AGM if single member

but not if multi

member

Restoration –

2 years

Directors

Compliance

Statement

doesn’t apply

Part 23 –

Corporate Governance

Statement – Chapter 3

Part 23 – Chapter 1, 2 &

4 applies to all PLC’s –

public offer, market

abuse, transparency


Sample Constitution for an Investment Company

Constitution

OF

[name of company as below]

MEMORANDUM OF ASSOCIATION

1. The name of the company is: THE HIGH SCORE INVESTMENT PUBLIC

LIMITED COMPANY.

2. The company is a public limited company, registered under Part 24 of the

Companies Act 2012.

3. The object for which the company is established is the collective investment of its

funds in property with the aim of spreading investment risk and giving members of

the company the benefit of the results of the management of its funds

4. The liability of the members is limited.

5. The share capital of the company shall be equal to the value for the time being of

the issued share capital of the company.

6. [Unless this is provided for in the articles of association] The actual value of the

paid up share capital of the company shall at all times be equal to the value of the

assets of any kind of the company after the deduction of its liabilities.

7. The share capital of the company is divided into 1,000,000 shares.

8. The issued share capital of the company for the time being shall not be less than

€5,000,000 nor more than €20,000,000.

9. [Unless this is provided for in the articles of association or the company has the

approval of the Central Bank not to so provide] The shares of the company shall,

at the request of any of the holders thereof, be purchased by the company directly

or indirectly out of the company’s assets.

ARTICLES OF ASSOCIATION

1. Regulations in relation to the company with respect to such aspects of the activity

of collective investment referred to in section 1376(1)(a), or matters related

thereto, as are deemed appropriate.

2. Unless the memorandum of association provides for this, the matter referred to in

paragraph 6 above.

3. Unless the memorandum of association provides for this or the company has the

approval of the Central Bank not to so provide, the matter referred to in paragraph

9 above.

4. Other regulations (if any).

We, the several persons whose names and addresses are subscribed, wish to be

formed into a company in pursuance of this Constitution, and we agree to take the

number of shares in the capital of the company set opposite our respective names.

As appropriate:

signatures in writing of the above subscribers, attested by witness as provided for

below; or

authentication in the manner referred to in section 889.

Dated the ______day of ____________________ 20___

Witness to the above Signatures:

Name: __________________________________________

Address: ________________________________________

Names, Addresses and Descriptions of

Subscribers

Number of Shares taken

by each Subscriber

1. Thomas Friel

Address:

Description:

5

2. George Mooney

Address:

Description:

375

3. Cormac O’Hara

Address:

Description:

225

4. Sarah Weizmann

Address:

Description:

55

Total Shares Taken 600


5 key questions

1 When will the new legislation be enacted and commenced?

2 What do directors need to consider?

3 What are the main changes that directors need to be aware of?

4 Will there be changes to the Financial Statements?

5 Are there changes to Part 13 Companies specifically?

Base Erosion Profit

Shifting (BEPS) –

The Impact on Funds

Louise Kelly


UK and Germany

agree tax

crackdown on

multinational

companies


Introduction

What is BEPS all about?

• Are countries getting their fair share of revenue?

High Taxed Countries Interest

Royalties

Products

Services

Low Taxed Countries

The BEPS project has two key objectives:

1) To align substance and taxing rights

2) To address double non-taxation

http://en.wikipedia.org/wiki/File:Flag_of_the_Netherlands.svg

http://en.wikipedia.org/wiki/File:Flag_of_South_Africa.svg

http://en.wikipedia.org/wiki/File:Flag_of_Mauritius.svg


Government and OECD steps to address BEPS

Background

G20 leaders met

OECD released “Addressing

Base Erosion and Profit

Shifting”

European Council

meeting

Forum of Tax

Administration

meeting

OECD’s Committee

on Fiscal Affairs to

agree action plan

OECD’s Action Plan

delivered to G20

Finance Ministers

G8 Summit

• Digital economy

• Hybrid mismatches

• Treaty abuse

• Transfer pricing documentation

• Transfer pricing of intangibles (1)

• Harmful tax practices /

Preferential tax regimes

• CFC rules

• Permanent establishments

• Transfer pricing of intangibles (2),

risks and capital, other

• Disclosure of aggressive tax

planning

• Dispute resolution

• Data collection and analysis

measuring BEPS

• Interest deductions

• Harmful tax practices / Preferential

tax regimes

• Multilateral instrument

G20 leaders met Cairns, Australia

15

Action

Items

November 2012 Feb 2013 May 2013 June 2013 July 2013

September 2014 September 2015 December 2015


Impact of BEPS actions on the Funds Industry


Action 13

Transfer Pricing Documentation Information required by tax

jurisdiction (aggregate for all

entities including PEs)

Profit/loss before income tax

Income tax paid (cash)

Income tax accrued

Stated capital

Accumulated earnings

Number of employees

Revenues (related, unrelated,

total)

Tangible assets (excl. cash/cash

equivalents)

Country-by-Country Template

Master File

Local File


Action 2 - Neutralising the Effects of Hybrid Mismatch Arrangements

Impact of BEPS

• Two types of perceived harmful outcomes

Double Deduction (DD)

Generates Double

Deductions

Deduction/No Inclusion (D/NI)

Deduction on one side

No income taxed on the

other side

A hybrid mismatch arrangement is:

an arrangement that exploits a difference in the tax treatment of an entity or instrument under the laws of

two or more jurisdictions to produce a mismatch in tax outcomes where that mismatch has the effect of

lowering the aggregate tax burden of the parties to the arrangement


It is proposed that linking rules will be introduced in jurisdictions that do not have anti-hybrid domestic

rules.

• The intention is to avoid relying on another jurisdiction.

• A new model treaty provision is also recommended to address mismatches arising in respect of

fiscally transparent entities (to expand application beyond partnerships)

A hybrid mismatch arrangement is:

How will Action 2 be implemented – “Linking Rules”

Impact of BEPS

Response Recommended Linking Rule

Primary To deny a deduction where a mismatch arises

Defensive To include the income as taxable income

(To apply in cases where a primary rule does not operate, i.e. the

recipient should be subject to tax if the payer takes a tax deduction)


Examples of Hybrid Mismatch Arrangements

Impact of BEPS

Hybrid Financial Instrument

Lux Co

Parent Co

Recommended hybrid mismatch rule

Response Defensive rule Scope

Deny Lux Co a deduction Parent Co includes as ordinary

income

Related parties (25%) and structured

arrangements (designed mismatch)

Payment on

Hybrid instrument

Facts

• Parent Co holds shares in Lux Co as well as a

hybrid instrument e.g. Convertible Preferred Equity

Certificate (“CPEC”), Profit Participating Loan

(“PPL”), or others

General tax consequences

• Deduction in Lux Co for accrued interest expense

under the hybrid instrument

• No taxation in Parent Co on income due to

treatment of hybrid instrument as equity


Repo mismatch

Impact of BEPS

Country

A

Company A

Obligation to pay purchase price

B Sub

Company B

Country

B

+

- +

-

Dividend

Right to acquire B sub shares

Recommended hybrid mismatch rule

Response Defensive rule Scope

Deny deduction in Co A for

payment

Include amounts as taxable

ordinary income in Co B

Financial instrument held by a related party or as part

of a structured arrangement. Some exceptions.

Restrict tax credit in Country B

to net taxable income

No limit

Facts

• Co A sells shares of B Sub to Co B under an

arrangement that A will acquire the B Sub shares at

a future date for an agreed price (repo)

• Between date of sale and repurchase, B sub pays

dividends to Co B.

• Net cost to A treated as deductible finance cost

(including B sub dividend cost)

• Country B grants credit/exclusion/exemption to Co

B on dividends received

• Co B treats transfer of shares to Co A as real sale -

> possible participation exemption on gain


• Deduction in Co A for repo payments

• No tax for Co B

• Mismatch


Is this transaction caught by Action 2

Impact of BEPS

Arms length interest

on bond

UK Co

Irish Fund Ireland

UK

Facts

• Fund holds bonds issued by a UK company


• Interest is not taxable in Irish Fund, as all fund

investors not Irish

• UK Co is entitled to deduction for interest under

domestic UK rules

OECD BEPS impact

• Action 2 primary applicable? Is mismatch due to

conflict in treatment of either instrument itself? Or in

treatment of relevant entities?

• Should be considered further in context of Action 4

(Interest Deductibility) in 2015


Action 2 and Funds

Impact of BEPS

Tax exempt

structures

• In some locations funds may not actually pay tax. Risk that

some countries may consider them tax exempt, which is not

the case.

• Not a hybrid entity under BEPS.

Efficient Portfolio

Management

(EPM) by funds using

repos, securities

lending.

• Not a hybrid instrument purely because utilised by a fund

where receipt/payment is not taxable/deductible.

• Further guidance and consideration needed.

Transparent

Structures

e.g. FGR, FCP, CCF

• Not a hybrid entity in many cases.

• Opportunity for recognition of transparency across OECD.

• Reverse hybrids – limit transparency to treat hybrid entity as

resident in location of establishment.

• Offshore fund regimes may need updating to address

imported mismatches


Action 6 – Prevent Treaty Abuse

Impact of BEPS


Prevent Treaty Abuse

Focus of Action 6

Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of Treaty benefits in inappropriate

Clarify that tax treaties are not intended to generate double non-taxation

Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country

1

2

3


Treaty Access is fundamentally important to Funds

Why?

1. Avoids double taxation of Fund Investors.

2. Enhances fund performance.

Issues/challenges for funds

Limitation on

Benefits Provisions.

Multilateral

Agreement (Action

15).

GAAR (General Anti-

Avoidance

Rules)/PPT

(Principal Purposes

Test).

Practical operation

and application of

treaty benefits e.g.

nominees, regular

change in ownership

of the fund units.


Key Themes

Outcome of September 2014 Deliverables from a Funds Perspective

WIP until September

2015

Transparent structures need

further consideration and BEPS could be

an opportunity

Recognition of the challenges for

Funds re Treaty access

Rules for on-market repos/stock lending to

be further refined

Offshore fund regimes may need

updating


OECD calendar for planned stakeholders’ input BEPS Action Plan Item Type Date* Deadline

8-10 Low-value adding services Discussion Draft October 2014 45 days after release

7 PE Status Discussion Draft October 2014 60 days after release

6 Treaty Abuse Discussion Draft Mid November 2014 45 days after release

Update on progress Webcast December 2014 tbc

1 VAT B2C Guidelines Discussion Draft Early December 2014 Mid February 2015

4 Interest Deductions Discussion Draft Mid December 2014 45 days after release

8-10 Risk, recharacterisation Discussion Draft

Mid December 2014

45 days after release

8-10 Commodity transactions Discussion Draft

8-10 Profit splits Discussion Draft

14 Dispute Resolution Discussion Draft December 2014 30 days after release

7 PE Status Public Consultation Early 2015 tbc

6 Treaty Abuse Public Consultation Early 2015 tbc

14 Dispute Resolution Public Consultation Early 2015 tbc

Update on progress Webcast Early 2015

11 Economic Analysis Discussion Draft Late January 2015 30 days after release

4 Interest Deductions Public Consultation 17 February 2015

1

VAT B2C Guidelines

Public Consultation 19 or 20 February

2015 (tbc)

8-10 Risk, recharacterisation

Public Consultation

19-20 March 2015

8-10

Base eroding payments (including

commodity transactions and low value adding services)

8-10 Profit splits

11 Data Analysis Public Consultation 27 March 2015

12 Disclosure Rules Discussion Draft Late March 2015 30 days after release

3 CFC Rules Discussion Draft Early April 2015 30 days after release

8-10 CCAs Discussion Draft Early April 2015 30 days after release

8-10 Intangibles – ownership; hard to value Discussion Draft Early April 2015 30 days after release

Update on progress Webcast April 2015

12 Disclosure Rules Public Consultation 11 May 2015

3 CFC rules Public Consultation 12 May 2015

8-10 CCAs Public Consultation

July 2015

8-10 Intangibles – ownership; hard to value

Request for input

Discussion Draft

Public Consultation

Webcast


5 key questions

1 What is BEPS all about?

2 What is Country by Country Reporting?

3 Will funds be treated as Hybrid entities?

4 Will BEPS affect treaty access for funds?

5 What are the next steps?

AML Inspections An overview

Niall O’Farrell


Message from Cyril Roux – Financial Regulator

In early 2016, the Financial Action Task Force will review our

compliance and Ireland has much to lose if its adherence

with the highest standards of anti-money laundering

procedures is left open to doubt or criticism,

Our current self-assessment is that we have a distance to

travel in this area if we are to reach international standards

or best practice. It is likely that the current IMF review will

concur with this view. It is therefore important that we

continue to focus on this area.


AML CEO Letter

• AML compliance framework with strong board and senior management

oversight and understanding

• Risk evaluation, mitigation and implementation – board responsibilities

• Failures in policies and procedures – on-going oversight by board

• Training

• CDD – existing customers

• CDD – Verification before or as soon as possible after business relationship

• CDD – bringing relationship to an end

• CDD -applying SCDD inappropriately

• Third party reliance - must meet all requirements

• STR - “as soon as practicable”


CBI AML Activity

• Over 80 inspections to date

• A number of banks recently inspected

• UBS International Life Limited (June 2012) Settlement, publicity, reprimand,

monetary penalty €65,000

• AXA MPS Financial - €50,000

Focus:

• Positioning of AML/CFT in the organisation

• Resources deployed

• Identification and mitigation of risks

• Alignment of business processes

• Decisive actions taken promptly where required

• Monitoring and management of compliance with policies and procedures

• Ability of firm to demonstrate compliance


CBI Key Findings

Governance – boards and senior management not taking appropriate steps to ensure that their businesses are complying with the 2010 Act. Lack of engagement and challenge by the Committees & Senior Management in the management of AML/CFT and FS risks;

Risk based approach – firms had not evaluated the risks of money laundering and terrorist financing pertinent to their business sector and had not adopted appropriate risk mitigation plans to mitigate the risks;

Training – inadequate training arrangements in place and boards of directors having not sought or received their firm’s own appropriate instruction;

Customer Due Diligence – failures in obtaining information on the purpose and intended nature of relationship and failures to identify nominee structures in line with due diligence requirements; and

1

Suspicious Transaction Reporting – inadequate procedures in place for investigating and reporting suspicious transactions.

PEPs

2

3

4

5

6

7 Over-reliance on poorly documented manual procedures


How does the CBI conduct inspections for the Funds industry?

PRISM

Deep Dive using third party

CBI led inspection

Fund Focused

4 3

2 1


Why does the CBI select an entity for inspection?

Supervisor has concerns

Issues identified during a

review

Material increase in AUM or

number of clients

Questionnaires and surveys

AML issues with parent

PRISM

Randomly picked

Failures in other operational

controls

Triggers and reactive measures should be developed in this

regard


What should you do now?

• Consider the focus of previous visits and using industry insight to understand

where questions are most likely to arise

• Talk to other firms who have been through the process

• Read and understand documentation submitted to the CBI – focus of the

discussion will be on the practical application of the policies and procedures

outlined in that documentation


What should you do on day of visit

• Understand the powers which the Central Bank are using?

• Consider appointing a person to manage the visit

• Make relevant persons aware of the visit internally

• Make sure the visit is appropriately resourced

• Make life easy for the regulator

• Act with one consistent voice

• Be cooperative and responsive

• Develop a documentation log and interview schedule


Documentation Request and Questionnaire

Governance – minutes, board packs

AML Strategy and Business Model – risk appetite,

contractual arrangements, outsourcing

Risk and Compliance – three lines, MLRO report,

risk structure

People, processes, systems and communications

Organisation – Reporting lines


Central Bank review framework

6.1 Conduct on-

going monitoring of

processes

6.2 Analyse internal

process trends

6.3 Review new

regulation &

guidance

6.4 Support internal

/ external audits

6. Monitor and

Improve

Effectiveness of

AML Controls 1.1 Adopt formal

policies 1.2 Define governance

structure

1.3 Define roles &

responsibilities

1.4 Define clear

approval/

escalation process

1.5 Define training &

awareness

strategy

1. Establish AML Governance

2.1 Identify risk faced by firm

2.2 Establish risk rating

methodology

2.3 Complete customer due

diligence (CDD)

2.4 Conduct on-going customer

monitoring

2.5 Conduct transaction

monitoring

2.6 Conduct risk based periodic

customer review

2.7 Create AML intelligence

2. Adopt Risk-based Approach

Implement training & awareness strategy 5. Manage people and training

3.1 Report suspicious

activity

3.2 Report sanctions

hits

4.1 Report

AML MI

4.2 Produce annual

MLRO report

4.3 Keep

records

3. Investigate / Escalate Suspicious Activity and Sanction

Hits

4. Report Management Information


Governance - AML Risk Framework

Co

mm

unic

ation

& C

on

form

ance

Re

po

rtin

g Governance Oversight

Risk Management

Management System

People Culture

Operating

Model

Governing

Bodies

Policy

Governance

AML Risk

Vision Values

Lines of Defence (control & monitor)

Stakeholder Expectations and Regulator Requirements

Ind

ep

end

ent A

ssu

ran

ce

Activitie

s

Performance

Management

Control

frameworks

Policy, Process

& Procedure

Training and

Education

Procedures and Control Activities


Risk Maturity


Themes

Reliance on

due diligence

being

conducted by

third parties

Customer Due

Diligence and

on-going

monitoring

Review of any

outsourcing

arrangements

Suspicious

transaction

reports including

transaction

monitoring

Review of

Politically

Exposed Persons

for new and

existing

customers


5 key questions

1 Are we clear on our legal obligation with respect to AML?

2 Are we prepared for an inspection, should the CBI decide to

inspect us?

3 As a Board, are we getting sufficient MI to understand our AML

Risk Exposure, and how this being managed?

4 Have we received sufficient training on AML, as a Board?

5 Are we carrying out Assurance Testing on our Fund

Administrator?

Client Asset

Regime for Fund

Service Providers

Clare Ann McDermott


“Who will be impacted?”

The Emerging Client Assets Regime for Fund Service Providers

Ireland’s Client Asset Requirement (“CAR”) Regime, which also includes Client Money, is issued

pursuant to MiFID Regulations and S.52 of the Investment Intermediaries Act, 1995. As such the

CAR Regulations will apply to firms authorised under the MiFID Regulations:

Stockbrokers Investment

Managers

Those authorised under

the IIA, e.g. Fund

Administrators &

Trustees.

As a result of strong industry feedback, 2 sets of regulations were issued 1 for FSPs (primarily

administrators) & 1 for everybody else. The need for separate Client Asset guidance for Investment

Firms & Fund Service Providers (“FSPs”) was identified in 2013 post the completion of the Central

Bank’s consultation process pertaining to the Client Asset Regulations. .

Draft Guidance on Investor Money Regulations for FSPs was issued by the CBoI during the Summer,

this guidance has 3 objectives:

To mitigate the risk of misuse of investors’ monies; 1

2 To provide a system which, in the event of a FSP’s insolvency, will enable the efficient return of investors’ monies to the owner at the lowest cost; &

3 To enhance & maintain public confidence in the investor money regime.


“Why is there a need for Investor Money Regulations?”


• The funds industry has viewed the regime provided for in the CAR Regulations as

unsatisfactory. This is predominately due to the fact that the CAR Regulations have

provided for a one size fits all approach, leading to difficulties within the implementation of

the Regulations.

• Given the difficulties in this regard a number of Administrators have looked to implement

account structures with related Trustee/Custodians to avoid CAR &/or sought to rely on

Guidance Note 1/99 Administration Companies and the Investor Compensation Act.

• The effect of this approach has been wide spread non-compliance within the funds

industry with regard to CAR requirements. This was noted in the CBoI’s “Review of the

Regulatory Regime for the Safeguarding of Client Assets”.

It is undesirable that no appropriate requirements to

safeguard client assets are imposed The report stated


“Why is there a need for Investor Money Regulations?”


• The main source of debate has been around the extension of client asset regulations to

encompass “Collection Accounts”, i.e. those facilities utilised by FSPs to transfer monies

from the investor to the fund’s depositary & during the redemption process where monies

are transferred from the fund back to the investor.

• The rationale for extending the client asset regulations is to protect investors’ monies

whilst on placement in collection Accounts.

• It is important to note that the client asset regulations do not apply, where the Collection

Account is in the name of the Investment Fund. Therefore many FSPs are looking to

make the Collection Account an asset of the fund.

• Obviously the Fund would have to agree & significant effort would be needed to identify

any potential risks/issues pertaining the ownership structure, for e.g. AML requirements,

will be impacted by the CAR in any attempt to restructure the Collection Account as a

fund asset.


“What will the new Client Asset Regime focus on?”

Client Assets Regime for Fund Service Providers

For firms subject to the CAR, CP71 proposes sweeping changes representing a very significant

increase in oversight, due diligence, reconciliation & documentation. The CBoI introduces the

concept of “Core Principals” 7 in total:

» The Central Bank introduces the concept of “Core Principals” which should be considered in addition to

the strict rules in CP71 – Segregation, Designation & registration, Reconciliation, Daily calculation,

Client disclosure and client consent, Risk management, and Client asset examination

Core

Principles

Segregation

and

Reconciliation

» The FSP should ring fence investors’ monies, i.e. hold, or arrange to hold investors’ monies separate

from its own assets (this is inclusive of nominee accounts);

» Accounting segregation in pooled accounts - investors’ monies are clearly identified;

» Daily calculation & reconciliation

» Fund deficit in account

Client

Communication

» The FSP should produce an Investor Money Key Information Document (described as a Client Asset

Key Information Document’ (“CAKID”) in CP71.

» Provide a receipt for monies received

» Obtain consent in writing to use funds in specific ways

CAMP

» Produce an Investor Money Management plan

» Appoint a Head of Investor Money (HIM), this will be a pre-approved control function under the Fitness

& Probity Regulations and therefore subject to CBoI approval.

» Appoint external expert to review CAMP

Auditor

Obligations » Annual report on compliance with obligations

» Confirmation of external balances.


“Where does the Industry have Concerns?”

Client Assets Regime for Fund Service Providers

The Industry has raised concerns pertaining to the following areas:

• In cases of late settlement where will the liability for funding a shortfall rest? (Segregation &

Designation & Registration);

• What will be the benefit and uplift resulting from the onerous activities performed during the

daily calculation of the balance on the Collection Accounts (Daily Reconciliations)

• What added value will the Investor Money Key Information Document offer to investors, in light

of all the other investor information which is provided (Client Disclosure)

• The Central Bank of Ireland have advised that the draft Guidance on Investor Money

Regulations for Fund Service Providers will be finalised by year end 2014, however to date this

guidance has not been finalised.

Key impacts or issues

Key stages

CP71 Issued

August 2013

CP71 Closed

31 October 2013 Central Bank

Review

Implementation

Q4 2014* * This is an estimated timeframe

subject to change.

“When will the draft guidance be finalised?”


5 key questions

1 Who will be impacted?

2 Why is there a need for Investor Money Regulations?

3 What will the new Client Asset Regime focus on?”

4 Where does the Industry have Concerns?

5 When will the draft guidance be finalised?

Irish Collective Asset-

management Vehicle

Aisling Costello


Available

legal structures

Investment limited

partnership

Unit trust Common contractual

fund

Variable capital

company ICAV

Eligible for US ‘check

the box’

Umbrella

sub-funds

Financial statements on

a sub-fund basis

Irish tax transparency

Requirement for AGM Not required Not required Not required Always required Can be dispensed with

Amending constitutional

documents Requires investor approval

Requires trustee

certification*

Requires custodian/

manager certification*

Requires investor

approval Depositary certification expected*

AIF/UCITS AIF only

Open-ended

Closed –ended

Risk spreading Not required Not required Not required Required Not required

How does the ICAV compare to existing Irish fund vehicles?

Greater flexibility


What benefit is the ‘check the box’ election?

Enhanced distribution

US “check the box” election under US tax rules to be treated as a transparent or flow-through entity for US federal income tax purposes.

US investors are placed in the same tax position as if they had invested directly in the underlying investments of the ICAV.

This status will make the ICAV particularly attractive for US investors seeking tax efficient returns from a regulated corporate fund vehicle.

Variable Capital Companies are the sole corporate fund structure available in Ireland and must be treated as a “per se” corporation for US tax purposes - tax leakage for US investors resulting in the investor being charged tax twice (at fund level and at investor level).

Funds currently structured as VCCs who do not currently benefit from this election should consider converting to an ICAV to increase attractiveness to US investors.


CRO or CBI?

Simplified compliance

The ICAV will deliver simplified compliance, including:

» A stream-lined incorporation and authorisation process, as both steps will be carried out

simultaneously by the Central Bank of Ireland (“CBI”) rather than registration first with the

Companies Registration Office (“CRO”) followed by CBI authorisation.

» The Board of Directors will be able to elect to dispense with the need for an AGM by notifying

shareholders.

» It is anticipated that amendments to the ICAV’s constitutional documents will be possible without

shareholder approval where the depositary certifies that the changes do not prejudice the interests

of investors, as is currently the case with unit trusts. Although the current draft of the ICAV Bill is

silent on this point, it is anticipated that this feature will be introduced in the final legislation.

» Creating a corporate vehicle outside the Companies Acts also future-proofs the ICAV against any

unintended consequences arising from changes in Irish and European company law.

» The ICAV will allow a streamlined compliance procedure: currently both the CRO and the CBI need

to be informed of material changes including changes to directors; the ICAV will only need to inform

the CBI of such company secretarial changes.


Conversion, migration or merger

How can existing funds benefit?

» the Conversion and migration processes aim to continue the track record and existence of a fund, rather

than launching a new fund with a new identity.

» They allow a fund to maintain its past performance data by changing the seat of incorporation rather

than starting anew. This avoids the need for any contracts to be re-executed.

Continuation

Registration

and de-

registration

» after registration with the CBI as an ICAV with a new ICAV number,

» the entity must then deregister from either the CRO in Ireland or its equivalent overseas, with effect from

its date of registration as an ICAV by the CBI.

Irish

structures » existing Irish VCCs can convert to an ICAV through a simplified conversion process.

Overseas

structures

» can convert to an ICAV under the streamlined re-domiciliation migration one-step process introduced in

2009, rather than being required to migrate and then convert.

UCITS and

AIFs

» both UCITS and AIFs can convert and migrate – if structured as corporate entities.

» Unit trusts, investment limited partnerships and common contractual funds are not currently permitted to

convert to an ICAV.

Merger » The existing UCITS merger regime applies to both UCITS and to AIFs. UCITS, regardless of their

underlying vehicle, can merge to form ICAVs; it remains to be seen whether the final draft of the

legislation will permit AIFs the same


‘Look before you leap’ - cost benefit analysis

To convert or not to convert?

It is anticipated that the ICAV will

be the vehicle of choice for the

vast majority of new fund launches

in Ireland and will replace the VCC

over time.

Before converting from your existing

structure to an ICAV, it is critical to carry

out a cost-benefit analysis to determine

whether the estimated benefits will

outweigh the costs and effort required to

complete a conversion. These

conversion costs include drafting the

instrument of incorporation, completing

the filings with the CBI, de-registering

from the CRO and notifying

shareholders.

It is also important to consider

certain tax, legal and investor

considerations as set out below.


‘Look before you leap’ - cost benefit analysis

ICAV

Tax

» Have your US tax advisors reviewed your

proposed ICAV structure to ensure

they are satisfied that any sub-funds are

suitable for “check the box” election and meet

your US tax objectives?

» Will “checking the box” trigger any

adverse tax consequences for US

investors who currently treat the investment as

“opaque”?

» Liaise with your tax advisors on foreign tax reporting to understand

if any considerations need to be addressed

Legal

• What does your entity need to do to convert or migrate? It is likely that approval will be required from the board, as well as and from shareholders at an extraordinary general meeting.

• New documents will need to be drafted and filed with the CBI, including:

» an instrument of incorporation in place of the existing memorandum and articles of incorporation (or equivalent);

» a declaration of solvency; and

» a statutory declaration by a director confirming certain matters.

Investors

Before taking steps to begin the

conversion process, engage with

investors to ensure that there are no

unintended consequences for the

investor that could negatively impact

their performance and therefore

jeopardise existing or future

investments.


5 key questions

1 How does the ICAV compare to existing Irish fund vehicles?

2 What benefit is the ‘check the box’ election?

3 CRO or CBI?

4 How can existing funds benefit?

5 To convert or not to convert?

Common Reporting

Standard (“CRS”)

Eugene O’Keeffe



A new requirement for Financial institutions (“FI’s”) to submit information on their Financial Accounts to

their local government and which automatically exchange that information with other jurisdictions with

which agreements are in place on an annual basis due to be implemented in Ireland by September 2017

CRS

TIMELINE

Feb

OECD

approve

CRS

2014 2017

Sept

Ireland has signed

agreements to

implement CRS by

Sept 2017 along

with 57 other

countries who have

either signed

agreements or

committed to same

2018

Sept

A further 35

countries have

signed

agreements or

committed to

implement CRS

by Sept 2018

July

OECD

release the

Standard

for

Automatic

Exchange

of Financial

Account

Information

on Tax

Matters

A new Section 25

has been added

to the Finance Bill

2014 to empower

Revenue to make

Regulations to

give effect to the

OECD’s Standard

for Automatic

Exchange of

Financial Account

Information i.e.

CRS

Background

• Globalisation and offshore

tax evasion

• US FATCA introduced in

2010 US legislation

• CRS extensively based on

FATCA approach


57 Countries to implement by September 2017, with a further 35 to implement by

September 2018




What is CRS?

• CRS will require governments to obtain

financial information on financial accounts

from their financial institutions (“FI’s”) and

automatically exchange that information

with other jurisdictions on an annual basis

• Ireland will sign agreements with other

jurisdictions to provide them with

information on financial accounts held in

Ireland by people/entities resident in their

foreign jurisdiction

• Irish FI’s will be required to identify its pre-

existing financial accounts (i.e. those held

pre 1 January 2016). FI’s will be required to

establish the tax residency of account

holders. Holders opening accounts on or

after 1 January 2016 will be required to

provide a declaration of their tax residency

• Broadly similar to FATCA with some

differences

CRS vs FATCA

• Does not have US specific aspect i.e. will

be required to report on all jurisdictions

signed up and agreements in place

• 4 Types of FI’s: Custodial Institutions,

Depository Institutions, Investment Entities

and Specified Insurance Companies

(Treasury Companies and Holding

Companies are not included for CRS)

• Entities whose stock is “regularly traded on

a stock exchange” are not exempt from

CRS

• Lower risk entities are not exempt from

CRS


The CRS encompasses several key elements which form the legal basis for

exchange between jurisdictions and outline the requirements for FI’s.

Mechanism For Exchange

Model Competent Authority

Agreement (“CAA”)

Model agreement which establishes

a legal basis for exchange between

participating jurisdictions

CRS

Common Reporting Standard

(“CRS”)

Outline the scope of the information

to be reported and the due diligence

procedures

CRS Commentary

Detailed guidance on the

application of the CAA and CRS,

including appropriate examples

CRS Schema and User

Guide

Provides a standardised approach

for transmitting information

electronically by reporting FIs to

Competent Authorities


Overview of how CRS will work alongside FATCA

Mexican

Customer

German

Customer

Jersey

Customer

US

Customer

Irish Financial

Institution

US FATCA

Reporting

CRS

Reporting

Irish

Revenue

Jersey Tax

Authorities

German

Tax

Authorities

Mexican

Tax

Authorities

IRS



Other Relevant Information

• Data protection

• CRS portal with useful information

• Account holder information

How this may affect you as Independent Non-Executive Directors?

• Company has considered falling into the scope of CRS

• Company is aware of possible obligation to register and report for CRS

• Company has considered seeking professional tax advice


Next Steps


• Establishing project teams and resources

• Assessment of impact and potential changes required

• Considering pre-existing remediation approach

• Enhancing system capabilities and in-house resources

• Dealing with multiple reporting requirements and deciding on a reporting solution

• Tracking implementation across multiple jurisdictions

Next steps


5 key questions

1 What is the Common Reporting Standard (“CRS”)?

2 When is the CRS expected to be implemented?

3 Is there much difference between CRS and FATCA?

4 How may this affect you as Independent Non-Executive

Directors?

5 What are the next steps?

Features of the loan

origination fund

Niamh Geraghty


Loan Originating QIAIFs

Loan origination by investment funds

As of 1 October 2014, the Central Bank will permit certain Qualifying Investor Alternative Investment Funds

(QIAIFs) to originate loans (“LOQIAIFs”). On 18 September 2014 the Central Bank published an updated AIF

Rulebook incorporating the rules governing the LOQIAIFs, and also published its feedback statement on its

Consultation paper on loan origination by investment funds, (CP85).

Ireland is the first European jurisdiction to offer a regulated loan originating investment fund. As Ireland is already

a favoured jurisdiction for the establishment of unregulated loan funds, it is anticipated that this will be a popular

product with fund managers.

Overview

10 Key features

1. Eligible Assets

2. Structure

3. Credit assessment granting and monitoring

4. Diversification

5. Prohibited loans

6. Stress testing

7. Valuation

8. Leverage

9. Investor protection

10. Tax


Investor protection features of the LOQIAIF

1. Implementing policies and procedures:

regarding assessing, pricing, and granting of credit; a risk appetite statement; monitoring, renewing and

refinancing credit; managing collateral, managing concentration risk, and valuation both of loans and collateral.

4. Diversification:

the LOQIAIF’s portfolio must be diversified. Exposure to one issuer or group is limited to 25% of net assets within

a certain time frame. These limits do not apply when the LOQIAIF is building its portfolio at the start of its lifecycle

or when closing out its positions at the end of its lifecycle.

3. Due diligence:

where an AIFM intends to provide access to its records/staff to any potential investor, it must ensure that such

access (if provided) is available to all unitholders on a nondiscriminatory basis.

.

2. Complying with the CBI’s Code of Conduct for Business Lending to Small and Medium

Enterprises:

The Code sets out the processes that lenders are required to adopt in facilitating access to credit. It also promotes

fairness and transparency of the treatment of borrowers and includes a clear framework for dealing with borrowers

in financial difficulty allowing borrowers and lenders to work together to address existing or emerging difficulties.


Investor protection features of the LOQIAIF

5. Stress testing

the LOQIAIF must implement a comprehensive stress testing programme, and report the results to the board of

the AIFM at least quarterly. The CBI’s rationale for imposing these requirements is that the potential systemic risks

arising from excessive credit growth and leverage are equally possible to arise from lending by an investment fund

as they are in the context of lending by banks.

6. Liquidity

Distributions and redemptions are permitted if liquid assets are available and there is no risk of jeopardising the

regulatory compliance or liquidity obligations of the LOQIAIF.

7. Leverage

contrary to the rules applicable to other AIFs which can set their own leverage limits, the LOQIAIF has a debt to

equity ratio of 1:1, in other words, its gross assets must not exceed 200% of net asset value. For example, an AIF

with assets of 100 may borrow 100. The requirement for total asset coverage of at least 200% means that a

reduction in the value of the assets must be matched by a corresponding reduction in the leverage.

8. Disclosures

the CBI acknowledges that the level of disclosures required by AIFs under AIFMD is already detailed. However, it

states that the unique nature of the LOQIAIF requires supplementary disclosures, both pre-investment and

periodically at each net asset value calculation point. The CBI reasons that LOQIAIFs should apply the same

criteria as banks to distressed loans so that investors can have some assurances that appropriate categorisation

is applied. Information to be disclosed to unitholders includes details of the fund’s loan book. The LOQIAIF must

also submit a list of any undrawn committed credit lines to the CBI.


Comparison between the ELTIF and the LOQIAIF ELTIF LOQIAIF UCITS or AIF? AIF only AIF only

Marketing passport • • •

Authorised or Registered AIFM Authorised only Authorised only

Regulated? •• • •

Retail/Professional investors Retail & professional Professional only

Open/closed ended Closed ended Closed ended, with predetermined

redemption dates throughout the life of the

fund

Diversity requirements Max 10% of capital in assets of a single issuer or single asset

Max 25% in a single issuer during a

specific time-frame

Eligible assets 70% may be invested in equity/ debt/loans or infra-structure

projects. This limit is disapplied during a start-up period of 5

years to build up this portfolio, and also during the end of the

life of the fund when positions are being closed Up to 30% can

be invested in UCITS compliant liquid assets

Loans only. The rules require that a loan

fund cannot engage in other businesses.

However, the loan fund can be structured

as a sub-fund within an umbrella fund,

where the other sub-funds invest in loan-

loan assets, eg, equities, etc.

Loans available to whom? » non-financial unlisted entities established to invest in

infrastructure, property, ships, aircraft, rolling stock

» European Social Entrepreneurship Fund

» European Venture Capital Fund

Businesses (non-financial)

Leverage? Up to 30% of the capital of the ELTIF, non-recourse and used

only to acquire eligible assets

Gross assets must not exceed 200% of the

net asset value

Legal structure Cannot be a partnership Any

Can investors transfer their

interests? Yes, they can sell their interests in the secondary market

No restrictions on transfer


How we can help

» Transaction support and transaction structuring;

» Valuation of loans and collateral;

» Advising on the transfer of loans from financial institutions to LOQIAIFs;

» Advising on the tax implications of purchasing and originating loans on a global basis, or any

tax consequences of dealing with any realised collateral;

» Advising on the tax structuring of a LOQIAIF.

Our teams of banking, valuation and tax experts can assist you with:


5 key questions

1 What level of expertise does the Investment Manager have in

the origination of loans?

2 Do the service providers to the structure have the necessary

expertise?

3 What are the procedures in place to monitor the investor

protection mechanisms?

4 How are the loans being valued?

5 Has a tax opinion been obtained on the structure of the vehicle

and on the purchasing and originating loans?

New Financial

Reporting Framework

Darren Griffin


New Financial Reporting Framework

FRC

FRS 100

FRS 101

SORPS

FRSSE

FRS 102

FRS 103

Background

Funds who currently prepare financial statements in

accordance with Irish GAAP have a decision to make

between transitioning to:

• FRS 102 (the new version of Irish GAAP); or

• IFRS (as adopted for use by the EU)

Changes will be mandatory for accounting periods

beginning on or after 1 January 2015, although early

adoption is possible. Therefore, at a minimum the

semi-annual financial statements for the 6 month

period ending on 30 June 2015 will need to be

prepared under the new accounting framework with

the Annual Report for the year ended 31 December

2015 also being prepared in accordance with the

newly selected accounting framework. Comparatives

are also required

Key Implications of Transition

When selecting the ‘best fit’ accounting framework for

the Fund it is important to understand both the

differences between FRS 102 and IFRS and also the

impacts of changing from your existing accounting

framework. With this in mind, the following table

summarises the key differences existing between Irish

GAAP, IFRS and FRS 102.


Theme IFRS FRS 102 Existing Irish GAAP

Overall effort

expected to

complete transition

Low

Irish GAAP and IFRS have been undergoing a

convergence and therefore only minor differences

currently exist between Irish GAAP and IFRS.

The key difference is the requirement to include a

Cash Flow Statement.

Moderate

Judgment will be required to determine the necessary changes to

your existing accounting policies and disclosure requirements. Any

changes required are likely to be simplification rather than requiring

enhancement which may be of some on-going benefit to the Fund.

N/A

Investor Considerations

Internationally Recognised

Less Recognised

It is necessary to consider whether investors will have any

preference for IFRS over FRS 102. In our experience investors

have not previously challenged Irish or UK GAAP and so there is no

reason to believe that they would raise any concerns over moving

to FRS 102.

N/A

Existing Irish GAAP is no

longer available for use.

Financial

Instrument

Disclosures

Limited Change Required

No changes to the existing recognition and

measurement policies or to the disclosures would

be required.

Key difference between Irish GAAP and IFRS is

that Irish GAAP did not require ‘Off-setting’

disclosures required under IFRS and US GAAP.

This will be relevant to the Fund as there are

some offsetting arrangements in place (For

example Repos).

Reduced Disclosures

FRS 102 introduces simplified disclosure requirements for Financial

Instruments.

A divergence between the ‘Leveling’ of investments may exist

between FRS 102 and IFRS whereby certain investments which are

valued based on a modelled price may fall into ‘Level 3’ under FRS

102 rather than ‘Level 2’ under IFRS.

This could be relevant to the Fund if any investments held in the

future are based on modelled prices.

Almost Identical to IFRS

Key difference between Irish

GAAP and IFRS is that Irish

GAAP did not require ‘Off-

setting’ Disclosures required

under IFRS and US GAAP.


Theme IFRS FRS 102 Existing Irish GAAP

Valuation of

Investments

Fair Value Pricing

Bid / Ask pricing is not strictly required

under IFRS 13 although fair value

methodology needs to represent exit price.

Mid-price may be used as a practical

expedient.

Fair Value Pricing

Section 12 of FRS 102 requires Bid / Ask pricing.

However, there is an option under FRS 102 to choose

to adopt the recognition and measurement principles of

IFRS which among other things would eliminate the

strict requirement to apply Bid / Ask pricing.

Fair Value Pricing

Under FRS 26 Bid / Ask pricing is required.

Ongoing

Frequency of

Updates

Frequent Updates Possible

Limited Updates

FRS 102 will only be updated every 3 years and at this

point changes under IFRS that occurred during the interim period may then be introduced to FRS 102.

N/A

Existing Irish GAAP was generally updated

in line with IFRS.

Complexity of

Standards

Complex Standards

Reduced Complexity

FRS 102 comprises only 226 pages.

Almost Identical to IFRS

.

Requirement to

include a Cash

flow Statement

Always Required

IFRS requires a cash flow statement to be

provided in all cases

May Not `Be Required

Exemption exists for open ended investment funds

with liquid investments from providing a cash flow

statement.

May Not Be Required

Exemption exists for open ended

investment funds with liquid investments

from providing a cash flow statement.

Consolidation

Exemption

Exemption for “Investment Entities”

IFRS 10 includes a specific consolidation

exemption for subsidiaries where an entity

meets the definition of an “Investment Entity”

Exemption where held for “Subsequent Resale”

Exemption exists from consolidating subsidiaries

where they are held for subsequent resale. The

exemption doesn’t go quite as far as IFRS when you consider Master / Feeder Funds etc.

Subsidiaries are required to be

consolidated


Fair Value Hierarchy

Introducing FRS 102

For financial instruments held at fair value in the statement of financial position, a financial institution

shall disclose for each class of financial instrument, an analysis of the level in the fair value hierarchy into

which the fair value measurements are categorised.

Portfolio now classified in terms of A, B & C rather than 1, 2 and 3.

DESCRIPTION

Level A: The best evidence of fair value is a quoted price for an identical instrument in

an active market (prices are readily and regularly available) and those prices represent

actual and regularly occurring market transactions on an arm’s length basis. The quoted

price is usually the current bid price.

Level B: When quoted prices are unavailable, the price of a recent transaction for an

identical instrument provides evidence of fair value as long as there has not been a

significant change in economic circumstances or a significant lapse of time since the

transaction took place.

Level C: If the market for the asset is not active and recent transactions of an identical

asset on their own are not a good estimate of fair value, an entity estimates the fair value

by using a valuation technique.


5 key questions

1 Have you considered the impact of FRS 102 on the financial

statements of your funds?

2 Could IFRS provide a better financial reporting framework for

your funds?

3 How would FRS 102 impact the levelling disclosures in your

funds?

4 Would choosing the measurement and recognition principals

of IAS 39 (IFRS 9) as an accounting policy choice impact you

decision on what GAAP to choose?

5 Are there any other options?

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