27 November 2024
On 04 November 2024 the Central Bank of Ireland (‘CBI’) released the details of a settlement notice under the CBI’s Administrative Sanctions Procedure (“ASP”) against Waystone Fund Management (IE) Limited (‘WFM’), an Asset Management firm. WFM agreed to this settlement on an Undisputed Facts basis in relation to contraventions of SI 257/2013, the European Union (Alternative Investment Funds Managers) Regulations 2013 (‘AIFMR 2013’) that occurred from May 2018 to August 2020.
In 2018 WFM delegated operations of an Alternative Investment Fund (‘AIF’) to a third-party investment manager. Their role was to carry out work in relation to the AIF which had a minimum subscription of €100,000 and would target qualifying, informed investors. WFM relied on due diligence (“DD”) of the third party previously conducted in 2015 in relation to an Undertaking for Collective Investment in Transferrable Securities (‘UCITS’). This acceptance without updated DD led to a failure to discover certain issues with the third party, including their inexperience dealing with illiquid assets, which made up a portion of the strategy for the AIF.
The third party invested €17.7 million into loan notes, a type of illiquid, non-exchange traded instrument, which were described as “...difficult to value with accuracy because there are no active markets for such assets.” This represented a new investment class for WFM however they failed to update their valuation procedures to take this into account. WFM were also informed that the third party was the only source of valuation for the loan notes which presented a significant conflict of interest. This led to problems calculating the Net Asset Value (‘NAV’) of the Fund, a clear issue when it comes to ensuring investor protection. Unbeknownst to WFM, a senior executive in the third party was also a director and the sole owner of the Issuer of the loan notes which was another significant conflict of interest. This conflict would more than likely have been discovered if they had sought renewed DD.
In late 2019, WFM’s auditor identified concerns regarding the loan notes, including the identification of the conflicts of interest set out above, together with the methodology and accuracy of the valuations being provided by the Issuer. WFM ultimately decided to seek the return of the funds as a solution to these issues, but only managed to recover 40% of their investment.
WFM notified the CBI on 05 August 2020 of their decision to suspend the fund, despite there being multiple events prior to this date which should have triggered the requirement to make a notification. On receipt of this notification, the CBI decided enforcement investigation was necessary and commenced same in 2021.
The CBI found WFM had breached multiple regulations of AIFMR 2013 by failing to:
WFM did not challenge the facts and on conclusion of the CBI investigation, it was decided that the appropriate sanction was a combination of a reprimand and a monetary penalty of €562,120. This figure had the 30% discount applied to it under the undisputed facts scheme bringing the final penalty down to €393,512. As WFM did not dispute the matter, it was possible for the CBI to expedite the process. It should be noted that there was no sanction imposed against any senior executive. The sanction must be confirmed by the High Court before taking effect.
WFM is no longer active having transferred activity to another entity within the Waystone group in 2022. The third-party investment manager is not authorised or regulated by the CBI and went into administration in September 2020. Payment of the sanction will finalise the matter between WFM and the CBI.
Any party preparing to engage with the Central Bank on an investigation or enforcement action where they could be the subject of the exercise of a regulatory power, should approach those engagements with the necessary understanding of the relevant legal issues, including the operation of the principles of natural justice, and the requisite level of preparation and expert professional support. Although no sanction was imposed against any individual in this case, the CBI can review personal liability under the IAF and SEAR frameworks. For more information on this please see some of our published articles listed below.
Experienced lawyers from KPMG Law LLP’s Financial Services Regulation team can provide firms and individuals with confidential legal advice on these issues. If you have any regulatory or enforcement queries, please do not hesitate to contact our team below.
