The Central Bank takes enforcement action against Waystone Fund Management (IE) Limited for breaches of the Alternative Investment Fund Managers Regulations

The Central Bank of Ireland (the Central Bank) has fined Waystone Fund Management (IE) Limited (WFM) €393,512 for breaching requirements of the European Union (Alternative Investment Fund Managers) Regulations 2013 (the AIFM Regulations) between May 2018 and August 2020.The AIFM Regulations require alternative investment fund managers to comply with key requirements aimed at safeguarding investors. The breaches arose from WFM’s failings in relation to due diligence, conflicts of interest, delegate oversight, risk management, valuation procedures, treating investors fairly and acting in their best interests.

WFM was the Alternative Investment Fund Manager (AIFM) of a fund, which launched in October 2018 (the Fund). WFM appointed an Investment Manager and delegated the investment management of the Fund to the Investment Manager. Between October 2018 and February 2019, the Investment Manager invested €17.7 million on behalf of the Fund in illiquid, hard to value private assets (the Loan Notes).

In November 2019, during the annual audit of the Fund, serious concerns were identified by the auditor in relation to the investment in the Loan Notes and the reliability of the valuation of the Loan Notes.

In order to address these concerns, WFM took steps to seek the return of the funds invested in the Loan Notes by the Investment Manager. Despite numerous attempts between December 2019 and July 2020 to recover the funds, the Fund was suspended in August 2020 with €10.2 million of the Fund’s assets still outstanding, resulting in a loss to the investors. WFM was later party to a settlement reached with the Fund’s investors relating to the loss of their investment. Pursuant to the settlement reached, investors recovered their initial investment in the Loan Notes.

The Central Bank was notified of the Fund’s suspension and subsequently commenced an investigation. The investigation identified eight breaches of the AIFM Regulations and found that WFM breached the 2013 AIFM Regulations when it failed to:

• conduct adequate due diligence and monitor delegated activity
• identify and manage conflicts of interest
• ensure adequate risk management systems were in place
• ensure that appropriate and consistent procedures were established to allow for the proper valuation of the Fund’s assets
• disclose a description of valuation procedures and pricing methodology to investors prior to investment
• notify the Central Bank of potential breaches of the AIFM Regulations
• act in the best interests of investors
• treat all investors fairly.

WFM has admitted the prescribed contraventions and has agreed to the undisputed facts as set out in the Settlement Notice (PDF 336.56KB). As part of the settlement agreement reached between the Central Bank and WFM, the Central Bank has determined that sanctions comprising a reprimand and monetary penalty in the amount of €562,160 are warranted. The application of a 30% settlement scheme discount brings the amount to €393,512. The sanctions have been accepted by WFM. The sanctions are subject to confirmation by the High Court and will take not take effect unless confirmed.

Seána Cunningham, the Central Bank’s Director of Enforcement and Anti-Money Laundering, said "The core objective of the AIFM Regulations is to ensure a high level of investor protection by setting out a framework for the regulation of fund managers (AIFMs). AIFMs are responsible for ensuring effective compliance with the regulatory requirements placed on fund management companies in order to protect investors’ interests and to ensure their fair treatment. In this case, there was a wholesale failure by WFM to abide by these requirements.

"WFM’s failure to conduct adequate due diligence, identify conflicts of interest and put in place adequate risk management structures and appropriate fund valuation procedures exposed the Fund and its investors to significant risks, which in this case crystallised in a loss to the Fund.

"WFM managed a fund, the investment strategy of which included investing in illiquid, difficult to value, private assets, having had limited experience with a strategy or asset class of this type in the past. WFM failed to ensure that the investment manager it appointed was qualified and capable to manage such a strategy and failed to conduct adequate oversight of this delegate once appointed. Furthermore, WFM did not have adequate knowledge and understanding of the investments to enable it to monitor the associated risks effectively. Delegating activities does not reduce a fund management company’s ultimate responsibility for compliance with its regulatory obligations.

"Treating investors fairly and acting in their best interests is at the heart of fund management regulation and effective compliance with the regulatory requirements placed on fund management companies is key to ensuring the protection of investors. This enforcement action reflects the seriousness with which the Central Bank views WFM’s regulatory failures and the continued focus of the Central Bank on compliance with investor protection requirements."

ENDS

Notes to editors

- This is the Central Bank’s 157th enforcement outcome to date, bringing the total fines imposed by the Central Bank to over €406 million.

- Undisputed Facts Settlement

This is the first settlement under the Administrative Sanctions Procedure (ASP) following the changes introduced by the enactment of the Central Bank (Individual Accountability Framework) Act, 2023. The ASP guidelines, which the Central Bank published in December 2023, outline the various settlement processes now provided for under the ASP. The Central Bank concluded this ASP by way of settlement under the undisputed facts settlement process. The Central Bank may enter into the undisputed facts settlement process with a Subject where there are undisputed facts that render an investigation and/or the continuation of an investigation unnecessary. A Subject who enters into a settlement under the undisputed facts settlement process may, at the sole discretion of the Central Bank, and subject to the timing of the settlement, be offered a potential discount to any monetary penalty proposed up to a maximum of 30% under the settlement scheme. Sanctions imposed by way of the undisputed facts settlement process will be subject to confirmation by the High Court.

- High Court Confirmation Application

As soon as practicable after such a settlement process has been concluded, the Central Bank will apply to the High Court for confirmation of the sanction imposed. The High Court will confirm the decision to impose a sanction unless it is satisfied that any sanction imposed is manifestly disproportionate.

If the High Court does not confirm a sanction agreed as part of a settlement agreement concluded under the Undisputed Facts Settlement Process, it will remit the matter for reconsideration by the Central Bank and the Subject along with any recommendation the High Court has in respect of the matters to be reconsidered.

Further information on the legal requirements for fund management companies can be found here and here.