Investment Funds Update: Central Bank Warning on Fitness & Probity Compliance
17 December 2020
The findings within the “Dear CEO” letter issued by the Central Bank in November 2020 arose from a series of recent thematic onsite inspections of banks and insurance companies. This review was conducted by the Central Bank in order to assess the level of compliance with the requirements of the Fitness and Probity (F&P) regime.
The inspections followed a letter issued by the Central Bank in April 2019 which requested all Regulated Financial Service Providers (Firms) to review their F&P policies and procedures, to assess their compliance with the requirements and to address any shortcomings. The inspections found a wide divergence in standards in the implementation of the F&P Regime. A significant number of findings were identified regarding the role of the Board, the conduct of due diligence and the outsourcing of pre-approved controlled function (PCF) roles or controlled functions (CF) roles.
Key findings and observations
The Central Bank specified that Firms should give careful attention to the following areas:
Role of the Board in F&P process
The Central Bank found the level of awareness by Board members of their F&P obligations to be very poor. The same level of scrutiny applicable for PCF/CF appointments is expected for Board appointments. This requires the compilation of interview notes and suitability assessments and their carefully scrutiny prior to any appointment.
The Board should also engage in active discussions around proposed appointments, challenge an appointment if necessary and only approve a proposed appointment following active engagement.
The Central Bank emphasised that it is inappropriate for a CEO to screen potential Board candidates. This is because it creates a clear conflict of interest between the respective responsibilities of the directors and executives.
The Central Bank stressed the high standards it expects to be applied for potential Board appointments.
The initial and on-going due diligence requirements were flagged by the Central Bank as being consistently weak. Issues identified included a lack of evidence of qualifications, reference checks and suitability searches.
PCFs and CFs are required to engage in full and frank disclosure if there has been any material change in circumstance. The Central Bank expects to be notified of adverse findings regarding PCF or CF holders as soon as they become apparent. Non-disclosure by individuals of Firms is taken very seriously by the Central Bank.
The Central Bank expects the on-going due diligence process for PCFs and CFs to extend beyond self-declarations which is a minimum requirement. Firms should ensure there are on-going due diligence screenings to ensure there has been no change in circumstances that may affect the F&P of an individual.
The Compliance Function
Firms should have compliance frameworks, policies and procedures in place to ensure active compliance with F&P requirements. The Compliance Function within Firms should provide proactive oversight of F&P processes and procedures together with periodic independent review by the Internal Audit Function to ensure fitness for purpose.
Firms must ensure they have robust processes in place to ensure continued compliance. Firms retain their obligations under the F&P regime even where a PCF or CF role has been outsourced.
Engagement with the Central Bank
Firms should have robust processes in place to ensure they have active engagement with the Central Bank on F&P issues. This includes a defined escalation process if a potential concern arises with the F&P of a CF or PCF holder.
The Central Bank will not accept a passive approach to be adopted by Firms.
The Central Bank noted in the letter that it is a matter of concern that a number of firms did not take action, on being prompted by its April 2019 letter, to perform a formal ‘gap analysis’ of their policies, processes and procedures.
The Central Bank expects Firms to conduct careful reviews of their F&P frameworks and address the significant issues outlined in the letter. The Central Bank may call upon Firms to evidence their review and the measures they introduced as a result.
The Central Bank takes non-disclosure very seriously. Failure by Firms to comply with their on-going obligations can result in an investigation under the Central Bank’s Administrative Sanctions Procedure, leading to potential sanctions for Firms and individuals.
Firms should ensure they have robust processes in place which encompass all practical requirements of the F&P regime.
With the increased Central Bank focus on individual accountability (to receive legislative recognition with the awaited introduction of a Senior Executive Accountability Regime) CFs, PCFs and Firms should each carefully consider their F&P obligations.
We can help Firms by:
Conducting gap analyses
Reviewing existing F&P policies and due diligence processes and ensuring they are in line with the requirements
Providing training to senior management and the Board on their F&P obligations
Providing support with the Individual Questionnaire process and requirements, and
Assisting with procedures for on-going compliance monitoring
If you would like to discuss the above in more detail, please contact a member of our Investment Funds team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.