Fit And Proper? The Central Bank Raises The Bar With A New Regime
15 December 2011
The following article appeared in the Spring 2012 edition of Credit Focus and can be viewed here in pdf.
As part of its response to the financial and banking crisis, the Central Bank of Ireland (the Central Bank), in September 2011, published new Standards of Fitness and Probity (the Standards) for persons who carry out certain functions in all regulated financial service providers (RFSPs), except for credit unions. This includes banks, insurance undertakings, investment firms, fund administrators and custodians, amongst others.
The Standards will apply to two categories of staff working in RFSPs as follows:
(i) persons occupying a pre-approval controlled function ("PCF"); and
(ii) persons occupying a controlled function ("CF").
PCFs are in fact a sub-set of CFs
The Standards commenced on 1 December 2011. From 1 December 2011, anyone appointed into a PCF (whether from within or outside a RFSP) requires prior approval from the Central Bank before that person can take up the role. RFSPs are required, by 31 December 2011, to submit to the Central Bank a list of the individuals in their organisation in PCF roles as of 1 December 2011.
A written confirmation from the Chief Executive Officer that he/she is satisfied that the persons on the list are compliant with the Standards must be
submitted by 31 March 2012. For new appointments into CF roles (whether from within or outside a RFSP) the Standards will apply from 1 March 2012. For any other employee occupying a CF, the Standards will apply from 1 December 2012.
The Central Bank has openly stated that it made a conscious decision to impose more demanding Standards than those in place in other jurisdictions because Ireland has suffered more than most countries in the financial crisis. To comply with the Standards, a person performing a PCF or CF role is required to be:
(i) competent and capable;
(ii) honest, ethical, and act with integrity; and
(iii) financially sound.
Competent and capable
A relevant individual will have to demonstrate that he/she has the necessary qualifications, experience, competence and capacity to carry QSut the
role. The due diligence of this piece will include obtaining evidence of the individual's professional qualifications, completion of continuing professional development, record of previous experience, together with a record of the job application and interview as well as references from former employers.
Honest, ethical and act with integrity
An individual's probity refers to honesty, diligence and independence of mind and a requirement to act ethically, with integrity and fairness - including
acting without a conflict of interest. It is described in the Guidance on Fitness and Probity as a matter of character illuminated by a person's past behaviour.
The due diligence in this regard will involve the relevant individual answering a list of questions in relation to matters such as criminal records,
disciplinary proceedings and dismissals. The individual must be in a position to demonstrate that his or her ability to perform the function is not
"adversely affected to a material degree" by the fact that any such circumstance applies to him or her.
Relevant individuals will also have to demonstrate that they have managed their own financial affairs in a sound and prudent manner. Again, this will involve the relevant individual answering a list of questions in relation to matters such as personal bankruptcy or association with the bankruptcy of a company and being in a position to demonstrate that such circumstance does not adversely affect his or her ability, to a material degree, to carry out the role.
The Basic Requirements
Each RFSP is required to satisfy itself, on reasonable grounds, that each and every employee and director occupying a CF (including a PCF) complies with the Standards both on entry into the RFSP and on an ongoing basis thereafter. In so doing, employers are now required to carry out due diligence to ensure the Standards are met and to record how it reached its decisions in this regard. This will be a significant task and the importance of documenting the process cannot be overstated.
Having been through a consultation process with industry players, published the Standards and the Regulations setting out the categories of PCFs and CFs and issued draft Guidance, the Central Bank has since amended the Standards and Regulations to deal with some issues in relation to which industrywide concern had arisen. In the past two weeks it has issued its finalised Guidance on the implementation of the Standards.
The Due Diligence Exercise
The first challenge for any RFSP is to identify all employees or directors who perform a PCF or CF role. While the Regulations contain a detailed list of such roles, RFSPs cannot rely exclusively on job titles and positions when identifying staff in PCF and CF roles and will have to drill down into each individual role. The Regulations specifically state that a person who is performing a particular function is taken to be responsible for the performance of that function even if he or she does not have the title that typically would be associated with that position.
Once the RFSP has considered the relevant duties and functions, it must then turn its attention to the individual occupying that role and carry out a
due diligence exercise on that individual to satisfy itself that the individual complies with the Standards. The individual is also required to agree to
abide by the Standards. As above, the requirements set out in the Standards are continuing and a RFSP needs to ensure compliance on an ongoing basis.
This includes a requirement on the individual to notify the RFSP of any material changes in respect of initial due diligence carried out. In turn, the RSFP must notify the Central Bank of any such change.
Impact on Employers
The introduction of these new enhanced Standards raises many complex issues for employers in the financial services industry. Consideration will
have to be given to the levels and types of due diligence required in order to ensure that the Standards are being met and continue to be met. Moreover, employers will need to reflect on what they can do in circumstances where some of their employees or directors who currently occupy CF
(including PCF) roles do not meet the Standards.
It is widely anticipated that its implementation will lead to a number of different types of legal challenges in circumstances where a finding that an
individual does not meet the required Standards would impact significantly on their ability to earn a livelihood.
The contents of this publication are to assist access to information and do not constitute legal or other advice.
Mason Hayes & Curran (www.mhc.ie) is a leading business law firm with offices in Dublin, London and New York. © Copyright Mason Hayes & Curran 2012. All rights reserved.