Fitness & Probity Update
16 January 2012
Our last update outlined details of the new fitness and probity regime recently introduced by the Central Bank of Ireland (the Central Bank). The purpose of this second update is to consider the employment-related implications of the new regime for employers, determining whether certain employees meet the requisite standards of fitness and probity (“the Standards”). For ease of reference, click here to view our previous briefing.
Impact on Employers
The new regime raises many complex issues for employers regulated by the Central Bank and will clearly place significant administrative and compliance burdens on such employers. It is widely anticipated that implementation of the new fitness and probity regime will lead to a number of different types of legal challenges, particularly in circumstances where a finding that an individual does not meet the required Standards would impact adversely on their ability to earn a livelihood. The Head of Financial Regulation, Matthew Elderfield, has stated that [he doesn’t] “underestimate the legal challenges that we might have in using our new powers, but we must be prepared to make difficult judgments on fitness and probity….”
The regime, which commenced on 1 December 2011, is being introduced on a phased basis and will apply to all categories of PCFs and CFs by 1 December 2012. In the first instance, employers need to carry out an internal due diligence exercise to confirm compliance by persons in PCF roles with the Standards. The employer must provide written confirmation to the Central Bank, by 31 March 2012, that it is satisfied that each person occupying a PCF is compliant with the Standards and that it has obtained written agreement from each such person to abide by the Standards. This will be a significant task and the importance of documenting the process cannot be overstated.
Employers will need to give consideration to 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 of course expected that employers will be faced with scenarios where such a person fails to meet the Standards and will have to be removed from that function and/or dismissed.
While failure to comply with the Central Bank’s Standards may give employers substantive justification for a dismissal, the process whereby an employer reaches that decision will be of utmost importance. An employee’s constitutional, common law and statutory rights to natural justice and fair procedures must be adhered to. This means, in arriving at a decision which might be adverse to an employee, employers must afford an employee (1) every opportunity to participate in the process and explain his/her failures/shortcomings and (2) an opportunity to appeal an adverse finding. Employers must also be able to demonstrate how it arrived at a decision on an objective basis.
The question of suitable alternative employment in these circumstances may also arise. While there is no (statutory or indeed common law) obligation on an employer to consider a suitable alternative role for an employee being removed from a CF in circumstances where he/she does not comply with the Standards, it is of course possible to do so. Indeed, to do so would make it very difficult for an employee to prove his/her financial loss in any subsequent unfair dismissal proceedings because an employer would have, in effect, offered them an opportunity to mitigate their loss.
Recruitment & Retention
Recruitment procedures, company policies and contractual arrangements for new CF (including PCF) roles should take account of the new regime. For new PCF roles, an employer is not permitted to offer a person a PCF role until the Central Bank has approved the appointment in writing in advance. An employer can, however, inform a person of an intention to offer a PCF role on the basis that it is made clear that the actual offer is subject to receiving the Central Bank’s prior approval in writing. Contracts for new PCF and CF roles should clearly state that their continued employment is subject to on-going satisfaction of statutory fitness and probity Standards. There is no specific requirement to amend contracts for existing CF and PCF roles in circumstances where employees’ contracts of employment have been amended by the new regime to the extent that there is now a term, implied by statute, that an employee must fulfil the requirements of the Standards.
In circumstances where the requirements set out in the Standards are continuing, employers will need to put in a place a procedure to assess and monitor staff on at least an annual basis.
The issue of references is likely to be a thorny one. Prospective employers are expected to obtain detailed references from former employers of individuals applying to PCF roles before the Central Bank will approve them. The timing of this could cause a practical difficulty for the individuals applying for such roles whose existing employers may not know they are considering leaving. The Central Bank has, however, indicated that it will take a pragmatic view in relation to the level of detail in any given reference in circumstances where the practice of providing detailed references is becoming increasingly less common. It could be the case that a new practice of providing employees with a ‘statement of employment’ at the time the annual review develops, which would certify the employee’s compliance with the Standards to that date. This would allow for movement of senior individuals within regulated entities.
Suggested Strategies to Reduce Risk of Legal Challenge
Employers will need to give consideration to different strategies to reduce the risk of legal challenges when implementing the new regime. We recommend putting in place robust policies as well as rolling out training on the requirements of the regime. The importance of a robust document retention plan is crucial – both in terms of defending against claims and complaints – and in order to satisfy the Central Bank in the event it carries out an audit.