On 25 February 2020 the Central Bank published a 'Notice of Intention' which proposed the addition of a number of new roles to the list of pre-approval controlled functions (PCFs) under the Central Bank's Fitness and Probity Regime. Although the proposals, if implemented, will have compliance implications under the current Central Bank's Fitness and Probity regime, individuals performing these roles may also potentially be subject to the proposed Senior Executive Accountability Regime (SEAR) and individual accountability framework.
Background to Ireland's PCF approval regime
Currently, the Central Bank has designated 46 PCF roles. Applicants for these roles must be pre-approved by the Central Bank (or the ECB, as appropriate) before taking up a relevant position.
PCF roles range from roles common to most financial services providers (e.g. Board Chairman and Directors, CEO, Head of Finance, Head of Compliance etc.) to industry sector specific roles (e.g. Head of Underwriting and Head of Claims in insurers and Head of Treasury and Head of Credit in banks). Industry specific PCF roles are also applied to investment firms and intermediaries, asset managers, payment institutions and retail credit firms.
The financial services provider commences the PCF pre-approval process and conducts due diligence on the applicant to satisfy minimum regulatory requirements. The PCF applicant then submits an individual questionnaire (IQ) to the regulator which covers their record and experience along with a declaration of the IQ's truth and accuracy. The Central Bank can request additional information and may interview the PCF applicant before approving or refusing the application. The Central Bank has recently announced a key enforcement priority to ensure that PCF applicants provide full and truthful information.
The latest Central Bank statement on the matter indicates that it has issued refusals to an unspecified number of applicants and that 86 applicants have withdrawn from the process following regulator challenge. Although the Central Bank does not currently publish decisions to refuse approval, the reforms currently proposed under the SEAR and individual accountability regimes anticipate that the Central Bank will have the power to do so in the future.
Proposed SEAR and individual accountability frameworks
Once the SEAR and individual accountability frameworks are implemented, all staff in financial services providers will be required to comply with a number of high level conduct standards covering integrity, due, skill, care and diligence, cooperation with regulators, market conduct and customer best interests.
Additional enhanced conduct standards will apply to 'senior executives' performing specified roles. They will be required to take all reasonable steps to ensure that the business of the firm for which they are responsible is effectively controlled, complies with regulatory requirements and that relevant delegations are appropriate and effectively overseen. 'Senior executives' will also be subject to an individual duty to proactively cooperate with their regulator.
It is expected that there will, at the very least, be significant overlap between those conducting PCF roles and those who will be specified as 'senior executives' for SEAR and individual accountability framework purposes.
Therefore, anyone conducting a PCF role may well be subject to these new frameworks once implemented.
Central Bank's additional PCF proposals
The Central Bank's recent notice of intention proposes the introduction of the three new PCF roles:
- The role of Chief Information Officer will, if the proposal is adopted, become a specific PCF role for many types of financial service providers, other than Credit Unions. This new PCF role reflects the importance of information technology within firms and the significant repercussions that technology failures bring. Regulators have focused heavily on this issue, with recent guidelines issued by the EBA on information and communication technology and security risk management and significant penalties imposed on firms for IT failings by the Central Bank.
- There are two proposed additions to banking sector PCF roles: Head of Material Business Line and Head of Market Risk. A material business line is one which has either assets of €10 billion or more, or accounts for 10% or more of the credit institution's gross revenue. A credit institution must have a head of market risk where, in any quarterly regulatory return, there is €500 million of market risk (including Credit Valuation Adjustment) risk weighted assets or €100 billion of notional derivatives traded.
The Central Bank proposes to split the PCF39 function, whose holders currently have managerial roles delegated to them by directors of certain fund management companies, into six separate new PCF roles.
The proposed roles cover persons responsible for:
- capital and financial management
- operational risk management
- fund risk management
- investment management
- distribution, and
- regulatory compliance.
Currently, the Central Bank UCITS regulations, AIF Rulebook and Fund Management Companies Guidance include a requirement that the Board of a management company be responsible for the management of these six functions. The monitoring and control of these functions can be delegated to Designated Persons.
Comments from stakeholders on this proposal are invited by the Central Bank, by 26 March 2020.
One effect of these proposals, if implemented, will be to bring any new individuals performing these additional PCF roles potentially into the scope of the new SEAR and individual accountability frameworks. Affected firms and individuals will therefore be interested in the draft heads of Bill that are expected later this year.