On 22 March 2011 the Central Bank of Ireland (Central Bank) published a consultation, which is proposing to implement a new statutory fitness and probity regime. The new requirements will apply to all entities which are regulated by the Central Bank, with the exception of credit unions.
The Central Bank Reform Act 2010 (2010 Act) gave the Central Bank the necessary powers to implement the regime.
Proposed draft Regulations and draft Standards of Fitness and Probity are attached to the consultation document.
It is also proposed to review the fitness and probity of all existing directors (executive and non-executive) of credit institutions which have received government assistance. Directors who plan to continue in such posts after 1 January 2012 will be assessed against the new standards including their competence and track records in the period leading up to the financial crisis.
For all other regulated entities the new fitness and probity requirements for the entry into and removal from senior positions within regulated entities, will be imposed.
Under the new regime the Central Bank will have the right to refuse senior appointments as well as suspend or remove people from senior positions within regulated entities. There will also be the power to prohibit individuals from working in senior industry positions entirely.
The rationale behind the proposed new regime is threefold:
- To prevent individuals from entering into senior positions within regulated entities;
- To enable the Central Bank to investigate, suspend, remove or prohibit individuals from senior positions in regulated entities where there are concerns in relation to their fitness and probity; and
- To set high standards to be followed in relation to fitness and probity for all individuals within regulated entities and which can be enforced where there is non-compliance.
The proposed new regime includes:
Pre-approval Controlled Functions (PCFs) – designation of PCFs which will require prior approval for positions where the Central Bank considers it obligatory to obtain approval prior to appointing an individual to that role or function. This is to ensure the Central Bank is satisfied that the individual is fit and proper to discharge their responsibilities and obligations to the regulated entity. The Central Bank will have the power to refuse such an appointment.
- Directors (executive and non-executive)
- The chairman of the Board, the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee
- The chief executive
- The secretary
- Where the entity is a partnership, each member of the partnership
- Where the entity is a natural person, that person
- Head of Finance
- Head of Compliance
- Head of Internal Audit
- Head of Risk
- Head of Compliance with responsibility for Anti-Money Laundering and - Counter Terrorist Financing Legislation
- Branch Manager of branches in other EEA countries
- Head of Retail Sales
Controlled Functions (CFs) – designation of positions within regulated entities which the Central Bank deem as sufficiently important on an ongoing basis that the Central Bank may investigate, suspend, remove permanently and/or prohibit an individual from carrying out a controlled function in a regulated entity in the future.
Under the draft Regulations a Controlled Function is defined as a function, in relation to the provision of a financial service, which:
- is likely to enable a person responsible for its performance to exercise a significant influence on the conduct of the affairs of a regulated entity.
- is related to ensuring, controlling or monitoring compliance by a regulated entity with its relevant obligations.
- is likely to involve the person responsible for its performance in the provision of a financial service by a regulated entity in one or more of the following ways:
- the giving of advice or assistance to a customer of the regulated financial service provider in the course of providing, or in relation to the provision of, the financial service;
- dealing in or having control over property of a customer of the regulated financial service provider to whom a financial service is provided or to be provided, whether that property is held in the name of the customer or some other person;
- dealing in or with property on behalf of the regulated financial service provider, or providing instructions or directions in relation to such dealing.
Imposing a statutory Standards of Fitness and Probity which all individuals holding positions as CF or proposed as PCF must meet.
The new draft Regulations and Standards are to be applied on a proportionate basis and the Central Bank will also take a risk based approach in the use of their powers.
The new Regulations and Statutory Standards implementing the regime are expected to come into effect from 1 September 2011. Interested parties have been invited to comment on the consultation and all comments must be received by 20 May 2011.
Where there is a breach of the new regime, such breach may result in the imposition of fines of up to €500,000 for individuals and up to €5 million for institutions.
Points to Note
The requirement to apply for the Central Bank's pre approval to act in the role of a PCF will apply to all new applicants after the commencement of the draft Regulations prescribing PCFs.
Persons in existing functions who are prescribed as PCFs by the Regulations are not legally required to seek the Central Bank's written approval to continue in that role or function. However such persons will fall within the Central Bank's powers concerning CFs. In addition, should such a person propose to take up a new position (defined as a PCF with a different firm (whether of the same authorisation status or not) or a different PCF within the same firm) which is a PCF, that person will require the Central Bank's pre approval in writing for his/her approval.
The Central Bank will require firms to identify and maintain a record of the individuals who are carrying out PCFs and CFs at transition to the new regime together with the necessary due diligence undertaken. Firms will also be required to submit to the Central Bank a list of those individuals who are carrying out the specific PCFs in their firm (as at the date upon which the Regulations come into effect). Firms will be given until 31 December 2011 to supply the list of PCFs to the Central Bank. The boards of such firms will be required to sign off on the list that they are satisfied that the individuals are fit and proper according to the Fitness and Probity Standards.
The onus will remain with the regulated entities to ensure that PCFs and CFs are vetted prior to being appointed, to ensure that they meet the fitness and probity standards. Therefore regulated entities will be expected to have effective systems in place in order to ensure that individuals proposed for PCFs and those appointed to CFs are fit and proper on appointment and remain fit and proper.