The Central Bank of Ireland (the "Central Bank") published new fitness and probity standards (the "Standards") for a person performing a prescribed “controlled function” (a "CF") or a “pre-approved controlled function” (a "PCF") in entities in Ireland that are regulated by the Central Bank (including banks, insurance undertakings, investment firms, collective investment schemes and their service providers but excluding credit unions). The Standards, which, on a phased basis from 1 December 2011, apply to persons performing a CF or a PCF in a regulated financial services undertaking are built on requirements of competence, capability, honesty, integrity and financial prudence.
All proposed appointments to PCFs with effect from 1 December 2011, require the prior written approval of the Central Bank. Failure by a candidate to satisfy the Central Bank as to an ability to comply with the Standards may lead to approval being refused. In addition, regulated financial services undertakings are required to confirm compliance with the Standards in relation to all persons carrying out PCFs who were doing so at 1 December 2011. New appointments to less senior positions (CFs) are subject to the Standards with effect from 1 March 2012. From 1 December 2012 the Standards will apply to all existing CFs.
Offers of Appointment to a PCF
Section 23 of the Central Bank Reform Act 2010 (the "Act") provides that a regulated financial service provider shall not offer to appoint a person to perform a PCF unless the Central Bank has approved in writing the appointment of the person to perform the function.
The Act further provides that an offer made in contravention of Section 23 does not create any contractual obligations between the parties. Therefore, it will no longer be possible for a regulated financial service provider to provide a candidate with an offer letter even where the offer is conditional on the prior written approval of the Central Bank.
The Standards expressly provide that a regulated financial service provider can inform the candidate of an intention to offer the candidate a position (which is a PCF) if it is made clear that the actual offer is subject to receiving the Central Bank’s prior approval in writing of the appointment of the candidate to perform the function. The statement of intention made by the regulated financial service provider should include the following paragraph:
“This shall not be taken to be an offer for the purposes of Section 23 of the Central Bank Reform Act 2010 unless and until approval is granted by the Central Bank of Ireland.”
Fitness and Probity
The Central Bank has a range of powers available to it to investigate, suspend, remove or prohibit individuals from performing CFs and PCFs in the financial services industry where concerns arise about their fitness and probity.
A person who is subject to the Standards must:
- be competent and capable;
- act honestly, ethically and with integrity; and
- be financially sound
A regulated financial services undertaking cannot allow a person to whom the Standards apply to occupy a PCF or CF if it is unable to satisfy itself on reasonable grounds as to that person’s compliance with the Standards. The question of the fairness of the proposal to terminate the employment of an executive officer and holder of a PCF for the failure to satisfy the Standards is one which has recently been the subject of a High Court Injunction application.
A senior executive of Ulster Bank applied to the High Court on an ex parte basis and secured a temporary injunction restraining Ulster Bank from taking any steps to dismiss him or to commence an inquiry into his competence. It is reported that this order was sought against a background where the bank allegedly indicated to the senior executive that it had concerns about his ability to comply with the probity standards, due to his personal financial indebtedness. It is reported that the bank also indicated that it proposed conducting an inquiry into the senior executive’s fitness, based on his role in the bank’s management team in the years preceding the banking crisis. Reports state that the senior executive told the court that the bank’s decision not to submit his fitness and probity papers would “cause [him] irreparable harm and have a catastrophic effect on [his] reputation within the banking community”.
The case underlines that, although the Standards have statutory force, an employer proposing to dismiss a person for failing to meet the Standards will not have an automatic defence to any employment claims or proceedings that follow. In addition, the case highlights the importance of employers ensuring that they have the requisite contractual flexibility to deal with CFs and PCFs
We recommend that, where regulated financial services undertakings, are hiring employees as PCFs or CFs, the offer letter / contract of employment should:
- expressly provide that any statement of misleading or inaccurate information made to the Central Bank at the time of the application by the employee is grounds for immediate dismissal;
- incorporate the Fitness and Probity regulatory requirements by making it a condition of the contract that the employee complies with all regulatory requirements (including the Standards);
- contain an express statement that the employee’s employment will terminate automatically where the Central Bank issues a prohibition notice against the employee;
- contain an express statement that failure to comply with the Standards can justify summary dismissal; and
- contain an express right to suspend the employee should any breach of the Standards be suspected. The normal disciplinary process of several warning stages and a period for improvement would not be appropriate where the employee is suspected of misconduct in carrying out a CF or a PCF .
However, the difficulty is that even where the contract of employment is clear and definitive in relation to the Standards, the rules of natural justice can hamper an employer from taking steps to terminate employment without the significant threat of litigation arising. Even if an employer has provided for the application of the Standards in its policies and contracts, it should be mindful that the principles of fair procedures are adhered to at all stages in the process.