The Central Bank's recent `Dear CEO' letter regarding its Fitness and Probity regime sets out its concerns, and what actions it expects regulated firms to take in response.
Introduced in 2010 by Part 3 of the Central Bank Reform Act 2010, the Central Bank of Ireland's Fitness and Probity regime applies to those who carry out `controlled functions' (CFs) (of which there are 11 broad types) within regulated financial services providers (RFSPs). Those who carry on certain categories of CFs, known as `pre-approval controlled functions' (PCFs) (of which there are 46 types) cannot carry out those functions without the prior written approval of the Central Bank.
Where the person in question is to carry on a CF role other than a PCF role, Central Bank approval is not required but the RFSP must be "satisfied on reasonable grounds" that the person complies with the Central Bank's Fitness and Probity Standards.
CENTRAL BANK FITNESS AND PROBITY REGIME
For RFSPs where the Central Bank is the supervising body for fitness and probity assessments1, the Central Bank has published Fitness and Probity Standards together with Guidance on Fitness and Probity Standards and Frequently Asked Questions.
CENTRAL BANK `DEAR CEO' LETTER
Last week, the Central Bank wrote to RFSPs, noting that while there is good industry awareness of the obligations imposed on individuals under the Fitness and Probity regime, there is less awareness of the obligations on the RFSP itself.
Among the key concerns raised by the Central Bank in the letter were the following:
- failure to carry out ongoing due diligence: certain RFSPs are not assessing, on an ongoing basis, whether those carrying on CF roles remain `fit and proper' to do so;
- failure to notify concerns to Central Bank: certain RFSPs who have had concerns regarding the fitness and probity of those carrying on CF roles have tried to address those concerns (including by way of suspension), but have not told the Central Bank about their concerns, or the steps taken by them to address them;
- failure to obtain PCF approval: certain RFSPs have appointed persons to PCF roles without prior Central Bank approval;
- failure to disclose material facts: a number of applicants for PCF roles have not disclosed material facts on the Individual Questionnaires that they have submitted to the Central Bank;
- possible inadequate due diligence: the number of applications for PCF approval that are withdrawn during the specific interview process has caused the Central Bank to question whether RFSPs are conducting adequate due diligence on those that they are proposing for PCF roles.
Recommendations made by the Central Bank in the letter included:
- RFSPs should require those who perform CF roles to inform them of circumstances that might impact their fitness or probity and should assess those individuals at least annually; and
- the Central Bank must be told "without delay" of any fitness and probity concerns and related actions taken regarding a person carrying on a CF role.
The Central Bank also cautioned that if an RFSP appoints a person to a PCF role without prior Central Bank approval, the Central Bank will hold the RFSP responsible for that failure.
The Central Bank referred to three settlement agreements in its letter where the failings of the RFSPs in question related to the Fitness and Probity regime, the importance of systems and controls (in particular, maintaining written records regarding the due diligence carried out by the RFSP on candidates for CF roles), and ongoing monitoring.
The Central Bank has advised RFSPs that, in light of the letter, it expects them to:
- review their Fitness and Probity policies, procedures and practices;
- address any shortcomings;
- be in a position to explain how they have considered the issues raised in the letter; and
- be in a position to explain and demonstrate any actions taken by them to remedy those shortcomings.
It has also asked that the contents of the letter be discussed with the boards and, if relevant, nomination committees of relevant RFSPs.
It appears likely that the Central Bank will return to this topic shortly.