As part of the recent reforms of the Central Bank’s powers set out in the Central Bank (Supervision and Enforcement) Act, 2013 (the 2013 Act), Part 2 of that legislation provides the Central Bank with the power to require a regulated financial services provider (RFSP) or a related undertaking of an RFSP (together the Reviewee) to produce a ‘skilled person’s report’. These reports will be completed at the cost of the RFSP but under the supervision of the Central Bank.
Such reports are intended to be used for the purpose of diagnostic analysis (to identify, assess and measure risk); preventative action (to limit or reduce identified risks); and remedial action (permitting the Central Bank to respond to risks when they have crystallised).
To assist both Reviewees and skilled persons in understanding the Central Bank's expectations and procedures during the skilled persons reporting process, on 19 November the Central Bank published a ‘statement of proposed use’ (the Statement).
The Statement sets out, by reference to the 2013 Act, how the Central Bank will use its reporting powers; the limits on those powers; matters to be considered when appointing a skilled person; what is expected of skilled persons during the process; how a skilled person’s report should be prepared; and the level of assistance required of a Reviewee.
Considerations of the Central Bank when requiring a Report
Under the 2013 Act, in deciding whether to require a Reviewee to commission a skilled persons report, the Central Bank will consider the following factors: whether there are any other legislative powers at their disposal that would be more appropriate in the circumstances; the relevant knowledge and expertise available to the Reviewee; and the costs implications for the Reviewee of providing the skilled person’s report.
The Statement also sets out key factors which the Central Bank will consider when deciding whether to require a skilled person’s report. These include: the attitude of the Reviewee; whether similar issues have arisen in the past; the quality of the Reviewee's record keeping and management information systems; the Central Bank’s confidence in the Reviewee's willingness and ability to deliver an objective report; whether it would be inappropriate for the Central Bank to rely on the Reviewee itself to enquire into the matter; the knowledge and expertise available to the Reviewee; the extent of the risk to the safety and soundness of the firm or customers and consumers; and whether the seriousness and probability of possible breaches of regulatory requirements is high.
Skilled Persons' Report Notice
The Statement also sets out further detail as to the process for issuing a formal notice requiring a skilled person’s report to be commissioned (a Notice). The 2013 Act provides that this will specify certain details including: the matters upon which the Central Bank requires a report; the scope, timetable and form of any such report; and whether the report is to include recommendations.
A report will be prepared by a skilled person nominated by the Reviewee, subject to approval by the Central Bank. If the Reviewee does not nominate a skilled person within the time specified in the Notice, the Central Bank may itself nominate a person to perform the role. Importantly, the Central Bank will not approve a skilled person unless they have the necessary skills, knowledge and resources to prepare an objective report and there is no professional difficulty or conflict of interest. To ensure that the information or opinion provided by the skilled person is not limited, the 2013 Act provides that the Reviewee is obliged to provide reasonable assistance to the skilled person.
Who may be a skilled person?
The skilled person may be an auditor, actuary, accountant, lawyer or any other person with the relevant business, technical or technological skills. In the Statement, the Central Bank accepts that in certain circumstances, and subject to considerations regarding any potential conflict of interests, the Reviewee may appoint its own statutory auditor, legal or other advisor as a skilled person as they may already be well versed in the issues to be covered by the report.
Helpfully, the Statement also refers to recent guidance provided by the Institute of Chartered Accountants in England and Wales in relation to skilled person’s reporting in the UK. The latest version of that guidance was issued in March 2012. It reflects much of the best practice followed in the UK under the equivalent ‘section 166’ reporting regime overseen by the UK Financial Conduct Authority (the UK FCA) and provides detailed guidance on the practice and procedure for completing such reports.
Once the Central Bank has approved a skilled person, the Reviewee will be required to enter into a contract with that skilled person. The terms of that contract must include certain provisions specified in the 2013 Act.
The Statement contains further practical guidance as to this aspect of the process. In order to ensure that the Central Bank and the skilled person share a ‘common understanding’ of the scope of the required report, the skilled person will be given an opportunity to discuss and clarify any issues arising from the matters specified in the Notice directly with the Central Bank before their engagement contract with the Reviewee is finalised.
When preparing the report, the skilled person is expected to provide the Central Bank with periodic updates on progress and any issues arising. The skilled person will communicate directly with the Central Bank and keep the Reviewee informed of the nature of any communications with the Central Bank. The Central Bank also expects skilled persons to define clearly for the Central Bank the steps which they intend to take to meet any specified deadline for the final report and to inform both the Central Bank and the Reviewee if they become aware that the agreed timetable is no longer achievable.
Whilst the Central Bank's ‘skilled person report’ powers in Ireland are relatively new, they have been available to the UK FCA for over a decade. The UK FCA has required an increasing number of skilled persons reports across a wide range of issues including compliance with client money requirements, anti-money laundering procedures, accuracy of transactional reporting, capital adequacy issues and dealings with consumers.
A significant body of experience with this supervisory mechanism has been established in the UK. This is acknowledged by the Central Bank in its express reference to the UK guidance. Whilst the Statement anticipates that similar technical guidance may be made available in Ireland in due course, the UK experience remains a useful comparator in assessing how these powers may operate in Ireland in the coming years.