26 June 2019
The Central Bank has recently outlined its concerns regarding regulated financial service providers' (‘Firms’) understanding of the extent of their legal obligations under the Fitness and Probity Regime (‘Regime’), in a ‘Dear CEO’ letter, dated 8 April 2019 (the ‘Letter’).
The Central Bank expects each Firm, together with its Board, to review its fitness and probity policies, procedures and practices and address any shortcomings in light of the Letter. Firms must also be in a position to demonstrate how the issues raised in the Letter have been considered and to explain and evidence any remedial actions taken.
The Fitness and Probity Regime
The Regime was introduced by the Central Bank under Part 3 of the Central Bank Reform Act 2010. It applies to persons in senior positions in Firms, referred to as Controlled Functions (‘CFs’) and Pre-approval Controlled Functions (‘PCFs’), which are set out in a number of statutory instruments.
The Regime’s core function is to ensure that persons in senior positions in Firms are competent and capable, honest, ethical and of integrity and financially sound. The Central Bank has published a statutory code, the Fitness and Probity Standards 2014, (the ‘Standards’), and guidance documents to assist Firms, CFs and PCFs to comply with their fitness and probity obligations.
PCFs are a sub-set of CFs which by virtue of the nature of the role require the pre-approval of the Central Bank, or in case of applications to the management body of significant credit institutions, the ECB. Prior to being appointed as a PCF, a person must complete an individual questionnaire (‘IQ’). While the Central Bank may approve a person as a PCF based on the IQ alone, it may also interview the applicant to assess his or her suitability for the role and will frequently do so for senior appointments to high and medium impact firms. Moreover, if the Central Bank considers that there are concerns that merit further enquiry, it will invite the applicant to a second, more detailed interview, known as a “specific interview” involving the Central Bank’s specialist fitness and probity team in the Enforcement Directorate.
Firms and the Fitness and Probity Regime
As well as imposing obligations on individuals in senior positions, the Regime imposes extensive obligations on Firms. Among other things, a Firm must:
A Firm cannot permit a person to perform a CF unless satisfied on reasonable grounds that the person is compliant with the Standards.
The purpose of the Letter is to emphasise to Firms the extent of their obligations under the Regime and to highlight some of the main areas of non-compliance as follows.
Systems and controls
The Central Bank has taken a number of enforcement actions against Firms for failing to put in place and/or failing to follow, proper systems and controls to ensure compliance with the Regime. The Central Bank expects each Firm to read the public settlement statements in respect of these enforcement actions and consider how its own fitness and probity controls compare.
On-going nature of due diligence
Firms must conduct due diligence on individuals in CFs on an on-going basis. According to the Letter, this means at a minimum, that each Firm should:
Reporting issues to the Central Bank
A Firm that has fitness and probity concerns regarding a person who is performing a CF role, and takes action on foot of those concerns, must notify the Central Bank without delay. Examples of the types of actions arising from issues relating to fitness and probity that must be notified to the Central Bank include:
Pre-approval Controlled Functions (PCFs)
A Firm must obtain the Central Bank’s approval before appointing a person to a PCF role and the Central Bank will hold the appointing Firm responsible for any non-compliance with this obligation.
According to the Letter, the Central Bank has recently observed a marked increase in the number of applicants referred to a “specific interview” and an uptick in the number of PCF applications withdrawn by proposing Firms either during or subsequent to the “specific interview” process. The Central Bank is concerned that this may mean that Firms are not conducting proper due diligence before proposing individuals for senior roles. In this regard, it is crucial that a Firm considers not only whether a given candidate is competent, but also whether he or she acts with integrity at all times.
Following on from the Letter, each Firm should review its fitness and probity procedures to ensure that it meets the concerns set out in the Letter. According to the Central Bank’s Public Settlement Statements referred to in the Letter, each Firm should also ensure that it: