On 8 April 2019, the Central Bank of Ireland (the “CBI”) issued a Dear CEO Letter (the “Letter”)¹ to the management of all regulated financial services firms (“Regulated Firms”) highlighting what it believes is a lack of general awareness of the scope of the Fitness and Probity (“F&P”) regime and, in particular, of the obligations of Regulated Firms under the regime.  

Background

The F&P regime was introduced by the CBI under the Central Bank Reform Act 2010 (the “2010 Act”). The core function of the F&P regime is to ensure that persons in senior positions within Regulated Firms are competent and capable, honest, ethical and of integrity as well as financially sound. 

In combination with the 2010 Act, the Central Bank published a statutory code (the “Standards”) and guidance documents to assist Regulated Firms and individuals in complying with the F&P regime (the “Guidance”)² which have been updated a number of times since first implemented in 2011.

Obligations of Regulated Firms

The Letter reminds Regulated Firms that:

1. a person should not perform a control function (“CF”) role unless the Regulated Firm is “satisfied on reasonable grounds” that the person complies with the Standards; and 
2. a person should not be permitted to perform a CF role unless that person has agreed to abide by the Standards. 

The Letter highlights a number of high-profile enforcement actions against Regulated Firms for failing to put in place, and/or follow proper systems and controls to ensure compliance with the F&P regime. The Letter encourages Regulated Firms to read the public statements connected with these actions.³

Shortcomings Identified

Despite the enforcement actions taken, the CBI notes that it has continued to see significant shortcomings in compliance, with the following failings being of particular concern:

Failure to conduct due diligence on an ongoing basis 

The CBI identified a number of failures of ongoing due diligence which would have assisted Regulated Firms in making a “fit and proper” assessment of compliance with the Standards.

These included circumstances where:

• an individual had a significant judgement registered against them, leading to questions around financial soundness; and
• an individual was publicly criticised by regulators and/or courts and this criticism was not taken into account by the Regulated Firm.

The Letter makes recommendations that, in essence, reiterate the CBI’s Guidance.⁴

Most Regulated Firms undertake due diligence on the appointment of individuals to CF positions and the Letter emphasises that such due diligence should take place on an ongoing basis to ensure that employees performing CF roles comply with the Standards. An example of this would be carrying out World-Check Reports on the individuals. In addition, the Central Bank advises that Regulated Firms should also ask persons performing CF roles to certify, at least on an annual basis, that they are aware of the Standards and that they agree to continue to abide by them.

Failure by firms to report issues to the CBI 

The Guidance requires Regulated Firms to notify the CBI where they have concerns over the fitness and probity of a person performing a CF role.

In one instance, an individual was suspended for fraud and the Regulated Firm did not notify the CBI.

The Letter goes beyond the Guidance in setting out a non-exhaustive list of matters that must be notified to the CBI, including issuing a formal written warning, suspending/dismissing a person, or reducing or recovering some of their remuneration as a result of issues relating to fitness and probity. The employment and contract law implications of this should be considered, particularly when it comes to contract with individuals.

Central Bank Approval of Individuals

Section 23 of the 2010 Act provides for the CBI’s “gatekeeper” remit with regard to approval of individuals carrying out certain senior financial services positions, known as pre-approval controlled functions (“PCFs”). 

In the Letter, the CBI cites instances of individuals acting in PCF roles without having sought approval from the CBI, in some cases, for a considerable time. 

The Letter emphasises that the statutory obligation for prior approval rests with the Regulated Firm and not the individual. The Guidance states that Regulated Firms should only inform individuals of the intention to make an offer and that no formal offers of appointment should made “unless and until approval is granted by the Central Bank of Ireland.”

Due diligence for senior positions

An integral part of the gatekeeper regime is the individual questionnaire (“IQ”) which a PCF applicant is required to complete and which the CBI uses to consider whether the applicant should be approved. 

The Letter indicates that the CBI has seen instances where applicants have failed to disclose in their IQs material facts which are either known to the Regulated Firm or would have been known if proper due diligence had been conducted. The Guidance sets out the minimum due diligence that it expects Regulated Firms to carry out and for it to “assess the information and exercise judgement to determine whether a person is fit and proper."

Particular emphasis will be placed by the Central Bank on the interview process and making further enquiry on any IQ responses that related to Reputation and Character. Some of these questions are very broad, for example: “Has any business (or legal entity) where you held a position of responsibility or influence been or is being investigated, disciplined, censured, suspended or criticised by a regulatory or professional body, a court or tribunal or any similar body, whether publicly or privately, in any jurisdiction?”

Both individuals and Regulated Firms should exercise the utmost care in the completion of IQs. The IQ must be signed off by a proposer from the Regulated Firm who is required to confirm that the Regulated Firm “has carried out the necessary due diligence enquiries as set out in the Guidance.”

The Letter emphasises that it is for the CBI, and not the individual, to decide whether a fact is material or not. The CBI will challenge applicants if they fail to make full disclosures. 

Interviews with PCF applicants

The Guidance provides that for low and medium impact Regulated Firms, PCF approvals may be granted on the basis of the IQ alone, but the CBI retains the discretion to interview applicants to assess their suitability and it will do so, especially if there are material disclosures in the IQ.⁵ For senior professionals in high and medium-high impact Regulated Firms, the process will involve an interview as a matter of course (“initial interviews”).⁶

However, the Letter notes that where the CBI has concerns that merit further enquiry, the applicant will be invited to a second interview with the CBI’s specialist fitness and probity team in the Enforcement Directorate (known as a “specific interview”). The Letter also notes that an applicant can anticipate a specific interview to be more intrusive than the initial interview and can expect questions on their time as a senior professional where a Regulated Firm was previously sanctioned in Ireland or any other jurisdiction.  

The Letter highlights that the CBI has recently seen a marked increase in the number of applications requiring a specific interview and of applications being withdrawn.

This has led the CBI to question whether Regulated Firms are conducting adequate due diligence on PCF candidates before they are proposed to the CBI. 

It should be noted that the IQ requires disclosure about any withdrawal of applications.

Conclusion

The F&P regime is central to the CBI’s role in regulating the investment funds sector, and individuals who work in this sector must meet the highest standards of competence, integrity and honesty. The CBI sees Regulated Firms as the first line of responsibility to ensure compliance with the F&P regime and as such, Regulated Firms must ensure that people subject to the regime are fit and proper when they are initially appointed to a CF or PCF role, and then on an on-going basis. 

The Letter advises the boards of Regulated Firms to review their fitness and probity policies, practices and procedures and to address any shortcomings. In doing so, Regulated Firms should be able to demonstrate how any issues raised in the Letter have been considered and addressed. 

Where Regulated Firms fall short in compliance, the CBI will take the appropriate action.