knowledge | 16 October 2020 |
Fitness and Probity Update - New Pre-Approval Controlled Functions Added to the List
The Central Bank has added three new functions to the list of pre-approval controlled functions (“PCFs”) and has split out PCF-39 Designated Person into six PCF roles aligned to specific managerial functions. The new PCFs comprise PCF-49 Chief Information Officer, which is applicable to all regulated financial service providers (“RFSPs”) except for credit unions, as well as PCF-50 Head of Material Business Line and PCF-51 Head of Market Risk, which apply to banks. RFSPs will need to provide certain confirmations or returns to the Central Bank regarding the additional PCF roles by 16 November 2020.
The core function of the Central Bank’s Fitness and Probity Regime is to ensure that persons in senior positions in RFSPs are competent and capable, honest, ethical and of integrity and financially sound. The regime distinguishes between Controlled Functions (“CFs”) and Pre-Approval Controlled Functions (“PCFs”), which are set out in the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (the “2011 Regulations”). While persons in both CFs and PCFs must meet certain standards, a person being appointed to a PCF role must be pre-approved by the Central Bank.
The new PCF roles are set out in the Central Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations 2020 (the “2020 Regulations”), which amend the 2011 Regulations. They follow on from a Notice of Intention which the Central Bank published in February 2020, in which it signalled that it intended to introduce the three new PCF functions, as a result of:
- the increasing importance of, and reliance on, information technology within regulated financial service providers, and
- the changing landscape of the banking sector in Ireland due to Brexit, including the entry / expansion of investment banks / broker-dealer firms with significant capital markets activity.
The Central Bank also indicated that it intended to split “PCF-39 – Designated Person” into six separate PCF roles, to reflect the specific managerial functions set out in the Central Bank’s UCITS Regulations, the Central Bank’s AIF Rulebook requirements and the Central Bank’s Fund Management Companies – Guidance 2016.
The new PCF-49 Chief Information Officer is applicable to nearly all RFSPs, whereas PCF-50 Head of Material Business Line and PCF-51 Head of Market Risk are only applicable to credit institutions within the meaning of the Capital Requirements Regulation. The six PCF roles which replace the previous PCF-39 – Designated Person are set out at PCF-39A – 39F of the 2020 Regulations and are relevant to Asset Managers.
The Central Bank has also published updated FAQs on the new roles. Significantly, according to those FAQ, where an RFSP/credit institution does not currently have an individual performing one of the new PCF roles, it is not required to create one in order to comply with its obligations under the Fitness & Probity Regime. It must, however, review its existing functions to determine whether they would in substance meet any of the new PCF roles set out in the 2020 Regulations.
PCF-49 Chief Information Officer (general)
The role of PCF-49 Chief Information Officer will typically apply to the most senior individual with responsibility for information technology matters and who is able to exercise a significant influence on the conduct of the relevant RFSP’s affairs.
According to the Central Bank, it expects the Chief Information Officer role to apply where:
- an RFSP has a PRISM impact rating of High or Medium High; or
- information technology is a key enabler or core element of the RFSP’s business model. In such situations, the Central Bank expects a person to be appointed as PCF-49 where the size, nature and complexity of the entity warrants such a role and where failure of the entity’s information and communication technology would have an adverse effect on one or more of the following:
- the provision of critical services to their customer base, taking into consideration potential customer detriment it may cause;
- the ability of the firm to meet its regulatory obligations; or
- the overall stability of the financial system in Ireland.
PCF-50 Head of Material Business Line – Credit Institutions
PCF-50 Head of Material Business Line covers a person who is head of a material business line, which would usually be held by a senior individual with a direct reporting line to the CEO. The Central Bank defines a Material Business Line as one which:
- has gross total assets equal to or in excess of €10 billion; or
- accounts for 10 per cent or more of the credit institution’s gross revenue.
The Central Bank will determine whether this criteria is met on the basis of the relevant credit institution’s annual financial statements or other relevant board approved documents that are formally submitted to the Central Bank, such as Strategic Plans and Internal Capital Adequacy Assessment Processes.
Individuals who are already pre-approved as PCF-17 Head of Retail Sales or PCF-21 Head of Treasury will not be required to also seek pre-approval as a PCF-50 Head of Material Business Line.
PCF-51 Head of Market Risk
This role will only apply where the Central Bank deems the level of market risk to be material, namely where the market risk of the credit institution satisfies either of the following (as reported in quarterly COREP and FINREP regulatory returns):
- €500m of market risk (including credit valuation adjustment) risk weighted assets; or
- €100bn of notional derivatives traded.
Split out of PCF-39 Designated Person
As mentioned, the split out of PCF-39 into six different managerial functions aligns with the existing rules applicable to Fund Management Companies and are as follows:
- PCF-39A Designated Person with responsibility for Capital and Financial Management;
- PCF-39B Designated Person with responsibility for Operational Risk Management;
- PCF-39C Designated Person with responsibility for Fund Risk Management;
- PCF-39D Designated Person with responsibility for Investment Management;
- PCF-39E Designated Person with responsibility for Distribution; and
- PCF-39F Designated Person with responsibility for Regulatory Compliance.
Although there is no requirement to appoint a person to the new PCF roles, the Central Bank expects each RFSP to review its functions in order to determine whether any would meet these new PCF roles, focusing on the substance of the relevant role rather than the applicable title.
An RFSP is not required to seek the Central Bank’s approval for an individual that was in one of the new roles on 5 October, when the 2020 Regulations came into effect. However, an RFSP must review the assessment it carried out when appointing the relevant individual and submit confirmation of such an assessment to the Central Bank.
Fund Management Companies must submit a list of the individuals performing each of the PCF-39A, PCF-39B, PCF-39C, PCF-39D, PCF-39E and PCF-39F roles via an in situ return to the Central Bank. Relevant RFSPs have six weeks from 5 October (i.e. until 16 November 2020) to provide the necessary confirmation or return to the Central Bank.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.