knowledge | 12 April 2019 |
Fitness and Probity: What does the Central Bank Expect?
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:
- satisfy itself on reasonable grounds that each relevant individual complies with the Standards on an on-going basis, including by conducting due diligence on the individual’s compliance with the Standards; and
- get written confirmation from each individual performing a CF that he or she will comply with the Standards.
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:
- requires each person in a CF to notify it of any changes in circumstances that might be material to that person’s fitness and probity, and, where appropriate, the Firm should properly assess if the relevant person still satisfies his or her obligations under the Standards; and
- ask each person performing a CF role to certify, at least on an annual basis, that he or she is aware of the Standards and agrees to continue to abide by them – this should include certification by service providers to whom the Firm has outsourced a CF function.
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:
- the issuing of a formal written warning; and
- suspending / dismissing a person; or reducing /recovering some of their remuneration.
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.
The significant increase in the number of applicants being referred to a “specific interview” as part of the PCF process may be daunting for many applicants. This is not surprising. However, the key to succeeding at a “specific interview” is ensuring that the applicant fully understands the Central Bank’s expectations regarding the relevant PCF role and can articulate how he or she is able to meet these expectations. While fully meeting the Standards, some applicants have difficulty in such an environment in presenting their knowledge, experience and expertise in a way that resonates with the Central Bank. The good news is that, in our experience, this problem can usually be resolved through careful preparation, including by advance consideration of the types of questions the Central Bank is likely to ask and how best to respond to them.
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:
- has in place adequate systems and controls which ensure full compliance with fitness and probity obligations and ensures that these systems and controls are followed;
- maintains a fitness and probity policy, which is sufficiently tailored to its business and which prescribes how the Firm ensures compliance with its fitness and probity obligations, including making adequate provision for the on-going nature of these obligations;
- correctly assesses the appropriate CF/PCF categorisations applicable to individuals and maintains a comprehensive register listing all individuals that provide CFs (including PCFs);
- considers the specific requirements of the CF being performed when carrying out due diligence in respect of that CF;
- documents the reasons the Firm is satisfied that it has reasonable grounds to be satisfied as to the fitness and probity of a person in a CF or PCF both initially and on an on-going basis;
- maintains written records documenting how it fulfils its on-going obligations to ensure individuals performing CFs continue to meeting the Standards; and
- keeps centralised fitness and probity records for each individual covered by the Regime.
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.