Asset Management & Investment Funds: Irish Practice Developments: April 2019

The Central Bank expects firms to review their Fitness and Probity policies, procedures and practices and address any shortcomings.  

The Central Bank has written to the management of all regulated financial services firms reminding them of their legal obligations under the Fitness and Probity (F&P) regime. 

  • The Fitness and Probity regime is critical to protecting public interest and ensuring confidence in the financial system
  • The Central Bank reminds firms of legal obligations to ensure individuals working in regulated firms meet the highest standard of competence, integrity and honesty
  • The Central Bank expects firms to review their own fitness and probity policies, procedures and practices and address any shortcomings

The regime was introduced in 2010 to ensure that individuals who work in regulated firms meet the highest standard of competence, integrity and honesty. The Central Bank sees the F&P regime as central to its role as a gatekeeper for the financial system, ensuring that it can fully assess whether the most senior people working in the financial services industry are fit and proper.

"Firms are the first line of responsibility to ensure that people working in key roles are fit and proper to hold those positions. This responsibility does not end when staff are hired to a position; firms must ensure that staff are fit and proper on an ongoing basis. Staff must be competent, but must also act with integrity at all times. Where we see evidence that firms are falling short in their obligations, we will take appropriate action, including removing individuals from those roles." 

The Central Bank expects "that firms review the issues set out in the letter and, together with their boards, review their own fitness and probity policies, procedures and practices and address any shortcomings. Firms should be able to demonstrate how the issues we have raised have been considered, and to explain and evidence any remedial actions taken. We expect to see a demonstrable change in how firms and individuals engage with the process over the coming period." 

The letter details specific issues that have arisen which firms must address to ensure they comply with the requirements. These include:

  • Firms have ongoing obligations to ensure that they do not allow a person to perform a controlled function role unless they are 'satisfied on reasonable grounds' that the person complies with the Central Bank's F&P requirements. The Central Bank has taken enforcement action against firms for failing to put in place, or failing to follow, proper systems and controls to ensure compliance with the F&P regime.
  • Firms must conduct due diligence on an ongoing basis to ensure employees in controlled functions continue to comply with the requirements. In one case, an individual had a significant judgment registered against them, leading to questions over that individual's financial soundness, but the firm failed to take any steps to satisfy itself that the individual still complied with the requirements.
  • There is evidence that some firms have identified F&P concerns about an individual and have taken steps to address these, including suspension for dismissal, but have failed to report those concerns, or the steps taken by the firm, to the Central Bank. 
  • The Central Bank observed a number of instances where individuals have not provided material information on their applications to the Central Bank for approval to senior roles. On occasion applicants have failed to disclose material facts which are either known to proposing firms, or would have been known if proper due diligence of their proposed candidates had been conducted. ​

Central Bank expects boards to get to grips with outsourcing risks​- Central Bank conference on outsourcing

The Central Bank is hosting a conference to discuss the evolving risks associated with outsourcing and to determine whether further guidance or policy is required in this area. The Central Bank views the management of outsourcing risk as key from both a Conduct and Prudential perspective.

Speaking today at a Central Bank conference on outsourcing, the Central Bank’s Director General, Financial Conduct, Derville Rowland, set out the Central Bank’s views on outsourcing in the financial services industry, and the risks associated with it.

  • The Central Bank expects boards to have appropriate oversight and awareness of outsourcing arrangements and the associated risks.
  • A Central Bank review found that 185 banks, asset management firms, insurers and payment institutions collectively reported having 7,700 outsourcing arrangements in place. 
  • The Central Bank found significant risk management deficiencies on a widespread basis.
  • The Central Bank concluded that, when it comes to outsourcing arrangements, governance and risk management standards are emphatically not where they need to be.
  • The Central Bank expects boards to have appropriate oversight and awareness of outsourcing arrangements and the associated risks.
  • On accountability and enforcement, “ultimate accountability for compliance remains with regulated firms, particularly the boards of those firms. Where a firm chooses to outsource a regulated activity, that firm will be held responsible for any regulatory breaches that occur. Indeed, the Central Bank has taken enforcement action regarding the failure by regulated firms to ensure that outsourced regulated activities are compliant with the relevant regulation including the Consumer Protection Code."
  • “From a Central Bank perspective, it is critical that we have visibility of activities that are being outsourced and that firms ensure that, when entering into such arrangements, that there are no barriers to our ability to effectively supervise those activities. It is also key that regulated firms can clearly demonstrate their understanding of their outsourcing arrangements and effectiveness of the governance and risk management measures in place.”

The Central Bank published a discussion paper on outsourcing last year including the findings of a detailed review of outsourcing activity in the regulated financial services sector.

The Central Bank's Strategic Workplan in Securities and Markets Supervision.

Colm Kincaid, Director of Securities & Markets Supervision addressed the Association of Compliance Officers in Ireland on the Central Bank Strategic Workplan in Securities and Markets Supervision. 

Mr Kincaid discussed the Central Bank's Strategic Plan 2019-2021 (published in late 2018) which reflects a marked growth in the number, scale and complexity of the securities market participants and venues supervised, accompanied by a shift to a more intrusive supervisory philosophy, including in the field of conduct supervision.

The Central Bank will increasingly adopt a ‘One Bank’ approach to its work. This recognises how intertwined its prudential, conduct regulation and central banking mandates are. This will also maximise the potential from the fact that in Ireland all of these mandates are housed within a single organisation, with the access to people, skills, knowledge and capacity to flex that comes with that.

In the period 2019 to 2021, the focus in Securities and Markets Supervision will be on:

  • Establishing a systematic, risk-based approach to the supervision of activity in wholesale securities markets across various statutory mandates
  • Assertive risk-based supervision of the funds sector
  • Being an ever more effective gatekeeper
  • Delivery of a data strategy to support the Central Bank's widening mandate and One Bank way of working
  • Operationalising new legislation
  • The enforcement of securities market legislation

In terms of Funds Supervision, Mr Kincaid noted​​ that the nature, scale and complexity of the funds industry in Ireland and its regulation continues to grow.

In this strategic cycle, the Central Bank will build on the considerable resource devoted to achieving a significant level of professionalism in the consideration of applications for authorisation, to build an ever more assertive risk-based approach to conduct supervision of funds. In particular:

  • UCITS performance fees.
    By way of example, Mr Kincaid references September 2018's Thematic Review of UCITS Performance Fees. The Central Bank published key findings in September 2018 and commenced supervisory engagement with all UCITS fund management companies where instances of supervisory concern were identified on foot of the thematic review. The Central Bank is currently closing out this follow up engagement through risk mitigation programmes imposed on relevant firms and redress to investors where required.
  • Actively Management v Passive Management.
    The Central Bank is continuing with its review of all Irish domiciled UCITS funds that report to be actively managed to determine if they are potentially index tracking. 
  • Measures introduced on foot of CP86.
    The Central Bank is scoping a thematic review to assess how firms have implemented the package of measures introduced on foot of CP86. The broad aim of this work will be to identify standards of industry compliance in order to inform the Central Bank's supervisory approach to this important area and ensure that the requisite systems of governance are in place to protect investors' best interests.

Effective Gatekeeping. Over the next three years the Central Bank will review its gatekeeper activity adopting a risk based approach. This will include reinforcing the responsibility of industry to ensure that they meet their statutory obligations and explain their products and offerings to potential investors in a manner that is fair, accurate and not misleading. The Central Bank has begun reviewing its gatekeeper processes and procedures for funds and prospectus approvals (including post—authorisation processes) which it combines with industry workshops to discuss operational and legislative developments. The Central Bank will devise gatekeeper principles to assist it in its work.

Mr Kincaid also recognised the challenge presented by the growth in EU and Irish financial services legislation, Mr Kincaid cites MiFID II's regulatory framework, estimated at over 1.5 million paragraphs when all of the various levels of requirements are factored in.

EU Financial Sanctions Return
The Central Bank issued a notification by email in March requesting all regulated financial service providers which have identified frozen assets under EU financial sanctions to complete and return a "Sanctions Return Form". 

For more information in relation to this topic please contact a member of the Asset Management & Investment Funds team.

Date published: 30 April 2019