Fitness and probity regime – fit for purpose?

First published by Finance Dublin.

In July 2024, the Central Bank of Ireland (CBI) issued the report of an independent review into the operation of its fitness and probity (F&P) vetting regime. The findings are balanced endorsing much of the existing regime, recommending strengthening of some aspects but also recommending some very significant changes to enhance fairness, transparency, efficiency and oversight. The CBI has indicated that it will implement the recommendations with a target date of the end of 2024.

Background

On 14 February 2024, the Irish Financial Services Appeals Tribunal issued its findings in an appeal taken by an individual, identified as AB, against the CBI's refusal of AB's application to take up two pre-approval controlled function (PCF) roles with a regulated fund. While not quite a Saint Valentine's Day massacre, the Tribunal's findings highlighted some serious deficiencies in the CBI F&P approval process. Following the decision, the CBI swiftly announced that it would conduct an independent review of that process and issued terms of reference for the review in March 2024.

Terms of the review

Although prompted by the AB case, the terms of the review went beyond the specific findings in that case. In summary, the review was to:

• evaluate effectiveness of the CBI's F&P process by reference to the quality and quantity work undertaken, the structure of the process and internal governance structures
• benchmark the CBI’s standards for F&P assessments against comparable supervisory practices internationally
• evaluate the calibration, efficiency and timeliness of the F&P process
• consider the transparency of the process
• make appropriate suggestions for improvement and enhancements

The CBI's aim in commissioning the report was to make sure that its F&P evaluation process remains effective into the future.

The reviewer and findings

The review was conducted by Andrea Enria, a former chair of the Supervisory Board of the European Central Bank. Amongst others, the reviewer consulted CBI personnel, other authorities, industry associations and regulated firms. He also examined comparable regimes in other countries. Mr Enria’s report avoids overt criticism and, instead, encourages enhancement of existing standards and practices. However, some of the findings and recommendations are very significant and would justify the CBI looking how it engages with regulated firms in some other contexts.

On a positive note for the CBI, the report concluded that:

• the CBI's F&P standards are broadly in line with international good practice
• the timelines for the process are aligned with target service standards (and are generally faster than other countries)
• the statistics on approvals, withdrawals of applications and refusals are broadly in line with other supervisory authorities

The report also accepted that, although many aspects of the evaluation process depend on objective information such as an applicant’s skills, supervisory judgement has an important role to play in the evaluation process.

Although the CBI was understandably quick to emphasise these positive conclusions, the review also emphasised the need to exercise supervisory judgement within a fair, efficient, proportionate and transparent process and highlighted deficiencies in the existing process. Unsurprisingly, many of these echoed the findings in the AB case. Issues identified with the current F&P process include a lack of clarity and transparency regarding standards and CBI expectations, inconsistencies in the application of standards and the confrontational nature of some interviews.

The report addressed key features of best practices internationally. These practices were reflected in the report’s recommendations. The report indicated that the recommendations do not all request change as practices adopted by the CBI are already largely aligned with the recommendations. Nonetheless, many of the recommendations, such as those relating to the conduct of interviews and efficiency of the F&P process, will resonate with firms and individuals who have experienced that process.

Recommendations

Recommendations cover a range of issues in the following categories: fostering regulated firms’ roles as primary F&P gatekeeper, governance, decision-making, communication, interviews, withdrawals, timescales, efficiency and quality assurance. The summary below of the recommendations is detailed in order to do justice to their significance.

Recommendations to foster regulated firms' role as F&P gatekeeper and to clarify F&P standards include that the CBI:

• provide clarity and guidance to industry on (i) the CBI's proportionate expectations for regulated firms’ due diligence on an applicant before applying for PCF approval, (ii) the records that regulated firms should keep and (iii) ongoing monitoring
• bring the diverse sources of existing CBI F&P requirements and guidance together to operate in an integrated manner
• apply F&P standards consistently
• provide enhanced guidance on the role of executive and non-executive directors and set out specific expectations for independent directors
• take a proportionate approach to assessments (the report cites guidance provided by the Dutch Central Bank on conducting assessments in a manner appropriate to the size, nature and complexity of the regulated firm and the role and responsibility of the individual being assessed)
• strengthen conflict-of-interest standards
• clarify how the CBI will assess collective suitability and diversity within boards and management
• enhance F&P standards by incorporating objective measures such as specific qualifications, certifications or experience requirements to reduce subjectivity in the assessment process
• set out clear expectations on the number of mandates that an individual can hold, above which enhanced information and assessment would be required for any additional mandates
• clarify the approach to be adopted in relation to considering past events (noting that it is important to recognise that the significance of past events can diminish over time as individuals learn from their experiences)

Many of these recommendations reflect concerns that regulated firms have raised for some time. Any process where the criteria for success are obscure and decision-making occurs in a black box does not engender public trust and confidence.

Some of the more significant recommendations related to governance include that the CBI:

• establish an F&P gatekeeping unit responsible for the entire gatekeeping process, segregated from the CBI's enforcement function
• implement an enhanced risk-based approach for F&P gatekeeping and consider a reduction in the number of PCF roles
• increase the number of interviews in the funds sector to de-stigmatise calls for interview
• ensure senior oversight, empowered to provide independent challenge, in cases that may lead to refusal of an application

Removing of the CBI’s enforcement function from the F&P process is an important recommendation. Skills aimed at investigating wrongs are not appropriate for F&P assessments.

The recommendations on communication, interviews, withdrawals, timescales and efficiency in the F&P process include that the CBI:

• hold an annual information session on the practicalities of the F&P process and ad hoc workshops on the functioning of the online portal
• clearly communicate the scope (agenda and detail of items to be covered) of an interview in advance, highlighting the focus of the CBI's concerns, if any
• provide a minimum of five working days’ notice for interviews specifying the (maximum of three) CBI interviewers and their roles
• disclose all relevant information to the interviewee in a timely manner, including providing information that the CBI will rely on in the interview
• avoid long interviews (a 90-minute duration was highlighted as good practice)
• ensure that interviewers are of requisite seniority and experience and have received appropriate training
• focus the interview on evaluating F&P not, for example, meet and greet, and aim to conduct just one comprehensive interview
• adopt a conversational, rather than an adversarial, tone and posture at interviews and allow the interviewee to bring a note taker or lawyer as an observer
• provide minutes of the interview to the individual within one week and allow one further week for comments
• provide feedback on the interview to interviewees and regulated firms, including where an application is withdrawn
• not hold off the record discussions with regulated firms regarding specific F&P applications
• set clear and comprehensive service standards, including a timeframe for concluding all F&P applications (the report suggests 90 days, with limited opportunities to stop the clock) with internal reporting and publication of statistics under specified headings at least annually

These are important recommendations. Fair procedures require that an individual be given fair warning of issues to be addressed in an interview, be aware of any specific issue that they will be asked to address and be given detailed reasons and an opportunity to comment on those reasons before a final decision. The recommendation on the tone of interviews is particularly welcome. Interview techniques appropriate for investigating wrongdoing have no place in an F&P process.

Many of the recommendations on decision-making reflect issues highlighted in the AB case. The recommendations include that the CBI:

• issue Minded to Refuse Letters including a draft decision and enhance those letters to (i) outline clearly the circumstances and the concerns arising under the relevant law and guidance and (ii) address all relevant issues, including written responses to arguments raised by the applicant
• give the regulated firm a reasonable time (such as ten working days) to make submissions on the draft letter
• establish a significant decisions committee in cases where the CBI proposes to appoint a single decision maker or to make a decision potentially leading to refusal
• the significant decisions committee should include at least one member who brings a wider perspective on independence and the Chair should be a senior official not routinely involved in assessing F&P cases
• the General Counsel of the CBI to provide legal advice if required in the decision-making process

These are essential changes designed to address the issues raised in the AB case.

The recommendations on quality assurance include that the CBI:

• establish robust F&P quality assurance mechanisms overseen by an external risk adviser appointed by the CBI
• establish an F&P complaints procedure (separate from the appeal process and involving an external risk adviser) to deal with withdrawals or concerns about the process
• develop a comprehensive training programme for the F&P gatekeeping process

These recommendations address industry concerns on the absence of any route for complaints about the operation of the F&P process and the absence of independent oversight.

Conclusion

The report recognises the importance of the F&P gatekeeping process and endorses many of the CBI's existing practices. However, it makes significant recommendations designed to improve the fairness, transparency and efficiency of the F&P process.

The F&P processes is an important part of maintaining Ireland's reputation and integrity as a financial services centre. However, it is possible to operate such a process in a fair, non-adversarial and transparent way. Implementing the report's recommendations will enhance the effectiveness of the process for all stakeholders and improve the experience for interviewees.

For further information on this topic, please contact James Grennan, Partner or any member of the Insurance & Reinsurance team.

Date published: 20 August 2024