The Central Bank of Ireland (Central Bank) has published the outcome of an independent review of the Central Bank’s fitness and probity (F&P) approval process (Review).
The Review was conducted by Mr Andrea Enria, former Chair of the Supervisory Board of the European Central Bank. The findings of the review capture themes such as clarity of supervisory expectations, internal governance of the F&P approval process, and fairness, efficiency and transparency of that process.
At A&L Goodbody we have assisted many individuals and firms in progressing through the F&P application process, including those where concerns are raised by the Central Bank. This has been an area of focus for regulated firms, particularly now that the Conduct Standards and Duty of Responsibility are in place under the Individual Accountability Framework (IAF).
Background
In February 2024, the Irish Financial Services Appeals Tribunal’s decision in AB v the Central Bank of Ireland made significant findings regarding the application of fair procedures during the decision-making process relating to an application for the appointment of an individual to a pre-approval controlled function (PCF). The Central Bank published the terms of reference for the review in March 2024. (For information on the AB case, see our separate client briefing).
The aim of the Review was, in summary, to ensure the regime remains effective into the future and identify areas for improvement, including in light of the AB case.
Mr Enria engaged with key stakeholders as part of the Review, including relevant industry associations, market participants, top and middle management in the Central Bank, legislative and policymaking bodies and other Irish authorised firms. An extensive analysis of good practices at other supervisory authorities in the EU, UK and Australia was also conducted to inform the Review.
In referring to the importance of ‘fairness, efficiency and transparency’ of the F&P process, the report acknowledged that the process involves both an objective (e.g. skills, experience, qualifications, time commitment) and subjective element (supervisory judgment). As a result, the report noted that a refusal should not be perceived as a ‘ban’ from the financial industry, although in our experience this has been a material concern for many senior individuals in the industry for some time.
Outcome of the review
The Review found that the conduct of the F&P approval process is broadly aligned with other peer jurisdictions across a number of areas, including standards, statistics on outcomes and timelines.
However, the Review also found that the F&P approval process is not always up to the requisite standards of fairness and transparency (as highlighted in the AB case), and there is a need to improve the consistency of the process across firms of different sizes and operating in different financial sectors.
To address these and other shortcomings identified in the Review, a number of recommendations have been issued to the Central Bank, which it has accepted.
The recommendations, which are summarised below, are due to be implemented over the coming months and be in place by the end of 2024.
Recommendation 1 – Fostering industry role in gatekeeping
- The Central Bank should provide greater clarity and guidance to industry on expectations of regulated firms in the ‘gatekeeper process’ (i.e. the internal diligence processes firms follow before submitting an application for PCF approval), including in relation to screening, background checks, documentation and record-keeping and on-going monitoring.
Recommendation 2 – Clear F&P standards
- The F&P Standards should be consolidated in a single location to enable firms to access and better understand the regulator’s expectations. The Guidance on F&P Standards, the F&P FAQs, Minimum Competency Code 2017, Corporate Governance Codes, and other relevant documentation should be considered in the context of such consolidation.
- The F&P Standards should also be enhanced to reflect good practices in other jurisdictions. Such enhancements include:
- the introduction of more objective measures (such as specific qualifications, certifications or experience requirements) and clear expectations in terms of the number of mandates that an individual can hold
- the development of specific enhanced guidance on the roles of executive directors, non-executive directors and independent directors
- the introduction of specific provisions for identifying, managing and mitigating conflicts of interest
- clarification of the way in which collective suitability and diversity within boards and management teams will be assessed
- Given the interconnectedness between corporate governance, the Minimum Competency Code, F&P and the IAF, all materials relating to these areas should be reviewed to ensure that they operate in an integrated manner.
- Interestingly, the Review is clear that while past events are relevant to an individual’s fitness and probity, the significance of those events may diminish over time as individuals learn from their experiences. This reflects an emphasis we have seen from the Central Bank during approval processes on ‘lessons learned’. The Review goes further in appearing to propose the establishment of a ‘reasonable timeframe’ after which matters are no longer relevant, taking into account the severity and nature of the underlying circumstances.
Recommendation 3 – Governance
- The Central Bank should establish an F&P gatekeeping unit with responsibility for the entire gatekeeping process to remedy the present approach where F&P is governed across multiple teams within the regulator. The report referred to feedback noting some current organisational overlap between the F&P and enforcement functions, and to the potential for the approval process being oriented towards a ‘quasi-enforcement investigation of past behaviour’. This specific unit appears intended to address that feedback.
- A risk-based approach for F&P gatekeeping should be implemented, which should involve the reconsideration of the overall number of PCF roles and possible adjustment in the approach to different industry sectors (e.g. certain funds and intermediary directorships and management roles). In considering the number of PCF roles, the F&P regime would be better able to differentiate the expectations of the roles and responsibilities of different PCF roles.
Recommendation 4 – Decision-making
- In circumstances where a ‘minded to refuse’ letter is issued to a firm, the letter should include a draft decision, a clear outline of the circumstances, the concerns arising under the relevant underlying law/guidance and address all relevant issues raised to date, including written responses to any arguments raised by the applicant. The firm should be given a reasonable time to respond (e.g. 10 working days).
- A ‘significant decisions committee’ should be established within the Central Bank that is responsible for the making of “significant decisions” (i.e. when an assessment is potentially leading to a refusal decision). However, a single decision maker may also be appointed to decide a given case and, in such cases, the single decision maker should not be below the level of Director.
- The Chair of the ‘significant decisions committee’ should not routinely be involved in the assessment stage and should have requisite seniority to provide independent challenge and authority to decide upon the composition of the committee based on the nature of the underlying case.
- Where legal advice is required at the decision making stage, it should be provided by the General Counsel to the Central Bank.
- The report also acknowledged the appropriateness in individual cases of approving a candidate ‘with recommendations’ (e.g. requirements that they undertake training on certain aspects such as specific regulatory or governance requirements). In our experience this has been used to good effect to progress appropriate candidates and assist in their continuous improvement in dynamic senior roles.
Recommendation 5 – Communication and IT platform
- An annual information session for firms and potential candidates should be held to assist their understanding of the practicalities of the F&P process.
- In addition, ad-hoc workshops should be organised to obtain feedback from firms on the functioning of the Central Bank’s online application portal and practical areas for improvement in relation to the application process.
Recommendation 6 – Interview stage
- The report identified a number of issues raised during feedback on the interview process, including a lack of clarity on topics to be discussed at interview; lack of timely notice; overly long interviews; lack of seniority of interviewers; the tone and posture during sessions and the potential for an asymmetry of information between the regulator and the candidate.
- A minimum of five working days’ notice of an interview should be given and the notification should identify the name and role of all staff members attending from the Central Bank (which should be limited to three persons).
- Interviews should be subject to time limits (such as 90 minutes) and should be conversational (not adversarial). In our experience, a 90 minute interview would be a significant departure from current practice in some cases, particularly if there are issues to be discussed with the applicant.
- The minutes of the interview should be shared with the individual within one week, allowing one week for providing comments. The individual should be permitted to bring a note keeper or a lawyer as observer.
- Feedback to both the individual and the firm should be provided following all interviews.
- The Review recognises that in some sectors, such as the investment funds industry, F&P interviews are less common than in other industries. The Review identified that this creates a particular stigma if an applicant is in fact called to interview. It is therefore recommended that the number of interviews of applicants for PCF roles in those ‘under-interviewed’ sectors, be increased.
- In our experience, directors and management in the industry will be particularly interested in these aspects of the recommendations, given the varied approach to ‘initial’ and ‘specific’ interviews across industry sectors, firms and by reference to different issues arising during an application.
Recommendation 7 – Efficiency of the interview process
- “Meet and greet” type interviews should not form part of the F&P gatekeeping process although they can take place outside the process.
- A single comprehensive interview should ideally be conducted (instead of an ‘initial assessment interview’ followed by a ‘specific interview’). This is particularly the case when a specific issue is known in advance. When combined with the proposal of interviews of 90 minutes or less, this would mark a substantially different approach to those interviews.
Recommendation 8 – Withdrawals / feedback
- Where an application is withdrawn, the Central Bank should provide feedback to both the individual and the firm.
- The Central Bank should not engage in off-record discussion with firms regarding any F&P applications and it should ensure that all relevant information is documented and available for review.
Recommendation 9 – Management information
- Service standards should be clear, comprehensive and cover all relevant aspects of the process.
- The service standards should apply to all applications, with the same overarching timeframe for completion applying. There should be no exclusions from the service standards, for example, where the approval process forms part of a firm’s application for authorisation.
- There should be a set timeframe within which applications have to be concluded (albeit voluntary) – a timeframe of 90 days is recommended, with only limited opportunities to ‘stop the clock’. This is particularly welcome given the varied timeframes experienced across industry and the potential lack of clarity as to why an application may be taking longer than others to consider.
- Aggregated management information on all applications should be provided to a senior management committee on a regular basis.
- Standardised information capturing all applications received, with appropriate breakdowns should be published at least on an annual basis to enhance transparency – specific data points for inclusion in such reporting are recommended. All of the information reported should be by reference to all regulated entity types and sector, and provide average times for applications received during that year.
Recommendation 10 – Quality assurance
- A robust quality assurance mechanism should be in place. This should be conducted by Central Bank staff with the oversight of an externally appointed advisor to the Central Bank. The output from the process should be conveyed, at least annually, to a senior committee.
Recommendation 11 – Complaints procedure
- A complaints procedure should be established specifically for the F&P gatekeeping process, which should be led by an externally appointed risk advisor to ensure independence, impartiality and maintain confidentiality as appropriate.
- This complaints procedure is intended as an avenue for candidates who have either been successful or had their application withdrawn to give feedback and receive feedback as to the process. It is not intended as an appeal mechanism for those candidates whose applications are unsuccessful.
Recommendation 12 – Training
- A comprehensive training programme for the F&P gatekeeping process should be developed, which includes training on the nature of the gatekeeping role and its significance, the process to be adopted, including any risk framework overlay, conduct of interviews and provision of feedback.
- A record of all training activities should be maintained to ensure that only trained personnel perform these tasks, and all relevant staff should undergo training at least annually. A process should also be adopted to regularly assess and update training materials to reflect any changes in best practice or lessons learned from previous assessments.
- The report itself acknowledged the appropriateness of interviewers going through a comprehensive training process, to ensure the ‘right posture’ and to avoid ‘confrontational attitudes’ during interviews.
Conclusion
The Review serves as a catalyst for the Central Bank to implement enhancements to the F&P approval process to ensure that it is effective, robust and fit for purpose now and into the future.
The Review is also welcome at a time when the tapestry of regulatory requirements for individuals subject to the F&P regime has become more complex, with the overlap between F&P, Conduct Standards and SEAR under the IAF. Indeed, the report suggests that additional consideration should be given to ‘further integration’ of the F&P regime and the IAF by leveraging inherent responsibilities in a way that highlights the competencies required for any particular senior role. This may indicate in due course amendments or enhancements to the IAF and F&P regime as both bed down together.
For further information on the potential impact of the Review on your firm or any aspects of the Fitness & Probity regime, please contact: Dario Dagostino, Partner, Mark Devane, Partner, Patrick Brandt, Partner, Chloe Culleton, Partner, Laura Mulleady, Partner, James Grennan, Partner, Sinead Lynch, Partner, Emma Martin , Of Counsel, Stephen Carson, Partner, Michael Barr, Partner, Kerill O'Shaughnessy, Partner, Lorena Dunne, Partner, Chris Bergin, Partner, Noeleen Meehan, Partner, Michael Doyle, Partner, Ciara Brady, Senior Associate, Louise Hogan, Senior Associate, Sarah Lee, Senior Knowledge Lawyer or your usual ALG contact.
Date published: 12 July 2024
