The new Fitness and Probity Regime – What will this mean for banks and their employees?
Against a backdrop of unprecedented global financial turmoil and Ireland’s own banking crisis, addressing the need for improved regulation of the financial services sector, and the individuals who work within it, has been the key driving force behind the new fitness and probity regime recently introduced by the Central Bank.
Part 3 of the Central Bank Reform Act 2010 (the “2010 Act”) creates for the first time a statutory system for regulation by the Central Bank of two categories of individuals performing certain key functions, namely those performing either a prescribed “controlled function” (CF) or a “pre-approved controlled function” (PCF), in Ireland’s regulated financial institutions.
The Central Bank has published details of how this new regulatory process is to be implemented and the standards which must be complied with by way of the following documents:
- The Central Bank Reform Act 2010 (sections 20 and 22) Regulations 2011. (the “Regulations”); and
- The Fitness and Probity Standards (the “Standards”)
This article examines briefly what the new Regulations and Standards actually mean for individuals who carry out CFs or PCFs in the regulated financial institutions.
Who are CFs and PCFs?
The Regulations prescribe what are CF and PCF positions.
The list of PCFs includes 42 senior positions in the financial sector which must be approved in advance by the Central Bank before people can take up those positions. This list includes, for example, chief executives, company directors, chairs of the board or other committees such as audit, risk, remuneration and nomination, heads of finance etc.
The list of CFs includes less senior positions from which individuals can be removed or banned by the Central Bank. This list focuses more on individuals who interact with customers and includes, for example, employees whose function is likely to enable the person to exercise a significant influence on the conduct to of the affairs of the regulated entity, who provide advice on the regulated financial service, who adjudicate on customer complaints, who arrange services for a customer of a regulated financial service provider etc.
When will the Standards apply?
The Standards will be introduced on a phased basis in order to allow institutions sufficient time to introduce the necessary controls and procedures for ensuring compliance as follows:
- From 1 December 2011, they will apply to all individuals occupying PCFs;
- From 1 March 2012, they will apply to those appointed from that date to perform CFs;
- From 1 December 2012, they will apply to all individuals performing CFs, regardless of when they were appointed.
What do the Standards say?
The Standards set out various obligations that apply to 1) the financial institutions and 2) the individuals employed to work within them in CF or PCF roles.
With respect to financial institutions, the Standards place an obligation on them not to permit a person to perform a CF or a PCF role unless they are satisfied on reasonable grounds that the person complies with the Standards. This places an onus on the financial institutions to ensure that all of its employees not only meet the requirements set out in the Standards at the very outset of their appointment, but that they continue to comply with them throughout their careers.
With respect to the individuals employed in CF and PCF roles, the Standards set out the general conditions that employees covered by the Regulations must satisfy in order to perform the function assigned to them including:
- being competent and capable;
- being honest, ethical and to act with integrity; and
- being financially sound.
The Standards also require individuals providing information pursuant to the Standards to either the Central Bank or to the regulated financial service provider to do so candidly and truthfully and in a way that is full, fair and accurate in all respects and not misleading to the best of that individual’s knowledge.
A more detailed description of these general conditions is outlined in the Standards. They include that a person performing a CF or PCF role:
- has the appropriate qualifications, experience, competency and understanding of the business of the financial service provider;
- has the necessary knowledge of the organization as a whole and of the specific responsibilities relevant to the function
- has not been suspended, prohibited or restricted, in any jurisdiction, from carrying on a business that requires a licence, registration or authorisation;
- has not been the subject of any complaint made to the Central Bank, the Financial Services Ombudsman or any equivalent body;
- has not been subject to any disciplinary proceedings;
- has not been convicted of any criminal offence or adjudicated a bankrupt;
- has not been disqualified or restricted from acting as a director in any jurisdiction; and
- manages his/her affairs in a sound and prudent manner.
The Central Bank has also published a Draft Guidance on Fitness and Probity Standards (the “Guidance”) for the purpose of assisting regulated entities in complying with their obligations and on the approval process for the appointment of PCF roles. The Guidance sets out the steps of a due diligence which a regulated financial service provider would reasonably be expected to take to ensure that a person performing a CF or PCF role is compliant with Standards. The Guidance includes steps and practical advice in relation to:
- identifying persons in CF and PCF roles;
- the approval process for PCFs;
- interviewing and offering appointments to PCFs;
- the due diligence to be undertaken in order to assess a person's fitness to perform a CF; and
- due diligence for criminal offences.
For the regulated institutions
Failure to comply with their obligations may expose that regulated institution and/or the persons concerned in its management to:
- Financial penalties and other sanctions through an Administrative Sanctions Procedure. This involves an investigation to establish whether there are reasonable grounds to establish an Inquiry. An Inquiry, if established will then decide if the prescribed contravention has occurred and will determine the appropriate sanctions.
- Alternatively, it may be appropriate not to take enforcement action as outlined above, but instead to embark on proactive supervision and monitoring of the regulated entities.
- The Central Bank has powers to prosecute some summary offences through the Courts.
- The Central Bank also has a duty to disclose information to other law enforcement agencies in certain circumstances.
For the individuals
Failure by an individual to comply with the Standards can result in:
- An application for appointment to a PCF being refused;
- An investigation into the fitness and probity of a person performing a CF or PCF role;
- The suspension or prohibition of a person performing either a CF or PCF role from continuing to do so.
What remains to be seen is the practical effect of the introduction of the new regime for both the regulated institutions and the individuals employed by them in CF or PCF roles.
Clearly, for the regulated institutions, the new regime places a considerable onus on them to ensure the proper checks are in place and to carry out regular assessments of its employees to ensure compliance with the Standards. Already there are concerns being expressed by certain banks that the administrative burden that will be placed on them to ensure management of the new regime could detract from the main objective of ensuring high standards of fitness and probity in the financial services industry, particularly if large numbers of junior employees fall within the current definition of a CF role.
It is apparent that the nature of the information required to be obtained and retained by the regulated institutions may potentially conflict with the principles of data protection law, particularly in relation to an employer’s obligation to only retain personal data relating to employees for so long as it is necessary and relevant and its obligation to ensure such is only used for purposes that are compatible with the purpose for which it was initially given. Consideration needs to be given by the regulated institutions to the implications of requesting and holding such information in order to ensure compliance with these principles.
There may also be practical difficulties for the regulated institutions trying to comply with the due diligence requirements set out on the Guidance which requires far more detailed information from prospective candidates than would generally be sought. For example, the institutions are expected to obtain detailed references from former employers of individuals applying to PCF roles before the Central Bank will approve them. Not only could this cause difficulty for the individuals applying for such roles whose existing employers may not know they are considering leaving, but the practice of providing detailed references is becoming increasingly less common making it more difficult for the prospective employer to obtain sufficiently meaningful information about the prospective candidate.
The new regime and the potential consequences of failing to meet the standards will also inevitably have a knock on effect on individual’s employment rights. For example, where an individual is suspended or prohibited from performing a CF or a PCF role, will this be sufficient grounds to justify their dismissal within the meaning of the Unfair Dismissal Acts 1977-2007 (“UD Acts”)? This remains unclear. On the one hand, the relevant sections of the 2010 Act which entitle the Central Bank to issue suspension or prohibition notices (sections 27(4) and 43(11) respectively) provide that such notices do not alter an employee’s contractual rights to remuneration and benefits.
On the other hand, section 6(4)(d) of the UD Acts provides that a dismissal will not be unfair where it results from an employee “being unable to work or continue to work in a position which he held without contravention (by him or by his employer) of a duty or restriction imposed by or under any statute or instrument made under statute”.
This suggests that, where the individual employee is deemed no longer to comply with the Standards and so cannot continue in their role as a result, they may be lawfully dismissed. How such situations are catered for in an individual’s contractual arrangements (if at all) will obviously have an impact on whether a suspension or dismissal is fair or not, and whether the individual has any contractual or statutory claim to make arising out of same.