The Central Bank has published a consultation paper on the enhanced fit and proper regime it intends to apply under Part 3 of the Central Bank Reform Act 2010 (the "Act"). The new regime is intended to come into effect on 1 September 2011. The consultation process ends on 20 May 2011.

Pre-approval Controlled Functions and Controlled Functions

The Central Bank may designate a function within a regulated financial services provider as a Pre-Approval Controlled Function (PCF) or Controlled Function (CF). These functions involve the exercise of significant influence on the conduct of a regulated financial services provider. Pre-approval must be obtained from the Central Bank before a person can be appointed to a PCF; a PCF holder must be deemed fit and proper before taking up that role. A CF holder does not require pre-approval of appointment, but can be removed from office by the Central Bank if that CF holder is considered not to be fit and proper.

Proposed appointments will be closely scrutinised and the Central Bank may investigate, suspend, remove permanently and/or prohibit an individual from carrying out a controlled function in a regulated financial services provider in the future.

The enhanced fitness and probity regime applies to all regulated financial services providers (except credit unions) and includes, for example:

  • credit institutions;
  • insurance undertakings;
  • a MiFID or Investment Intermediaries Act investment firm;
  • trustees or custodians of investment funds;
  • UCITS and Non-UCITS self-managed investment companies; and
  • management companies within the meaning of the Unit Trusts Act 1990 or Part XIII of the Companies Act 1990 or Investment Funds, Companies and Miscellaneous Provisions Act 2005.

In general, the following persons within regulated financial services providers perform a PCF role:

  • executive director;
  • non-executive director;
  • chairman of the Board;
  • chairman of the audit committee; risk committee; remuneration committee and nomination committee respectively;
  • chief executive;
  • company secretary;
  • each member of a partnership; and
  • heads of the following areas: finance, compliance, internal audit, risk, compliance with responsibility for anti-money laundering and retail sales.

PCFs in respect of credit institutions include:

  • head of treasury;
  • head of credit; and
  • head of asset and liability management.

PCFs in relation to investment managers include:

  • branch managers within the State;
  • heads of trading and investment respectively; and
  • chairman of the compliance committee.

PCFs in relation to custodians include:

  • branch managers within the State; and
  • heads of trustee services and custodial services respectively.

PCFs in relation to an administrator or manager include:

  • head of transfer agency; and
  • head of accounting valuations.

PCFs in respect of a UCITS self managed investment company or a UCITS or Non-UCITS management company include:

  • designated persons to whom a director of a UCITS self-managed investment company or management company may delegate the performance of the management functions.

PCFs in respect of insurance undertakings or reinsurance undertakings (excluding captives or special purpose reinsurance vehicles) include:

  • head of underwriting;
  • head of investment; and
  • chief actuary.

Central Bank can designate a CF as a PCF

The Central Bank may prescribe a CF as a PCF if the person performing the function reports directly to a director or company secretary, or to the chief executive, particularly in view of the size or complexity of the regulated financial services provider. The Central Bank can also determine that a function is a PCF if: (i) the person performs a management function; (ii) the function is not prescribed as a PCF by the Regulations; and (iii) no other person in the regulated financial services provider performs a PCF.

It is not intended that a person filling a PCF role temporarily will be held responsible for the performance of that role provided there is an agreement in writing with the Central Bank in advance of such person assuming that role.

Initial due diligence and ongoing monitoring

Regulated financial services providers must have effective processes in place to ensure that persons proposed for PCFs and those appointed to CFs are fit and proper on appointment and remain fit and proper. They are also required to submit by 31 December 2011 a list of those persons carrying out the specific PCFs (as at 1 September 2011). In submitting the list to the Central Bank, regulated financial services providers must confirm that they are satisfied the individuals are fit and proper.

The Central Bank's Regulatory Transactions Department plans to introduce an automated online Individual Questionnaire and is considering issuing non-statutory guidelines setting out appropriate levels or types of due diligence that should be carried out.

Sanctions

In the event of non-compliance, the Central Bank will take enforcement action against a regulated financial services provider. The Act also creates certain criminal offences:

  • failing to appear before the head of Financial Regulation of the Central Bank, when required;
  • failing to produce evidence, when required;
  • refusing to answer questions in compliance with an evidentiary notice from the head of Financial Regulation; and
  • providing false or misleading information to the Central Bank or the head of Financial Regulation.

Fitness and Probity Standards

The fitness and probity standards proposed by the Central Bank are divided into three sections:

Competence and Capability

A person is required to have the necessary competence and may also be required to demonstrate the ability to understand internal governance and risk management concepts and the overall business model of the proposing regulated financial services provider.

Relevant considerations include:

  • the activities and size of the regulated institution;
  • the responsibilities of the position;
  • sound knowledge of the business and responsibilities and a comprehensive understanding of the regulatory and legal environment in which they will operate;
  • whether the person has shown the capacity (i.e. the competence and capability) previously to undertake similar responsibilities; and
  • the existing responsibilities of the individual. This also involves a consideration of the number of directorships held.

Probity

Persons proposed for a CF or PCF role are required to ensure that they will act honestly, ethically and with integrity.

Financial Soundness

The Central Bank also requires evidence of financial soundness. Personal bankruptcy or an association with the bankruptcy, insolvency, administration or liquidation of a company will be relevant considerations, even where they are not likely to cause an adverse decision.

Regulated financial services providers which have received State financial support

The Central Bank has stated that it will review the fitness and probity of persons in PCFs in financial services providers receiving, or having received, State financial support, who intend to continue performing those functions after 1 January 2012.

In performing this review the Central Bank will consider, in particular, the extent to which that person may have contributed to the necessity for such State financial support. This review may result in an investigation and the issue of a prohibition notice where appropriate.

Impact on existing PCFs

PCFs in existing roles are not required to seek the Central Bank's written approval to continue in their roles. Regulated financial services providers must satisfy themselves that the person complies with the applicable standards. Existing PCFs will be subject to the Central Bank's powers of investigation, suspension and prohibition under the Act. However, where an existing PCF moves to a similar position in a different regulated financial services provider or takes on a different PCF function within the same institution they will be required to comply with the pre-approval process.

Conclusion

The proposed changes will place a greater administrative and compliance burden on regulated financial services providers. If you wish to discuss any of these changes or to respond to the Central Bank's consultation paper, please do not hesitate to contact us. We will continue to update you on these developments.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.