On 1 September 2011 the Central Bank of Ireland (the "Central Bank") published the Fitness and Probity Standards (the "Standards") which were issued under S.I. 437 of 2011, the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (the "Regulations"), which come into effect on 1 December 2011. The publication of the Standards was accompanied by the Draft Guidance on Fitness and Probity Standards (the "Guidance"). The consultation period for the Guidance will end on 30 September 2011.On 1 September 2011 the Central Bank also published enhanced minimum competency requirements. Application The Regulations specify t wo categories of staff working in regulated financial service providers who will be subject to the Standards:
- a person occupying a pre-approval controlled function ("PCF"); or
- a person occupying a controlled function ("CF").
The Standards will take effect in a phased basis as follows:
a) 1 December 2011 for all persons occupying a PCF;
b) 1 March 2012 for all new appointments to a CF (including new offers of employment and internal transfers/promotions); and
c) 1 December 2012 for all persons in existing CFs.
The Standards apply to all regulated financial service providers (with the exception of credit unions) operating in a broad range of sectors including general banking, insurance, investment services and investment funds, and will replace the existing fit and proper regime. The phasing in periods outlined above are intended to give regulated financial service providers time to introduce any necessary new policies, systems and procedures.
Controlled Functions and Pre-Approval Controlled Functions
Under the Regulations, a CF is a function in relation to the provision of a financial service which:
a) is likely to enable the performer of that function to exercise significant influence on the conduct of affairs of a regulated financial service provider;
b) relates to ensuring, controlling and monitoring compliance by a regulated financial service provider with its obligations;
c) is likely to involve the performer of that function providing a financial service in one or more of the following ways:
i. giving advice on a financial service;
ii. arranging or offering to arrange a financial service;
iii. assisting with the making of an insurance or reinsurance claim;
iv. determining the outcome of a claim arising under a contract of insurance or reinsurance;
v. managing or supervising a person providing the services at (i) to (iv);
vi. adjudicating on a customer complaint in respect of a financial service;
vii. dealing in or having control over property of a customer of the regulated financial service provider to whom a financial service is provided, whether that property is held in the name of the customer or some other person; and
viii. dealing in or with property on behalf of the regulated financial service provider, or providing instructions or directions in relation to such dealing.
In an insurance or reinsurance intermediary, a person occupies a CF if they are;
- involved in the direction and management of the intermediary and are responsible for mediation in respect of insurance products; or
- involved directly in insurance or reinsurance mediation.
The scope of the functions which fall within the Regulations are broad. However, there is an exception for staff whose function is solely concerned with acting in accordance with a written set of instructions in the form of a script, for example call centre staff.
A PCF is a CF carried out at a more senior level within a regulated financial service provider. The Regulations contain a detailed list of all PCFs. In general, the following persons within a regulated financial service provider will perform a PCF:
- executive director;
- non-executive director;
- chairman of the Board;
- chairman of the following committees: audit; risk;
- remuneration; and nomination;
- chief executive;
- company secretary;
- each member of a partnership; and
- heads of the following areas: finance; compliance;
- internal audit; risk; anti-money laundering compliance; and retail sales.
The Regulations also prescribe additional PCFs for specific types of regulated financial service providers. For example, in the case of a Credit Institution within the meaning of the European Commission (Licensing and Supervision of Credit Institutions) Regulations 1992, the following additional roles are also PCFs:
- head of treasury;
- head of credit; and
- head of asset and liability management.
In addition to the PCFs set out in the Regulations, the Central Bank has the power in certain circumstances to declare that a function being performed by, for or on behalf of a regulated financial service provider is a PCF.
Compliance with the Fitness and Probity Standards
To comply with the Standards a person performing a CF or PCF is required to be:
- competent and capable;
- honest, ethical and to act with integrity; and
- financially sound.
A regulated financial service provider must not allow a person to perform a CF or a PCF unless it is satisfied on reasonable grounds that the person complies with the Standards, and has agreed to abide by them. A regulated financial service provider cannot appoint a person to a PCF unless the Central Bank has approved that appointment in writing.
Persons in existing PCFs are not required to seek the Central Bank's written approval to continue in those roles. However, by 31 December 2011, a regulated financial service provider must submit a list of those persons carrying out specific PCFs as at 1 December 2011. The regulated financial service provider must be satisfied that those persons comply with the Standards.
The Guidance sets out the steps a regulated financial service provider is expected to take to comply with the Standards, including comprehensive details of the level of due diligence that a regulated financial service provider should undertake. The requirements set out in the Standards are continuing. Therefore, a regulated financial service provider needs to ensure compliance on an ongoing basis. Regulated financial service providers will need to put in a place a procedure to assess and monitor staff. The Guidance also suggests that an annual audit be carried out on all persons in a CF or PCF. Under the Central Bank Reform Act 2010 the Central Bank has the power to investigate, suspend or remove a person from a CF or PCF where it has concerns about their fitness and probity. In addition any breaches of the Regulations or the Standards can be dealt with under the administrative sanctions procedure contained in the Central Bank Act 1942 (as amended).
Minimum Competency Code 2011
To compliment the introduction of the Standards, the Central Bank has also issued a revised Minimum Competency Code ("MCC") to replace the Minimum Competency Requirements ("MCR") which came into effect on 1 January 2007. The MCR was implemented to improve the quality of service provided to consumers by setting down minimum standards of skill and knowledge for staff providing advice on, or arranging, retail financial products. The MCC will replace the MCR with effect from 1 December 2011. The MCC preserves the overall scheme of the MCR. However, the MCC and the Standards are now more closely integrated. Minimum competency will be one of the considerations in assessing whether the holder of a CF or PCF complies with the Standards.
The MCC applies to persons in a CF or PCF that:
a. provide advice to consumers on retail financial products;
b. arrange or offer to arrange retail financial products for a consumer;
c. carry out one of the specified functions set out in the MCC, for example assisting a consumer make an insurance claim.
The categories of retail financial product covered by the MCC are broad, and include savings, investments, pensions and insurance. The MCC sets out the minimum level of knowledge and competence required for each category. To comply with the MCC a staff member must complete a recognised qualification and continual professional development.
The MCC also made the following amendments:
a. the categories of retail financial products have been restructured;
b. the CPD requirements have been amended;
c. the number of recognised qualifications has been increased;
d. new entrants are to be subject to tighter supervision; and
e. a regulated financial service provider must keep certain records in respect of staff members claiming the "grandfathering" exemption.
Conclusion
Implementing the Standards will be a significant compliance project for regulated financial service providers, especially credit institutions with large numbers of front and back office staff. The key challenges will be to:
- identify all staff who perform a CF or PCF;
- assess whether those staff meet the Standards; and
- design internal controls and procedures to ensure compliance with the Standards on an ongoing basis.
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.