26 August 2024
In February 2024 the Central Bank of Ireland (“Central Bank”) announced it had commissioned an independent review of its fitness & probity (“F&P”) regime. The review was published in July and makes twelve recommendations, all of which have been accepted by the Central Bank. The implementation of these recommendations, which is due to be completed by the end of 2024, will lead to significant reform of the regime and how it is operated. This briefing contains our analysis of this important regulatory development and the potential changes it may bring, which will impact all firms and individuals that are subject to the F&P regime.
Under the F&P regime an individual is prohibited from performing certain senior roles, known as pre-approval control function (“PCF”) roles, within firms regulated by the Central Bank unless the Central Bank has confirmed it is satisfied the individual is fit and proper.
This means the Central Bank must assess each individual wishing to take up a PCF role and decide whether, in its view, the individual is appropriately capable, honest, ethical and of integrity and financially sound.
Because of the serious consequences of this decision, the assessment engages the individual’s constitutional rights. A consequence of this is the assessment process must be fair and consistent with constitutional and natural justice requirements.
In January 2024, the fairness of the F&P assessment process was the subject of a hugely significant decision by the Irish Financial Services Appeals Tribunal (“IFSAT”) to uphold an appeal by an individual (known as “AB”) against a decision by the Central Bank to refuse to approve his proposed appointment to two PCF roles with a regulated entity, on the basis that he was unfit to perform those roles.1 In its decision, which focused on fair procedures, IFSAT found the Central Bank’s decision-making process was flawed, that it had denied AB fair procedures at each stage of the process, in breach of constitutional and natural justice requirements. For detailed analysis and commentary on the IFSAT decision, see our previous briefing here.
In response to the IFSAT decision the Central Bank commissioned an independent review of the F&P regime.
The review, which was carried out by Andrea Enria, a former Chair of the ECB Supervisory Board, involved extensive engagement with a range of stakeholders and analysis of the F&P practices of several other supervisory authorities.
It suggested that an effective gatekeeping function requires extensive reliance on supervisory judgement. It noted that given the severe potential consequences for firms and individuals arising from the exercise of that supervisory judgement, it must adhere to the highest standards of fairness and transparency.
The review examined the effectiveness and efficiency of the F&P process from the perspective of clarity of supervisor expectations, governance and process fairness and transparency.This identified five key themes which emerged as fundamental principles across all areas.
The review found that the conduct of the F&P process by the Central Bank is broadly aligned with other peer jurisdictions across several metrics but highlighted areas in which the operation of the F&P process is “not always up to the requisite standards of fairness and transparency.”2 It notes the critical need to address this and puts forward twelve recommendations which flow from the themes identified and which it says “if implemented or clearly reiterated as key elements of internal practices, would go a long way in ensuring that in all cases the Central Bank will exercise the significant powers granted to them by the legislature with professionalism, integrity and respect for fair process.”3
The Central Bank should provide greater clarity and guidance on its expectations as to the process a regulated firm engages in prior to submitting a PCF application. This should address due diligence and screening, background checks, documentation, and record keeping and monitoring of ongoing fitness and probity.
The Central Bank should establish a consolidated single location for standards which should be enhanced by:
An external risk advisor to the Central Bank should oversee a robust quality assurance mechanism conducted by staff of the Central Bank. The output from the process should be provided to a senior Central Bank committee on an annual basis.
A F&P complaints procedure should be established to address grievances, issues or concerns that arise as part of the approval process or where a withdrawal has occurred. An external risk adviser should be involved to ensure independence, impartiality and to maintain confidentiality.
All Central Bank staff involved in the F&P process should receive comprehensive training annually because it is imperative that those involved in the process from the Central Bank are well versed in decision-making elements, fairness of process, proportionality and the duty to give reasons.
In light of the Central Bank’s acceptance of the review and its recommendations, it is understood the Central Bank has begun work on the establishment of a dedicated F&P unit and an overhauled F&P regime that reflects the range of recommendations put forward.
The precise details of the changes that emerge in the reformed regime (due at the end of 2024) will be hugely relevant to all stakeholders and subject to comprehensive analysis by a range of market participants.
We will provide our further insights on these changes as the reform of the regime progresses.
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Reform of Central Bank of Ireland’s fitness and probity regime underway (PDF, 459KB)
Engagements with the Central Bank as part of a PCF assessment process can have profound professional, financial, employment-related and reputational consequences for firms and individuals. Any party preparing to engage with the Central Bank on a PCF application or on any other matter such as an investigation or enforcement action where they could be the subject of the exercise of a regulatory power, should approach those engagements with the necessary understanding of the relevant legal issues, including the operation of the principles of natural justice, and the requisite level of preparation and expert professional support.
Experienced lawyers from KPMG Law LLP’s Financial Services Regulation team and its Employment Law team can provide firms and individuals with confidential legal advice on these issues, including assistance with preparations for interviews and representation at those interviews. Clients can also benefit from access to market-leading fitness and probity experts from KPMG Ireland with unique practical experience gained from the implementation and on-going assurance of clients’ fitness and probity compliance controls.
01. Supervisory Judgement
Any proper assessment of an individual’s fitness and probity to perform a specific role must involve both objective and subjective elements. The subjective element or supervisory judgement, is described as an indispensable component of the assessment process and the recommendations in the report are intended to improve the transparency, efficiency and fairness of the exercise of that supervisory judgement.
02. Fairness
Fairness and the perception of fairness is described as a pivotal principle in the F&P process. In AB and the Central Bank, IFSAT found the process had been unfair and several of the recommendations address steps in the process that were described by IFSAT as flawed, most notably those concerning the involvement of the enforcement division of the Central Bank and the interview process.
03. Efficiency
The report notes that “efficiency is a key component of fairness and an approval process that does not deliver timely decisions is fundamentally unfair.” It notes the negative impact on firms and individuals that flows from an absence of efficiency, a point which was made forcefully by IFSAT in AB and the Central Bank.
04. Proportionality
The report describes the importance of proportionality in the approval process and suggests this is achieved through a risk-based approach to the assessment process whereby higher risk roles, institutions or sectors receive greater scrutiny from the Central Bank, with others following a more streamlined process. This risk-based proportionate approach should also be applied to the due diligence expectations placed on regulated entities.
05. Culture
The report notes the importance of the culture prevailing amongst the Central Bank staff involved in the process in ensuring that the process is perceived as a fair and legitimate exercise of supervisory judgement. In considering culture it draws the distinction between an adversarial approach characteristic of an enforcement investigation and a more inquisitive approach appropriate for a gatekeeping process.