Guidance for ‘fitness and probity’ regime overhaul anticipated in Ireland

In July this year, the Central Bank confirmed that it intends to implement all the recommendations of the independent review into the Central Bank’s operation of the fitness and probity regime (F&P regime). The background to the review was the decision of the Irish Financial Servies Appeals Tribunals (IFSAT) in the AB case, which found that the Central Bank breached constitutional and natural justice requirements in assessing an individual’s application for approval for two senior roles where they would perform what is known as pre-approval controlled functions (PCFs).

Following IFSAT’s decision, the Central Bank commissioned an independent review of its operation of the F&P approval process, which was conducted by Andrea Enria, former chair of the supervisory board of the European Central Bank, who prepared a report that made several recommendations to improve the operation of F&P approval process.

The report found that the F&P regime as implemented by the Central Bank was broadly consistent with international peers, and generally aligned with international good practice. However, it identified some shortcomings in operation of the F&P framework and makes 12 recommendations that are designed to enhance the consistency and fairness of the F&P approval process and address concerns raised by IFSAT’s decision.

Of interest to firms will be the recommendation that the Central Bank provide greater guidance and clarity to firms on its expectations in relation to the “gatekeeping” role that firms play prior to applying for regulatory approval of a PCF role. Guidance to industry is expected to cover best practices for firms in relation to initial screening, conduct of background checks, verification of qualifications and record keeping.

The report recommended that the Central Bank improve the clarity of the F&P standards by incorporating more objective measures, such as specific qualifications, experience or certification requirements, which could reduce the level of subjectivity in F&P assessments.

To enhance the clarify of the F&P standards, Enria recommended that the Central Bank develop specific guidance on the role of executive director and non-executive director, and guidance for the role of independent non-executive director. Furthermore, the report recommended that the Central Bank provide further clarity to industry on the management of conflicts of interest and to develop specific provisions on the identification, management and mitigation of conflicts of interest.

The report also recommended that Central Bank set out clear expectations in relation to the number of PCF roles that an individual may hold. Commenting on the funds sector specifically, the report noted that the Central Bank conducts a particularly low level of interviews and that holding more assessment interviews would be consistent with the Central Bank’s risk-based approach to supervision, would ensure some form of F&P scrutiny, and should de-stigmatise the fact of being called for interview.

There were several recommendations regarding the Central Bank’s management of the fitness and probity approval process too, including recommendations for the establishment of a single unit within the Central Bank with responsibility for assessing F&P applications, establishing protocols for interviewing and assessing PCF applications, developing transparent service standards with clear timeframes for the processing of applications, and improving transparency – such as annual reporting on key performance metrics

In relation to the development of further guidance on the proper management of conflict-of-interest, we expect that the Central Bank will develop a framework based on the ECB’s guidance on F&P assessments which sets out criteria for the identification of conflicts of interest, a framework for the assessment of materiality, and guidance on measures to mitigate and manage conflicts of interest.

At present, firms await the measures to be announced by the Central Bank, but we expect that the Central Bank will implement a substantial overhaul of the F&P regime that will require firms to update their F&P policies to enhance the initial screening of applicants, to conduct more focused suitability assessments of applicants to include an assessment of an applicant’s experience and his/her understanding of the firm’s governance arrangements, and to carry out more detailed appraisal of conflicts of interest.

The Central Bank advised it would implement the report’s recommendations over months and that the recommendations should be in place by year-end. Amendments to the F&P approval process are expected to provide much transparency and clarity for firms and applicants on the Central Bank’s approval process and will be very welcomed by industry.

A version of this article was first published by Finance Dublin.