Individual Accountability – Holding Companies in the Spotlight

Ireland has traditionally positioned itself as an attractive domicile for holding companies of all types, including financial holding companies. Liam Flynn and Stephen McVeigh from our Financial Regulation team examine recent CBI proposals to include directors and other staff of financial holding companies within scope of the fitness & probity regime, and ask whether these proposals could impact negatively on Ireland’s foreign direct investment proposition in the financial sector.

The Central Bank of Ireland (CBI) Consultation Paper on the Individual Accountability Framework (IAF) and Senior Executive Accountability Regime (SEAR) was published on 13 March, kicking off a 3-month consultation process that will end on 13 June 2023. The general principles of IAF/SEAR have been known for some time, but this consultation process offers industry the opportunity to influence the detailed rules by engaging comprehensively and at a granular level with the CBI’s proposals.

In-scope holding companies

We focus here on the CBI’s proposal to extend its fitness and probity (F&P) regime to directors and staff of certain financial, insurance or investment holding companies (in-scope holding companies). Currently, directors and senior executives of in-scope holding companies must be properly qualified and of good reputation under applicable EU law, but the full rigour of the CBI’s F&P process does not apply to them.

Going forward, the CBI proposes that candidates for pre-approval controlled function (PCF) roles at in-scope holding companies will be required to undergo pre-appointment vetting. PCFs and controlled function (CF) role holders at in-scope holding companies will be required to comply with the CBI’s F&P standards. CFs and PCFs will be subject to annual re-certification for F&P purposes and failure to maintain F&P standing could result in removal from office. The CBI’s proposals apply to “in-scope holding companies”, which are “financial holding companies”, “mixed financial holding companies”, “insurance holding companies” and “investment holding companies”. These terms are defined under the EU’s Capital Requirements Regulation, Solvency II Directive, and Investment Firms Directive respectively. Very broadly speaking, all Irish-incorporated bank, insurance, MiFID, and mixed banking group holding companies will be covered.

Group supervision under EU law

All such holding companies are currently subject to one of several systems of group supervision under EU law. For example, financial holding companies and mixed financial holding companies are subject to an authorisation requirement, either by the ECB or by the consolidating bank supervisor. In instances where the relevant holding company is based in Ireland, the consolidating bank supervisor could be the CBI. The group supervision systems are prescribed under EU law and vary in intensity depending on the nature of the group. These supervision systems require directors and senior executives of in-scope holding companies to be suitably qualified and of good reputation. EU law does not however require the CBI to apply its full domestic F&P regime to these holding companies. The CBI’s proposals, therefore, represent a form of national “gold plating”, where a member state goes over and above the requirements of EU law and deserves to be examined critically in that light.

Plugging the gap

The CBI argues that the F&P regime must be extended to in-scope holding companies since there is an “acknowledged gap” in the regulatory system at present. However, the CBI offers no further explanation of what this gap is and how it negatively impacts its regulatory functions. The CBI’s proposals also seem inconsistent with Ireland’s traditional stance of seeking to be as facilitative and attractive as possible as a domicile for holding companies, including financial holding companies.

We fear that, if overseas directors of Irish financial holding companies become subject to PCF pre-approval and the formalities of the F&P system, they may in future be less willing to accept such positions. This could in turn make Ireland less attractive to new and existing holding companies, creating risks to Irish tax revenues. By way of comparison, our understanding of the UK Senior Managers Certification Regime, or “SMCR”, the UK equivalent to IAF/SEAR, is that it does not apply to directors or personnel of financial holding companies as such.

Where an Irish holding company is subject to an independent legal requirement to be authorised under financial services legislation, such as the requirement that applies to certain bank holding companies under CRD V, we can see a policy justification for the CBI’s F&P regime to apply to such companies. For other holding companies, such as insurance holding companies, we do not see the same policy justifications.

Discretion

The Central Bank has broad discretion under the relevant legislation to specify functions within financial holding companies as CF or PCF functions. We believe that the Central Bank should, if it decides to exercise this discretion, do so with caution. If it must bring financial holding companies into scope of the F&P regime, it should limit this to bank holding companies that require authorisation under CRD V. It should further limit the scope of CF designation to those persons within a financial holding company that have specific responsibility for compliance by the holding company with its financial services regulatory obligations imposed by virtue of its falling within the relevant regulatory holding company definition. CFs should not be designated for other aspects of compliance or for the conduct of the holding company’s business generally.

Directors and chairs

We do not see a policy justification for all directors and the chair of financial holding companies automatically becoming PCF functions requiring pre-approval vetting. We are of the view that PCF designation should be limited to those directors of a financial holding company that, by virtue of that position, exercise specific and significant responsibilities related to relevant regulated subsidiaries. Therefore, and by way of example, a holding company director that participates in a committee of the regulated entity would be captured, but “regular” holding company directors would not.

Comment

There is evidence that Ireland’s competitive standing as a financial services domicile is slipping due to, among other matters, high capital requirements and elevated operating costs. The CBI’s holding company proposals will do little to enhance Ireland’s attractiveness in this respect, and we believe they could benefit from some reconsideration.

For more information, contact a member of our Financial Regulation team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.