Assessment of the fitness and probity, or F&P, of senior executives of regulated firms is an important pillar of the Central Bank of Ireland’s regulatory oversight. It is critical for both regulators and customers that senior managers of financial firms should be honest, highly competent and diligent. Ireland’s F&P approval system has existed since 2010. However, partly due to fear of publicity in a small and close-knit business community, it has been very rare for firms and individuals to challenge negative Central Bank F&P decisions. This makes a recent Irish case and its aftermath more noteworthy. In this case, the Central Bank’s approach to F&P assessment was severely criticised, resulting in an immediate independent review and recommended future process changes.
Independent review
The Irish Financial Services Appeals Tribunal delivered its ruling in AB v the CBI in February 2024[1]. The Appeals Tribunal ruling was highly critical of the approach adopted by the Central Bank in conducting interviews as part of its assessment of senior executives, known as pre-approval-controlled function-holders, or “PCFs”. The ruling found that the Central Bank had given insufficient and inappropriate notice to the complainant regarding material to be discussed at interview. In addition, it was noted that the Central Band had adopted a detailed line of questioning which was more akin to an enforcement investigation than an assessment interview.
Following the ruling, the Central Bank commissioned Mr Andrea Enria, former Chair of the ECB Supervisory Board to lead an independent review of its processes. The review report found overall that the Central Bank’s F&P process is broadly aligned with the approach adopted by regulators in comparable jurisdictions and is neither more stringent nor more lenient. Despite this appraisal, the review report made recommendations to the Central Bank to enhance and improve the process, which the Governor has since publicly committed to implementing.
Findings and recommendations
The review report recommended that steps should be taken to improve the consistency of the F&P assessment process across firms of different sizes and operating in different financial sectors. Like the Appeals Tribunal, it highlighted concerns regarding the conduct of interviews by the Central Bank, noting issues concerning:
- Lack of timely notice
- Insufficient clarity on topics to be discussed, and
- A confrontational tone adopted at interviews.
The review report references interview processes employed by the Dutch and UK regulators to support recommended changes.
Senior managers and directors can expect revised and enhanced F&P standards and guidance to be published in due course by the Central Bank due to the review report. Overall, the report recommends a reduction in PCF roles and the number of individuals called for interviews. However, this approach is not the case for fund directors where increased scrutiny is proposed due to the sector’s systemic footprint. The report calls for an enhanced review process within the Central Bank for applicant rejections, with proposed rejection decisions to be escalated to either a committee or senior decision-maker.
Most importantly and practically for individuals who are called to interview, the report recommends that they should be provided with at least five working days’ notice. It also proposes that interviews themselves should be kept below 90 minutes and that the interview style should be conversational rather than investigatory. The report also states that the current Central Bank practice of conducting an initial ‘appraisal’ interview followed by a more formal interview where concerns are identified should not continue. The report confirms that the aim should be for only one interview with a candidate to be conducted.
The review report further comments on the Central Bank’s current lack of clarity as to how collective suitability and diversity within boards and management teams is assessed and recommends that further guidance in this area should be provided. This is timely, given that on 24 July 2024, the European Central Bank launched a consultation on its revised draft guide on governance and risk culture for significant banks, which is set to replace the 2016 SSM supervisory statement on governance risk appetite.
The ECB draft guide places particular emphasis on the need for management bodies of regulated banks to have the right composition of members. While each member of the management body must be individually suitable, the ECB has stressed the need for F&P assessments to consider if a management body is collectively able to understand the risks facing a firm, proportionate to its size, complexity and risk profile. Regulated firms have grown accustomed to the Central Bank applying “soft pressure” to influence the composition, diversity and skillset of boards. The ECB draft guide suggests that inappropriate board composition could itself become a ground for refusing F&P approval going forward.
Comment
The introduction of the Central Bank’s individual accountability and senior executive responsibility framework (IAF/SEAR) is, in our view, likely to be used over time by regulators to further increase their expectations of individuals working in the financial industry. In the UK, non-financial misconduct, i.e., behaviour by individuals in their personal lives, has been a basis for denying their F&P and withdrawing their ability to work in the industry since 2018. Indeed, the UK Financial Conduct Authority wrote to 180 London banks in February 2024 requesting information regarding sexual misconduct, harassment and bullying as part of a market review of non-financial misconduct. This approach indicates the FCA’s focus on these areas is increasing.
Regulators’ scrutiny of individuals’ actions, both at work and outside, is ever more intensive and the penalties that can be imposed are severe. It is therefore critical that regulators’ processes are fair and that impacted individuals have robust and accessible means to challenge adverse decisions. Unlike the UK[2], Ireland does not yet have a culture of formal challenge to regulatory decisions, but its response to the recent Appeals Tribunal decision demonstrates that it has no reason to fear them.
In terms of practical steps, despite the work no doubt already done in the context of IAF/SEAR implementation, firms will need to review their F&P policies and processes and related arrangements when the Central Bank’s full response to the review report is known. We recommend that they should also consider enhancing their onboarding processes for PCFs and ensure that PCFs are properly supported through the F&P assessment process. Deciding how and whether to support a PCF that is not approved will likely remain a case-by-case decision. That said, there is merit in firms considering in general terms whether and in what circumstances they may be prepared to support an aggrieved individual who wishes to challenge an F&P refusal or withdrawal.
For more information and expert advice in preparing for the implementation of IAF/SEAR and the anticipated changes that the Central Bank’s response to the report will herald, 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.
[1] Appeal No. 029/2022, available at https://www.ifsat.ie/decisions/ab-v-the-central-bank-of-ireland/
[2] See Financial Conduct Authority v Seiler [2024] EWCA Civ 852.
