Irish Central Bank: insurance platforms must ensure suitability of senior staff

A recent article (17-page / 801KB PDF) published by the Central Bank of Ireland (CBI) strikes a cautionary note for such firms and underlines that, when embarking on an application for an authorisation project, ensuring compliance with the CBI’s Fitness and Probity Regime (F&P Regime) should not be left until the last minute. Applicants unfamiliar with the regime should seek appropriate guidance from Irish legal and professional advisers.

Ireland continues to be among one of the most attractive locations within the EU to establish an insurance or reinsurance intermediary (together, ‘intermediary’) platform. As Ireland has a large and very well-developed international insurance industry, there is a generous talent pool available for new applicants to look to hire from. Typically, authorisation is capable of being granted within 5-6 months of a completed application for authorisation being submitted to the CBI. However, sufficient time needs to be allocated by the applicant in advance of submission in order to carefully compile information and supporting documentation necessary to complete the application form.

The ability to demonstrate compliance with the F&P Regime is an integral aspect of an application for authorisation as an intermediary under the European Union (Insurance and Reinsurance) Regulations 2018 (IDR 2018).  An application may be significantly delayed or possibly rejected by the CBI where an applicant has failed to demonstrate compliance.  While it is perhaps trite to mention that an applicant would seek to only hire individuals at board and senior management level who are considered by it to be appropriate to drive the commercial ambition of the insurance business, equal care must be taken to ensure that such individuals meet the CBI's regulatory requirements. These include having relevant qualifications, and relevant professional experience and expertise.

Pre-application considerations

Under the F&P Regime, before submitting an application for authorisation to the CBI, an applicant needs to have careful regard for the CBI's Fitness and Probity Standards (F&P standards) (16-page / 744KB PDF), the 2017 Minimum Competency Code (MCC 2017) (80-page 1.53MB PDF), the Central Bank (Supervision and Enforcement) Act 2013 and the Minimum Competency Regulations 2017 (MCR 2017) (18-page / 562KB PDF).

As part of an application to be submitted to the CBI, the applicant must:

• identify the individuals that are proposed to hold any PCF (pre-approval controlled function) roles;
• confirm that it has reviewed and assessed the regulatory standards set out in the F&P standards and that it has appropriate governance arrangements and internal systems, controls and procedures in place to ensure that it and all relevant individuals comply with their obligations under those standards on the date of authorisation and on an ongoing basis;
• identify the executive directors and staff of the applicant that will comply with the requirements set out in the MCC 2017 and identify the MCC 2017 ‘specified functions’ that they will be engaged in that requires them to comply with those requirements;
• confirm that it has reviewed and assessed the requirements set out in the MCC 2017 and the MCR 2017 and that it is satisfied that the relevant individual(s) in scope possess the appropriate level of knowledge and competence required by the MCC 2017, and that it has appropriate governance arrangements and internal systems, controls and procedures in place to ensure that the applicant and all relevant individuals comply with their obligations under the MCC 2017 and MCR 2017 on the date of authorisation and on an ongoing basis.

Identifying individuals for PCF roles

PCF roles (2-page / 199KB PDF) are roles that, under Irish legislation, require an applicant for CBI authorisation to obtain the regulator's approval prior to an individual commencing that role.

The particular PCF roles likely to be relevant to a platform seeking authorisation as an insurance intermediary will generally be assessed on a case-by-case basis having regard to the nature, scale and complexity of the applicant's proposed activities. In my experience, however, the roles that are most likely to be relevant include PCF-1 (executive director); PCF-2A (non-executive director); PCF-2B (independent non-executive director); PCF-8 (chief executive); PCF-11 (head of finance); PCF-12 (head of compliance); and PCF-17 (head of retail sales).

During at least the initial growth phase of the business, the platform may wish for at least one individual to perform multiple PCF roles – for example, with a view to minimising personnel costs. Under the F&P Regime, it is generally permissible for an individual to perform multiple PCF roles. However, the CBI emphasises that the individual in question must display competency for each PCF role for which they are applying, and must be approved by the CBI in respect of the performance of each role. Approval from the CBI for one particular PCF role does not necessarily guarantee approval for other PCF roles.

The CBI expects that, pre-authorisation under IDR 2018, an applicant would only propose individuals for appointment to PCF roles that have obtained relevant experience at a suitably senior level. As a rule of thumb, I would generally encourage an applicant where possible to seek to hire individuals to board and senior management positions who have performed the same or at least a similar PCF role at an existing Irish regulated financial service provider, and who have therefore have already been approved by the CBI under the F&P Regime. While this does not necessarily guarantee that the individual would be approved by the CBI for the same PCF role(s) within the applicant, it should enhance the likelihood of approval. Similarly, where a prospective hire to a PCF role is performing or has performed a similar role for a regulated financial service provider with a head office in another EEA member state, that should usually that should expedite that individual's PCF application for CBI approval.

Where prospective board or senior management hires are based outside of Ireland, the applicant must be able to demonstrate to the CBI that its substance and mind and management is or will be located in Ireland and that the day-to-day decisions in respect of its business will be made in Ireland. While it is outside the scope of this article, this requirement typically involves there being a certain level of full-time presence in Ireland at both board and senior management level. In practice, the precise level of presence that is required in Ireland will usually depend on the nature, scale and complexity of the applicant's proposed business model. There may also be Irish corporate tax considerations as to the level of ‘substance’ expected to be located in Ireland for the applicant to consider.

For start-ups financial costs associated with a new regulated business will need to be carefully managed, and in circumstances where the applicant for authorisation is a part of an existing corporate group that carries on regulated financial activities elsewhere in the EEA or in the UK, a natural inclination may be to seek to make appointments to PCF roles from within the group's existing human resource pool. In practice, some of those individuals may not live in Ireland and there is no prospect of them relocating to Ireland. Being mindful of the need to demonstrate to the CBI that the applicant's mind and management will be located in Ireland upon authorisation, an applicant that is proposing to carry on its business in or from Ireland with no or very minimal PCF presence in Ireland is unlikely to find favour with the CBI.

Reviewing and assessing the fitness and propriety standards

As is more particularly addressed under the F&P standards, an individual who is being proposed by an applicant for authorisation to the CBI to perform a PCF role must be competent and capable; honest, ethical and act with integrity; and financially sound. The applicant itself needs to be satisfied on reasonable grounds that the individual complies with the F&P standards and, if applicable, with the MCC 2017.

The selection of an individual for appointment to a PCF role should not be seen as a rubber-stamping exercise by the applicant. In its guidance on the F&P standards (58-page / 964KB PDF), the CBI sets out it expectations on due diligence to be undertaken by employers when assessing an individual's fitness and probity for a PCF role. The regulator has warned that it is increasingly finding that some PCFs proposed by applicants are unable to demonstrate how they meet the F&P standards. Where the CBI considers a candidate to be unsuitable for appointment to the PCF role for which they are nominated, this has the propensity to considerably elongate its assessment of an application for authorisation or even to reject the application entirely.

When proposing to appoint an individual to perform a PCF role, an applicant should carefully consider whether the candidate:

• holds an appropriate professional or other qualification;
• is able to demonstrate that they have the capability appropriate to the role;
• has obtained the competence and skills appropriate to the role (whether through training or experience gained in an employment context); and
• has shown the competence and proficiency to undertake the role through performance of previous roles.

While a candidate for a PCF role would not necessarily be called for interview by the CBI as a part of the PCF approval process, the CBI advises that a candidate should be ready to attend an interview if invited to do so and prepare adequately. The CBI’s F&P Regime Interview Guide (17-page / 915KB PDF) provides information on what to expect if a candidate is called for interview.

Identifying executive directors and staff that will comply with the Minimum Competency Code

The MCC 2017 is closely linked to the F&P Regime. Together with the MCR 2017, the MCC 2017 sets out minimum professional standards for individuals providing certain financial services, including those under the IDR 2018, particularly when dealing with consumers. The aim of these standards is to ensure that consumers obtain a minimum acceptable level of competence from individuals acting for or on behalf of regulated firms in the provision of advice and information and associated activities in connection with retail financial products, including insurance.

The CBI mentions in its article that there is a commonly held misconception that the minimum competency requirements only apply to individuals in an intermediary that will be providing advice to consumers. In that regard, applicants for authorisation may be inclined to ignore the possibility of the MCC 2017 applying to an individual proposed for a PCF role, as these are generally board and senior management roles. This is not necessarily the case: where the individual will be involved in activities such as providing advice to consumers on insurance products, arranging, or offering to arrange, insurance products for consumers or supervising others providing advice or information to consumers they are likely to be subject to the MCC 2017.

Where the MCC 2017 applies, if the individual cannot demonstrate their compliance, their appointment to a PCF role in question would not be approved by the CBI. Again, this has the potential for the platform's application for authorisation under the IDR 2018 to be delayed or potentially rejected.

Applicants should therefore carefully consider whether the MCC 2017 will apply to any of their PCF roles at an early stage in the authorisation project, and prior to identifying candidates for those roles. This will help to inform what recognised insurance related qualification, set out at Appendix 4 of the MCC 2017, the candidate would need to have.

Note that, where the MCC 2017 applies to a particular PCF role, satisfying the requirements of the MCC 2017 alone will not be sufficient for an individual to be approved by the CBI for appointment. The other aspects of the F&P Standards would also need to be satisfied.