Out-Law News 3 min. read

Successful challenge raised to Irish Central Bank’s PCF interview process

A successful legal challenge to the Central Bank of Ireland’s pre-approval controlled function (PCF) interview and decision-making process has several important implications for the fitness and probity assessments of people in senior positions in the financial sector, a legal expert has said.

The decision of the Irish Financial Services Appeals Tribunal (IFSAT) found that the Central Bank did not apply fair procedures during the interview and decision-making process for a PCF application under the fitness and probity regime. In light of this decision, the Central Bank has said that it intends to commission an independent review of the fitness and probity approval process.

This decision serves as a significant signal and reminder to the financial services industry that the Central Bank is required to comply with principles of natural justice in the exercise of its interview and decision-making powers, according to commercial litigation and regulatory enforcement expert Lisa Carty of Pinsent Masons.

“Based on this decision, going forward the Central Bank should only ask questions on matters about which the applicant has received prior notice. The Central Bank will also likely need to reconsider how it engages with applicants during PCF interviews and, in particular, the type of questions asked and the manner in which they are asked,” said Carty.

The legal challenge was raised by an individual who applied for approval to the positions of non-executive director and chairman of an Irish asset management firm, but received a ‘minded to refuse’ letter from the regulator following two interviews as part of the Central Bank’s fitness and probity assessment process. The Central Bank refused the PCF applications on the grounds that the applicant did not satisfy the ‘fitness’requirement, citing specifically that the individual had not demonstrated a comprehensive understanding of the relevant regulatory environment. The individual appealed the decision to IFSAT, claiming that the Central Bank had failed to afford him fair procedures and seeking to set the decisions aside.

IFSAT ruled that there were fundamental procedural flaws at all three stages of the fitness and probity assessment and decision-making processes. It found that the individual was denied fair procedures and that the procedures adopted by the Central Bank did not comply with the requirements of Constitutional and natural justice, including the necessity for fair notice, the duty to give reasons and the principle of ‘audi alterem partem’ – which means that a party is entitled to be heard and to reply to the case being made against them. As a result, it set aside the Central Bank’s determination and remitted the matter back to the Central Bank.

“This decision puts beyond doubt that administrative decisions which affect an individual's right to earn a living must be made with due regard to constitutional principles, including fair procedures,” said Carty.

She added that this case follows other recent developments which have built additional fair procedures protections into Central Bank processes. The Irish Supreme Court’s decision in Zalewski is one such example. Following the Zalewski ruling (3 page / 93.9KB PDF), reforms were introduced to the Individual Accountability Framework and Administrative Sanctions Procedure to ensure that fair procedures were respected and that there was oversight of the exercise of the Central Bank’s quasi-judicial functions.

IFSAT identified several procedural issues that breached the individual’s right to fair procedures. For example, the minutes of the first meeting referred to a number of issues which did not accord with the topics on which the individual was told he would be questioned. Another issue identified relates to the fact that the interview was conducted remotely and an interviewer was off camera, and questioned the individual on matters that went far beyond the topics notified to him.

According to IFSAT, some of the questions asked of the individual to determine his knowledge of the regulatory environment were “unnecessarily granular and sometimes unclear” and were “extraordinarily complex with many sub-clauses”. However, it did not provide any guidance as to what the appropriate level of detail for such questioning would be.

There was a similar lack of fair procedures at the second ‘specific’ interview. IFSAT criticised the fact that the individual was sent a large pack of documents for discussion at the interview the day before the meeting. IFSAT was critical of the lack of notice of these documents to him, and that the documents were not provided to his solicitor.

In addition, the tribunal said that the decision maker in the Central Bank followed the ‘minded to refuse’ letter without properly taking into account submissions by and on behalf of the applicant. The detailed submissions provided by the applicant in response to the ‘minded to refuse’ letter, and the additional evidence and references provided at that stage, were not adequately engaged with by the decision maker.

The IFSAT decision emphasised that there is an important balance to be struck between the Central Bank’s ‘gatekeeper’ role and an individual’s right to earn a living and to protect their reputation. It said that “an interviewer is entitled to ask important questions; but there must be fair notice of them”.

“This IFSAT decision may be too late for individuals whose PCF applications have been refused in the past, but it is anticipated that, from now on, PCF applicants can expect fair notice and additional detail in relation to the topics that will be raised during interviews,” said commercial litigation expert Orla Hubbard of Pinsent Masons.

The Central Bank has been directed to notify the applicant of the procedures it will apply in reconsidering his application within 21 days, giving due regard to IFSAT’s findings. Its reassessment of his application should be completed within 90 days.

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