Irish firms warned over fitness and probity compliance

Out-Law News | 18 Dec 2020 | 5:17 pm | 2 min. read

Financial firms in Ireland are yet to sufficiently step up compliance with 'fitness and probity' (F&P) rules following an earlier review by the Central Bank of Ireland, the regulator has warned.

Last month, the Central Bank issued a second 'dear CEO' letter (11-page / 153KB PDF) to the heads of all regulated financial services providers, setting out its concerns and its expectations of firms. It is particularly concerned with firms' scrutiny of board members; initial and ongoing due diligence around those in senior roles; and firms' outsourcing of controlled function (CF) and pre-approval controlled function (PCF) roles.

The Central Bank carried out a series of onsite inspections of insurance and banking firms following its first 'dear CEO' letter, of April 2019, in which it first identified gaps in compliance with F&P requirements. The reviews were of firms' processes for managing compliance with the regime, rather than of the fitness and probity of particular individuals.

Ruth Hennessy

Solicitor

Firms should, if they are not already doing so, carry out a review of their compliance with the F&P regime and address and identify any shortcomings in order to meet the Central Bank's requirements.

Introduced in 2010, the F&P regime requires people in senior positions at regulated firms to be competent and capable; to be honest, ethical and act with integrity; and to be financially sound. The Central Bank recently extended its list of PCFs requiring regulatory approval; ahead of the anticipated introduction of new accountability and conduct rules for staff and senior executives at financial firms.

Ed Sibley, deputy governor of the Central Bank, said: "The F&P regime is a cornerstone of the regulatory framework in Ireland".

"The range of findings from our thematic onsite inspections indicate that many firms do not have due regard to their obligations under the F&P regime. It is also a matter of concern that a number of firms did not take action, on being prompted by our April 2019 letter, to perform a formal 'gap analysis' of their policies, processes and procedures. It is wholly unacceptable that such shortcomings continue to exist in circumstances where the F&P regime was introduced almost 10 years ago," he said.

Financial services regulation expert Ruth Hennessy of Pinsent Masons, the law firm behind Out-Law, said: "Firms should, if they are not already doing so, carry out a review of their compliance with the F&P regime and address and identify any shortcomings in order to meet the Central Bank's requirements, as set out in the 2019 'dear CEO' letter and the new 'dear CEO' letter".

According to the Central Bank, board members at many of the firms reviewed had little awareness of their fitness and probity obligations, while board members in CF and PCF roles were not generally subject to the same levels of scrutiny or formality as other appointments. For example, little evidence of interview notes and suitability assessments had been kept by firms to support board-level appointments. The Central Bank was also concerned to see some instances of chief executives screening potential board candidates, despite the conflict of interest.

More broadly, due diligence was the area in which the reviewed firms were most consistently weak. Firms did not keep sufficient evidence of candidates' qualifications, reference checks and suitability searches, while 'ongoing' due diligence tended to be limited to an annual self-declaration. Where outsourced CFs or PCFs were appointed, the majority of firms had not obtained the required documentation or made any inquiries into the outsourcing provider's process for assessing fitness and probity.

Firms were also criticised for not having sufficiently robust and timely processes in place to identify, escalate and notify the Central Bank of any fitness and probity concerns; lack of oversight by the compliance function; and for insufficient engagement with the regulator.

"The Central Bank expects firms to be proactive in identifying fitness and probity issues as part of its ongoing due diligence and in reporting as appropriate to the Central Bank without delay," it said in its letter.