Irish Central Bank’s “Dear CEO” letter on firms’ Fitness and Probity obligations

This article looks at the messages Irish Regulated Financial Service Providers should take from the Central Bank of Ireland’s recent Dear CEO letter, which underlines the obligations imposed on firms under the Fitness and Probity Regime introduced by the Central Bank Reform Act 2010.
On 08 April 2019, the Central Bank of Ireland (the Central Bank) published a ‘Dear CEO’ letter entitled “Compliance by Regulated Financial Service Providers (Firms) with their Obligations under the Fitness and Probity Regime” (the Letter).

Noting the Central Bank’s view that “there is a lack of general awareness in the industry regarding the scope of the Fitness and Probity Regime” introduced by the Central Bank Reform Act 2010 (the Reform Act), the Letter flags up, in particular, the legal obligations of firms under the Reform Act.

    The Regime and the Fitness and Probity Standards Code

    The Regime and the corresponding fitness and probity standards (the Standards) contained in the Central Bank’s Code impose significant obligations on firms. These are intended to ensure that senior and other key personnel comply with the requirements set out and meet high standards of competence, integrity and honesty.

    The Reform Act establishes two types of functions:

    • Pre-Approval Controlled Functions (PCF) whereby suitable individuals due to perform such roles must, prior to their appointment, receive approval from the Central Bank as to their fitness and probity to perform such a role, and
    • Controlled Functions (CF), whereby suitable individuals due to perform such roles, are not required to receive approval from the Central Bank either prior or subsequent to their appointment in such a role.

    A Firm should not appoint persons to either PCF or CF roles, unless the Firm is “satisfied on reasonable grounds” that the person to be appointed to either type of role complies with the Standards.

    The Letter expresses the Central Bank’s concerns surrounding Firms ensuring that individuals comply with the Standards, and the legal obligations imposed on Firms to do so. The Letter also states that the Central Bank will hold Firms responsible for any non-compliance with the Regime and makes reference to instances where it required Firms to undertake remedial action.

    Central Bank Recommendations

    The Letter offers a number of recommendations with regard to compliance with the Standards.

    (i) Actions Firms should take following appointment

    Subsequent to any PCF or CF appointments and the appropriate background checks being undertaken, the Central Bank recommends that, at a minimum, Firms should:

    • require that any appointed PCFs or CFs notify them of any changes in circumstance, which might be material to their fitness or probity
    • where appropriate, assess if an individual continues to satisfy his or her obligations under the Standards, and
    • request any appointed PCFs or CFs to certify, on at least on an annual basis, that they are aware of the Standards and that they agree to continue to abide by them.
    (ii) Failings by Firms

    The Letter sets out two failings which are of particular concern to the Central Bank:

    • the failure to provide for the Ongoing Nature of the Obligation – whereby firms need to continue to satisfy themselves that individuals appointed to PCF and CF roles remain “fit and proper”, and
    • the failure by Firms to report issues to the Central Bank – where Firms have identified fitness and probity concerns about an individual and have taken steps to address these concerns but have failed to report these concerns to the Central Bank.
    (iii) The Central Bank’s expectations of Firms and their Boards

    In the Letter, the Central Bank also states that it expects each Firm, together with its Board, to:

    • be in a position to explain how the issues raised in the Letter have been considered
    • explain and evidence any remedial actions taken, and
    • review its fitness and probity policies, procedures and practices and address any shortcomings.

    Conclusions and recommended actions to be taken

    In light of the contents of the Letter, we would suggest the following steps should be taken by a Firm:

    • on an annual basis, executed certifications should be sought and received from each of the Firm’s appointed PCFs and CFs. These certifications should confirm the appointed person’s compliance with, and understanding of, his or her obligations under the Standards
    • the certifications should be presented to the Board, formally noted and retained on the Firm’s records. In addition, they should be readily accessible and be capable of being produced upon request
    • a robust discussion should be held at the next scheduled quarterly Board meeting to discuss the content of the Letter and any remedial actions that may be required to be addressed or undertaken
    • such discussions should be accurately reflected in the minutes of the relevant meeting
    • consideration should be given to conducting a review of all documentation currently held in respect of each of the Firm’s appointed PCFs and CFs. At a minimum, we would suggest this review should include:
      • ensuring that all appointed PCFs and CFs have provided evidence of their compliance with the Standards
      • obtaining copies of up to date CVs for any appointed PCFs and CFs
      • undertaking refreshment judgement checks on any PCFs and CFs currently appointed to the Firm, and
      • determining the frequency of which judgement checks on any appointed PCFs and CFs should be undertaken going forward.

    This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.