Dealing with Fitness & Probity whilst facing possible bankruptcy

Many people in the financial services sector have been adversely affected by the current financial crisis. As a result of the financial crisis the Central Bank has tightened up its Fitness and Probity regulations.

The Central Bank Reform Act 2010 creates for the first time a statutory system for regulation by the Central Bank of two categories of individuals performing certain key functions, namely those performing either a prescribed “controlled function” (CF) or a “pre-approved controlled function” (PCF), in Ireland’s regulated financial institutions.

Who are CFs and PCFs?

The Regulations prescribe what are CF and PCF positions.

The list of PCFs includes 42 senior positions in the financial sector which must be approved in advance by the Central Bank before people can take up those positions. This list includes, for example, chief executives, company directors, chairs of the board or other committees such as audit, risk, remuneration and nomination, heads of finance etc.

The list of CFs includes less senior positions from which individuals can be removed or banned by the Central Bank. This list focuses more on individuals who interact with customers and includes, for example, employees whose function is likely to enable the person to exercise a significant influence on the conduct of the affairs of the regulated entity, who provide advice on the regulated financial service, who adjudicate on customer complaints, who arrange services for a customer of a regulated financial service provider etc.

What do the Standards say?

The Standards set out the general conditions that employees covered by the Regulations must satisfy in order to perform the function assigned to them including:

  1. being competent and capable;
  2. being honest, ethical and to act with integrity; and
  3. being financially sound.

A more detailed description of these general conditions is outlined in the Standards. They include that a person performing a CF or PCF role:

  • has the appropriate qualifications, experience, competency and understanding of the business of the financial service provider;
  • has the necessary knowledge of the organization as a whole and of the specific responsibilities relevant to the function
  • has not been suspended, prohibited or restricted, in any jurisdiction, from carrying on a business that requires a licence, registration or authorisation;
  • has not been the subject of any complaint made to the Central Bank, the Financial Services Ombudsman or any equivalent body;
  • has not been subject to any disciplinary proceedings;
  • has not been convicted of any criminal offence or adjudicated a bankrupt;
  • has not been disqualified or restricted from acting as a director in any jurisdiction; and
  • manages his/her affairs in a sound and prudent manner.

The Central Bank has also published a Guidance note on Fitness and Probity Standards for the purpose of assisting regulated entities in complying with their obligations and on the approval process for the appointment of PCF roles. The Guidance sets out the steps of a due diligence which a regulated financial service provider would reasonably be expected to take to ensure that a person performing a CF or PCF role is compliant with Standards. The Guidance includes steps and practical advice in relation to:

  • identifying persons in CF and PCF roles;
  • the approval process for PCFs;
  • interviewing and offering appointments to PCFs;
  • the due diligence to be undertaken in order to assess a person’s fitness to perform a CF; and
  • due diligence for criminal offences.

Failure by an individual to comply with the Standards can result in:

  • An application for appointment to a PCF being refused;
  • An investigation into the fitness and probity of a person performing a CF or PCF role;
  • The suspension or prohibition of a person performing either a CF or PCF role from continuing to do so.
Practical Implications

The new regime places a considerable burden on the regulated institutions to ensure the proper checks are in place and to carry out regular assessments of its employees to ensure compliance with the Standards.

The new regime will have a knock on effect on individual’s employment rights. For example, where an individual is suspended or prohibited from performing a CF or a PCF role, the employee may have a claim under the Unfair Dismissal Acts 1977-2007.

The Unfair Dismissals Acts provides that a dismissal will not be unfair where it results from an employee “being unable to work or continue to work in a position which he held without contravention (by him or by his employer) of a duty or restriction imposed by or under any statute or instrument made under statute”.

We are advising many clients in the Financial Services sector on how to comply with the regulations on fitness and probity, and on how to retain their employment, even if they have judgments against them.

For further information please contact Jim Stafford or Tom Murray. on 01 661 4066 or jim.stafford@frielstafford.ie, tom.murray@frielstafford.ie