Central Bank of Ireland publishes Fitness and Probity Regime review

On 11 July, the Central Bank of Ireland (the Central Bank) published a report, Fitness and Probity Review, authored by Andrea Enria, former Chair of the ECB Supervisory Board.

The Report makes a number of recommendations, which it considers would go a long way to ensuring that the Central Bank exercises its significant powers with “professionalism, integrity and respect for fair process”.

As the Central Bank implements its new Individual Accountability Framework (or IAF), the proposed enhancements to its operation of the Fitness and Probity regime would also support an overall framework that improves governance and fosters a culture of greater accountability within financial services firms.

The Central Bank, through its Governor, Gabriel Makhlouf, has accepted all of the report’s recommendations.

Background to the Review

The Central Bank’s Fitness and Probity (F&P) regime (the Regime) is a cornerstone reform introduced by way of the Central Bank Reform Act 2010 following the damage caused in Ireland by the 2008 global financial crisis – this damage was exacerbated by regulated entities failing to implement good corporate governance standards and by a lack of proper regulatory oversight of governance arrangements.

In line with the Central Bank’s desire to evolve and enhance the Regime, in March 2024, it commissioned an independent review.

The Review’s remit was to consider how transparently, efficiently and effectively the Central Bank operates the Regime, considering the Regime’s purpose and objectives to support the safety and soundness of firms, threats to consumer and investor protection and the stability of the system overall, with a focus on the processes, systems and structures used by the Central Bank to exercise its functions.

What did the Review find?

The Review follows a ‘compact but extensive’ consultation of key stakeholders (including industry associations, market participants, top and middle management and Central Bank staff) as well as an extensive analysis of good practices at other supervisory authorities in the EU, the UK and Australia.

The Report concludes that:

• the manner in which the Central Bank conducts its F&P process is broadly aligned with other peer jurisdictions - standards are comparable; statistics on approval, withdrawal and refusal of applications are in line with other regulators while timelines are generally faster than in other countries
• the Regime’s first 13 years of application have successfully raised the bar for the entry in key positions in the financial industry, a point ‘widely acknowledged’ by industry
• however, the decision of the IFSAT in the AB case (see our summary here) and confidential feedback from the consultation process have highlighted a number of areas where the operation of the Regime is “not always up to the requisite standards of fairness and transparency”
• there is potential for targeted improvements so the Regime is consistent across firms of different size and operating in different financial sectors.

The Report’s recommendations focus on three areas:

(a) Clarity of supervisory expectations

The Central Bank’s standards, while not out of step with the good practices of peer regulators, are fragmented across different documents and not presented in a user-friendly way.

The standards should be consolidated into in a single location and complemented with communication tools (such as speeches by Central Bank’s leaders, Q&As and open workshops for firms) so candidates can prepare for the process.

In some areas, practices in place at other authorities could be adopted - for instance, practices followed by the UK’s FCA could indicate that there is a need to streamline the number of roles which require prior approval.

Calibration of the Regime across firms and financial sectors could be considered. As far as the funds sector is concerned, a very low number of candidates are actually interviewed and this has two main consequences:

• individuals can accumulate a significant number of mandates without any direct discussion with their supervisor and
• the few who are called for interviews are subject to stigma and risk being shunned for additional roles.

Higher targets for interviews to be conducted could be introduced, along with the practice of engaging in a conversation with individuals assuming significant roles in an important sector for the Irish financial services industry.

More detail could be provided as to what is expected for executive and independent directors and criteria specified regarding conflicts of interest and collective suitability.

(b) Internal governance of the process

The Report notes that the F&P process at the Central Bank is fragmented across different units and there is some degree of organisational overlap between the F&P and enforcements functions – this generates confusion amongst firms and candidates as to the process’s principal focus.

The IFSAT decision on the AB case also noted the principle of independence of decision making and the internal checks and balances within the process.

The Report recommends establishing a single unit in charge of F&P gatekeeping, as was the case with all other supervisory authorities that the Review surveyed. This would help ensure consistency across decisions and discipline in keeping timelines within clear boundaries.

The unit should be organisationally separate from the enforcement function so there is a clear distinction between the two processes.

As the assessment of a given application moves towards a possible refusal, management of the process should be escalated to higher levels of seniority so there is greater awareness of the impact of a negative decision.

A senior panel, made up of staff not directly involved in the management of the F&P process to that point in the application, should be established to ensure an independence of perspective and able to benefit from independent legal advice within the Central Bank. Where legal advice is needed before the decision making stage, this should come from a separate legal adviser in the Central Bank’s Legal Division.

Where complex cases occur and delays arise, such cases should be promptly escalated to senior management within the Central Bank to take ownership of the final steps.

(c) Fairness, efficiency and transparency of the process

An effective F&P process is not a tick the box exercise but requires supervisory judgement on an individual’s ability to exercise given functions in a financial firm professionally and ethically.

An assessment of a person’s fitness is not an absolute judgement. Instead, it is time contingent, specific to the position applied for and specific to the firm. A refusal should not be perceived as a “ban” – unsuccessful candidates should receive clear feedback, indicating what needs to be done to be successful in future applications.

Fairness and transparency are essential ingredients of a well-functioning, effective F&P process. Following observations from the IFSAT in the AB case, along with confidential feedback during the consultation, the Report recommends a number of improvement which the Central Bank can make to ensure it consistently achieves appropriate standards of fairness, efficiency and transparency.
In particular, the Report recommends that

• a candidate should be given sufficient advance notice of a draft agenda with a clear indication of the topics on which the interview will focus. The interview should stay within a well-defined time limit (90 minutes) and maintain a conversational tone, not an enforcement-style investigation. A write-up of the interview should be shared with the candidate within a week, and the candidate given a further week to provide comments
• when the assessment is moving towards a possible referral to a decision-maker to consider a refusal, the applicant firm and candidate should be given clear feedback in a formal and consistent way. It should be possible to withdraw an application when the supervisory authority communicates its concerns with the candidate’s F&P
• as well as providing a candidate with full disclosure as to why the Central Bank may be minded to refer the decision to a decision-maker to consider refusal, if the candidate disagrees with the firm’s decision to withdraw the application, the candidate should still have channels to challenge the Central Bank’s assessment
• the Central Bank should make available a formal complaints channel, with sufficient safeguards of independent assessment such as an independent third party tasked with reviewing the complaint and providing a formal response to the complainant
• there should always be feedback from the interview process so that, where an application is refused, the candidate has a clear indication of where improvements are needed to ensure success in future applications
• the Central Bank should publicly commit to maintaining the overall timeline for completion of F&P assessments within 90 days, in line with the guidelines provided by ESMA and EBA and similarly to the statutory limit in place in the UK
• interviewers should go through a comprehensive training process, making sure they avoid confrontational attitudes during interviews - a clear dividing line must be maintained between the F&P process and enforcement actions
• a negative F&P assessment should not be seen as a sanction, or even less as banning somebody from the industry, but as a firm-specific and position specific supervisory assessment. Of course, past enforcement decisions or episodes of misconduct could and should be factored into F&P decisions, but also in this case it would be important to have a clear and transparent policy as to the number of years that should elapse before a person could be considered again for a PCF function
• IT tools, making it easier for firms and candidates to understand what is expected of them, help make the process more user-friendly. It was noted that there were a number of complaints on the functioning of the Central Bank’s portal - holding regular workshops to gather users’ feedback could help here
• regular publication of outcomes of the Regime - including granular information on approvals, withdrawals and refusals by sector and complexity of firms - would help firms and individuals engaged in the process.