Fitness & Probity 2023

Extending F&P Regime

The 2023 Act makes a series of amendments to Part 3 of the Central Bank Reform Act 2010, which deals with the Central Bank’s Fitness and Probity (F&P) Regime. These amendments will extend the F&P regime to certain categories of holding company and persons performing controlled functions in relation to them. They will also make changes to the operation of the F&P regime to make it more efficient and effective and to ensure that it conforms to the required standards of fairness in the administration of justice, in light of the decision of the Supreme Court in the case of Zalewski v. An Adjudication Officer and Others (2021).

The fitness and probity regime does not currently apply to directors or staff of holding companies, as they are unregulated entities. Holding companies do, however, come within the scope of some elements of the current regulatory framework, including requirements for the assessment of directors/staff of holding companies.

The extension of the F&P regime to financial holding companies will make the regime available to the Central Bank as a supervisory and enforcement tool, where consistent with the discharge of its existing obligations, under EU law, in relation to holding companies.

RFSPs and holding companies will be required to certify that they are satisfied that each person performing a controlled function in relation to them is fit and proper.

Procedure

The power of the Central Bank’s Head of Financial Regulation to conduct an investigation in relation to the fitness and probity of a person performing a controlled function will be extended to apply to any person who performed a controlled function up to six years before the commencement of the investigation (subject to transitional provisions).

Where a person is suspended by the Head of Financial Regulation from performing a controlled function (or part of a controlled function) the maximum period of the suspension is extended to six months, and the period for which the suspension can be further extended by the High Court is extended to 24 months.

The decision by the Head of Financial Regulation to confirm a suspension notice will be appealable to the Irish Financial Services Appeals Tribunal (IFSAT).

Prohibition

Where a person is prohibited by the Central Bank or the Governor from performing a controlled function (or part of a controlled function), either for a specified period or indefinitely, the Bank or the Governor will be required to apply to the High Court for confirmation of the prohibition.

This requirement will not apply where the Bank or the Governor enter into an agreement with the prohibited person whereby the person agrees to abide by the terms of the prohibition notice.

The Act provides that the Central Bank or the Governor or the prohibited person can apply to the High Court for an order to vary or revoke a prohibition notice where there has been a relevant change in circumstances since the prohibition was confirmed.

The Act introduces additional safeguards to ensure the independence of decision-makers in relation to the F&P process.

Pre-Approval Function

Extension of the scope of the Fitness and Probity regime to financial holding companies, mixed financial holding companies, insurance holding companies, and investment holding companies and to persons performing controlled functions in relation to such holding companies is facilitated by amendments throughout this Part.

An RFSP or holding company shall not permit a person to perform a controlled function in relation to it unless it has certified that it is satisfied that the person complies with any standard of fitness and probity issued by the Central Bank; that the RFSP or holding company shall revoke such certification if it ceases to be so satisfied; and that the Bank may make regulations as to these matters and to the reporting to the Bank in relation to obligations under this section.

The 2023 Act clarifies that the information-gathering powers available to the Central Bank for the purposes of considering whether or not to approve a person for appointment to perform a pre-approval controlled function apply in relation to applicant firms which are not yet RFSPs.

A significant supervised entity (within the meaning of the Single Supervisory Mechanism (SSM) Framework Regulation) shall not appoint a person to perform a prescribed pre-approval controlled function in relation to it, unless the Central Bank of Ireland has notified the entity in writing that the European Central Bank (ECB) has approved the appointment; and that the Central Bank of Ireland may by regulations prescribe those pre- approval controlled functions approval of appointments to which is subject to the exclusive competence of the ECB under Article 4(1)(e) of the SSM Regulation.

Investigation & Suspension

The Head of Financial Regulation may conduct an investigation in relation to the fitness and probity of a person who has performed a controlled function after the commencement of this section and within the period of six years immediately preceding the commencement of the investigation.

As soon as practicable after a decision is made by the Head of Financial Regulation to conduct an investigation in relation to the fitness and probity of a person, he or she shall serve on the person notice in writing stating the reasons for holding the opinion that there is reason to suspect the person’s fitness and probity to perform the relevant controlled function, including a copy of such material as the Head considers appropriate on which that opinion is based, and informing the person of his or her right to respond to the contents of the notice within a stated period of time; and that, if an investigation is discontinued, the Head shall serve on the person notice in writing of the discontinuation giving one or more reasons for the discontinuance.

Where the Head of Financial Regulation has certified to the Court the refusal or failure by a person to produce a document, provide information, or answer a question and the person concerned claims to be entitled to refuse on grounds of legal professional privilege, the Court may give directions as to the appointment of a suitable person to examine the material for which privilege is claimed and to prepare a report to assist the Court in deciding what action to take. Head of Financial Regulation to prepare report.

Suspension

A suspension notice cannot be served on a person in relation to whose fitness and probity an investigation is capable of being conducted only due to the fact that he or she has performed a controlled function within the period of six years immediately preceding the commencement of the investigation; and deletes the provisions relating to the service of a suspension notice.

The  Head of Financial Regulation can confirm a suspension notice where a function under Chapter 3 or 4 of the Act of 2010 is being carried out in relation to the suspended person, and not only where a fitness and probity investigation in relation to that person is ongoing; extends the period of validity of a suspension notice confirmed by the Head of Financial Regulation from three months to six months; and provides that a decision to confirm a suspension notice is appealable to IFSAT, which shall have particular regard to the need for expedition in the hearing of such an appeal.

The  period for which the High Court may extend the validity of a suspension notice is increased from three months to six months and that further extensions of up to six months of the period of validity may be made by the Court subject to the limit that the period of validity shall not extend beyond 24 months from the end of the period of validity following confirmation by the Head of Financial Regulation (allowing for a total suspension period of 30 months from confirmation by the Head of Financial Regulation) or, where a prohibition is imposed on the suspended person, beyond the time when an application to the High Court for the confirmation of the prohibition notice has been disposed of.

Decision & Prohibition

There are  matters to be considered by the Head of Financial Regulation before preparing a report of a Fitness and Probity investigation; and provides that the Head shall not make any recommendation, or express any opinion, in an investigation report, as to whether any prohibition (or, if so, what prohibition) should be imposed if the Central Bank or the Governor forms the opinion that the person concerned is not of such fitness and probity as is appropriate.

A person may be prohibited from performing any and all controlled functions in relation to any and all RFSPs or holding companies; provides that any finding of fact made by the Central Bank or the Governor for the purpose of forming the opinion that the person concerned is not of such fitness and probity as is appropriate shall be made on the balance of probabilities; provides that,  a prohibition notice does not take effect unless confirmed by the High Court; and provides that, where the Bank or the Governor imposes a prohibition without an investigation, on the basis of indisputable facts, the Head of Financial Regulation is to be notified.

As soon as practicable after the service of a prohibition notice, the Central Bank or the Governor shall,  apply to the High Court for confirmation of the notice. An application for an order varying or setting aside a prohibition notice which is confirmed  may be made to the High Court by the Central Bank, the Governor, or the prohibited person, and that if the Court is satisfied that, since the confirmation of the prohibition notice, there has been a change in circumstances such that a different decision would be taken in relation to the application for confirmation, the Court may make an order setting aside or varying the prohibition notice as it thinks fit, subject to the condition that the Court may not vary a prohibition notice in a way that would make it more onerous to the prohibited person.

A prohibited person and any RFSP or holding company in relation to which the prohibited person was performing a controlled function at the time of the issue of the prohibition notice may agree in writing with the Central Bank or the Governor to comply with the prohibition notice for such period as is agreed; that, where such an agreement is entered into, the prohibition notice will not require to be confirmed by the High Court; that, where a party to such an agreement breaches the terms of the prohibition notice, the Head of Financial Regulation may apply ex parte to the Court for an order directing that party to comply with the notice; and that, if the Bank or the Governor, as the case may be, considers that there is no further need to continue the prohibition notice, the agreement may be terminated by written notice to the other parties.

Independence of decision-makers

The function of conducting a fitness and probity investigation, or any function for or in connection with the conducting of such an investigation, is not to be performed by the person who formed the opinion, that there is reason to suspect the person’s fitness and probity to perform the relevant controlled function, on the basis of which the investigation was commenced;

• that any function in relation to the confirmation of a suspension notice by the Head of Financial Regulation is not performed by a person who performed a function in relation to the issue of the suspension notice;
• that any function in relation to the imposition of a prohibition, following a fitness and probity investigation, is not performed by a person involved in that investigation; and that
• the provision does not prevent the person who formed the opinion, that there is reason to suspect the person’s fitness and probity to perform the relevant controlled function, from exercising functions, of management, advice, or otherwise, that do not affect the independence of the investigation.

The Central Bank shall not rely on any contract, including a contract of employment, with a person exercising the functions of deciding to issue or confirm a suspension notice or to impose a prohibition, in any respect that may affect the person’s independence in the exercise of that function. The persons exercising these functions will be appointed from a panel established.

This will include members of the Bank’s staff, and external persons who will be paid by the Bank to exercise the functions concerned. The standards of fairness in the administration of justice required in light of the decision of the Supreme Court in the case of Zalewski v. An Adjudication Officer and Others (2021) require that the independence of decision-makers vis-à-vis the Bank be adequately safeguarded.