Central Bank inspection finds weaknesses in firms’ compliance with Fitness & Probity Regime

• The Fitness & Probity (F&P) Regime is a cornerstone of the regulatory framework in Ireland.
• Central Bank inspections revealed common issues and shortcomings, as well as a wide divergence of standards, in the implementation of the F&P Regime.
• Weaknesses identified in firms will prompt supervisory interventions by the Central Bank.

The Central Bank today issued a letter to the management of all regulated financial services providers (PDF 153.46KB) (“firms”) setting out its expectations for firms to take appropriate action to address the significant issues identified by thematic inspections concerning their legal obligations under the Fitness and Probity (F&P) regime.

The F&P Regime was introduced by the Central Bank under the Central Bank Reform Act 2010. In line with the Central Bank’s role to safeguard financial stability and protect consumers, the granting of any new authorisation is a key element of the Central Bank’s “gatekeeper function” to permit or refuse an applicant to provide financial services to the public. The F&P Regime protects consumers by requiring that persons in senior functions within regulated firms meet the Central Bank’s Fitness and Probity Standards. Under the F&P Standards, people in senior positions are required to be competent and capable; to be honest, ethical and act with integrity; and to be financially sound.

Recent Central Bank inspections evaluating the processes in place within firms to manage compliance with the requirements of the F&P Regime highlight a number of common issues and shortcomings, as well as a wide divergence of standards, in the implementation of the F&P Regime.

In many of the firms, the level of awareness by Board members of their fitness and probity obligations was poor. This was evident in particular in relation to the process for appointing members to the Board. More broadly, the area which was most consistently weak across the majority of firms was due diligence. Issues identified included a lack of evidence of qualifications, reference checks and suitability searches.

Where Pre-Approval Controlled Function (PCF) or Controlled Function (CF) roles are outsourced to unregulated Outsource Service Providers (OSPs), the majority of firms had not, as part of their due diligence in appointing CF role holders, obtained the required documentation nor made any inquiries as to the OSP’s process for assessing fitness and probity.

In addition, many firms did not have robust processes in place to identify, escalate and notify the Central Bank in a timely manner of potential concerns regarding the fitness and probity of a CF or PCF holder.

While the majority of firms had compliance frameworks, policies and procedures in place, given the findings of the thematic inspections, it is clear that many firms are not undertaking robust compliance testing of their fitness and probity processes and procedures.

Deputy Governor Ed Sibley said: “The F&P Regime is a cornerstone of the regulatory framework in Ireland. The Central Bank will not authorise firms, and will not approve persons to perform senior functions in regulated firms, where they do not meet our Fitness and Probity Standards.

“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 ten years ago. The Central Bank will continue to engage with firms to assess the robustness of their application of the F&P Regime and will initiate necessary supervisory responses to any weaknesses identified.”

Notes

• In April 2019, the Central Bank issued a Dear CEO letter to all firms (PDF 308.9KB), which identified a number of areas where F&P compliance had been found to be lacking. Following this, the Central Bank undertook thematic onsite inspections across a sample of firms in the insurance and banking sectors in order to assess the level of compliance with the fitness and probity requirements.
• All enforcement actions by the Central Bank are published on our website, including actions related to F&P.
• During 2020, to the end of Q3, 2,848 PCF applications were assessed by the Central Bank and 33 PCF applications were referred to the Enforcement Division. Also, in the same period, the Enforcement Division conducted 16 Specific Interviews and 11 applications were withdrawn by firms following referral to the Enforcement Division.
• The Central Bank published reviews of Diversity and Inclusion conducted in the Banking and Insurance sectors in 2018 (PDF 756.85KB)and 2020 (PDF 1.06MB)respectively. Firms are required to be mindful in not only considering individual competency but also how they are considering the collective mix of skills and composition, particularly at board and senior management levels.