Posted by Ciara McLoughlin, Eimear O'Brien and Hayley Maher on 25 November 2020
Tagged to CBI, IndividualAccountability, Regulation

On the 17 November 2020, the Central Bank of Ireland (CBI) published a "Dear CEO" letter to Regulated Financial Service Providers (RFSPs). This letter was published following a thematic inspection by the CBI of a sample of firms in the insurance and banking sectors. The purpose of the inspection was to assess the level of compliance with Fitness and Probity (F&P) requirements and follows on from a similar CBI letter in 2019. The 2019 letter highlighted certain failures on the part of RFSPs, including a failure to (a) provide for the ongoing nature of their obligations under the F&P regime, (b) report issues regarding F&P to the Central Bank, and (c) carry out sufficient due diligence before appointing or nominating individuals to senior positions.

The 2020 inspections found a wide divergence of standards in the implementation of the F&P Regime, as well as issues relating to the role of the Board, the conduct of due diligence, the outsourcing of CF roles, engagement with the CBI and the role of the compliance function.

The 2020 letter emphasised the objectives of the F&P regime that “regulated firms and individuals who work in these firms are committed to high standards of competence, integrity and honesty, and are held to account when they fall below these standards.” The CBI expressed its concern that RFSPs failed to carry out formal ‘gap analysis’ of their F&P polices, processes and procedures following the 2019 letter.

We believe the increased focus by the CBI on the F&P regime relates to the future introduction of the Individual Accountability Framework (IAF), which will apply to individuals working in the financial services sector, as well as an increased pressure to hold individuals in the financial services industry to account generally in Ireland and across other jurisdictions (see below in relation to FCA developments in this area).

Competence, integrity and honesty

The 2020 letter reminds firms that a failure to comply with F&P obligations can result in sanctions under its Administrative Sanctions Procedure (ASP) or a prohibition order to prevent individuals from performing controlled function roles in any RFSP. Since the commencement of the Fitness and Probity Regime the CBI has issued eight prohibition notices relating to, inter alia, misconduct and fraud.

At the beginning of November, the Financial Conduct Authority (FCA) announced that it had banned three individuals from working in the financial services industry for non-financial misconduct.  In 2018, all three men were (separately) convicted of various criminal offences.  The nature and severity of the offences varied but all involved serious offences against the person. The FCA has imposed the bans on the basis that the men are not fit and proper as they lacked the necessary integrity and reputation required to work in the regulated financial services sector.

This is not the first example of the FCA publicly stating its view that non-financial misconduct contributes to poor culture and outcomes within the sector; but it is the first time that we have seen it take enforcement action. Irish RFSPs should be mindful that the CBI may well follow suit in taking action against individuals for non-financial misconduct. 

Actions to take

Looking at the experience in the UK, there are practical steps employers in the financial services sector can start to take to prepare for the new IAF regime. RFSPs can use this opportunity to address the issues identified by the CBI and in carrying out their risk gap analysis use the opportunity to start early preparations for the introduction of the IAF in Ireland.

The 2020 letter clearly sets out the CBI position that it is “wholly unacceptable that such shortcomings continue to exist in circumstances where the F&P Regime was introduced 10 years ago”. The expectation being that all RFSPs will  “take appropriate action to address the significant issues identified in the Dear CEO Letter” and that firms should be able to evidence this to the CBI, if requested.

We are uniquely placed to advise on the IAF and next steps RFSPs may want to consider, due to DLA’s significant experience advising on the equivalent UK regime (the SMCR). If you have any questions please contact any of the authors or your usual DLA Piper contact.

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