Fitness and Probity

The Act provides for a fitness and probity regime in respect of individuals performing certain key functions divided as follows:

(a) “controlled functions”; and
(b) “pre-approval controlled functions”. 

Accordingly there is a two-tier system.  In respect of “controlled functions” the relevant regulated entity must be satisfied that the person carrying out the role complies with the applicable standards of fitness and probity as prescribed by the Bank.  In respect of appointments of persons to perform “pre-approval controlled functions” (essentially, it would seem, board members and persons reporting directly to the board) the prior consent of the Bank to such appointments will be necessary. 

The regime will apply to all financial service providers (although with respect to credit unions the Act envisages that the regime will be brought into force at a later date).

Although the Act provides for a more comprehensive fitness and probity regime backed up with stringent powers of enforcement it also formalises much of the existing regime.

(a) Controlled Functions

The Bank has the power under the Act to issue regulations prescribing functions as “controlled functions”.  The relevant regulations have not yet been published.  It is anticipated that they will be published later this year and brought into force in the second quarter of next year.

The Bank may prescribe a function as a “controlled function” if:

(i) the person performing the function would be in a position to exercise a significant influence on the conduct of the affairs of the relevant entity;

(ii) the function is related to ensuring compliance by the entity with its relevant statutory obligations; or

(iii) it is likely to involve the person responsible for the function in one or more of the following ways:

• the giving of advice or assistance to a customer of the entity;
• dealing in or having control over the property of a customer;
• dealing in  property on behalf of the regulated entity.

The Bank may prescribe a particular function as a controlled function by reference to particular classes of regulated entity or in relation to regulated entities generally.

Under the Act, the relevant entity must not permit a person to perform a “controlled function” unless it is satisfied on reasonable grounds that the person complies with any standard of fitness and probity contained  in a code to be issued by the Bank under the Act and the person has agreed to abide by any such standard. (The Bank plans to issue the relevant code for consultation in December of this year with the intention of bringing it into force it in the second quarter of 2011.)

Although the list of controlled functions has yet to be prescribed it is likely to cover positions such as compliance officers, money laundering reporting officers, risk managers and heads of internal audit.  Since “controlled functions” will now be listed in regulations there will be more certainty as to the functions covered.  It may also mean, however, that a wider range of functions will come within the ambit of the regime. 

(b) Pre-Approval Controlled Functions
The Act also enables the Bank to designate certain functions as “pre-approval controlled functions.”

The Bank may prescribe a controlled function as a “pre-approval controlled function” if the function is one by which a person may exercise a significant influence on the conduct of the affairs of a regulated entity. 

The Act deems directors, secretaries and chief executive officers as being persons exercising a significant influence on the conduct of the affairs of a regulated entity.  Where the regulated entity is a partnership, the partners shall be deemed to exercise significant influence on the conduct of the entity’s affairs.  If the regulated financial service provider is a sole trader, the sole trader is deemed to exercise a significant influence on the entity’s affairs.  The Bank may also prescribe functions as pre-approval controlled functions if the person carrying on the function reports directly to any of the foregoing (i.e. director, chief executive, secretary, partner in a partnership or sole trader).

In prescribing pre-approval controlled functions in respect of regulated entities the Bank may prescribe them in respect of particular classes of regulated entity or in respect of all such entities.  In the case of the former the class may be defined, inter alia, by reference to the kind of business in question or the size of the regulated entity’s balance sheet.

While we have to await the regulations, the Act appears to envisage that pre-approval controlled functions will be controlled functions of a senior nature in large, complex or systematically-important institutions.

In determining whether or not to approve a person to exercise a pre-approval controlled function, the Bank has the power to require the person involved or a specified officer or employee of the regulated entity concerned to produce specified documents, provide information, answer specified questions and/or attend for interview before a specified officer.

The Bank may refuse to approve the appointment of a person to carry out a pre-approval controlled function on a number of grounds including the following:

• the person does not have the experience, qualifications or skills necessary to perform the controlled function;
• the person does not satisfy an applicable standard of fitness and probity in a code to be issued by the Bank under the Act;
• the person has participated in serious misconduct;
• the person has furnished information to the Bank that he knew or ought to have known was false or misleading;
• the person has been convicted of an offence whether inside or outside the State of money laundering or an offence involving fraud, dishonesty or breach of trust.

The Bank may also refuse to approve an appointment where the person involved or the regulated entity has failed to provide information as requested or if the Bank is unable to decide on the basis of the information available to it whether the person is of sufficient fitness and probity.

A refusal by the Bank to approve a person for appointment can be appealed to the Financial Services Appeal Tribunal.

Enforcement of Fitness and Probity Regime

In order to enforce the fitness and probity regime the Act gives the Head of Financial Regulation powers of investigation and suspension and powers to compel the production of evidence. 

The Bank or the Governor have the ultimate power to prohibit a person from carrying out a controlled function.

These powers of enforcement will apply to persons currently occupying positions that are to be prescribed as controlled functions under the relevant regulations as well as persons who are appointed to such positions after the coming into force of the Act.

(a) Powers of Investigation
If the Head of Financial Regulation forms the opinion that there is reason to suspect a person’s fitness and probity to perform a controlled function he may conduct an investigation into the matter.

(b) Power of Suspension
If a person’s fitness or probity is (or has been) the subject of an investigation, the Head of Financial Regulation may issue a suspension notice in relation to that person.  The suspended person and the regulated entity involved, have the right to show cause within 5 days after service of the notice as to why the suspension order should not be confirmed.

The Head of Financial Regulation having considered any written submissions from the persons suspended or from the regulated financial service provider involved may confirm or revoke the suspension notice.  Unless it is confirmed by the Head of Financial Regulation the suspension notice shall have effect for 10 days.  A suspension notice that has been confirmed has effect for 3 months (unless revoked by the Head of Financial Regulation).  The Head of Financial Regulation has the power to apply to the High Court to extend the suspension notice for a further period of up to 3 months.

(c) Power to Compel Production of Evidence

In the course of investigating the fitness and probity of a person the Head of Financial Regulation has the power under the Act to serve notices (described as “evidentiary notices”) on any person (including for example an officer or an employee or former officer or employee of a regulated entity) requiring the person to appear before the Head of Financial Regulation to give evidence or produce documents etc.  The Head of Financial Regulation may hear oral evidence as part of the investigation and may permit a person giving oral evidence to be cross-examined.

After carrying out an investigation the Head of Financial Regulation shall prepare a report for consideration by the Bank and the Governor (a copy of which shall be served on the relevant parties to the investigation).

(d) Prohibition of Persons from Carrying out Controlled Functions
Following an investigation by the Head of Financial Regulation and the consideration by the Bank or the Governor of his report, the Bank or the Governor has the power to prohibit a person from carrying out a controlled function.  (The Bank or Governor can also issue a prohibition notice if there are undisputed facts that in the reasonable opinion of the Bank or the Governor will render an investigation unnecessary and any regulated financial service provider involved has been afforded a reasonable opportunity to make a submission in relation to the matter.)

The person and the regulated entity involved must be accorded a hearing in relation to the proposed prohibition as is necessary to do justice and the Bank or the Governor must be satisfied that the issue of the prohibition notice is necessary in the circumstances. 

When considering to issue a prohibition notice the Bank or the Governor are required to have particular regard to the need to prevent potential serious damage to the financial system in the State and ensure the continued stability of that system.

The prohibition notice shall have effect for two months unless extended by application to the High Court.

The Bank can apply to the High Court for confirmation of the prohibition.  The Court has the power to confirm a prohibition indefinitely or for such period that the Court thinks appropriate or a further order of the Court.

In lieu of applying to the Court there is also provision in the Act for the Bank to agree with the person and the relevant regulated entity as regards compliance with the prohibition notice.