Fitness & Probity: Central Bank's Expectations of Regulated Financial Service Firms
Regulated FS Firms reminded by Central Bank to have robust Fitness and Probity policies, procedures and practices in place

 

Following on from our briefing on the Dear CEO letter (the "Letter") of 8 April 2019 issued by the Central Bank of Ireland (the "Central Bank"), this article looks at employer's obligations throughout the lifecycle of employees holding Controlled Functions ("CF") or Pre-Approval Controlled Functions ("PCF") (a subset of CFs). 

The Letter reminds employers of their obligations to ensure compliance with fitness and probity requirements from the outset of a PCF's or CF's employment right through to the termination thereof. PCF and CF holders must maintain high standards of competence, integrity and honesty throughout the employment lifecycle. 

Recent Enforcement Actions

The contents of the Letter should not be regarded lightly – the Letter contains examples of penalties handed down for failing to put in place, and/or failing to follow, proper systems and controls to ensure compliance with the fitness and probity regime. These examples include a regulated firm which was fined €200,000 in 2017 and another firm that was fined €443,000 in 2018. The Letter encourages firms to read the public statements in respect of, for example, the above-mentioned fines here and here to determine how their own firm's fitness and probity controls compare.

Commencement of Employment

Firms must not allow a person to perform a CF unless they are "satisfied on reasonable grounds" that the person complies with the Fitness and Probity Standards (the "Standards"). Firms are obliged to:

  1. consider the number of other CF roles held by a person; and
  2. only permit persons that agree to abide by the Standards to occupy a CF role.

It is also important to note that an employer is not permitted to offer an individual a PCF role until the Central Bank has approved the appointment and the firm itself must be satisfied as to the individual's fitness and probity. The firm is, however, entitled to make a conditional offer of employment subject to obtaining Central Bank approval. In circumstances where a person is appointed to a PCF role without the approval of the Central Bank, the appointing firm will be held responsible for non-compliance. 

A PCF applicant is required to fill out an Individual Questionnaire ("IQ") for the Central Bank's consideration before approval is granted. The Letter notes instances where applicants have failed to disclose on their IQs material facts which were known or should have been known by firms. The Letter states that it is for the Central Bank to determine whether a fact is material to a PCF application. At high and medium-high impact firms, applicants will also be required to attend at interview with the Central Bank. In low and medium impact firms, PCF approval may be granted based on the IQ alone, but the Central Bank retains discretion to interview an applicant.

Ongoing Obligations

One of the key failings addressed in the Letter relates to the failure to provide for the ongoing nature of the fitness and probity requirements. 

The Central Bank has taken issue with instances where issues have arisen which should have prompted firms to:

  1. investigate the fitness and probity of the employee; and
  2. report any outcome, if appropriate, to the Central Bank.

Bearing this in mind, workplace investigations into misconduct and disciplinary procedures should incorporate fitness and probity considerations where appropriate and HR teams should be encouraged to liaise with Compliance teams where necessary.

The Letter states that where the firm has any fitness and probity concerns regarding a person who is performing a CF or PCF role, and takes action on foot of those concerns, the firm must notify the Central Bank without delay. The Letter states that there is no exhaustive list of the types of action that must be notified to the Central Bank but actions would include, for example:

  • the issuing of a formal written warning;
  • suspending/dismissing a person; or
  • reducing/recovering some of their remuneration

as a result of issues relating to fitness and probity. 

Firms should also ask persons performing CF roles to certify, at least on an annual basis, that they are aware of the Standards and that they agree to continue to abide by them. 

Termination of Employment

Firms should be aware that any act of dismissing a CF holder as a result of issues relating to fitness and probity, triggers an automatic reporting obligation.

The Unfair Dismissals Acts 1977 – 2015 effectively provides that a dismissal shall be deemed fair where it results wholly or mainly from "the employee being unable to work or continue to work in the position…without contravention of a duty or restriction imposed by or under any statute".

Although there is little or no case law on the above provision, it could potentially provide a useful defence to an unfair dismissals action for firms who dismiss a CF holder for breach of their fitness and probity requirements. 

The employer should, however, be wary of terminating an employee for non-compliance with fitness and probity requirements without going through appropriate and thorough investigations and following robust policies.

Conclusion

It is important that employers are aware of their ongoing fitness and probity obligations as to due diligence and reporting required by the Central Bank, but also of the interaction between these obligations and the employment lifecycle generally. In addition to having robust fitness and probity policies and practices in place, employers should also incorporate aspects of their obligations into their hiring and disciplinary policies and any termination practices. As stated above, HR and Compliance should ensure a synchronised approach in this regard. Further, PCF and CF's contracts of employment should be carefully drafted to ensure appropriate protections for the firm are in place in the event of a fitness and probity breach.

 

Contributed by: Lisa Shannon

 

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