Central Bank of Ireland (“CBI”) to implement changes to its Fitness & Probity regime following publication of Enria Report

On 11 July 2024, the CBI announced that it would implement all of the recommendations in the independent review of the CBI’s fitness & probity (“F&P”) regime, that was carried out by Andrea Enria, former Chair of the ECB Supervisory Board. Mr Enria’s report of his independent review (“Enria Report”) was published on the same day.

The independent review was commissioned by the CBI following severe criticisms by the Irish Financial Services Appeals Tribunal (“IFSAT”) of the CBI’s approach to handling a Pre-approval Controlled Function (“PCF”) application under the F&P regime. IFSAT’s January 2024 decision, which was an appeal of a refusal by the CBI of approval for a PCF position, concluded that there were fundamental procedural flaws in the CBI’s decision-making process.

The resulting Enria Report, which addresses the PCF application process under the F&P regime, is very comprehensive at some 87 pages. The Enria Report concluded that the CBI’s approach is broadly aligned with other peer jurisdictions across various dimensions: standards are comparable; statistics on outcomes (approvals, withdrawals of applications, refusals) are in line with other supervisory authorities and do not signal either a particular stringency or leniency of the process; timelines are well aligned with the target service standards and generally faster than in other countries. It found, however, that the CBI’s process “is not always up to the requisite standard of fairness and transparency.”

The Enria Report identified 12 recommendations for improvements, some of which do not involve change by the CBI because CBI practices are already largely aligned with the recommendations, but they are articulated for purposes of reiteration and to be “made clear in official documents and rooted in Central Bank’s culture.” A number of the recommendations, however, point to material deficiencies in current CBI practices and will give rise to significant changes in the CBI’s approach to processing PCF applications under the F&P regime.

The 12 recommendations are under the separate headings of clarity of supervisory expectations; internal governance of the process; fairness, efficiency and transparency of the process. The following sets out a brief summary of the key points in these recommendations.

Clarity of supervisory expectations

• The CBI should provide greater clarity and guidance to industry on the important role of regulated entities in carrying out due diligence of candidates for PCF roles (Recommendation 1). The Enria Report noted the work the CBI has already done in this area, including through its recent ‘Dear CEO’ letters regarding the due diligence expected of firms, but suggested this could be enhanced.
  
  
• The CBI should consolidate the various applicable F&P standards in a single location, for ease of identification of the applicable standards.
  
  
• Although Ireland is “not significantly out of line with the F&P standards issued by peer regulators”, the CBI should enhance the F&P standards, in particular by: including more objective measures (such as specific qualifications or experience requirements); develop specific enhanced guidance in particular on the role of executive/non-executive/independent directors and expectations in relation to them (this can be done by, for example, leveraging the stated inherent responsibilities for PCF roles under the Individual Accountability Regime); including specific provisions relating to identifying, managing and mitigating conflicts of interest; clarifying the way in which collective suitability and diversity within boards will be assessed; clarify the approach to be adopted regarding the assessment of past events (a reasonable time frame should be established, beyond which past events are no longer considered in the PCF application process, taking account of the nature and severity of the circumstances in question) (Recommendation 2).

 

Internal CBI governance of the process

• The CBI should establish a separate F&P gatekeeping unit to deal with all PCF applications. The Enria Report noted that “the current level of decentralisation has led to a lack of clarity and consistency across various areas.” This unit should be separate from the Enforcement division: “as perception matters, members of the F&P team should not belong to a Directorate containing the term ‘enforcement’ in its heading. The Enria Report noted, pointedly, that the current organisational overlapping between the F&P and enforcement functions within the CBI “seems to have generated some confusion amongst firms and candidates as to the key focus of the F&P process being orientated towards a quasi-enforcement investigation of past behaviour.”
  
  Also, there should be an enhanced implementation of a risk-based approach to F&P gatekeeping. This would involve a reconsideration/possible reduction of the overall number of PCF roles (“which is significantly higher than in other jurisdictions”). It would also involve an adjustment to the approach adopted in some sectors, including the funds sector. In light of the increased size and systematic footprint of the funds sector in Ireland and the widespread practice of multiple directorships, it could be appropriate to increase the number of F&P interviews in the sector “with a view to ensuring some form of F&P scrutiny, also on time commitment, on individuals accumulating a large number of roles and to de-stigmatise the fact of being called for an interview.” (Recommendation 3)
  
  
• Where significant F&P concerns persist with an application, the F&P team would issue a Minded to Refuse Letter. This would include a draft decision that would address e.g. all relevant issues and arguments raised by the applicant. The regulated entity would have at least 10 business days to respond. A final decision on the application, where it might lead to a refusal, would be made by a proposed new significant decisions committee. That committee could appoint a single decision-maker, but not below the grade of Director. The Chair of this proposed new committee would be accountable to the Central Bank Commission in respect of the decision-making process. Thus, “the decision-making process would prove more robust if it could entail higher seniority, benefiting from the debate that can take place in a panel including different perspectives and bolster in this way the actual and perceived independence in decision making”. (Recommendation 4)
  
  
• The CBI should organise an annual information session with industry to assist with their understanding of the practicalities of the F&P process. It should also organise ad hoc workshops to get feedback on the practical functioning of the F&P online system. (Recommendation 5)

 

Fairness, efficiency and transparency of process

• Affected individuals should be provided with a minimum notice period of 5 working days of an F&P interview. The CBI should commit to keeping interviews within about 90 minutes “as it is good practice at other authorities”. The number of CBI staff attending should be limited to 3. The setting for the interview “should remain conversational rather than adversarial”. The minutes of the interview should be shared with the interviewee. The CBI should, as a principle provide feedback on the interview to both the individual and regulated entity. (Recommendation 6). This would be a significant change from the CBI’s current approach to F&P interviews.
  
  
• The CBI should aim to have a single comprehensive F&P interview, rather than the current process of an assessment interview, potentially followed by a specific interview (Recommendation 7)
  
  
• The CBI should provide post-interview feedback to the regulated entity and individual, including in cases where the application is withdrawn. Also, importantly, the CBI should not engage in off-the-record discussions with regulated entities regarding specific applications. (Recommendation 8)
  
  
• The CBI should establish clear F&P application processing service standards, covering all applications. Thus, for example, there should be no exclusion from these service standards where interviews are held. Also, the CBI should commit to a timeframe for completion of all applications; a timeframe of 90 days is recommended (with limited opportunities to stop the clock). The CBI should also provide specified more comprehensive public data relating to the F&P applications it has processed (e.g. applications received; withdrawals; numbers of interviews; timeframes). (Recommendation 9)
  
  
• The proposed 90-day timeframe addresses one of the concerns raised by industry during the review process i.e. “the ‘slow-no’ approach that firms and applicants believed that the Central Bank sometimes engages in, by delaying a decision to put pressure on the firm to withdraw the application.”
  
  
• A robust F&P quality assurance mechanism should be put in place. This work should be carried out by CBI staff with oversight from an externally-appointed risk advisor to the CBI. (Recommendation 10)
  
  
• A complaints process should be established specifically for the F&P gatekeeping process. This procedure should be led by an externally appointed risk advisor, to ensure independence, impartiality and maintain confidentiality as appropriate. Thus, “an external grievance procedure fosters trust between the regulator, applicants, and stakeholders by demonstrating a commitment to addressing concerns fairly and objectively.” Complaints could be made about the conduct of the F&P process by the CBI, even where an application has been withdrawn or an approval has been granted. (Recommendation 11)
  
  
• The CBI should develop a comprehensive internal F&P training programme for its relevant staff. The training would cover issues such as the process to be followed, the conduct of interviews and provision of feedback. (Recommendation 12)