Ireland: Financial Services Regulatory Enforcement Newsletter – Quarter 3 2014

Welcome to Maples and Calder's quarterly newsletter on financial services regulatory enforcement, where we provide you with updates on all hot regulatory and enforcement topics, from global trends to in-depth advice on Irish-specific issues.

ENFORCEMENT ACTIONS – IRELAND

The Central Bank issued warning notices against nine unauthorised investment firms during the third quarter of 2014. These warnings can be very damaging to the reputation of a firm and they have a knockon impact when applying for regulatory licences in other jurisdictions or when applying to be an approved person.

For further information please see: http://www.centralbank.ie/regulation/unauthorised-firms/pages/list-search-unath.aspx

There were no enforcement sanctions issued against Irish regulated entities during the third quarter of 2014.

For further information please see: http://www.centralbank.ie/publications/Pages/settlement-agreements.aspx

The Central Bank's on-going investigation of Custom House Capital Ltd (in liquidation) and persons concerned with its management was discussed in the Examiner's Court between 1-3 October 2014 in relation to the quantum of costs of the liquidation. The judgement was reserved and is expected to follow shortly.

For further information please see: http://www.centralbank.ie/press-area/press-releases/Pages/UpdateonCustomHouseCapital.aspx

ENFORCEMENT ACTIONS – INTERNATIONAL

During quarter three the UK FCA issued warning notices against 107 firms acting without the necessary regulatory licence. Also in the UK, five entities were fined c. Ł170 million, 11 individuals were personally fined and eight people were charged with insider dealing.

For further details please see: http://www.fca.org.uk/news/list?ttypes=&yyear=2014&ssearch

In international news, the Securities and Exchange Commission ("SEC") issued monetary sanctions to firms of c. $712 million (including $2 million for violating FCPA regulations) as well as 54 charges of fraud; 20 charges of inside trading; 34 charges for filing failures; 25 charges of short selling; and 23 charges of pump-and-dump activity.

The SEC also announced its largest ever expected whistleblower award of more than $30 million to an individual who provided key original information that led to a successful SEC enforcement action.

The US Justice Department announced its largest ever settlement between the government and a US private corporation of $16.65 billion in respect of knowingly selling toxic mortgages to investors.

LEGISLATIVE/REGULATORY ENFORCEMENT DEVELOPMENTS – IRELAND

The Protected Disclosures Act 2014 (the "Act"), commonly known as 'the Whistleblowers Act', came into effect on 15 July 2014. The Act covers both private and public sectors and extends the remit of the protection afforded to whistleblowers under current legislation.

Under the Act, employees in all sectors are protected against reprisal where they have made a disclosure in relation to wrongdoing which has come to their attention in the workplace. The Act seeks to promote a culture of corporate risk management which supports and protects whistleblowing.

FEATURED ARTICLE

Regulators Increased Focus on Systems and Controls Environment

Introduction

As expected, there has been a marked increase in the level of regulation, regulatory supervision and regulatory sanctions in the wake of the 2008 financial crisis. Between 2008 and 2012 €1.5 trillion in state aid was introduced throughout Europe to prevent another financial crisis occurring. Regulatory enhancement is cyclical and, following a financial crisis, history dictates a call for a strengthening of regulatory supervision and intervention. To address these calls and to enhance financial stability, the European Union ("EU") coordinated with its international counterparts in the G20 and developed a regulatory reform agenda which included over forty proposals to be introduced over a five year period.

The objectives of this reform agenda included: the enhancement of financial stability and resilience of the financial system; the restoration of the EU single market; protection of investors and consumers; and improved efficiency and minimisation of transaction and financial services costs.

In Ireland, the Taoiseach (Irish Prime Minister) launched the 'Strategy for the International Financial Services Industry in Ireland 2011-2016' which included the high level goal of the 'Proper and Effective Regulation of Financial Institutions and Markets'. To achieve this goal, the report set out a number of strategies for the Central Bank of Ireland ("Central Bank") to undertake which mostly reflected the G20 reform agenda. Financial institutions must also be conscious of upstream regulatory risk and impending legislative developments awaiting transposition or entry into force.

Such an enhanced focus on regulation and supervision inevitably leads to an increase in regulatory sanctions, both in terms of frequency and amount. In 2010, the Central Bank imposed eight fines on financial institutions totalling €2,248,700 whereas in 2013, sixteen fines were imposed totalling €6,350,000. A leading contributory factor to these sanctions being ineffective and deficient systems and controls environments. The table below sets out a summary of sanctions since 2010 and highlights the percentage of these imposed due to ineffective and deficient systems and controls.

Similarly in the UK, sanctions have frequently been issued for ineffective and deficient systems and controls environments. Since 2010, the average amount of regulatory sanction activity has increased as set out below. The following table illustrates this in summary form.

A recurring theme in this regard is the substantial proportion of fines for or with reference to ineffective and deficient systems and controls. In five of the six sanctions issued by the Central Bank in 2014, the Director of Enforcement in the Central Bank, Derville Rowland, has highlighted the importance of effective systems and controls frameworks, most notably stating in one sanction:

"The Central Bank views the existence and proper functioning of a firm's policies, procedures, systems and controls as being fundamental to ensuring its compliance with its regulatory requirements. The existence of inadequate policies, procedures, systems and controls is an unacceptable risk to the Central Bank as it can be the basis for, and potentially leads to, large scale non-compliance with regulatory requirements."

PRISM, Themed Reviews, Enforcement Priorities and Financial Enquiry Panel

There continues to be a sustained increase in PRISM (Probability Risk and Impact SysteM) engagements by the Central Bank across all sectors rising from 2,198 engagements in 2012 (including pre-PRISM engagements) to 3,925 in 2013, highlighting a clear indication that the Central Bank is interacting with and scrutinising regulated financial institutions more frequently.

Regulated financial institutions should also be aware of the Central Bank's 'Programme of Themed Reviews' ("Reviews"). The Central Bank annually publish a list of Reviews that it intends to carry out separate to its reactive reviews and regular engagements, covering multiple financial sectors and focusing on specific areas of regulation. The principle behind the Reviews is that they "allow the Central Bank to monitor compliance with the relevant rules and requirements" set by the Central Bank. In anticipation of these Reviews, regulated financial institutions must have procedures in place documenting compliance and ensuring that the entity's obligations are documented to mitigate the risk of a Central Bank sanction, particularly in areas highlighted under the Reviews.

The Central Bank also publishes annually its "Enforcement Priorities" ("Priorities") which document its targeted areas for enforcement action. In 2014, the Central Bank set out fifteen Priorities specific to certain sectors including two applicable to all sectors - prudential requirements and systems and controls.

In October 2014, the Central Bank announced details of its new Financial Enquiry Panel ("FEP"), which comprises a panel of thirteen domestic and international legal and banking experts with the task of investigating potential breaches of banking rules by credit institutions and personnel. Included in the FEP is Fiona Muldoon, former Central Bank Director of Credit Institutions and Insurance Supervision. In line with the Central Bank (Supervision and Enforcement) Act 2013, the FEP has the power to fine up to €10 million or 10% of an entity's turnover. It can also ban and fine individuals up to €1 million, provided it does not bankrupt them.

The key observation to be made from this increased supervisory and regulatory activity is that regulated financial institutions need to be aware of the legal regulatory obligations applicable to their business and the need to have effective and robust systems and controls in place to monitor, record and stress test these obligations. Preparation and evidencing testing results is fundamental to documenting systems and controls. Where deficiencies are found, these need to be remedied and, in some instances, legal advice will need to be sought.

Fitness and Probity

In addition to the regulatory focus on financial institutions, the Central Bank's Fitness and Probity ("F&P") standards, enforceable under the Central Bank Reform Act 2010, highlight that the legal regulatory obligations extend further than just the regulated financial institution as a legal person, but to those persons in particular positions. Under the F&P standards, a person elected to a 'pre-approval controlled function' ("PCF") or a 'controlled function' ("CF") is required to be 'competent and capable' which compels the person to demonstrate that he or she:

"has a sound knowledge of the business of the regulated financial service provider as a whole, and the specific responsibilities that are to be undertaken in the relevant function;" and

"has a clear and comprehensive understanding of the regulatory and legal environment appropriate to the relevant function".

The message from the Central Bank is clear; those who hold a PCF or CF position must understand and be aware of their regulatory obligations and must be able to demonstrate their compliance with their obligations, much like regulated financial institutions. Failure to do so may lead to the Central Bank determining the individual to be unfit for their respective control function.

The Need to Show Awareness

Recent sanctions imposed by both the Central Bank and the FCA have highlighted that regulated financial institutions are required not only to be aware of their obligations, but also actively to test and demonstrate compliance with these obligations. A number of regulated financial institutions have received warnings and sanctions for not applying regulatory measures set out in legislation after identifying the need to apply them. These institutions should regularly test their compliance framework to ensure that the controls in place are effective, operational and accurate. Stringent risk based tests should be carried out on a continuous basis evidencing compliance with legal regulatory obligations.

Responsibility for compliance with legal regulatory obligations rests with senior management and a disconnect between management and the compliance function will be detrimental: this will reject badly on the firm's ability to demonstrate a proper compliance system. Information presented to senior management must be useful, accurate and of sufficient quality in terms of how the regulated financial institution is discharging its responsibilities. Senior management should establish and assess a positive compliance culture and evidence that culture in action.

Conclusion

The Central Bank is conducting an increased number of inspections and PRISM engagements. The cost set aside by regulated financial institutions to manage compliance risk is increasing in line with the rise in regulatory sanctions and the associated fines imposed. The Central Bank is concentrating on preventing regulatory breaches before they occur by scrutinising regulated financial institutions' systems and controls environments. The most important step a regulated financial institution can take in mitigating risk is to ensure the implementation of an effective and robust compliance environment and framework. This framework must be tested regularly and the results evidenced. Senior management are becoming more vulnerable than ever and must also take steps to demonstrate their compliance with applicable legal regulatory obligations. Clear reporting and escalation procedures in the event of any regulatory breaches or concerns must be established, and these breaches and concerns can only be identified by sufficient testing of a regulated financial institution's systems and controls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David Nolan
Callaghan Kennedy
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.