Background

The Central Bank (Supervision and Enforcement) Act, 2013 (the "Act") was enacted on 11 July 2013 and came into operation on the 1 August 2013, with the exception of Section 72. This Act significantly enhances the capacity of the Central Bank of Ireland ("Central Bank") to supervise regulated financial services providers and enforce financial services legislation, particularly by:

  • Increasing its powers to investigate, give directions and make regulations;
  • Consolidating and augmenting the authorised officer role;
  • Providing protection for whistleblowers; and
  • Increasing the level of sanctions it may impose.

In addition it brings debt management firms into the regulatory regime for the first time and it provides that a third country credit institution can now apply to the Central Bank to establish a branch in Ireland.

A summary of the main provisions of the Act is set out below.

Main provisions

Provision of report to the Central Bank

The Central Bank can require a regulated financial service provider (or a related party undertaking thereto) (the "reviewee") to commission a report by a third party (the "reviewer") on any matter which the Central Bank is already entitled under financial services legislation to request information/production of documents. The cost of the report is to be borne by the reviewee.

The Central Bank will issue a notice to the entity ("reviewee") which states:-

(i) The date on which the notice was given;

(ii) The period in which the reviewee shall nominate a person to the Central Bank for approval as a reviewer;

(iii) The purpose of the report;

(iv) The scope of the report;

(v) The timetable for completion of the report;

(vi) The matters required to be reported on;

(vii) Whether the report is to include recommendations;

(viii) The form of the report;

(ix) If appropriate, the methodology to be used in the preparation of the report; and

(x) Other matters relating to the report as the Central Bank considers appropriate.

Prior to issuing a notice to provide such a report, the Central Bank must consider whether it can avail of other more suitable powers available to it under any other financial services legislation, the relevant knowledge and expertise available to the reviewee, and the cost implications for the reviewee of providing the report.

The report required to be issued shall be prepared by the reviewer. This reviewer can be nominated by the reviewee. Where no person has been nominated within the period specified in the notice, the Central Bank may nominate a person to act as reviewer. The Central Bank will not approve a nomination for a reviewer unless it is satisfied that the reviewer possesses the necessary skills and competencies to draft an objective report on the matters concerned. The reviewer may be an auditor, actuary, accountant, lawyer or any other person with relevant business, technical or technological skills.

Once the reviewer has been approved by the Central Bank, the reviewee will enter into a contract with the reviewer. The Act specifies terms to be included in the contract between the reviewer and the reviewee. Of particular interest is that the contract between the reviewee and the reviewer must state that any duty owed by the reviewer to the reviewee which might limit the provision of information or opinion by the reviewee to the reviewer in preparing a report shall be waived. In addition, the contract shall provide that the reviewer is required and permitted to provide progress updates, interim reports and copies of draft reports to the Central Bank, if the Central Bank so requests. The Central Bank has the power to request a copy of the draft contract before it is concluded and make such modifications as it sees fit.

Obstructing or impeding the reviewer or knowingly giving false information in a material respect is an offence. The Central Bank also has the power to apply to the High Court if a person has failed to comply with any of the conditions or requirements imposed in relation to the provision of a report.

The Central Bank may publish guidelines to assist with the preparation of reports and it may include different provisions to account for different classes of reviewee or reviewer.

Information to be provided to the Central Bank

The Act provides the Central Bank with the power to require information from the persons set out in the Act. This list of persons from which the Central Bank can require information is extensive and includes:

  • A regulated financial service provider;
  • A person who has applied for an authorisation but whose application has not been determined;
  • A person whom the Central Bank or an authorised officer reasonably believes is or has been a regulated financial service provider or is or has been acting as, or claiming or holding itself out to be, a regulated financial service provider; and
  • A person who is or has been, or whom the Central Bank or an authorised officer reasonably believes is or has been, without an authorisation, providing a financial service in respect of which an authorisation is required.

The Central Bank's power also extends to a person who is currently or has been an officer or employee or agent of any of the persons referred to above.

The Central Bank must put its request for information in writing. The information that can be requested by the Central Bank includes the information specified in the notice and can include any forecasts, plans, accounts or other documents so specified. The Central Bank may require that the information or documents requested be certified or attested as to their authenticity or correctness in such manner as the Central Bank may reasonably require including by statutory declaration. The Central Bank may take copies of any records or documents provided.

It must be noted that the information gathering powers contained in the Act do not limit any other power of the Central Bank to require the provision of information or records or the preparation and provision of documents. Therefore, sector specific legislation may provide the Central Bank with more extensive information gathering powers.

Authorised Officers

Under the new Act the existing authorised officer regimes are consolidated. Authorised officers may be officers or employees of the Central Bank or other suitably qualified persons. They will be furnished with a warrant of his/her appointment, which must be produced along with photo identification as requested when exercising the powers conferred by the Act.

The powers of the authorised officers will include the ability to:

  • Enter/search and inspect premises and secure these premises for later inspection for such period as is deemed reasonably necessary to preserve records for inspection that he reasonably believes may be kept there;
  • Require the production of/inspect records and secure these records and retain such records for later inspection and this power extends to the retention of data equipment, including any computer;
  • Summon a person to provide information, records that the person has control of or access to or require an explanation of a decision, course of action, system or practice or the nature or content of any records provided;
  • Require a person, who is unable to provide information requested, to state to the best of their knowledge and belief where the record is located or from whom it may be obtained; and
  • Require a person to answer questions and to make a declaration of the truth of the answers to those questions.

If the Central Bank or authorised officer proposes to retain any information requested from the regulated entity for more than 14 days, or longer than any such period agreed with the person, it must furnish, on request, a copy of the records to the person who, but for the exercise of the powers under this section, is entitled to possession of it.

A person to whom this part applies must give all assistance to the authorised officer as reasonably required and make available all facilities as are reasonably necessary.

Warrant to enter any premises

The authorised officers may apply for a warrant from the District Court to enter premises where there are reasonable grounds for believing that records are to be found on, at or in any premises.

The warrant will only be valid for one month from the date of issue but this may be extended if:

  • If the application to extend the period of validity of the warrant is based on information on oath laid by the authorised officer stating, by reference to the purpose or purposes for which the warrant was issued, the reasons why the authorised officers considers the extension to be necessary; and
  • If the judge is satisfied that there are reasonable grounds for believing that further time is needed to fulfil the purpose of the warrant.

The period of extension granted by the judge must be appropriate and just.

Failure to comply

Where a person fails or refuses to comply with any requirement imposed by the Central Bank or authorised officer, this may be referred to the High Court. The High Court may then inquire into the case and may make an order or direction as it sees fit. Before it makes an order or direction the High Court must first hear any witnesses who may be produced on either side and any statement which may be offered in defence.

Offences

It will be an offence to:

  • Obstruct or impede the Central Bank or an authorised officer in exercising their powers;
  • Not comply with a requirement without reasonable excuse; or
  • Knowingly provide false or misleading information in a material respect.

A person who commits an offence is liable:

  • On summary conviction to a class A fine (a fine not exceeding €5,000) or imprisonment for a term not exceeding 12 months, or both, or
  • On conviction on indictment, to a fine not exceeding €250,000 or imprisonment up to 5 years or both.

Legal professional privilege

Where a person refuses to provide information requested by the Central Bank or an authorised officer on the grounds that the information contains privileged legal material, the Central Bank may, within 6 months of the refusal (or such longer period as the High Court may allow) apply to the High Court for a determination as to whether the information, or any part of the information contains privileged legal material.

Before the Central Bank can make an application to the High Court it must:

  • Have reasonable grounds for believing that it is not privileged legal material; or due to the manner or extent to which such information is presented together with any other information, it is impossible or impractical to extract only such information; and
  • The Central Bank has reasonable grounds to suspect that the information contains evidence relating to the commission of a prescribed contravention or an offence under financial services legislation.

Until a determination is made by the High Court, the information must be kept in a secure and safe place. The High Court may appoint an independent person with suitable legal qualifications to examine the information and prepare a report to assist the High Court in making the determination.

Use of information

Information obtained may only be used by the Central Bank for the purposes of the performance of any of its functions under financial services legislation.

Auditor Assurance

The Act has amended the Central Bank Act, 1997 to include new provisions which provide the Central Bank with the powers to request an auditor to conduct an examination and provide a statement to the Central Bank on the regulated financial services provider's compliance with its obligations under financial services legislation. The Central Bank must give the auditors notice at least 3 months before the auditor's report is due to be submitted to the Central Bank and this notice must specify the standards with which the examination is to be conducted. The auditor must report its findings to the Central Bank within two months after the date on which the auditor's report is due. If the auditor opines that the regulated financial services provider has not complied with the provisions under the financial services legislation, the auditor must include the reasons why it is not satisfied. When specifying the standards with which the examination is to be conducted, the Central Bank must have regard to internationally recognised standards for assurance and auditing.

Protection of Whistleblowers

The Act provides for persons making protected disclosures i.e. it provides for whistleblowing protection. A protected disclosure is one made by a person in good faith to an appropriate person (the Central Bank, its employees, officers or authorised persons) where they have reasonable grounds to believe it will show that:

(i) An offence was or is being committed under financial services legislation;

(ii) A prescribed contravention was or is being committed;

(iii) A provision of financial services legislation was or is being contravened; or

(iv) Evidence regarding the above is being or is likely to be deliberately concealed or destroyed.

Disclosures made anonymously will not qualify as a protected disclosure. The identity of a person who makes a protected disclosure will not be divulged by the Central Bank without the person's consent except in certain circumstances prescribed by the Act. However, the Central Bank will make all reasonable efforts to notify the person before his/her identity will be disclosed.

Under the Act, a person performing a pre-approval controlled function ("PCF") i.e. one in which they may exercise significant influence on the conduct of a regulated financial service provider's affairs, will be obliged to report a breach of financial services legislation as soon as practicable if he/she knows/believes it might be of material assistance to the Central Bank. Failure, on the part of the PCF, to make a disclosure could be the basis for an investigation and action under the fitness and probity regime. A person will however be excused from this obligation if the PCF has a reasonable excuse such as if the disclosure might incriminate them personally. The Act does not provide an exhaustive list of what might constitute a â€Üreasonable excuse'. The Central Bank may publish guidelines in relation to the obligation on PCFs to make such disclosures.

Where a person makes a protected disclosure he/she will not be liable in damages for making it, unless it was made in the knowledge that the information disclosed is false or misleading.

The Act also provides for the protection of employees from penalisation for making a protected disclosure and sets out procedures for redress for those employees who have been penalised.

Any employer who penalises or threatens to penalise commits an offence and can be subject to maximum fine on indictment of €250,000 or imprisonment up to 5 years or both. Further, if an employee is dismissed, the employee may institute proceedings in respect of that dismissal under the Unfair Dismissal's Acts 1977 to 2007.

If a person is victimised because they or any other person:-

(i) Honestly made a protected disclosure;

(ii) Gave evidence in any proceedings under financial services legislation; or

(iii) Gave notice of their intention to do either of the above;

They have a right of action in tort against the person who victimised them. Examples of victimisation include intimidation or harassment, discrimination, disadvantage or adverse treatment in relation to a person's employment, injury, damage or loss, or a threat of reprisal. It must be noted that an employee cannot pursue a right of action for victimisation and a right of action under any provision of any other enactment in respect of the same matter.

Extension of Part V of Central Bank Act 1997 to Debt Management Firms

Debt management firms (which previously fell outside the scope of the regulatory regime) will now be subject to regulation by the Central Bank under Part V of the Central Bank Act, 1997.

The Act goes on to define debt management services as meaning;

  • Giving advice about the discharge of debts (in whole or in part), including advice about budgeting in connection with the discharge of debts;
  • Negotiating with a person's creditors for the discharge of the person's debts (in whole or in part); or
  • Any similar activity associated with the discharge of debts.

Firms providing such debt management services must now make an application for authorisation by the Central Bank. There is a transitional provision whereby an existing debt management firm will be regarded as being authorised (until formal authorisation is granted or refused) provided such firms apply for authorisation before 1 November 2013.

Details on the application process including draft guidance on completing an application is available on the Central Bank's website: www.centralbank.ie

Irish Branch of a Non-EU Credit Institution

Under Section 73 of the Act, which amends the Central Bank Act, 1971, a non-EU credit institution can now seek authorisation from the Central Bank to establish a branch in Ireland.

Before the Central Bank will grant authorisation to a non-EU credit institution to establish a branch in Ireland it must be satisfied that:

  • The regulatory or administrative provisions relating to authorisation to carry on banking business to which the non-EU credit institution is subject correspond to those in Ireland; and
  • The level of protection of deposits with the branch corresponds to the level of protection provided in the European Communities (Deposit Guarantee Schemes) Regulations 1995.

Enforcement Provisions

Enhanced Powers

The Central Bank's enforcement powers have been increased with the introduction of the Act. Under the Act, the Central Bank may apply to the High Court for an order either restraining the person from engaging in certain conduct or requiring the person to do an act.

Administrative Sanctions

The Act makes a number of significant amendments to Part IIIC of the Central Bank Act 1942.The most notable amendment to Part IIIC of the Central Bank Act, 1942 relates to the increase in penalties and fines related to the Administrative Sanctions Regime. Where the Central Bank makes a finding that a regulated financial service provider is committing or has committed a prescribed contravention, natural persons may now face fines of up to €1 million (this was previously €500,000) and bodies corporate or unincorporated bodies may face fines which amount to the greater of €10 million or 10% of their previous year's turnover (this was previously limited to €5 million).

The Central Bank also has the power to publish certain information relating to sanctions and findings of inquiries in the form and manner it deems appropriate.

Customer Redress

The Central Bank is provided with the power to issue a direction requiring the making of appropriate redress to the customers where they have suffered or will suffer a loss as a result of widespread or regular relevant defaults by a regulated financial services provider.

For the purposes of the Act, a relevant default includes the following;

(i) Providing a customer with a financial service which was not suitable for the customer at the time when it was provided;

(ii) Providing a customer with inaccurate information which influences the customer in making a decision about any financial service;

(iii) A failure of any system or controls of the regulated financial service provider; or

(iv) A prescribed contravention.

A direction issued may require the regulated financial service provider to cover the Central Bank's costs in issuing the direction. This decision by the Central Bank to issue a direction is an appealable decision for the purpose of the Part VIIA of the Central Bank Act, 1942. The Central Bank may publish this direction or publish a notice that it is considering a complaint or investigating any other matter for the purpose of deciding whether to give a direction.

If the Central Bank has dealt with a complaint or is considering the complaint, then it does not need to refer the matter to the Financial Services Ombudsman. In turn, the Financial Services Ombudsman does not need to investigate a complaint if the Central Bank has dealt with it by issuing a direction.

Central Bank's power to issue Directions

In the interests of the proper and effective regulation of financial service providers, the Central Bank has the power to issue directions to a regulated financial service provider or a related undertaking of a regulated financial service provider to take specified actions in a number of circumstances. A regulated financial service provider to whom a direction has been given may apply to the High Court for an order setting aside the direction and any decision by the Central Bank to issue a direction is an appealable decision for the purposes of Part VIIA of the Central Bank Act, 1942.

The Central Bank may apply to the High Court for an order enforcing any directions which have not been complied with.

Central Bank's power to make Regulations

The Central Bank will be empowered to make regulations covering a wide range of issues, for example:

(i) Risk minimisation;

(ii) Monitoring staff training and qualifications;

(iii) The level of information to be given to customers;

(iv) The restriction of "cold calling";

(v) The process around refunds and rebates to customers;

(vi) Resolution procedures concerning disputes with customers;

(vii) Order execution; and

(viii) The suitability of financial services for customers.

The Act provides that the Central Bank will consult with the Minister and may consult with other relevant parties when making such regulations. In addition, the Central Bank must have regard to the principle of proportionality by taking account of the nature, scale and complexity of the activities of the regulated financial service provider. Regulations made by the Central Bank must be laid before each House of the Oireachtas as soon as may be after they are made.

Conclusion

The Act is designed to strengthen the regulatory framework for Irish financial service providers by clarifying and enhancing the powers of the Central Bank to allow it to monitor, supervise, query and investigate the conduct and activities of financial service providers and where appropriate impose sanctions on those financial service providers.

While the above summarises some of the key new powers and amendments as a result of the Act, it is not designed to cover the Act in its entirety.

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.