Ireland: IFSAT Critical Of The Central Bank's Decision On PCF Roles

On 14 February 2024, the Irish Financial Services Appeals Tribunal (IFSAT) published its decision on an appeal related to the Central Bank of Ireland's (Central Bank) fitness and probity (F&P) approval process.

The appeal concerned a decision by the Central Bank on 5 December 2022 to refuse an individual's application to two senior roles (pre-approval controlled functions (PCFs)) in a regulated financial services firm under the Central Bank's F&P regime. The PCF roles in question were those of non-executive director (NED) and Chairman of a regulated investment fund.

IFSAT found that the Central Bank's decision was incorrect in law. Critically, IFSAT also highlighted several concerns with how the Central Bank handled the PCF applications. The tribunal returned the applications to the Central Bank for reassessment because the original PCF assessment process breached “constitutional and natural justice” requirements.

The statutory F&P regime, which was introduced by the Central Bank Reform Act 2010 (2010 Act), is a key part of the Central Bank's gatekeeping role, the core function of which is to ensure that individuals in key decision-making and customer-facing positions within a regulated firm are competent, capable, honest, ethical, of integrity and financially sound.

In light of the decision, the Central Bank has commissioned an independent review of the F&P approval regime for individuals seeking to hold PCF functions.

From 31 January 2024, the date of the order, the Central Bank will have 21 days to notify the applicant of the procedures that will apply to its reconsideration of the applications and 90 days to reassess the applications.

Background to the case

Under the 2010 Act, a regulated firm must obtain prior written approval from the Central Bank before the firm can appoint an individual to a PCF role.

In June 2021, when the applicant in question (applicant) applied for the two new PCF roles (2021 applications), he had already been approved by the Central Bank to act as NED or Chairman of seventeen regulated financial service provider firms in Ireland.

At that time, the applicant was the Chairman and NED of a Central Bank regulated firm which had been appointed as management company of a Central Bank regulated alternative investment fund (AIF), of which he was also Chairman and NED. The management company received investment advice from a Swiss entity and then, subject to consideration, would make investments on behalf of the AIF. Some of the investments made on behalf of the AIF were in bonds which became impaired in value, resulting in losses to investors. The Central Bank was notified of this in late 2019 and subsequently launched an investigation. As a result, the management company had to submit a business plan to the Central Bank to remedy deficiencies in its due diligence, oversight and monitoring in relation to the AIF.

For context, it is worth noting that in 2020, applications for certain PCF roles in respect of the same individual were made to the Central Bank (2020 applications). The Central Bank did not engage or issue a decision in relation to the 2020 applications, and they were ultimately withdrawn.

The Central Bank's F&P assessment of the applicant in respect of the 2021 applications and the subsequent IFSAT appeal related only to the question of the individual's fitness (concerning qualifications, knowledge, skills and experience) and not to that of probity.

Fitness and probity assessment process

The process regarding controlled function role assessment consists of the following stages:

1. Individual Questionnaire (IQ) submission
   The IQ is a detailed document which the individual applying for a PCF role must complete online. The proposing firm must endorse the IQ before submitting it electronically to the Central Bank for assessment.
2. Documents
   Following examination of the IQ the Central Bank may request further documents relevant to the assessment.
3. Interviews
   If the Central Bank has further questions, the applicant may be called to attend an “assessment interview” and, following this, possibly a second interview, known as a “specific interview” (it should be noted that many PCF applications proceed without any interview).
4. Decision
   Unless an application is withdrawn, the Central Bank will either approve the appointment or issue a “minded to refuse” letter. A minded to refuse letter is intended to inform a firm and the individual concerned of the Central Bank's preliminary opinion that the individual is not suitable for PCF role approval. An official in Central Bank (who is not involved in the original decision-making process) (ultimate decision-maker) will then consider any submissions in response.

Key Issues highlighted by the IFSAT decision

IFSAT found that the Central Bank's procedures at the interview and decision stages of the 2021 applications process were flawed. The Constitutional principles of natural justice require fair notice, the duty to give reasons and adherence to the principle of audi alterem partem (to hear the other side). IFSAT was satisfied that these requirements were breached, whether considered separately or together.

The Central Bank interviews

IFSAT distinguished between F&P applications and regulatory investigations. It made the point that if the Central Bank were investigating an individual, that individual would have access to certain procedural rights set out in case law such as:

• the right to fair notice of the issues to be covered or the allegations made;
• notice of the evidence to be relied on;
• the right of examination and cross-examination of accusers;
• the right to legal representation; and
• the right to an independent decision-maker, free from bias or prior involvement.

Although applicants for PCF roles under the F&P regime do not benefit from the same range of rights as they would if they were the subject of a regulatory investigation, IFSAT noted that they are still entitled to fair procedures including notice of the issues to be covered at interview and interviewers who consider relevant matters fairly and impartially.

In the context of the online assessment interview, the applicant was given prior notice of a list of general matters to be covered, however, the interviewer, off camera, questioned him at length about specific matters beyond the scope of that list and with an emphasis on matters related to the AIF. For example, the applicant knew he would be examined on his knowledge of the regulatory environment; however, some questions were “unnecessarily granular and sometimes unclear” and the issues recorded in the formal minutes of the interview did not reflect the list of general matters on which prior notice had been given. Other questions were found by IFSAT to be “extraordinarily complex with many sub-clauses” and some of the interviewers appeared to be confused about the nature of the bonds that the fund was proposing to trade.

There was a similar lack of fair procedure in the context of the specific interview when the applicant was given an invitation which was “broad and unspecific in its terms” and was also sent a large pack of information the afternoon before the interview, which was not copied to his solicitor. The applicant was questioned extensively on this information and did not have the opportunity to consider or refer to the information before or during the interview. Many of the flaws evident in the initial interview were mirrored in the specific interview.

Minded to refuse letter

The applicant's qualifications and experience (including endorsements) were not fully reflected in the Central Bank's minded to refuse letter which contained the Central Bank's preliminary opinion as to his fitness for the PCF roles following both interviews notwithstanding that the individual had extensive experience in these roles and in the funds industry.

The decision of the ultimate decision-maker

A Central Bank official who was the ultimate decision maker and not involved in the original decision-making process was appointed to consider the preliminary opinion and the submissions received to determine the matter. This official relied heavily on the information from the applicant's interviews which followed an already flawed process and failed to hear the other side. The official also focused on the applicant's regulatory and legal knowledge and failed to engage with or take due account of his very detailed rebuttal evidence or set out the reasons for their decision.

Standard of fitness

The Central Bank did not make out the standard of fitness to be met by the applicant in this case. Many practitioners in the industry may feel that this is reflective of the wider F&P application regime, where the standard required could be clearer.

Right to a livelihood

The IFSAT decision pointed out that what was at issue here was more than simply the right to the applicant's good name. Rather, what was in question was a binding decision on his right or interest to earn a living. It appeared that the applicant would never be able to obtain PCF approval from the Central Bank following the investigation of the AIF. In the context of the funds industry, the applicant's reputation and standing with the Central Bank and the ability of a fund to comply with launch deadlines are important.

Potential consequences of the IFSAT decision

Persons applying for PCF roles in the future and their advisors will be minded to study this decision closely. It underscores several potential avenues to support a legitimate challenge to a PCF application refusal and will likely mean that procedural steps in the F&P process will in future be brought into sharper focus. Matters of particular focus may include whether:

• adequate prior notice of issues to be raised at the interview is provided;
• agenda items for the interview are clearly set out in advance;
• adequate time is provided for the applicant's review of the agenda and other relevant documentation and for taking advice;
• the substance and form of questioning at interviews is fair (e.g. notified in advance, flowing naturally from the agenda and clear rather than complex or difficult to follow);
• supporting materials submitted in support of a PCF application are given due consideration so that the decision does not disproportionately hinge on performance at interview;
• timely consideration of applications and responses is given;
• if a legal advisor is on record for the applicant, they receive copies of relevant information;
• unusual practices (e.g. questioning off-camera) are avoided;
• assessment interviews are recorded or at least a note-taker for the applicant is permitted;
• previous appointments to PCF roles are appropriately taken into consideration.

Conclusion

IFSAT recognised that the Central Bank has a fundamentally important role as a regulator and noted that even though its concerns about the AIF may have been justifiable

IFSAT observed that “the Central Bank and its officials have to fulfil the difficult statutory functions of investigator, regulator, and decision-maker” and that it must “be neutral, objective and independent.” IFSAT noted that “these roles are not always easy to reconcile. There is a risk of overlap or even conflict between these function” and that bodies exercising quasi-judicial powers “should be independent, impartial, dispassionate, apply the law and observe fair procedures“. PCF interviewers and decision-makers have a duty of fairness and compliance with the standards laid down in the Constitution and relevant case law. Persons subject to decisions which potentially affect their livelihood are entitled to fair procedures.

Regulated firms cannot be established or fund entities launched without approval being in place for relevant PCF role holders, including NEDs. Timing concerns, potential damage to reputation and consequential impact on livelihood may in the past have led to PCF applications being withdrawn rather than challenged if the Central Bank signalled whether expressly or implicitly that it had concerns with a PCF application. The IFSAT decision is important in this context and will give potential PCF applicants, regulated firms and their legal advisers food for thought.

The Central Bank Individual Accountability Framework (IAF), which (except for the Senior Executive Accountability Regime (SEAR)) came into effect on 29 December 2023, has recently introduced some enhancements to the F&P regime including a requirement for firms to certify that the persons performing controlled functions in relation to the firm comply with fitness and probity standards. SEAR will come into effect on 1 July 2024 and will apply to NEDs and independent non-executive-directors (INEDs) from 1 July 2025.

The Central Bank has emphasised to the financial services industry that its approach to the implementation and supervision of IAF will be based on the principles of proportionality, predictability and reasonable expectations.

Contributed by Jane Balfe

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