In a landmark address in May 2010, when he was just a year in the job, the Financial Regulator, Matthew Elderfield, set out his response to the banking crisis to the Public Accounts Committee – the work to date and his plans for the future.
Phase one of the new Elderfield regime was to smash the hitherto cosy relationship between the banks and Dame Street to by introducing “a more intensive approach” to the regulation of banks.
This was not just about regulated firms having increased reporting obligations so that the Regulator could obtain more comprehensive information on a timely basis – there was also to be increased personal visibility and a far more adversarial approach: “Supervisory staff were placed on site in the banks so that they could attend regular meetings with senior executives, including those responsible for compliance, internal audit, risk management and credit, and could attend certain board, board committee and other management meetings on a sample basis to assess corporate governance in action.”
The prospect of close, personal proximity of removitated and inquisitorial Central Bank personnel was something entirely new for the nation’s bankers. While at the time Elderfield acknowledged that he not have remotely enough staff to do the job, and that the staff he had were lacking in technical knowledge, he subsequently boosted numbers and introduced a comprehensive training programme.
The second phase of the new regulatory regime was based around “an assertive risk-based system of regulation underpinned by the credible threat of enforcement,” with a large part of that effected by the subsequently enacted Central Bank Reform Bill.
That Act was notable for the abolition of the Irish Financial Services Regulatory Authority (IFSRA) but it is the provisions relating to “Controlled Functions” that is of greater significance to regulated institutions.
Under the terms of the Central Bank Reform Act, the Central Bank may prescribe a Controlled Function if, in relation to the provision of a financial service, it is:
likely to enable the person responsible for its performance to exercise a significant influence on the conduct of the affairs of a regulated financial service provider, or
is related to ensuring, controlling or monitoring compliance by a regulated financial service provider with its relevant obligations.
In other words, any conceivable role that could possibly lead to the holder threatening to wreak the kind of havoc perpetrated on the economy by errant bank officers throughout a decade of madness.
Under the new regime, Controlled Functions (CFs) are roles, in the words of the Regulator, from which “we can remove people from where they fall short of the appropriate benchmark for fitness and probity.” Pre-approval Controlled Functions (PCFs) are “roles requiring our approval before people can take up those positions.”
The Central Bank now requires regulated firms to identify and maintain a record of the individuals who are carrying out PCFs and CFs. Since 31 December each firm has had to supply a list of those individuals who were carrying out PCFs in their firm when the Regulations came into effect.
Boards of regulated firms are required to confirm that they are satisfied that the individuals in PCFs are fit and proper according to the new standards. The passing of the March 31st deadline where regulated firms have to certify that they have undertaken due diligence in relation to all Pre-Approval Controlled Functions that were in-situ as at the 1st December 2011 means the final piece of the new rules is in place.
Critically, a financial institution cannot allow a person to perform a Controlled Function unless it “is satisfied on reasonable grounds that the person complies with standards of fitness and probity.”
In March 2011 Elderfield introduced the Consultation Paper that heralded the new Fitness and Probity Standards – “the framework to ensure that the people operating at senior levels in regulated firms are fit and proper.”
Elderfield defined “fit and proper”: “Fitness and probity are the broad headings for applying standards to individuals who work – or wish to work – in the financial services industry in Ireland. They relate to an individual’s ethics, integrity and financial position but also their competence and capability.”
Elderfield said he was surprised to find in Ireland gaps in the Regulator’s powers in this area. “The Regulator could only consider an individual’s fitness and probity on the way into the industry. Once someone was in, if an issue subsequently came to our attention that we considered would justify their removal, we had no statutory power to take action. The only statutory tool available was the nuclear option of revoking a licence or authorisation – hardly a proportionate or realistic response. In practice, the only real option was moral suasion.”
All that has now changed. No regulated entity can appoint a person to a Pre-approval Controlled Function unless the Central Bank has approved that person’s appointment in writing. The Bank has searching powers in relation to that person’s appointment including interview by an officer of the Central Bank. The Bank can refuse the appointment and suspend or prohibit any person who does not meet standards of fitness and probity.
For those who wonder exactly what fitness and probity actually means, Elderfield provided an explanation last year.
The requirement to act honestly, ethically and with integrity needs little explanation. I would say that our proposed standards will enable greater clarity and robustness in dealing with individuals who have been removed from other positions or otherwise have been subject to civil or criminal sanction, in this jurisdiction or elsewhere.
The requirement for financial soundness will mean that individuals who wish to carry out senior functions in the financial services industry will have to demonstrate an ability to manage their affairs in a sound and prudent manner.
In assessing competence and capability we will not just consider professional qualifications and experience, we will also look for capabilities such as an understanding of governance and risk management standards and a firm’s particular business model… A firm proposing an appointee should ensure that the candidate fulfils the Central Bank’s minimum competency requirements where these apply.
Firms will need to show us that they have satisfied themselves with regard to the proposed appointees’ awareness of the responsibilities of the position, their knowledge of the business and their understanding of the regulatory and legal environment. Firms will also have to take account of any existing responsibilities the individual has, including for example the number of existing directorships they hold.
The provisions on competence are greatly to be welcomes. From a StubbsGazette point of view, we are particularly pleased that the Central Bank, in its Guidance on Fitness and Probity Standards, has identified credit risk as critical to competency. Specifically, the guidance states: “The regulated financial service provider should check against publicly available sources whether a judgment debt has been registered against a person” and the guidance goes on to name specifically StubbsGazette as one such “publicly available resource”.
With the Fitness and Probity Standards now fully in place, the Irish banking system is subject to one of the most intrusive and probing regulatory regimes anywhere – a regulatory carte blanche from the Central Bank – but these more onerous conditions that now apply to Ireland’s banks are appropriate – they were, after all, well earned.