First successful appeal of a CBI decision to refuse a PCF application

Introduction

In an important decision for both firms and individuals subject to regulation by the Central Bank of Ireland, the Irish Financial Services Appeals Tribunal (IFSAT) has found that the Central Bank did not apply fair procedures during the decision-making process for a pre-approval controlled function (PCF) role as part of its ‘gatekeeper role’ under the fitness and probity regime. IFSAT’s findings reference important constitutional rights to fair procedures and a person’s right to earn a living and is expected to have a significant practical impact on how the PCF approval process will operate in the future.

Background to the appeal

In June 2021, AB applied for approval to the positions of non-executive director (PCF-2) and chairman (PCF-3) of Redhedge UCITS ICAV, an investment fund authorised by the Central Bank.

As part of the Central Bank’s fitness and probity assessment process, AB attended an ‘assessment’ interview, followed by a ‘specific' interview (which are generally used for more focussed questioning on specific topics), both of which ultimately resulted in the Central Bank reaching certain adverse findings relating to AB.

On 3 December 2021, the Central Bank issued a ‘minded to refuse’ letter to AB, giving written notice that it had formed a preliminary opinion and was minded to refuse AB’s PCF applications, and inviting AB to make submissions in response. AB made detailed submissions challenging the Central Bank's findings and providing additional evidence and references.

Citing some, but not all, of the grounds referred to in the ‘minded to refuse’ letter, the Central Bank maintained its opinion and issued a final decision, on 5 December 2022, refusing AB’s PCF applications under section 23(5)(a) of the Central Bank Reform Act 2010. This was on the basis that, in its opinion, AB was not ‘fit’ to perform the PCF roles (as opposed to concerns regarding the individual’s ‘probity’). In particular, the Central Bank determined that AB had not demonstrated a comprehensive understanding of the regulatory environment appropriate to the roles of PCF-2 and PCF-3.

AB appealed the Central Bank’s decision to IFSAT, arguing that he was denied fair procedures at each stage of the fitness and probity approval process.  

Decision of the Tribunal

Over four days, IFSAT heard evidence from AB and other witnesses, including an academic expert in governance. IFSAT also examined the applicable legal framework, including the Fitness and Probity Standards, the characteristics of UCITS and investment funds and the importance of the investment funds sector.

Following consideration of written and oral submissions, IFSAT determined that there were fundamental procedural flaws at all three stages of the fitness and probity assessment and decision-making process, concluding that AB was denied fair procedures. IFSAT found that the various procedures adopted by the Central Bank, taken cumulatively (or even individually) did not comply with the requirements of Constitutional and natural justice, including the necessity for fair notice, the duty to give reasons and the principle of audi alterem partem (‘let the other side be heard’). 

IFSAT remitted the matter back to the Central Bank, directing it to reassess AB’s PCF applications within 90 days of IFSAT’s decision having due regard to IFSAT’s detailed findings and directions. It is important to note that IFSAT can either affirm the relevant application or remit it back to the Central Bank for reconsideration.

In this case, IFSAT directed that the reassessment be carried out by persons who were not directly involved in the initial decision-making process. IFSAT also directed the Central Bank, within 21 days of the decision, to notify AB of the procedures that it will apply in reconsidering the applications.

In respect to costs, IFSAT ordered that AB is entitled to the costs incurred in preparing for the appeal and the costs of the appeal itself (save for costs incurred in each directions hearing, for which AB is entitled to recover half his costs).

Key findings

In determining that the Central Bank failed to adhere to fair procedures, IFSAT identified the following deficiencies in the Central Bank’s fitness and probity assessment and decision-making process:

  • Disclosure of topics for interview: There was a lack of clarity and transparency in the assessment interview, as the Central Bank did not inform AB of all of the matters to be addressed during the interview.
  • Access to interview transcript: The Central Bank failed to provide AB with notes of the assessment interview (until a much later time), which contained adverse findings and formed the basis of the specific interview.
  • Right to be heard during the assessment process: AB was not provided with a reasonable opportunity to comment on or rebut the allegations made against him following the assessment interview, or correct any inaccuracies or omissions in the interview minutes that were subsequently provided to him.
  • Adequate consideration of response to ‘minded to refuse’ letter: The Central Bank failed to consider AB’s submissions and evidence in response to the minded to refuse letter, which purported to demonstrate AB’s fitness and probity.
  • Adequate reasons for ‘fitness’ decision: The Central Bank failed to give adequate reasons for its decision, which did not explain how the Central Bank applied the Fitness and Probity Standards or weighed the evidence.

Key learnings

Overall, the IFSAT emphasised the importance of fair procedures and the right to a fair hearing in the context of fitness and probity assessments by the Central Bank. The Central Bank must provide clear and fair notice of the issues to be addressed in interviews and must engage substantively with the submissions made by applicants.

(A) Interview Process

  • In particular, it is interesting to note that IFSAT’s finding takes a balanced approach in acknowledging that “an interviewer is entitled to ask important questions but there must be fair notice of them”. In respect to the assessment interview, IFSAT stated that the notice of the matters to be raised during the interview versus what was discussed were “at variance” and that even the issues recorded in the minutes differed from the generic description set out in the notice of the matters to be addressed during the interview.
  • Furthermore, in respect to the intense questioning of previous events in AB’s career, the Tribunal stated that “these specific motivations and concerns should have been made evident and clear in advance”.  Therefore, it appears that going forward, the Central Bank should only ask questions on matters which the applicant has been notified about in advance.
  • The Tribunal also emphasised the extreme level of detail of the questioning of the applicant, including detailed multipart questions and questions focused on past experience, which the applicant was not made aware would be queried in such detail.  In its conclusions, the Tribunal remarked that some of the questions asked of AB were “unnecessarily granular and sometimes unclear” and were “extraordinarily complex with many sub-clauses”. While these types of complex questions will be familiar to individuals previously the subject of Central Bank fitness and probity assessment interviews, it appears that the Central Bank will need to reconsider how it poses questions to applicants during these interviews and the appropriateness of the level of detail by reference to the purpose of the interview and the length of time available, and therefore the overall emphasis to be made, during those sessions.

(B) Documents and materials before and after an Interview

  • IFSAT also focused on documentation relating to the fitness and probity interviews. IFSAT took issue with the fact that one of the interviewers appeared to have confused certain matters during questioning (e.g. matters relating to non-listed bonds) and that AB did not receive the minutes of the interviews in time for the record to be corrected. Furthermore, the day before the specific interview, AB was provided with a folder of documents, via email, for discussion at the interview. IFSAT was critical of the lack of notice of these documents to AB, and that the documents were not provided to AB’s solicitor. 

(C) Fair procedures

  • Importantly, IFSAT’s findings highlight that decisions affecting an individual's right to earn a living must be made with due regard to Constitutional and natural justice principles. As such, the principle of proportionality is critical, which required the Central Bank to balance the public interest in ensuring the fitness and probity of persons in senior positions in the financial sector with the private interest of AB in pursuing his career and reputation.
  • The recent ruling of the Supreme Court in Zalewski v An Adjudication Officer and Others (Zalewski) also focused on fair procedures and Constitutional rights. As discussed in our Guide on the Individual Accountability Framework and Guide on the New Administrative Sanctions Procedure, the Irish legislature has already taken into consideration the findings in Zalewski regarding fair procedures in some of the reforms implemented under the Individual Accountability Framework and, in particular, the fair procedure reforms incorporated into the revised Administrative Sanctions Procedure (e.g. requiring High Court confirmation of any sanction imposed following an Inquiry).
  • The Central Bank will now likely have to assess what further actions or reforms may be needed in light of the Tribunal’s decision, including its views on the extent of fair procedures existing in the Central Bank’s fitness and probity approval process, including the PCF interview process. This is particularly pertinent now given that the fitness and probity regime is applicable to a wider pool of individuals following the expansion of the fitness and probity regime to apply to directors and chairpersons of certain holding companies.  

Matters not addressed

A significant question underlying the case, but which was not determined by IFSAT is the level of knowledge or understanding of the regulatory and legal environment required by a PCF applicant for compliance with the Fitness and Probity Standards. AB argued in written submissions that the Central Bank set the bar inordinately high in his case, and that the interview questions were excessively granular (indicating that, as a result, it was challenging for him to demonstrate his fitness for the roles). IFSAT found that “While it is true to say that the Appellant was informed that he was to be examined regarding his knowledge of the regulatory environment, some of the questions asked of him were unnecessarily granular and sometimes unclear”. It will be interesting to see whether the Central Bank will have more to say on this point, whether via updates to its Fitness and Probity Standards, related guidance or otherwise.

IFSAT did not make any findings as to the appropriateness of, or necessity for, a stenographer or notetaker to be present during fitness and probity interviews. Following AB’s written request to have a notetaker present during the assessment interview, he was informed that this would not be permitted. In his submissions to IFSAT, AB considered that it was unfair that he did not have a stenographer during the assessment interview. IFSAT noted that while the refusal appeared to reflect the Central Bank’s rules of such interviews, it was not clear from the Central Bank’s Guidance on the Fitness and Probity Standards why such a rule exists.  

Conclusion

IFSAT’s decision is a significant one, as it highlights the importance of fair procedures and natural justice in the Central Bank's decision-making process, and the role of IFSAT in ensuring the accountability and transparency of the Central Bank. This is illustrated by the Central Bank’s decision to commission an independent review of the fitness and probity approval process on foot of IFSAT’s findings.

The decision also provides guidance for applicants and legal advisers on the factors and evidence, along with the requirements of fair procedures, that the Central Bank should consider in assessing applications for PCF positions in the financial sector. Therefore, the decision will be welcome as applicants may, in the future, expect more detail and “fair notice” of the topics or issues which may be asked during a PCF interview.

For further information on any aspects of the Tribunal’s decision or the fitness and probity regime generally, please contact Dario Dagostino, Partner, Mark Devane, Partner, Chloe Culleton, Partner, Patrick Brandt, Partner, Florence Fanning, Solicitor, Aisling Ennis, Solicitor, Sarah Lee, Senior Knowledge Lawyer, or your usual ALG contact.

Date published: 20 February 2024