IAF / Fitness and Probity Updates

There have been a number of recent developments regarding the Fitness and Probity regime, arising out of the implementation of the Individual Accountability Framework (IAF). Most recently, the Central Bank of Ireland (CBI) published two sets of Regulations (see below) to designate controlled functions (CF) and pre-approval controlled functions (PCF) for regulated financial service providers (RFSPs) and in-scope holdings companies. Both Regulations are effective from 29 December 2023.

Importantly, these Regulations also introduce the ‘materiality threshold’ for branch managers as flagged in the finalised IAF Guidance.  

1. Independent Accountability Framework – New Regulations

Regulated Firms

The Central Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations 2023 (S.I. No. 663 of 2023) prescribe new and amended PCF roles for RFSPs via amendments to, and substitution of, Schedule 2 to the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (S.I. No. 437 of 2011).

Central Bank Reform Act 2010 (Sections 20 and 22) (Amendment) Regulations 2023 (S.I. No. 663 of 2023)

New PCF Roles

Head of Client Asset Oversight (Credit Institutions) (PCF-53)

Head of Material Business Line (Insurance Undertakings) (PCF-54)

Head of Material Business Line (Investment Firms) (PCF-55)

Amendment to PCF-16

The PCF role of Branch Manager of a branch established outside the State (PCF-16) has been amended by the introduction of a materiality threshold, whereby a branch manager of a branch established outside the State will be a PCF-16 role only in circumstances where the business arising from the branch amounts to 5% or more of the assets or revenues or gross written premium of the regulated financial service provider.

In relation to PCF-16, it is not clear what will happen in practice in terms of compliance with fitness and probity requirements and approval processes if an RFSP falls below the new 5% materiality threshold by a minimal amount or for a short period of time, including in circumstances where the RFSP continuously falls above and below the threshold during a given year. For other PCF roles where quantitative thresholds have previously been set (e.g. Head of Material Business Lines for credit institutions) RFSPs in some instances have taken pragmatic views and sought approval where there is a real possibility that these thresholds would be met in the short term.   

Holding Companies

The Central Bank Reform Act 2010 (Sections 20 and 22 Holding Companies) Regulations 2023 (S.I. No. 664 of 2023) prescribe PCF and CF roles for in-scope holding companies for the first time. Section 9 of the IAF Act amended section 20 of the 2010 Act to extend the fitness and probity regime to persons performing applicable PCF and CF roles within in-scope holding companies.

Central Bank Reform Act 2010 (Sections 20 and 22 Holding Companies) Regulations 2023 (S.I. No. 664 of 2023)

New PCF Roles

Chairperson of the board of the holding company (HCPCF-1)

Director of the holding company (HCPCF-2)

New CF Roles

A function in a position to exercise a significant influence on the conduct of the affairs of a holding company (HCCF-1)

A function which is related to ensuring, controlling, or monitoring compliance by a holding company with its relevant obligations (HCCF-2)

To reflect the changes to the PCF and CF roles, the CBI also published an updated list of PCFs and an updated list of CFs, together with two publications notifying of the changes in respect of RFSPs and holding companies.

2. Updated Fitness and Probity Standards and Guidance

As part of the reforms to the fitness and probity regime, the CBI has updated the Fitness and Probity Standards and the Fitness and Probity Guidance as summarised below.

Updated Fitness and Probity Standards 

The Standards have been updated to include:

  • Reference to holding companies as applicable
  • Amendments to the Section 4 requirements for conduct to be honest, ethical and to act with integrity, providing for the broadening of, and addition of, categories of prior conduct that may be material to an assessment of fitness and probity; these include e.g:
    • the issuing of proceedings, whether or not concluded, against the individual;
    • the individual being subject to remuneration clawbacks as a result of alleged wrongdoing; and
    • and the individual being subject to disciplinary proceedings.

Updated Fitness and Probity Guidance

The Guidance has been updated to include:

  • Details on the new certification process for individuals to be appointed to a CF role, including:
    •  an acknowledgment that the CBI has not prescribed a format for ‘certification’; and
    • a suggestion that RFSPs may wish to incorporate the certification process as part of their ongoing performance monitoring).
  • New requirements for in-scope holding companies

The Appendices to the Guidance have been updated in relation to:

  • Sample due diligence checks;
  • The agreement of an employee to comply with the Guidance; and
  • The inclusion of updated lists of CFs and PCFs.

3. Certification Regulations

The Central Bank Reform Act 2010 (Section 21(6)) Regulations 2024 (S.I. No. 2 of 2024), also known as the ‘Certification Regulations’, have been published by the CBI. 

The Regulations were published in draft form, in December 2023, alongside the CBI's new IAF Guidance and feedback statement, following public consultation. 

In March 2023, the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act) amended and replaced section 21 of the Central Bank Reform Act 2010 to provide that a RFSP shall not permit a person to perform a controlled function in relation to it unless a certificate of compliance with standards of fitness and probity, given by the RFSP in accordance with section 21, is in force in relation to the person.

The IAF Act empowered the CBI to make regulations as to the giving of the certificate of compliance, including prescribing the form and content of the certificate, the period of validity of the certificate and the adoption of related procedures, systems and checks by the RFSP. The Certification Regulations have been published by the CBI for this purpose.

Conclusion

Much of the IAF has come into operation, with the notable exception of the Senior Executive Accountability Regime (SEAR). The CBI published draft ‘SEAR Regulations’ in December 2023, at the same time the IAF Guidance was published, and we expect the final Regulations to be issued soon.

Visit our Individual Accountability Framework hub for further materials, including our 'IAF and SEAR Guide', and thought leadership on this important topic.

For further information on the Individual Accountability Framework and Fitness & Probity and how ALG can assist your business, please contact Dario Dagostino, Partner, Mark Devane, Partner, Patrick Brandt, Partner, Chloe Culleton, Partner, Sarah Lee, Senior Knowledge Lawyer, Duncan Inverarity, Partner, Noeleen Meehan, Partner, Michael Doyle, Partner, James Grennan, Partner, Laura Mulleady, Partner, Sinéad Lynch, Partner, Emma Martin, Of Counsel, Kerill O'Shaughnessy, Partner or your usual ALG contact.

Date published: 16 January 2024