The Central Bank of Ireland’s new Individual Accountability Framework (IAF), which came into force in December 2023, is an important milestone in Irish financial regulation. The SEAR regime, a key pillar of the new framework, applies from July 2024. It brings a targeted focus on compliance by individual personnel of in-scope firms, with defined responsibilities for designated individuals and new conduct standards intended to drive change and improve governance across the sector. The Central Bank held a detailed consultation process in respect of the new regime and took on board suggestions following that process, with changes reflected in guidance issued by the regulator in late 2023. Much of the commentary during the consultation period focused on how the new scheme would be administered. There was particular concern about the shift from corporate to individual responsibility, and potential for inequality of arms as between individuals seeking fitness and probity clearance, and a powerful regulator that is responsible for making, interpreting, supervising and enforcing the rules.

The new framework is designed to ensure that those exercising roles across in-scope firms act in the best interests of customers and the integrity of the market, while meeting clearly laid-out standards of conduct.  With individual responsibility central to the effective working of the new framework, a recent decision of the Irish Financial Services Appeals Tribunal (IFSAT) brings the fairness of procedures underlying the Central Bank’s fitness and probity clearance process into renewed focus.

The background

In AB v. The Central Bank of Ireland, a fund named Redhedge UCITS ICAV (Redhedge) had applied for fitness and probity clearance for an individual PCF (AB) in respect of the positions of Non-Executive Director and Chairman. AB was an experienced executive who was already authorised by the Central Bank to perform pre-approved controlled functions, being non-executive director or chairman in several funds and a regulated fund administration company. He had previously served as chair of a fund that experienced substantial losses arising from impaired bonds the subject of a Central Bank investigation (Ruvercap ICAV).

On 5 December 2022, following an assessment interview and a later specific interview that the Central Bank had determined were required, a minded to refuse recommendation was issued, which was then confirmed by a senior decision-maker, finding that AB was unfit to hold the two PCF roles. There was no suggestion that AB lacked probity – the issue was the extent to which he met the fitness requirements (while fitness relates to qualifications, knowledge, skills and experience, probity is concerned with more human qualities such as integrity and trustworthiness: Carroll v. The Law Society of Ireland [2016] 1IR 676). AB appealed the determination to IFSAT, submitting that the Central Bank had failed to afford him fair procedures and that the determination should be set aside. The Central Bank argued that it had discharged its statutory functions in accordance with the requirements of fair procedures and that, at the end of that process and following extensive engagement, the interviewers formed the provisional view that AB had not demonstrated a clear and comprehensive understanding of the legal and regulatory environment, or the competency and skills appropriate to the PCF roles applied for.

Decision set aside

In a detailed judgment, IFSAT, chaired by former Supreme Court judge Mr Justice John MacMenamin, set aside the determination and remitted the matter to the Central Bank for fresh consideration on the basis that the decision-making process was flawed, AB had not been afforded fair procedures at each stage of the process, and that there were significant deficiencies in how the Central Bank had dealt with the applications. The IFSAT decision highlights a series of serious flaws in the process leading to the adverse determination, which are relevant to the conduct of regulatory processes and investigations more generally and are worth analysis.

Fitness and probity process

As IFSAT pointed out, constitutional statutory compliance requires more than apparent adherence to statutory procedures. Actual compliance requires that those procedures be applied fairly.

Most fitness and probity clearance applications are dealt with on the papers submitted. The Central Bank can, however, determine that an assessment interview is required. AB was called for such an interview and given prior notice of a list of general topics that would be covered in the interview. Conducted via video call, AB was questioned at length by a questioner appearing off camera about matters that went far beyond the topics notified to him prior to the interview. The Central Bank then determined that AB should attend a specific interview, a further lengthy meeting at which this pattern of questioning AB in depth without fair warning occurred again, with a pack of material sent to AB by email the day before the interview, which he had not had an opportunity to consider. AB was asked very detailed questions over several hours about the applicable regulations and was again tested on matters beyond the scope of the notified issues.

Pointing out the distinction between an application and an investigation, IFSAT noted that a person subject to an investigation is entitled to a range of procedural rights, including the right to fair notice of the issues to be covered or the allegations made; notice of the evidence to be relied upon; the right to examine and cross-examine accusers; the right to legal representation; and the right to an independent decision-maker, free from bias or prior involvement. The maker of an application by contrast does not enjoy that panoply of rights but is nonetheless entitled to fair notice of the issues to be covered at interview and interviewers who consider all relevant matters in a fair and impartial manner. “This is not to set an artificial standard. An interviewer is entitled to ask important questions; but there must be fair notice of them.”

Dealing with the initial assessment interview, 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.” The formal minutes of the meeting referred to a series of “issues” which did not accord with the topics on which AB was told he would be questioned. Some of the questions were extraordinarily complex with various sub-clauses. There also appeared to be confusion on the part of the questioners as to the nature of the bonds in which the fund was going to trade. There was also a lack of clarity, which was never resolved, as to what the standard was that AB had to meet and the Central Bank did not put forward any factual evidence as to what had occurred, but instead relied on expert evidence as to the regulatory context. It was clear that the interviewers were intensely preoccupied with matters relating to its investigation into Ruvercap ICAV.

It is open to the Central Bank under the fitness and probity procedures to call an applicant back for a specific interview. Here, IFSAT found that there was a similar absence of fair procedures. AB was sent a broad and unspecific invitation to interview and sent a large pack of material the day before the interview. He was not given any opportunity to refer to those materials during the interview, although he was questioned extensively on their contents. AB’s qualifications and experience received little attention in the minded to refuse letter which followed the interview. The ultimate decision-maker, who was independent of the process, having not attended the interviews, did not adequately engage with extensive rebuttal material put forward by AB, but focused unduly on his performance at the two interviews and his knowledge of the detail of the regulations.

IFSAT found that, taken either individually or cumulatively, the procedures adopted by the Central Bank did not comply with the requirements of constitutional and natural justice, including the necessity for fair notice; the duty to give reasons; and the observance of the principle of hearing the other side. The decision has been set aside and remitted to the Central Bank for reconsideration.

Analysis

The IFSAT findings demonstrate the importance of statutory procedures being applied in a way that gives substance to, and not merely the appearance of, fair procedures. This can be challenging for regulators but an appreciation of the importance of getting this right is fundamental to the effective operation of, and trust in, the new SEAR regime. This links to a trend we are also seeing with other financial services regulators of using individual approval applications in a way that goes beyond their intended scope in a way that risks being unfair to the individual (and firm) concerned.

The Central Bank has announced following the IFSAT decision that it has commissioned an independent review into its fitness and probity vetting regime for individuals seeking to hold PCF functions. This is a welcome development given the significance of the process for those operating at senior levels in regulated firms and the importance of firms understanding what is required, to ensure individual and corporate compliance with the IAF. With SEAR due to come into effect in July 2024, and applying to non-executive office holders from July 2025, it is essential that this review is completed well in advance of SEAR’s implementation and it is to be hoped that other regulators will also take the opportunity to review and learn from its findings.