Fitness & Probity – The New Regime Máiréad Devine, Acting Head of GAAP, Central Bank of Ireland

1. Fitness & Probity – The New RegimeMáiréadDevine, Acting Head of GAAP, Central Bank of Ireland ACOI lunchtime seminar 14 December 2011.

2. Introduction • Existing CBI Publications & Industry Consultation • New Publications • Main Issues arising from Consultation on Draft Guidance Key Policy Questions FAQs Safeguarding Stability, Protecting Consumers

3. 1. Existing CBI Publications & Industry Consultation 1 September 2011 – Central Bank published: • Regulations prescribing CFs and PCFs • Fitness and Probity Standards (Section 50 Code) • Draft Guidance for Industry • Also: New Minimum Competency Code (2011) (see section 23 of Final Guidance) • As a result of Formal Consultation with Industry (March-May 2011 (CP51) and September 2011 (Draft Guidance)) and Feedback through Presentations (October – November 2011), useful suggestions have been made which the CBI has taken on board. Note:These slides constitute an summary only of the topic presented upon. Reference should be made to the original materials in all cases. Safeguarding Stability, Protecting Consumers

4. 2. New Publications - Dates • Final Guidance for Industry Published on 23 November. To be published by 30 November 2011: • Amending Regulations 2011 • Amended F&P Standards To be published by Q1 2012: • Frequently Asked Questions Safeguarding Stability, Protecting Consumers

5. 3. Main Issues arising from Consultation on Draft Guidance • CBI consultation on the Draft Guidance prompted 25 + written submissions. • CBI listened to industry concerns and questions raised at presentations in October and November . • All submissions were also taken into account in finalising the Guidance. The key policy questions raised relate to: • Outsourcing • Matrix Management Structures • Guidance on the definition of functions constituting PCFs • Self-certification for Directors / Concurrent responsibilities • Branches of Irish RFSPs located outside the State Safeguarding Stability, Protecting Consumers

6. 3.(a) Key Policy Questions– Outsourcing (1) Outsourcing Draft Guidance – Published in September 2011: PCFs and CFs: • Arrangement between RFSP and service provider must identify the individual in the service provider who is responsible for the performance of the outsourced PCF and the CFs, and • Arrangement must identify the individual in the RFSP who is responsible for the performance of the PCF and the CF. • Where proposing to appoint a person to a PCF in an outsourcing arrangement, RFSP had to obtain the CBI’s prior written approval to the appointment. • The persons identified in the arrangement as responsible for the performance of the PCF and CFs must comply with the Standards. Safeguarding Stability, Protecting Consumers

7. 3.(a) Key Policy Questions – Outsourcing (contd.) Industry Submissions: • Impractical to identify the specific individuals who are responsible for the day to day exercise of the CFs in the contractual arrangement. • Team assigned to the exercise of the CFs could change on a regular basis. Safeguarding Stability, Protecting Consumers

8. 3.(a) Key Policy Questions – Outsourcing (contd.) Solution: • Bifurcated approach dependent on whether the function is outsourced to another regulated entity, or an unregulated entity. • OUTSOURCING TO A REGULATED ENTITY ‘Regulated’ = regulated either: • by the Central Bank of Ireland; or • by an authority that performs functions in an EEA country that are comparable to the functions performed by the Bank; or • by an authority that performs functions in a non EEA country that are comparable to the functions performed by the Bank. Safeguarding Stability, Protecting Consumers

9. 3.(a) Key Policy Questions – Outsourcing (contd.) PCFs • Where the RFSP authorised in the State outsources a PCF to a regulated entity, the RFSP will be excluded from the requirement to obtain the CBI prior written approval to the appointment of the PCF (Regulation 12A). PCFs and CFs • Where RFSP authorised in the State outsources PCF / CF to a regulated entity the F&P Standards will be dis-applied from those individuals. Safeguarding Stability, Protecting Consumers

10. 3.(a) Key Policy Questions – Outsourcing (contd.) Solution: • OUTSOURCING TO AN UNREGULATED ENTITY PCFs The Original approach issued in the draft guidance in September 2011 applies, i.e the SLA must identify the individual who will perform the PCF, and the CBI prior written approval must be obtained. Safeguarding Stability, Protecting Consumers

11. 3.(a) Key Policy Questions – Outsourcing Solution (contd.) • OUTSOURCING TO AN UNREGULATED ENTITY CFS • Persons performing CFs under an outsourcing arrangement must be compliant with the F&P Standards. • The outsourced service provider must: (i) be able to identify the individuals who will perform the CFs and assess whether those persons are compliant with the F&P Standards; and (ii) obtain those persons’ agreement to abide by the F&P Standards. Safeguarding Stability, Protecting Consumers

12. 3.(a) Key Policy Questions – Outsourcing Solution (contd.) • In contrast to the outsourcing of PCFs, it is not necessary to identify and list in writing each individual performing the CF in the SLA itself. However, the CBI expects the outsourced service provider to incorporate the F&P Standards into its Human Resource process. • The RFSP remains responsible for compliance with its obligations under Section 21. The outsourced service provider should provide written confirmation to the RFSP that those individuals performing CFs are compliant with the F&P Standards and have agreed to abide by them. In addition to this written confirmation, the outsourced service provider should furnish the RFSP with sample documentation as to how compliance with the F&P Standards is adhered to. Safeguarding Stability, Protecting Consumers

13. 3.(a) Key Policy Questions – Outsourcing Solution (contd.) • Solution in summary: • The Regulations and F&P Standards apply to Irish Authorised RPSPs; • Where Irish authorised RFSP outsourced / delegated PCF/CFs to a regulated entity they do not have to comply with the F&P Standards, and do not require to obtain prior written approval for appointment to a PCF; • Where Irish authorised RFSP outsources / delegates PCF/CFs to an unregulated FSP, the SLA must ensure compliance with the F&P Standards, and RFSP must obtain prior written approval for appointment of a PCF. Safeguarding Stability, Protecting Consumers

14. 3.(a) Key Policy Questions – Matrix Management Structure (2) Matrix Management Structures Draft Guidance: did not specifically address the issue of complex management structures in multinationals. Industry: Asked for clarity on how the fitness and probity regime would operate in the context of such structures where dual reporting roles often exist (e.g. the Head of Compliance in the domestic RFSP has a reporting line into the Group Head of Compliance as well as the CEO of the RFSP). Safeguarding Stability, Protecting Consumers

15. 3.(a) Key Policy Questions – Matrix Management Structure (contd.) Solution: • The F & P Standards do not apply to a person performing a function in a separate legal entity in a group structure of companies (whether such an entity is a regulated financial service provider or otherwise) who may exercise a significant influence over a person performing a CF or a PCF in a regulated financial service provider in an entity in that group which is authorised, licensed or registered by the Central Bank.(see Section 1.5 of the Amended Standards, and section 3.3(iii) of Guidance). Safeguarding Stability, Protecting Consumers

16. Safeguarding Stability, Protecting Consumers

17. 3.(a)Key Policy Questions - PCF functions (3) Guidance on the definition of functions constituting PCFs Industry sought clarity on the definition of various PCFs to enable identification of underlying functions, regardless of the title held by a particular individual, e.g. Office of Secretary. Solution: • Issues raised in respect of specific roles are being addressed on a continuous basis, and further clarity will be provided in the FAQs e.g. Chief Actuary. • The Office of Secretary function has been removed from the PCF List. (Note: PCF 9 removed - Amending Regulations). • Amended PCF9 (formerly PCF10) has been narrowed to exclude limited partners of Investment Limited Partnerships. • Non-UCITS SMICs have been added (Amending Regulations). Safeguarding Stability, Protecting Consumers

18. 3.(a) Key Policy Questions– Self-certification for Directors (4) Self-certification for Directors / Concurrent Responsibilities • Draft Guidance:required a CRO search verifying the number of directorships held. • Industry:submitted that this requirement was too onerous given the time and expense associated with such a search. Safeguarding Stability, Protecting Consumers

19. 3.(a) Key Policy Questions– Self-certification for Directors (Contd.) Solution : • Guidance has been amended to remove the requirement on the RFSP to verify individual directorships but will still require checks for disqualifications. The RFSP should seek confirmation from the individual that the performance of his/her responsibilities in other directorships will not adversely impact on his / her ability to perform the CF / PCF from a timing perspective or otherwise. Safeguarding Stability, Protecting Consumers

20. 3.(a) Key Policy Questions – Branches & FOS (contd.) Inward Branches: The F& P Standards do not apply to EEA branches established in the State (‘inward EEA branches’) and inward freedom of services (FOS) provider. • Part 3 of the Act applies in all cases. • Other Standards imposed under Section 50 (e.g. MCC) may still apply Safeguarding Stability, Protecting Consumers

21. 3.(a) Key Policy Questions – Branches & FOS (5) Two situations must be distinguished: Outward Branches: A person performing a CF at a location outside the State on behalf of a regulated FSP authorised, licensed or registered in the State will be subject to the F & P Standards. • Where an FSP proposes to appoint a person to a PCF at a location outside of the State, it must obtain the CBI’s prior approval in writing. • In so far as is practical the due diligence set out in this Guidance shall apply to CFs in branches of RSFPs located outside the State, other than in circumstances where there is a prohibition to applying the due diligence in local law. In these circumstances the institution should notify the supervision team in writing of the inability to apply the Standards. Safeguarding Stability, Protecting Consumers

22. 3.(b) FAQs - Due diligence for existing PCFs What do RFSPs need to do in relation to existing PCFs? • RFSPs must submit a list of all PCFs in situ as at 1 December 2011, to the Central Bank by 31 December 2011. There is no requirement to submit an IQ for PCFs in situ as at 1 December 2011. Hard copies of the list should be sent to the Supervisory division. • If a person is performing the functions of a PCF on 1 December 2011, s/he must be included on the list. Safeguarding Stability, Protecting Consumers

23. 4. Key Changes - Dates Safeguarding Stability, Protecting Consumers

24. Fitness & Probity – The New RegimeKathy Mooney, Enforcement I, Central Bank of Ireland ACOI lunchtime seminar 14 December 2011.

25. Framework: Act, Regulations, Standards & Guidance • Part 3 of the Central Bank Reform Act, 2010 • Regulations 2011 (S.I. No.437 of 2011) • Amending Regulations 2011 (30/11/11) S.I No 615 of 2011 • Fitness and Probity Standards (F &P) (Section 50 Code) • Final Guidance –Published on 24 November Safeguarding Stability, Protecting Consumers

26. Part 3 of the Central Bank Reform Act, 2010 • 1 October 2010 – Commencement of the Act • Created a harmonised statutory regime for the regulation of persons performing CFs or PCFs in regulated FSPs, with the exception of credit unions Operation: CFs & PCFs: • Power to prescribe CFs and PCFs (s 20 & 22) by regulation • Issue a Code setting out Fitness and Probity Standards. Safeguarding Stability, Protecting Consumers

27. WHO are CFs and PCFs? In September of this year the Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (S.I. No.437 of 2011) were published. Amending Regulations: • CFs - Controlled Functions (Schedule 1, Regulations): CFs 1-11 CF1 : Significant Influence function CF2 : Compliance function CF3-9: Customer facing function CF10-11: Dealing in property function Safeguarding Stability, Protecting Consumers

28. WHO are CFs and PCFs? (Contd.) • PCFs - Pre-Approval Controlled Functions (Schedule 2, Regulations): PCFs 1-41 PCFs are a sub-set of CFs – PCFs are by definition also CFs PCF1-8 : Member of a Board / Committee / CEO PCF9-10 : Member of a Partnership / Sole Trader (FSP) PCF11-17: Senior Management Positions (Core - FSP) PCF18-40: Senior Management Positions (Industry specific - FSP) PCF41:Non-EEA Firm - branches in the State * Note: Change in numbering - PCF9 (‘Office of Secretary’) has been removed. Amended PCF9 (formerly PCF10 (‘Partnerships’) has bee narrowed to exclude limited partners of Investment Limited Partnerships. Safeguarding Stability, Protecting Consumers

29. Key Obligations for the RFSP Financial Service Providers: • Shall not permit a person to perform a CF unless satisfied on reasonable grounds that the person complies with the Standards, and has obtained confirmation that the person has agreed to abide by the Standards (Section 50 Code) (s.21). • Shall not offer to appoint a person to perform a PCF unless the Bank has approved in writing the appointment (s.23). It is permissible to offer to appoint a person on a conditional basis. See slide 53 on ‘statement of intention’. Safeguarding Stability, Protecting Consumers

30. Appointment of PCFs. Note: An RFSP shall not offer to appoint a person until approval has been obtained (s.23 of the Act) but can inform the person of an intention to offer the person a PCF position subject to CBI approval. The statement of intention should include the following paragraph: “This shall not be taken to be an offer for the purposes of Section 23 of the Central Bank Reform Act 2010 unless and until approval is granted by the Central Bank of Ireland”. (Ref. wording at section 11.3 of the Guidance) Safeguarding Stability, Protecting Consumers

31. WHAT – The F&P Standards (Section 50 Code) Specifies the minimum standards which all persons performing CFs or PCFs shall comply with A person to whom the Code applies is required to be (2.2): • Competent and Capable; • Honest, Ethical and to act with Integrity; and • Financially Sound Safeguarding Stability, Protecting Consumers

32. Date of Application of the Standards. • 1. From 1 December, 2011, these Standards will apply to persons performing those controlled functions which are also prescribed as pre approval controlled functions, whether the person is already performing such functions or is proposed to perform such functions. • 2. These Standards will apply to persons appointed to Controlled Functions (other than Pre-Approval Controlled Functions) after 1 March 2012. This is to include new offers of employment and internal transfers/promotions which may involve a Controlled Function role after that date. • 3. The Standards will apply to all persons occupying Controlled Functions from 1 December 2012. Safeguarding Stability, Protecting Consumers

33. Exemptions • Call-Centre Exemption • Matrix Management Structure / Group Functions • Outsourced CFs & PCFs when Outsourced to a Regulated Entity * • Branches & Passporting See section 1.5 of the F & P Standards and Section 3.3 of the Guidance. NOTES: * Where outsourcing to an unregulated entity, the F & P standards apply. • The above identified are exempt from the F & P Standards only. Part 3 still applies. MCC may still apply. Safeguarding Stability, Protecting Consumers

34. The StandardsResponsibilities for Firms and Individuals Firms must: • Be satisfied on reasonable grounds that PCFs and CFs comply with the Standards on appointment; and • Ensure staff abide with the Standards throughout their employment; • Carry out the appropriate level of Due Diligence • PCF – IQ to be submitted but firm has to be satisfied with own due diligence • CF – Guidance on differing levels of due diligence to apply across range of CFs • Establish systems and controls to comply with their obligations and retain supporting documentation (see Guidance) Individuals must: • Agree to abide by the Standards • Are subject to the Central Bank’s powers of investigation, suspension and prohibition. Safeguarding Stability, Protecting Consumers

35. Guidance • Primary purpose to assist RFSPs in complying with section 21 obligations: “A regulated FSP shall not permit a person to perform a controlled function unless: (a) the regulated FSP is satisfied on reasonable grounds that the person complies with any standard of fitness and probity in [the Section 50 Code]; and (b) the person has agreed to abide by [the Section 50 Code]” • Includes guidance on other issues (e.g. CBI approval of PCF appointments) • Sets out the steps which the CBI would expect a regulated FSP to take to satisfy itself on reasonable grounds that a person performing a CF is compliant with the Standards. Safeguarding Stability, Protecting Consumers

36. HOW - Appropriate Levels of Due Diligence • RFSPs should consider responsibilities of the specific function and determine the specific competencies and level of probity that should be expected of a person performing that specific CF in their firm • Level of due diligence may differ depending on the categorisation of the CF (i.e. CF1 and CF2 will attract higher levels of due diligence than CF3-11) • Guidance provided on determining the standard of fitness and level of due diligence appropriate to a particular CF (Sections 14 & 15 of Guidance) • Guidance provided on determining the standard of probity and due diligence to be undertaken (Section 16 & 17 of Guidance) • Additional guidance for CF1 / CF2 and PCF positions (Section 18 of Guidance) • Additional guidance for criminal offences (Section 19 of Guidance) Safeguarding Stability, Protecting Consumers

37. Fitness – Due Diligence (Section 15 of Guidance) The CBI expects RFSPs to undertake the following due diligence when assessing a person’s ‘fitness’: • Evidence of compliance with Minimum Competency Code (MCC), where relevant • Evidence of professional qualification(s), where relevant • Evidence of CPD, where relevant • Record of interview and application • References • Record of previous experience • Record of experience gained outside the State • Concurrent responsibilities (Self-Certification - Directorships / Other Roles) Safeguarding Stability, Protecting Consumers

38. Probity – Due Diligence (Section 17 of Guidance) RFSPs should undertake the following due diligence when assessing a person’s ‘probity’: • Signed written confirmation from individual performing CF as to whether any of the circumstances set out in section 4.1(a)-(k) [‘Honest, Ethical, Integrity’] or section 5.2(a)-(e) [‘Financial Soundness’] of the F&P Standards apply - 4.1(a)-(k): refusal, prohibition, restriction or suspension from right to carry on a business, trade or profession; involuntary revocation of licence, registration or authorisation; conviction for a relevant offence, etc. 5.2(a)-(e): default on a compromise or scheme of arrangement; unsatisfied judgment debt, etc. • Useful Template for Written Confirmation: Online IQ Questions 5.1-5.21 • Where one or more of the circumstances apply, the individual must be in a position to demonstrate that his or her ability to perform the CF is not adversely affected to a material degree. Safeguarding Stability, Protecting Consumers

39. Probity – Due Diligence (contd.) Process • If individual confirms one or more circumstances set out in section 4.1(a)-(k) & 5.2(a)-(e) of the F&P Standards applies, RFSP should request documentation relevant to the matter. • Assessment made by RFSP based on all information received as to whether matter is material to CF. Relevant issues include seriousness, surrounding circumstances, repetition, duration of behaviour, etc. RFSP to document this assessment. • If material, RFSP to make all reasonable enquiries arising on foot of information provided by individual. • RFSP not required to remove or suspend a person from acting as a CF solely on the basis that one or more of the circumstances set out in sections 4.1 or 5.2 of the F&P Standards may have occurred. Key question is whether the presence of those circumstances adversely affects the individual’s ability to perform the specific function to a material degree. • RFSP cannot permit person to continue in CF where it is not satisfied on reasonable grounds that the person complies with the F&P Standards. Safeguarding Stability, Protecting Consumers

40. Additional Due Diligence – PCFs & CF1/2 (Section 18) • Section 4.1(c): Consult publicly available sources to confirm for own records that person has not been the subject of sanction or other regulatory action. • Section 4(1)(e)-(f): Requires CRO Check (Restrictions and Disqualifications). • Section 4(1)(j): Requires CFs to confirm in writing whether, to the best of their knowledge, any such circumstances have arisen (Disciplinary investigation/action). • Section 5.2(c): Consult publicly available sources whether a judgment debt has been registered against a person. Safeguarding Stability, Protecting Consumers

41. Data Protection – How long should information be retained? • RFSPs should retain information for duration of performance of CF or PCF by individual concerned; • CF1 & CF2, PCFs: Minimum of 6 years post end of performance of function; • CF3-11: Minimum of 2 years post end of performance of function (without prejudice to any other requirement imposed by law). Safeguarding Stability, Protecting Consumers

42. Appendix 2 to the Guidance – Employee Agreement Agreement of employee pursuant to section 21(b) of the Central Bank Reform Act 2010 (the “Act”) Section 21 of the Act provides as follows: (1) A regulated financial service provider shall not permit a person to perform a controlled function unless- (a) the regulated financial service provider is satisfied on reasonable grounds that the person complies with any standard of fitness and probity in a code issued under section 50, and (b) the person has agreed to abide by any such standard. I confirm that I have read the code setting out Standards of Fitness and Probity issued by the Central Bank of Ireland pursuant to section 50 of the Act (the “F&P Standards”) and I confirm that I comply with the F&P Standards. I agree to abide by the F&P Standards. I agree to notify the regulated financial service provider without delay if for any reason I no longer comply with the F&P Standards. ___________________ Employee Signature Safeguarding Stability, Protecting Consumers

43. Points to Note: • Section 21 is a continuing obligation. It is not a one-off obligation discharged once due diligence has been undertaken upon commencement of the regime or in relation to an initial appointment to a CF or a PCF. • RFSPs should request persons performing CFs to notify any material changes in respect of initial due diligence carried out (see section 21 of the Guidance and wording of employee declaration at Appendix 2). • Where RFSP becomes aware that there may be concerns regarding the fitness and probity of a person performing a CF, CBI expects RFSP to investigate concerns and take action as appropriate without delay. RFSP should also notify CBI of any such action. • Failure to comply with s.21 is a prescribed contravention which may result in ASP proceedings (see section 1.9 of the Guidance). Safeguarding Stability, Protecting Consumers

44. New PCF Appointments on or after 1 December 2011 All such appointments will require the prior written approval of the CBI (see Section 8 of the Guidance) • RFSPs should conduct due diligence before proposing a person for appointment to a PCF. At a minimum, RFSP should comply with sections 14 & 15 (‘Fitness’), 16 & 17 (‘Probity’) and 18 (‘Additional’) of the Guidance. • Process will require submission of online IQ via the Central Bank’s website. RFSPs will be provided with ‘User Accounts’ for this purpose. Safeguarding Stability, Protecting Consumers

45. New PCF Appointments on or after 1 December 2011 (Contd.) • Approval process will be managed by the Regulatory Transactions Division (RTD), a new division within the Central Bank established to centralise, streamline and automate regulatory transactions. • The Head of the Regulatory Transactions Division is Alan Briscoe and the Manager of the new online IQ project is Michael Beagon. • Any problems or queries regarding the new online IQ should be addressed to the following address: fitnessandprobity@centralbank.ieRFSPs are encouraged to register for RTD’s Bulletins on the CBI website by subscribing to the RSS feed for Fitness and Probity. Safeguarding Stability, Protecting Consumers

46. What is the position where a person has, prior to 1 December, submitted an application for approval to the Central Bank for the exercise of a function which after 1 December 2011, would be a PCF function. • The person is dealt with under the ‘old ‘ regime, and will not have to apply for the CB’s pre-approval under Section 23 of the Act. • The list of PCFs to be submitted by 31 December 2011 need only list those persons who are performing the function of a PCF as at 1 December 2011. Safeguarding Stability, Protecting Consumers

47. Due diligence for existing PCFs What steps should RFSPs  take before submitting their list of existing PCFs? • Check the list of PCFs in Schedule 2 of the Regulations • Create a record of persons performing PCFs in your firm as at 1 December 2011. • If you are unsure whether an employee is performing a PCF, please contact a member of your supervisory team in the Central Bank Safeguarding Stability, Protecting Consumers

48. Due diligence for existing PCFs (Contd.) • Submit PCF list to RFSP’s Lead Examiner / Supervisor in CBI . • By 31 March 2011, CEO/Partner/Sole Trader to confirm the following to the CBI: • RFSP has performed the due diligence; • the RFSP is satisfied that the PCF is compliant • they have obtained the PCFs written confirmation that they agree to abide by the Standards. Safeguarding Stability, Protecting Consumers

49. Outsourcing of a PCF • Where the RFSP authorised in the State outsources a PCF to a regulated entity, the RFSP will be excluded from the requirement to obtain the CBI prior written approval to the appointment of the PCF (Regulation 12A). • Note: where a function is outsourced to a regulated entity, the F & P Standards do not apply. Safeguarding Stability, Protecting Consumers

50. Key Dates Safeguarding Stability, Protecting Consumers