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New Fitness and Probity Regime

AUTHOR(S): Joe Beashel, Michael Jackson
PRACTICE AREA GROUP: Asset Management and Investment Funds, Regulatory Risk Management and Compliance, Financial Regulation
DATE: 30.11.2011

Background

The Central Bank of Ireland (“Central Bank”) has introduced a new regime to regulate the “fitness and probity” of directors, senior managers and other office holders of regulated financial services providers. Affected functions are categorised into pre-approval controlled functions (“PCF”) and controlled functions or (“CF”). The most senior functions such as board members are in the PCF category. The new requirements will apply to both new and existing (“PCFs”) from 1 December 2011 and to new CFs from 1 March 2012. Persons currently occupying CF functions have until 1 December 2012 to comply.

The requirements are set out in regulations (SI 437 of 2011 the “Regulations”) and Standards of Fitness and Probity (the “Standards”) issued under Part 3 of the Central Bank Reform Act 2010 (the “2010 Act”).

Revised Guidance

To coincide with the publication of the Regulations and Standards, the Central Bank issued draft guidance for industry and responses to the draft guidance were requested by the end of September. On 23 November 2011, the Central Bank held an information session on the new regime and issued revised guidance which addresses issues raised during the consultation process. Some welcome clarifications in the revised guidance include:

  • Where outsourcing of a PCF is to a regulated financial services provider, prior approval is not required and the Standards will not apply to that function. Therefore, the Standards will not now apply where PCFs (eg head of transfer agency and head of accounting valuations) are preformed, on an outsourced basis, by a regulated fund administrator, custodian or investment manager.
  • The deadline for completion of due diligence in respect of individuals in PCFs as at 1 December 2011 has been extended from 31 December 2011 to 31 March 2012.
  • The Company Secretary function will be removed from the categories of PCF. (However, where an individual in the position of Company Secretary exercises significant influence, they will continue to be captured under CF1.)

The Central Bank is due to publish revised Regulations and Standards clarifying both the scope and application of the regime before 1 December 2011.

The New Regime

The new requirements supplement the existing requirement of the Central Bank for “fit and proper directors” of investment and fund management companies, involving the completion of a detailed individual questionnaire and provision of appropriate references. The Standards require persons performing PCFs to be competent, capable, honest, financially sound, and to act with integrity.

From 1 December 2011 existing and new staff in PCFs will be subject to the Regulations and Standards. Firms are required to draw up a list of individuals in situ in PCFs on 1 December 2011 and to notify the Central Bank of this list by 31 December 2011. Confirmation in writing to the Central Bank that due diligence in respect of existing PCFs has been carried out will be required by 31 March 2012.

The guidance sets out the approval process for PCFs which, similar to the regime currently in place for directors, requires the submission of an individual questionnaire to the Central Bank. It also indicates the type of due diligence that regulated financial service providers should carry out in relation to persons proposed for or holding PCFs.

In line with the new regime, the Central Bank has issued a revised form of Individual Questionnaire (IQ) which will apply from 1 December 2011. Appointments to the position of director or senior manager within financial service firms are required to complete this questionnaire which must be endorsed by the financial service firm and submitted for approval to the Central Bank. The online application form will replace the current paper form of IQ. The new IQ is accompanied by a User Manual which was published on 30 November 2011. The user manual provides guidance on the use and navigation of the IQ Fitness and Probity application and provides general guidance on each of the 13 sections of the application followed by question-specific information for each section.

If you would like clarification or advice on the new fitness and probity regime, please get in touch with your usual Asset Management and Investment Funds Group contact.

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