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The Central Bank establishes an Inquiry into a person formerly concerned in the management of a Regulated Financial Services Provider

On 10 November 2021, the Central Bank of Ireland (the “Central Bank”) announced that it is establishing an inquiry under its Administrative Sanctions Procedure (“ASP”) to investigate the actions of a person formerly concerned in the management of a regulated financial services provider (“RFSP”).  The Central Bank has “determined that it has reasonable grounds to suspect” that this individual participated in the commission of suspected prescribed contraventions in respect of the Consumer Protection Code 2006.  The Central Bank has not yet formally named the individual, pending a decision by the inquiry whether to proceed with the inquiry in public or private.  The default position under legislation is that an inquiry will be held in public unless the Central Bank agrees or decides it should be held in private.  Whilst the Central Bank made a decision not to name the individual, the media was not prohibited from disclosing the individual’s identity. 

The Central Bank has for some time faced public scrutiny, in the media and before the Joint Committee on Finance, Public Expenditure and Reform, regarding its intentions to seek to hold individuals to account in connection with the Tracker Mortgage Examination.  Now, having concluded a settlement with the relevant RFSP, for admitted regulatory breaches relating to the Tracker Mortgage Examination, it seems the Central Bank moved to commence proceedings against the individual now subject to this inquiry.  This sequence of events is likely a consequence of what is known as the “participation link” whereby a prescribed contravention must have been found against the RFSP before an individual concerned in the management of that RFSP can be sanctioned.  

Many of the fair procedures issues, raised in our earlier commentary, on the clash between financial services regulation and Irish employment law, are likely to come to the fore in this inquiry.  For individuals the stakes are high and the consequences of an adverse finding could be very far-reaching.  The fair procedures issues arise as a result of Irish employment and constitutional law principles.  We understand that these types of issues are likely to have been significant considerations for the legislature in drafting the Central Bank (Individual Accountability Framework) Bill 2021 (the “Individual Accountability Bill”).  These issues must also be carefully navigated by regulated financial services employers.   

Not the First Inquiry of its Kind 

Although Central Bank inquiries are relatively rare, it is not the first inquiry into a person formerly concerned in the management of a RFSP.  The Central Bank commenced an investigation into Irish Nationwide Building Society (“INBS”) and certain former senior executives of INBS (“Former Senior Executives”) in 2010.  INBS entered into a settlement with the Central Bank in 2015, and the Central Bank then referred the cases against the Former Senior Executives to inquiry.  At this inquiry, the Central Bank noted it had “reasonable grounds” to suspect that the Former Senior Executives participated in a series of alleged regulatory breaches between 2004 and 2008, which centred around seven different aspects of INBS’ commercial lending and credit risk management processes. 

In late 2019, the Central Bank announced that one Former Senior Executive, Mr Michael Fingleton (former Managing Director and CEO of INBS) would no longer be subject to inquiry due to ill health.  The Central Bank did however continue to pursue other key individuals, and in June 2021 it fined a Former Senior Executive, Mr Gary McCollum (former Head of Commercial Lending (UK) and UK Branch Manager (Belfast and London)) €200,000 and disqualified him from being a person concerned in the management of a Central Bank regulated financial services firm for 15 years.  Other Former Senior Executives reached settlements with the Central Bank and one Former Senior Executive remains subject to inquiry.

Challenge to the Central Bank’s Administrative Sanctions Procedure (ASP)

During the inquiry in to the Former Senior Executives of INBS, two of those Former Senior Executives initiated High Court challenges against the Central Bank’s inquiry process for a myriad of reasons but which were largely focused on issues of fair procedures.  Both of those challenges failed in the High Court with subsequent appeals to the Court of Appeal also failing.  With these failed challenges, the Central Bank has a strengthened confidence in its process and it was to be expected that further inquiries into current and former management of RFSPs would be established by the Central Bank.  

However, the Central Bank has been committed to achieving changes to legislation to overcome the challenges it faces in pursuing enforcement action against persons who play critical roles in financial services, and who have failed to meet the regulator’s expectations.  The long awaited publication of the Individual Accountability Bill earlier this year is a key win for the Central Bank in this regard.  The bill seeks to address some of the perceived gaps in the Central Bank’s ASP process and will strengthen the process to ensure that the Central Bank will be able to hold individuals directly accountable for their own misconduct and not solely where they have participated in a RFSP’s regulatory contravention1.  

Whilst this new inquiry will be conducted outside the incoming regime, the fact that an inquiry has been commenced may be viewed as an important, although not unexpected, marker in terms of the Central Bank’s approach to individual accountability in financial services.  It is likely that the Central Bank’s investigative process and approach to individual accountability will come under public scrutiny during the course of the inquiry (if it is ultimately held in public).  No doubt also that RFSPs, their senior executives, PCFs and CFs will be paying close attention to see whether the inquiry relates to conduct which experienced individuals in the sector would reasonably agree constitutes culpable misconduct or whether its focus is on the type of error, omission or misstep which could befall any manager, even those acting most diligently, honestly and responsibly. 

As such, the Central Bank’s approach with respect to this inquiry may well be construed as a harbinger for how it will supervise and enforce compliance with the Individual Accountability Framework (“IAF”) and the Senior Executive Accountability Regime (“SEAR”).  Certainly senior individuals in the financial services sector welcome measures intended to embed and promote good conduct and culture in organisations, however, they are to some degree apprehensive of precisely how the IAF will impact on their roles and responsibilities.  Our experience is that our clients with presences in jurisdictions where a similar regime is already in force have found it to be a positive development, when approached in the right way.  The reasonable hope for Irish regulated firms and individuals now is that this inquiry will serve as a reminder and reassurance that the Central Bank’s express intention is to pursue its objectives in a proportionate manner, and that IAF and SEAR will, ultimately, bring about positive reinforcement of the compliance culture that the vast majority of firms and individuals in the sector practice and promote.  

This article was co-authored by partners, Karen Reynolds, Bryan Dunne, Joe Beashel and senior associate, Aishlinn Gannon and contributed to by trainee solicitor of Matheson’s financial regulation and investigations team.  For further information, please contact any one of them or your usual Matheson contact.

1The participation link remains in relation to the duty of responsibility imposed on individuals performing “senior executive functions” to take reasonable steps to avoid their firm committing or continuing to commit a “prescribed contravention” in relation to the areas of business for which they are responsible. The breaking of the participation link applies to conduct standards which will be directly enforceable against individuals performing a Controlled Function (CF) and / or a Pre-approval Controlled Function (PCF) role.