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Thursday, 25th April 2024 |
| Financial services directors to go under the spotlight |
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| IFSRA has released a consultation paper to seek the views and opinions of industry participants and the general public on a proposed new regime for determining whether or not directors and managers within the financial services sector have the requisite skills and qualities to perform their functions effectively. Paul Ryan and Tom Carney examine the implications for new and incumbent directors. |
In the wake of recent international financial scandals, the national prudential regulatory authorities of EU Member States have turned their focus to the calibre of person holding positions of seniority within the financial services sector.
The Irish Financial Services Regulatory Authority (IFSRA) in directing its attention to the fitness and probity of directors and managers of financial service providers has now issued Consultation Paper CP11 entitled: ‘Financial Services Regulation: Comprehensive Framework of Standards for testing the probity and competence of directors and managers of Financial Services Firms’ (Consultation paper). The purpose of this document is to seek the views and opinions of industry participants and the general public on a proposed new regime for determining whether or not directors and managers within the financial services sector have the requisite skills and qualities to perform their functions effectively.
It follows that the Irish test for examining the fitness and probity of directors of financial service providers may be about to undergo a radical overhaul. It may be the case that directors will soon be subjected to increased scrutiny of their employment history, qualifications, experience and general background. The extent to which the test of fitness and probity undergoes change will be dependant upon the extent and nature of the comments which interested parties feed back to the financial regulator as part of the consultation process.
In this article, we will (i) set out the current test for fitness and probity, (ii) seek to identify the salient features of the test for fitness and probity of directors proposed by the financial regulator in its consultation paper and (iii) examine the challenges and likely impact the test proposed by the financial regulator may have on the financial services industry in Ireland.
The current test for fitness and probity
Currently, before a new director or manager is appointed to a financial services firm authorised or supervised by the financial regulator he/she must undergo a process to demonstrate to the satisfaction of the financial regulator that he/she is sufficiently fit to hold the position of director or manager of an Irish authorised financial service provider. The standards imposed by the financial regulator on new directors/managers derive from EU and Irish legislation, which require that all directors of regulated financial services firms meet required standards of competence and probity. These standards are generally termed the ‘fit and proper’ standards.
The term ‘fitness’ in EU and Irish law encompasses the extent to which a person appointed as a director or manager has the necessary qualifications, skills and experience to perform the duties of that position.
The term ‘probity’ requires that a person appointed to the position of director/manager possesses the requisite degree of honesty and fairness to discharge the functions of his or her position ethically.
It is fair to say that the current ‘fit and proper’ standards are enforced by the financial regulator not only as against new directors and managers but also as against existing directors and managers of regulated financial service providers. The regulator’s process of checking the fitness and probity of directors and managers of financial service providers varies depending upon whether the provider is a bank, insurance company, securities firm, investment firm or collective investment scheme. IFSRA’s methodology for appraisal, however, is broadly similar, across the sector. Directors and managers are expected to complete an individual questionnaire, which may vary, however, from one sector to another. Completed forms are examined and validated by relevant departments within the financial regulator.
In situations where the financial regulator has reason to question the fitness or probity of a director or manager, the authorised service provider or the financial regulator may take action with a view to protecting the interests of consumers. The powers of the financial regulator include a power to remove a person from his or her position.
Currently, the fit and proper test is applied to all directors and managers at the level of executive board. It is not applied to managers below that level. Neither is the test applied uniformly across the various strata of the financial services sector.
The salient features of the proposed test
The financial regulator has set out in its consultation paper the substantive elements of its proposed test for fitness and probity and has provided for a new procedural framework. The consultation paper identifies how the proposed test will operate in practice and specifies the envisaged role of the financialregulator.
Central to the successful operation of the proposed test is the participation and ‘buy-in’ of firms authorised by the financial regulator. Authorised firms will be expected to prioritise the proper vetting and appointment of fit and proper directors and managers. The coalface for the effective implementation of the proposed ‘fit and proper’ test will be the authorised firms themselves, which will be obliged to ensure that successful candidates meet all the requirements of the test set by the financial regulator.
Candidates will be obliged to complete individual questionnaires, which require full details of all relevant qualifications and experience. Essential information including details of sanctions, censures and criminal convictions must be detailed, vetted and examined. So too will the financial history of all candidates. It appears that a positive duty will be imposed on financial service providers to verify information provided to them by a candidate. Only when the financial service provider has satisfied itself that the verification process has been discharged properly, is it expected to forward the completed individual questionnaire to the financial regulator with a proposal to appoint the candidate to a relevant position.
While a positive duty is imposed on the financial service provider to verify the information provided to it by a candidate, no equivalent obligation is imposed on the financial regulator when it receives individual questionnaires and proposals from the service provider. Instead, the financial regulator may carry out checks to verify the information provided. Only when the agreement of the financial regulator is received by the service provider may the appointment be confirmed.
In essence the proposed test for fitness and probity encapsulates substantive and procedural aspects. An appointing firm must demonstrate a sound selection process for directors and managers. The financial service provider must ensure that all information required in the individual questionnaires is actually received by it. It must carry out a full verification of the information received and forward its request for appointment with all information to the financial regulator. No appointment of new directors or managers may be effected without the agreement of the financial regulator. The new test through its procedural dimension will ensure that the substantive requirements of the current/old test are thoroughly met.
Challenges and the likely impact of the proposed test
The financial regulator in its consultation paper has emphasised the need for a common ‘fit and proper’ test for all firms in the financial services sector, with a view to ensuring that all firms, directors and managers regulated by it should be subject to consistent standards. In essence, the financial regulator wishes to introduce a degree of legal certainty to the procedural and substantive application of rules to ensure the probity of those responsible for the management of our financial services sector.
At present, as a result of differences which derive from the application of different EU/Irish standards to various categories of financial services firms the application of the current ‘fit and proper’ test, in terms of emphasis and procedure has varied considerably across the Irish financial sector. The EU/Irish legal bases which ground the rules applying to the different categories of financial services firms vest in the regulator varying powers and duties to enforce of the current fit and proper test. A revised legal environment for the regulatory implementation of the test will provide for uniformity of application across the sector. Insofar as a revised framework for the ‘fit and proper’ test would introduce legal certainty and consistency to the procedures and rules applicable, the initiative of the financial regulator is welcome.
One can envisage challenges, however, to the effective operation of the proposed test. Our understanding of the framework proposed is that the lawful appointment of new directors and managers will be dependent on the express approval of the financial regulator. Adequate resources must be dedicated by the regulator to the units responsible for approving appointments in order to avoid delays to the efficient running of business, including key decision-making. One can envisage particular challenges in situations where due to the death or resignation of an incumbent director, appointments require to be made expeditiously. Administrative delays should be minimised in order to facilitate the proper functioning of corporate business, while meeting all the objectives of the framework proposed by the regulator.
The proposed framework should operate to ensure that compliance with rules relating to minimum numbers of directors of private and public companies are safeguarded.
In order to avoid the negative effects of administrative delays should they arise, there may be merit in the framework accommodating a well-defined time limit within which confirmation of appointments from the regulator must issue. Where the financial regulator fails to confirm an appointment within a defined time limit, where no reason for the delay is communicated to the applicant, approval through efflux of time and the silence of the financial regulator should operate on the expiry of the deadline.
It would be of practical assistance to both regulated financial service providers and the financial regulator itself if a blue print code of ethics were adopted by the regulator. This blue print could operate as a useful reference point in a framework designed to implement common standards for fitness and probity across the financial services sector.
It remains to be seen how liability for negligent appointment of managers and directors will be allocated in a future environment where new fitness and probity rules operate but where loss is occasioned as a result of either an appointing company or the financial regulator fails to discharge adequately their respective responsibilities as regards vetting and appointment. |
Paul Ryan is a director and Tom Carney is a solicitor in the regulatory & compliance unit in Dillon Eustace Solicitors.
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| Article appeared in the April 2005 issue.
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