13/03/2024
Briefing

Terms of Reference for the Independent Review

The review will be led by Andrea Enria (former Chair of both the ECB’s Supervisory Board and the European Banking Authority). His report (including recommendations) is to be presented to the Central Bank Governor in Q3 2024.

This follows the announcement by the Central Bank of its decision to commission an independent review in light of the decision of the Irish Financial Services Appeals Tribunal (IFSAT) in AB v The Central Bank of Ireland (31 January 2024).

According to the Terms of Reference, the review will focus on how the F&P framework has been implemented. The reviewer will be asked to look at:

  • The effectiveness of the performance of the F&P framework (quality and quantity of work undertaken; the current structure; and internal governance structures).
  • Whether the standards that the Central Bank applies to F&P assessments are broadly consistent with the comparable F&P frameworks in other jurisdictions.
  • How the Central Bank’s F&P functions are carried out having regard to organisational priorities and available resources (calibration; efficiency; and timeliness).
  • How the transparency of the activities carried out as part of the Central Bank’s F&P functions could be improved.

The reviewer will also be asked to suggest how the way in which the Central Bank performs its F&P functions could be made more effective (e.g. changes to reporting or organisational structures, additional training etc.)

Commentary

Given the seriousness of the issues raised in the IFSAT decision, the wider implications and read-across potential of that decision, the Central Bank’s demonstrated commitment to public consultation and its strategic theme of being “open and engaged”, it had been hoped that a public consultation would form part of the review to ensure that it is comprehensive and is viewed as credible by industry. However, there is no mention of a public consultation in the Terms of Reference. Hopefully the reviewer will take the opportunity to speak to industry participants and advisors as part of their work, and not just “senior management across the Central Bank and other staff involved in F&P processes and decisions” as the Terms of Reference state.

Below, we look back at the IFSAT decision, highlight key principles to be extrapolated from that decision, and highlight broader questions arising from the IFSAT decision that, in our view, should be considered as part of the independent review.

The IFSAT Decision

The IFSAT decision was given in an appeal of a Central Bank’s decision of 5 December 2022 to refuse applications for an individual, AB, to be approved for two pre-approval controlled functions (PCF) positions with a regulated investment fund: non-executive director (PCF2) and chair (PCF3). Under the Central Bank Reform Act 2010, written approval from the Central Bank is required before a person can be appointed to perform a PCF role (as part of the F&P regime).

IFSAT found that the Central Bank’s decision-making process involved “fundamental procedural flaws”, with AB denied fair procedures at each stage of the application process, and that the Central Bank’s procedures “…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 audi alterem partem [hear the other side]”. IFSAT remitted the applications to the Central Bank for reconsideration.

As part of its decision, IFSAT made several findings in respect of key procedural aspects of the applications: the assessment interview; the specific interview; and the basis for the final decision made by the Central Bank.

  • The Interviews: Many of the concerns highlighted by IFSAT in respect of the assessment interview applied equally to the specific interview. In each case, IFSAT found that the Central Bank did not give AB fair notice of what would be discussed at the interview.
  • The Assessment Interview: IFSAT noted that the issues covered in the minutes varied from the generic description notified to AB of the topics that the Central Bank planned to cover. Some questions were “unnecessary granular and sometimes unclear”, and the interviewers had “an intense preoccupation” with events relating to a regulated firm with which AB had previously been involved which should have been made clear in advance. The use of a blank screen by one interviewer was noted by IFSAT as being “very striking”.
  • The Specific Interview: IFSAT observed that the flaws from the assessment interview fed into the specific interview. The invitation was “broad and unspecific” and again AB was not given full notice of the issues that were to be discussed. A “white folder” of documents was sent to AB the afternoon before the specific interview, leaving him very little time to familiarise himself with it. While he had instructed a solicitor, the Central Bank did not send that folder to his solicitor, which IFSAT found surprising. The specific interview lasted approximately 8 hours and, while there were several short breaks, those breaks did not give AB adequate time to consult with his solicitor. AB was not given the opportunity to refer to the “white folder” during the specific interview.
  • The Central Bank’s Decision: IFSAT found that the Central Bank’s decision was based on information which came out of a flawed interview process. Additional information was available to the decision-maker (who was not involved in the interview process) which was not adequately considered (this included material supplied by AB in which he rebutted the interview process, challenged the fairness of the procedures, and argued that he had not been given fair notice). Instead, the decision-maker focused only on AB’s knowledge of regulations and his performance at the interviews. In particular, IFSAT noted that the “…absence of a determination in relation to this significant, countervailing and rebuttal evidence [supplied by AB] is more significant in light of the fact that there was, for that reason, a failure on the part of the decision-maker to give reasons for her decision.”

A notable overarching observation made by IFSAT was that the Central Bank’s position regarding the standard that AB needed to meet “…was never made clear…[the] expert evidence also begs the questions of precisely what standard is expected of an applicant such as [AB] in practice.”

Commentary: Key principles to be extrapolated from the IFSAT decision

The Central Bank’s ‘gatekeeper’ role is critically important to protecting the interests of consumers and investors who interact with regulated firms and the market as a whole. IFSAT’s decision underlines this but clarifies, in considerable detail, the fair procedures parameters within which this role must be exercised by the Central Bank. In particular, IFSAT made clear that the Central Bank must act in a manner that is independent, impartial and dispassionate, and must adhere to the law and principles of fair procedures. In meeting these standards, it is the substance of the fair procedures applied by the Central Bank that matters, not their mere appearance.

The existence of these parameters was not in dispute in the case. Instead, the case hinged on whether the process adopted by the Central Bank in practice adhered to the high standards required. This was clearly hotly disputed, as borne out by the extent of the evidence adduced by both sides and the length of IFSAT’s decision (which runs to over 90 pages).

There are a number of key principles to be extrapolated from IFSAT’s decision for firms and PCFs regarding a Central Bank application process:

  • Fair notice of issues to be covered at interview: The Central Bank is entitled to ask probing questions at interview, but a PCF applicant is entitled to fair notice of the issues or topics intended to be covered by the Central Bank. The notification of interview should cover the type and depth of issue which the Central Bank intends to cover – broad and unspecific notifications are not sufficient.
  • Fair notice of documents to be referred to at interview: Insofar as the Central Bank intends to refer to documents or other materials at interview, applicants (and any solicitors acting for them) should receive sufficient advance notice of such materials, the opportunity to review those materials beforehand and the opportunity to refer to materials at interview.
  • Fair questions to be put at interview: A person subject to an interview is entitled to be questioned fairly. The questions raised at interview should be clear and should not be overly complex or granular.
  • Access to Interview Notes / Minutes: Applicants should receive the Central Bank’s notes of the interview in a timely fashion and be given the opportunity to make submissions with a view to correcting or supplementing those notes, as necessary.
  • Fair hearing and the Central Bank’s duty to give reasons: Applicants are entitled to respond to issues raised and make submissions as part of the process and the Central Bank is obliged to meaningfully engage with the materials submitted and submissions made by applicants. There is a fundamental difference between mentioning or recording issues which were raised or submissions which were made, and actually addressing the matters contained in those materials and submissions substantively (e.g. by responding and giving reasons why they were rejected). This does not require a lengthy discursive description by the Central Bank of its position on every point raised, but the Central Bank should set out sufficient analysis of the main issues and submissions made, and a clear statement as to why they were rejected, as the case may be.

Commentary: Broader questions to be considered as part of the Independent Review

The Central Bank’s decision to commission the independent review of its F&P approval process is to be welcomed. It is hoped that the review will consider the above issues in depth, together with broader questions arising from the IFSAT decision such as:

  • Scope: The appropriate scope of the F&P approval process, including where it involves scrutiny of an applicant who has worked at a firm where there have been allegations of regulatory non-compliance.
  • Conflict: How the Central Bank reconciles overlap or conflicts between its statutory functions as investigator, regulator and decision-maker in the F&P approval process.
  • Timescales: The Central Bank’s timescales for dealing with applications and whether it is obliged to make decisions on applications in a timely fashion and not leave applications ‘in limbo’ for extended periods of time. The Central Bank gave evidence in this case that, in 2022, there were as many as 3,500 PCF applications, of which the majority (some 3,000) were approved speedily. It also stated that its “service standard” is that 85% of such applications should be approved within 12-15 days and that up to 98% of such applications were dealt with within that timeframe. However, this evidence did not appear to address the Central Bank’s timing for and approach to the remaining 2 -3 % including applications that did not receive any response from the Central Bank at all.

The issues underlying the IFSAT decision and the processes adopted by the Central Bank are not unique to the F&P approval process and will be familiar to anyone who has advised or supported individuals in dealings with the Central Bank, for example in relation to interviews conducted in connection with the Administrative Sanctions Procedure. The principles of natural justice and fair procedures enunciated in this decision should apply equally to all regulatory and supervisory functions exercised by the Central Bank both in respect of firms and individuals. It is hoped that the result of the IFSAT decision will be considered by the Central Bank in a wider context. If that is the case, the outcome of the independent review should have important implications, in particular, for the exercise of powers by the Central Bank pursuant to its Administrative Sanctions Procedure.