27/08/2021 Briefing

Scope and breaking of the “participation link”

As discussed in our recent briefing, the General Scheme provides that the scope of persons who may be subject to the ASP will be amended with the removal of the concept of a “person concerned in the management” of RFSPs (albeit that such persons will remain liable for participation in the actions of an RFSP before the new legislation comes into force). The scope of those subject to the ASP will be extended to persons performing controlled functions and persons performing pre-approval controlled functions in RFSPs.

In addition, and as expected, the General Scheme envisages the removal of the ‘participation link’ whereby an RFSP must first be found to have breached financial services legislation before relevant individuals can be pursued by the Central Bank. As a result, the Central Bank would be able to take direct enforcement action against individuals falling within the updated scope.

These amendments are intended to allow the Central Bank to: (i) enforce the Standards for Business, the Common Conduct Standards and the Additional Conduct Standards that are to be introduced; and (ii) ensure that those who are subject to the individual accountability framework are also subject to the associated enforcement process in order to prevent delays in finalising individual investigations and/or inquiries.

 

Enforcement Investigations

The General Scheme outlines various amendments to the Central Bank Act 1942 (the 1942 Act) that will put various features of enforcement investigations in the context of the ASP framework on an express statutory basis. The General Scheme provides that the Central Bank will be able to commence an investigation where circumstances suggest that a person has committed or participated in a prescribed contravention. At the conclusion of an investigation, the Central Bank will be required to prepare a report to be provided to the person who is the subject of the investigation.

Any inquiry that follows an investigation will have regard to the investigation report produced by the Central Bank. The consideration of the investigation report by the inquiry could avoid the need for the inquiry to re-investigate fundamental matters coming before it and may also prevent delays for investigation subjects. By having regard to the investigation report and subsequent submissions, it is envisaged that issues and conflicts of fact will be identified at an early stage, leading to more focused and efficient inquiry hearings.

 

Presentation of results of an investigation

In order to improve efficiency and reduce the costs and time involved in an inquiry, the General Scheme provides that the Central Bank will be able to designate a person to present the matters underlying the referral to the inquiry to the persons conducting the inquiry. In order to give adequate protection to an inquiry subject’s constitutional right to fair procedures, the designated person will have no involvement in decision-making and the persons conducting the inquiry will not be bound by any matter presented by the designated person.

 

Documentary evidence presumed to be evidence of truth of its contents

The ASP amendments include a statutory presumption that documentary evidence shall be admissible as prima facie evidence of the truth of its contents.

However, it will be possible for this presumption to be displaced following an objection by an inquiry subject or by a motion of the inquiry if the inquiry is of the opinion that the admission or exclusion of the evidence will result in unfairness to the inquiry subject. Additional provisions akin to sections of the Civil and Criminal Law Miscellaneous Provisions Act 2020 are also to be adapted for the ASP in order to bring the process in line with similar inquiries.

 

Sanctions

Currently, the 1942 Act provides for sanctions including disqualification and monetary sanctions. The General Scheme outlines amendments that will assist the Central Bank in imposing sanctions that are more proportionate and flexible.

 

Disqualification

Instead of having a one-size-fits-all approach, the General Scheme provides that the Central Bank may specify such a period and conditions of disqualification as it deems appropriate having regard to the circumstances of the individual and the case. The Central Bank’s powers would include disqualifying an individual: (i) from the controlled function in issue; or (ii) any controlled function in a specified RFSP; or (iii) any controlled function in any RFSP.

 

Monetary Sanctions

Guidelines in respect of monetary sanctions imposed on individuals are due to be introduced which will envisage the Central Bank taking the following into account when assessing a sanction:

  • The nature, seriousness and impact of the contravention concerned;
  • The conduct of the individual concerned during and after the contravention;
  • The relevant previous record of the individual concerned; and
  • The financial position of the individual concerned.

These considerations are similar to the guidance that is already in place and the General Scheme provides that the Central Bank may publish further guidelines in relation to sanctions. It is intended that the amendments in respect of sanctions will assist the Central Bank in imposing sanctions that are dissuasive, but proportionate, and take all relevant circumstances into account. The Act will also be amended to provide the High Court with the ability to confirm any sanctions imposed pursuant to an ASP. It is not yet known if the guidance will include an assessment of the quantum of monetary sanctions. In an ideal scenario, such guidance would be provided.

 

Disclosure of Privileged Material to the Central Bank

The General Scheme details the introduction of a privilege “safe harbour” that will allow individuals to voluntarily submit privileged legal material to the Central Bank, as part of the ASP, without such disclosure constituting a waiver of privilege vis-à-vis third parties generally. This provision will not provide the Central Bank with the power to compel such a disclosure and appropriate provisions will be put in place to protect the disclosure from any litigation or disclosure requests by third parties (such as requests under the Freedom of Information Act).

However, in the event of the material being used as evidence in an investigation or inquiry, the General Scheme envisages that it may be disclosed to an individual who is not the privilege owner.

The General Scheme suggests that these “safe harbour” amendments will only apply prospectively to future investigations and inquiries commenced after the publication of the new legislation and therefore it would appear that the “safe harbour” will not extend to investigations that have already commenced under existing legislation prior to the commencement of the new legislation.

 

Balancing Protections and Efficiency

In order to ensure that individuals’ constitutional rights and the Central Bank’s powers are appropriately balanced, the amendments to the ASP include placing aspects of the ASP on a statutory footing to clarify the process and to introduce protections for the subjects of an investigation/inquiry, as well as witnesses and inquiry members.

Furthermore, some amendments have been introduced to improve efficiency and more proportionate responses to issues that may arise within an inquiry. These amendments include:

  • The right of the subject of an investigation to make submissions on any matter contained in the investigation report prepared by the Central Bank, with the Central Bank having a right of response;
  • A duty of confidentiality to be imposed on recipients of documents furnished by the Central Bank to potential witnesses for the purposes of the witnesses providing information, evidence and/or documents to the Central Bank in the conduct of an inquiry. The amendment will provide for a criminal offence where this duty is breached;
  • A prohibition on the publication of certain information disclosed in the course of a hearing or inquiry management meeting held in public to protect the privacy and data protection rights of individuals;
  • The proposed “safe harbour” will no doubt provoke much discussion in due course and it will be interesting to hear from the Central Bank as to how they anticipate that the “safe harbour” will work in practice;
  • A requirement that the Central Bank is satisfied that a person’s reputation would not be unfairly prejudiced by the publication of documents such as procedural directions, decisions and transcripts that may be published in the public interest in understanding how the inquiry will work and the status of the inquiry;
  • A requirement to consider professional secrecy, confidentiality and/or unfair prejudice to a person’s reputation prior to the publication of settlements, with current publication obligations confirmed by case law to remain in place;
  • The ability to displace the presumption of admissibility of documentary evidence as prima facie evidence of the truth of its contents;
  • A prohibition on the involvement of designated individual(s) presenting the results of an investigation having an involvement in decision-making and a clarification that the persons conducting the inquiry are not bound by the presentation;
  • A defence of absolute privilege for statements made at an inquiry, including any documents produced and anything said or done at an inquiry or any other communication to, or by, the inquiry. This is to bring the ASP in line with the investigations procedures in similar regulatory regimes and provide protection to inquiry members and inquiry participants, including witnesses; and
  • The introduction of a civil remedy whereby the Central Bank will be able to apply to the High Court for an order where a person obstructs an inquiry. At present, it is a criminal offence to obstruct an inquiry but this is only pursued in the most extreme cases. A civil remedy could serve as a more proportionate alternative and be quicker and more effective in ensuring compliance.

 

Transitional Measures

The General Scheme outlines how the new amendments will apply going forward so that individuals will not have retrospective liability for matters occurring before the new legislation comes into force, unless they were also “persons concerned in the management” of the RFSP as only pre-existing participation by these individuals would survive the abolition of the concept.

Further, any enforcement investigation that has commenced at the time of commencement of the new provisions, will not be subject to the amendments relating to the statutory commencement of an investigation. In most cases, persons performing controlled function or pre-approval controlled function roles would only be liable for participation in prescribed contraventions by a RFSP that occurred post-commencement of the legislation.

 

Looking Ahead

The General Scheme confirms that the Central Bank’s approach to enforcement action will remain unchanged with a focus on being proportionate and risk-based. Therefore, in deciding whether to take enforcement action, the Central Bank will continue to consider the extent to which such action will promote compliance by the regulated entity and within the industry or sector.

More clarity will be provided when draft legislation is available. However, the Minister for Finance has indicated that it will take up to 12 months before the legislation will pass through the Oireachtas. The Central Bank will also be required to consult on the accompanying regulations and materials and therefore it is likely to be around 18 months before these amendments come into effect.

In the meantime, we can expect frequent briefings and announcements from the Central Bank on their expectations as regards the preparations that RFSPs should be making pending their entry into force.

 

Keeping you Informed

We will be hosting a series of events on the individual accountability framework, including the ASP-related amendments, in September and October. If you are interested in attending, please reach out to your usual Arthur Cox contact or email events@arthurcox.com for further details.

 

Contact

Please get in touch with any member of our market-leading Financial Regulation: Investigation and Enforcement team if you wish to discuss the potential impact of the proposed individual accountability framework or ASP-related amendments on your business. We advise and support clients on a wide range of financial regulatory investigations and enforcement issues, and have deep specialist knowledge of the financial services regulatory environment and experience in managing complex contentious regulatory matters.

We would like to thank Shannon Buckley Barnes for her contribution to this article.