Central Bank Of Ireland - Offshore Banking

(i) New Fitness and Probity Regime

On 1 September 2011 the Central Bank published its Regulations and Standards of Fitness and Probity, pursuant to its powers under Part 3 of the Central Bank Reform Act 2010, together with Draft Guidance on Fitness and Probity Standards.

The new regime will commence on 1 December 2011 for all existing staff and new staff holding senior positions i.e. Pre-approval Controlled Functions ("PCFs"). In respect of new appointments to less senior positions, i.e. Control Functions ("CFs"), the new regime will commence on 1 March 2012 and from 1 December 2012 for existing staff in CF roles. This phased introduction is aimed at allowing regulated financial service providers ("regulated firms") time to implement the necessary internal controls and procedures to comply with the new regime.

The Regulations

The Central Bank Reform Act 2010 (Sections 20 and 22) Regulations 2011 (the "Regulations") confirm that the new regime will apply to two distinct groups i.e. persons performing PCFs and CFs. The list of PCFs, set out in Schedule 2 of the Regulations, specifically identify 42 senior positions as PCFs in a regulated firm. The Central Bank's approval is required before a regulated firm can offer to appoint a person to those functions.

The Regulations afford a more generic definition in respect of the 11 categories of CFs, which include a function related to the provision of financial services which is, for example, likely to enable the person responsible for its performance to exercise significant influence over the conduct of the firm's affairs. While the Central Bank's prior approval is not required for persons to be appointed to a CF position, it will be able to investigate, suspend, remove and/or prohibit a person from carrying out such a function in the future.

Regulated firms must identify and maintain a record of persons performing PCFs in their organisations and by 31 December 2011, must submit to the Central Bank a list of persons in a PCF as of 1 December 2011. Written confirmation must also be submitted by the CEO, where appropriate, of regulated firms, that the regulated firm is satisfied that the persons on the list comply with the Standards of Fitness and Probity (the "Standards") and that the firm has obtained written agreement from such persons to abide by the Standards.

While all new persons appointed to a CF role will be required to adhere to the Standards by 1 March 2012, regulated firms must by 1 December 2012, also identify and maintain a record of all persons performing CFs in their organisation and carry out the necessary due diligence to ensure such persons meet with the Standards including obtaining a written statement that such persons will abide by the Standards.

The Standards

The Standards set the conditions which a person must satisfy to perform a PCF or CF and may form the basis for refusing to approve the person's appointment to a PCF or for removing or prohibiting a person from a CF if he/she does not meet those standards. The Standards require a person to be competent and capable; act honestly, ethically and with integrity; and be financially sound. The Standards outline in greater detail what each of these conditions entail.

Draft Guidance

The Draft Guidance on Fitness and Probity Standards (the "Draft Guidance") specifies the due diligence that firms should, at a minimum, carry out to ensure persons are fit and proper to perform PCFs or CFs before proposing them for appointment thereto. The measures considered appropriate to determine a person's fitness require firms, for example, to obtain evidence of requisite qualifications and to retain a record of the application and interview process. Due diligence in respect of probity requires firms to take steps to ensure they are aware of and assess matters which may adversely affect persons' ability to perform the function to a material degree, for instance if the person has been the subject of disciplinary action. Interested parties had until 30 September 2011 to respond to the Draft Guidance.

The Regulations, Standards and Draft Guidance are available on the Central Bank's website: www.centralbank.ie.

(ii) Central Bank (Supervision and Enforcement) Bill 2011

On 28 July 2011, the Department of Finance published the Central Bank (Supervision and Enforcement) Bill 2011 (the "Bill"). The Bill is aimed at enhancing the supervisory and enforcement powers of the Central Bank so as to ensure the proper and effective regulation of financial services, particularly by increasing its investigative powers and the sanctions it may impose. It represents further reform of financial regulation in Ireland and the introduction of such legislation constitutes a further requirement of the EU-IMF programme of support for Ireland.

If enacted in its current form, the Bill will introduce the following measures:-

Fines and sanctions – the maximum penalties which could be imposed under the administrative sanction regime will increase from €5m to €10m (or 10% of prior year turnover, whichever is the higher) for corporate bodies and from €0.5m to €1m for natural persons. Regulated financial services providers in breach of financial services legislation could also have their authorisation suspended or revoked;
Restitution – following an application by the Central Bank, the High Court may order restitution for those who have suffered as a result of a breach of regulatory provisions by a financial service provider;
Skilled persons reports – financial services providers (or related undertakings) could be required to commission (and bear the cost of) reports by independent experts on matters reasonably required in connection with the exercise of the Central Bank's statutory functions e.g. examination or inquiry into suspected breaches of financial services legislation;
Directions – if the Central Bank has concerns as to regulated financial services providers' ability to meet their capital requirements, legislative obligations or obligations to creditors or customers, the Central Bank will be able to issue directions, requiring such financial services providers, for instance, to take certain actions or suspend certain activities to address these concerns;
Regulations – the Central Bank will be able to make regulations on a wide range of issues including risk minimisation; monitoring staff training and qualifications; restricting "cold calling"; and dealings with customers, in terms of suitability of products and resolving complaints. In many instances, this power would relate to matters which are already Central Bank requirements under Codes e.g. consumer protection, related party lending and minimum competency requirements;
Authorised officers of the Central Bank – the authorised officer regime will be consolidated, replacing some 20 existing regimes. Further, authorised officers may attend financial services provider meetings to assist the Central Bank in its statutory functions;
Settlement Agreements - if the Central Bank and a regulated financial services provider enter an agreement to resolve a suspected contravention and the regulated financial services provider does not abide by it, the Central Bank may seek a High Court order compelling compliance therewith;
Whistle-blowing protections – a whistleblower will be protected from civil liability and penalisation by their employer for making a protected disclosure i.e. one made to appropriate persons (e.g. Central Bank officers/employees) if they have reasonable grounds to believe it will show a prescribed contravention, breach of or offence under financial services legislation is or was being committed or evidence regarding same is being or is likely to be deliberately concealed or destroyed; and
Mandatory disclosure regime – persons performing pre-approval controlled functions (those in which they may exercise significant influence on the conduct of a regulated financial service provider's affairs) must report a breach of financial services legislation unless this might incriminate them personally. Failing to so disclose could be the basis for an investigation and action under the fitness and probity regime.

The Bill is expected to progress to the second stage in Dáil Éireann during the autumn session. The Bill may be viewed on the Oireachtas website: www.oireachtas.ie.

(iii) Central Bank Issues Consultation Paper 56 ("CP56")

On 11 August 2011 the Central Bank issued a public consultation, CP56, dealing with the protocol to be established between the Central Bank and the Auditors of Regulated Financial Service Providers (the "Auditor Protocol"). It aims to provide a framework which will allow the Central Bank and the auditing profession to exchange relevant information on a timely basis with a view to enhancing both the regulatory and statutory audit processes.

To fulfill its objectives, the draft Auditor Protocol specified that it is necessary for communication channels between the Central Bank and auditors to remain open and an environment that facilitates frank discussions should exist. In this regard it suggested that the following measures should be adopted:

firms should advise the Central Bank of the contact details of the Lead Partner of its auditor and similarly should advise its auditor of the contact details of the Senior Examiner in the Central Bank; and
at meetings between the Central Bank and auditors, they should endeavor to share information they believe would lead to higher quality audits or would assist in the exercise of their supervisory functions.

To further pursue the above aims, the consultation highlighted the need to identify and remove barriers to sharing information. As such, it emphasised that the contractual agreements between auditors and firms should not hinder information sharing and provision should be made therein acknowledging that the Central Bank and the firm's auditors can discuss issues relevant to their oversight of the firm and that such communication will not be determined to be a breach of duty by either party.

The proposed framework also provides a structure for bilateral meetings (between the Central Bank and auditors) which are expected to take place twice yearly at the pre- and post-audit stage and trilateral meetings (between the Central Bank, auditors and the audit committee or Independent Non-Executive Director) to be conducted at the planning stage of the audit process.

The Protocol will be subject to annual review and will be updated to reflect changes in legislation, auditing practice and other relevant developments.

The Central Bank indicated that the Auditor Protocol may apply in the first instance to firms rated high impact under its regulatory risk model, PRISM, which is due to be rolled out in 2011/2012. Such categorisation will reflect the firms' relative size and potential to harm the economy, consumers or the wider financial system and will be based on balance sheet size, turnover, client base etc.

Comments were to be submitted on the proposals by 23 September 2011. It is anticipated that the Auditor Protocol will be published later in 2011, whereupon an implementation plan will be agreed with the auditing profession, to commence no later than the beginning of the new audit cycle for relevant firms in 2012.

CP56 may be accessed from the Central Bank's website: www.centralbank.ie.

(iv) Responsibility for Information within a Prospectus for Debt Securities

On 16 September 2011, the Central Bank published a communication to industry participants to clarify the requirements of Article 6 of the Prospectus Directive.

The publication indicates that an issue has arisen with regard to the drafting of responsibility statements in debt prospectuses. Recent practice has allowed "split responsibility" statements where it would appear that the issuer disclaims responsibility for certain parts of the prospectus. This practice has its roots in the regime that existed prior to the implementation of Directive 2003/71/EC (the "Prospectus Directive") in Ireland by the Investment Funds, Companies and Miscellaneous Provisions Act, 2005 (the "2005 Act") and the Prospectus (Directive 2003/71/EC) Regulations 2005 (the "Irish Regulations"). The Central Bank publication clarifies that this practice is not permitted.

The publication clarifies that whilst Schedule 1, Paragraph 3(2) of the Irish Regulations permits others to assume responsibility for certain sections of the prospectus, this does not substitute for the responsibility under Regulation 31(2) of at least one of the other "persons" mentioned in Schedule 1 of the Irish Regulations, such as the issuer, to assume responsibility for the whole of the prospectus.

In this regard, Schedule 1, Paragraph 3(2) of the Regulations states: "In a case to which this paragraph applies, each of the following persons is, subject to the other provisions of this Schedule, responsible for the prospectus:

the issuer of the securities;
each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus;
if the case involves an offer of securities to the public, the offeror of the securities, if this is not the issuer;
if the case involves the admission to trading of securities, the person seeking admission, if this is not the issuer;
if there is a guarantor for the issue, the guarantor in relation to information in the prospectus that relates to the guarantor and the guarantee; and (f) each person not falling within any of the preceding provisions of this subparagraph who has authorised the contents of the prospectus.

Regulation 31(2) of the Irish Regulations provides that, "For the purposes of these Regulations, responsibility for the information given in a prospectus attaches, subject to the provisions of that Schedule, in each of the cases specified in Schedule 1 to these Regulations to the persons specified in the relevant case, and references in these Regulations to responsible persons shall be construed accordingly."

As a result under the Irish Regulations, the issuer, offeror and the person seeking admission to trading will be responsible for the whole of the prospectus. Therefore, qualifying language limiting the issuer's responsibility will no longer be acceptable unless the issuer is wholly excluded from the offer or application for admission to trading.

The publication also clarifies; (a) the requisite wording to be inserted into a prospectus in respect of the declarations by those responsible for the information in the prospectus; and (b) that the use of certain confirmations in respect of third party-sourced information (to the extent permitted as highlighted therein) does not obviate the responsibility of the issuer with regard to that information in the prospectus.

This industry communication may be accessed on the Central Bank's website: www.centralbank.ie

(v) Appointment of Inspectors to Custom House Capital Limited

Following an application by the Central Bank under the European Communities (Markets in Financial Instruments) Regulations 2007 (the "Regulations"), on foot of information which gave rise to concern about the status of client assets managed by Custom House Capital Limited (the "firm"), on 15 July 2011 the High Court appointed Inspectors to conduct an investigation into its affairs.

The Central Bank has taken this action to evaluate the records of the firm relating to client assets and customer holdings and to assess the financial position of the firm. It has placed restrictions on the firm, preventing it from carrying out any transactions or making payments to any clients to protect the interests of all existing clients until the impact of these issues has been established.

This is the first time that these powers of court appointment, prescribed by section 116 of the Regulations, have been exercised and their invocation introduces an element of compulsion on directors and employees to produce records, appear before and assist the inspectors. It demonstrates the Central Bank's commitment to ensuring its supervisory obligations are performed properly and without delay due to the reluctance of relevant persons to voluntarily assist with investigations.

The Inspectors have now presented three interim reports to the High Court and the matter has been listed for 21 October 2011, with a final report and recommendations as to what (if any) orders the Court may consider making, expected on that date.

More information on this matter may be obtained on the Central Bank's website: www.centralbank.ie.

(vi) Settlement Agreement between the Central Bank and Aviva Investors Ireland Limited

The Central Bank entered into a Settlement Agreement with effect from 20 July 2011 with Aviva Investors Ireland Limited (the "firm"), a regulated financial services provider, in relation to six breaches of regulatory requirements contained in the Client Asset Requirements (the "CAR"). The breaches included failures in relation to properly designating client accounts, obtaining confirmations in respect of dealing with client monies and performing reconciliations. These breaches, which did not result in financial loss to clients, occurred because the firm's policies and procedures governing compliance with the CAR were inadequate and in some instances, not adhered to. The Central Bank reprimanded the firm and required it to pay a penalty of €30,000. In determining the appropriate penalty, the Central Bank recognised that all breaches had been rectified and the firm cooperated in resolving the matter and settled at an early stage in the Administrative Sanctions Procedure.

This is the second Settlement Agreement concluded for breaches of the CAR in the past nine months and reflects the importance attached to the CAR as a key protection for customers of authorised investment firms and their assets. Peter Oakes, the Central Bank's Director of Enforcement, specified that "the CAR is a priority area for the Central Bank and [it] will continue to focus [its] supervisory and enforcement resources to help achieve acceptable standards of compliance with this important safeguarding requirement". In this regard, firms were advised to monitor and test internal policies and procedures to ensure that they are effective so as to minimise the potential for non-compliance with the Regulations or binding requirements issued under the Regulations.

By way of background to such actions, the Central Bank's press release also contained links to other items including, an industry letter on the introduction of the CAR regime in 2008 and to the Enforcement Strategy 2011-2012. These documents, as well as the Settlement Agreement, are available on the Central Bank's website: www.centralbank.ie.

(vii) Settlement Agreement between the Central Bank and Pan Index Ltd

The Central Bank entered into a Settlement Agreement with effect from 25 August 2011 with Pan Index Limited ("the Firm"), a regulated financial services provider, in relation to its breaches of the EC (Markets in Financial Instruments) Regulations 2007 (the "MiFID Regulations"). These breaches involve the firm's failure to ask (potential) clients to provide information regarding their knowledge and experience of spread trading contrary to Regulation 76(4)(a) and 94(9) and its failure to take into account the information required pursuant to Regulation 76(4)(a) to assess whether the spread trading services sought by the client were appropriate for that client.

The Central Bank reprimanded the Firm and required it to pay a penalty of €40,000, reflecting the seriousness with which it views breaches of the above obligations under the MiFID Regulations. In determining the penalty the Central Bank did however recognise that the breaches are no longer continuing and that the firm cooperated in resolving the matter and in settling at an early stage in the Administrative Sanctions Procedure.

These breaches were detected by the Central Bank during a themed inspection of contracts for difference ("CFD") and financial spread betting firms in March 2011, the findings of which, published on 16 June 2011, specified that "consumers need to be made fully aware of the complexity and very high risks of CFD and financial spread betting before making investment decisions". As such, the Central Bank's press release advised firms to ensure they have adequate processes and procedures in place so that consumers receive appropriate warnings before engaging in high risk and complex 'Spread Betting' or 'Spread Trading'. It further reiterated that the Central Bank will fully investigate potential breaches of the MiFID Regulations and apply proportionate and robust sanctions, where appropriate. The press release and the Settlement Agreement are available on the Central Bank's website: www.centralbank.ie.

(viii) Settlement Agreement between the Central Bank and Goldman Sachs

The Central Bank of Ireland ("the Central Bank") has entered into a Settlement Agreement with effect from 8 September 2011 with Goldman Sachs Bank (Europe) plc ("the firm"), a regulated financial service provider in relation to breaches of regulation 16(3) of the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 ("the Regulations").

The Central Bank reprimanded the firm and required it to pay a monetary penalty of €160,000.

On 13 December 2010 the firm disclosed errors in calculations of the firm's counterparty risk requirement to the Central Bank. This issue arose due to a failure in the firms control mechanisms giving rise to an error in the firm's in-house regulatory counterparty risk capital requirement calculation.

The Central Bank of Ireland also issued a general comment from Director of Enforcement, Peter Oakes:

"The existence of adequate systems and controls is a priority area identified in the Enforcement Directorate's Strategy Document 2011 — 2012.

The existence of proper systems and controls to ensure continuous and proper calculation of risk and regulatory capital requirements is essential to the maintenance of stable and properly financed financial service providers. The reliance on automated systems should therefore be tempered by adequate oversight to ensure that systems and controls are, and continue to be, comprehensive and proportionate.

Firms are reminded to monitor and test their internal control systems on a regular basis and should take great care to ensure that any changes to systems are properly and fully tested so that regulatory requirements are adhered to and all regulatory reports provided to the Central Bank are accurate."

(ix) New Deputy Governor

On 1 September 2011, Stefan Gerlach took up his position as Deputy Governor of the Central Bank with responsibility for central banking functions. He is one of two deputy governors, the other being Matthew Elderfield who is responsible for financial regulation. Mr. Gerlach succeeds Tony Grimes who retired, having served most recently as Director General, and then Deputy Governor, since 2007.

Prior to his appointment as Deputy Governor, Mr. Gerlach was Professor of Monetary Economics and Managing Director of the Institute for Monetary and Financial Stability at the University of Frankfurt. Before this he worked with the Bank of International Settlements in Basel, most recently as Head of Secretariat of the Committee on the Global Financial System. He has also served as Chief Economist at the Hong Kong Monetary Authority.

Announcing the appointment in July 2011, the Central Bank Governor, Patrick Honohan said: "I am delighted to welcome Stefan Gerlach to the Central Bank of Ireland. He brings exceptional skills to the role. His experience across the monetary and economic spectrum and the qualities he has developed over his career are perfectly suited to the new role he is taking on, at what remains a very challenging time".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ireland: Central Bank Of Ireland