The Central Bank, which has put thousands of candidates for senior financial positions through their paces over the past 13 years, has seen the spotlight turn on its own post-crisis vetting regime in recent months, like never before. It’s been a chastening experience.
The regulator has received 50,000 applications to approve individuals for key positions – or what are known as preapproved control functions (PCFs) – in financial firms over the period. In the course of the past four years, it has approved 11,000 individuals, according to a report published this week. A further 1,200 or so withdrew from the process – often when it became clear their chances of passing were slim.
Very few stick around for an actual refusal decision. But one individual who did would expose practices that threatened to undermine the whole system.
The Irish Financial Services Appeals Tribunal (Ifsat), an independent body that hears appeals from aggrieved parties against certain Central Bank decisions, said in February that the regulator’s decision-making process in refusing to approve an unnamed executive in late 2022 for a board position on an Irish fund was “flawed” and the appellant was “denied fair procedures at every stage”.
A notification of a vetting interview did not cover the type and depth of issues that he would be asked about, resulting in questions that were “unnecessarily granular”, sometimes unclear “and extraordinarily complex”, said Ifsat, which redacted the name of the individual.
He was not properly warned that Central Bank staff would delve, in detail, into issues at a previous firm in which he was involved.
Most egregiously, the regulatory official who made the ultimate decision – but had no prior involvement in the case – relied heavily on information from the applicant’s interview, which followed a flawed process and failed to hear the other side.
Central Bank governor Gabriel Makhlouf decided immediately after the Ifsat decision to commission an independent review of the vetting – or so-called fitness and probity (F&P) – system. He would hire the recently departed European Central Bank (ECB) banking supervisory chairman, Andrea Enria, to carry it out.
Enria’s report, published on Thursday, highlighted a number of issues – not least the fact that the current use of enforcement staff in complex cases causes confusion that the process is akin to a “quasi-enforcement investigation”.
He said candidates called for an interview by the Central Bank F&P team should be given sufficient advance notice of a draft agenda with a clear indication of the topics on which the interview will focus. Interviews should also have a well-defined time limit, such as 90 minutes, which he said was “good practice” at other authorities.
The case appealed to Ifsat lasted the entire day, albeit with breaks.
There are more than 21,000 PCF roles currently active in Ireland, with the nonbank, retail intermediaries and investment firms accounting for three-quarters of these. Enria recommends that the level of scrutiny an application receives should be proportionate to the risks associated with the roles and firms involved.
Still, the former ECB executive debunks a commonly held view across the financial industry about the “slow-no” – that the Central Bank delays a decision to put pressure on a firm to withdraw an application, a move that would prevent it from having to justify and defend an official refusal.
The average processing time for gatekeeping applications during the second half of last year was 24 calendar days and 98 per cent of applications were processed within 90 days. If anything, this looks more efficient than elsewhere, Enria suggests. Still, he recommends the Central Bank officially commit to a 90-day cap, with limited opportunities to stop the clock.
Also, interviews have been conducted in only 5 per cent of all PCF applications, half the rate seen by similar regimes in the UK and the Netherlands, which Enria used as benchmarks.
Peter Oakes, a former enforcement director at the Central Bank and an experienced independent non-executive director in the finance industry, said Makhlouf’s decision to embrace all of Enria’s recommendations and set up of a new unit to oversee and streamline the F&P process was “heartening”.
“The decision to embrace the recommendations is a sign of a mature regulator,” he said.
Brian Hayes, chief executive of the Banking & Payments Federation Ireland, welcomed Enria’s proposal that the Central Bank hold regular informal workshops to help both firms and potential candidates understand what is expected of them, but also for the Central Bank to get a better view of how firms produce names.
“The fitness and probity regime has been in place for 13 years but never reviewed before now,” he said. “There is a wider lesson for the Central Bank about reviewing all kinds of processes.”
Concerns about the opacity and onerousness of the F&P process resulted in firms relying more than they should on putting forward individuals who have previously been approved – especially board positions – for roles.
This limited potential candidates in the system and increased the risk of groupthink, the type of behaviour that contributed to the financial crisis a decade and a half ago.
Enria’s proposals should improve the perception of F&P and increase the pool of people willing to put themselves forward.
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