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Comments from ACCA
April 2005

ACCA Ireland is pleased to comment on the consultation document (CP 11) ' Financial Services Regulations: Comprehensive Framework of Standards for testing the probity and competence of Directors and Managers of Financial Services Firms', February 2005.

3. THE ROLE OF THE “FIT AND PROPER” TEST IN THE REGULATORY REGIME

Q3.1

Since the different financial services sector are now governed by a single regulator we agree that it makes sense for IFSRA to take appropriate steps to harmonise regulatory practice in the area of fitness and propriety.

4. PROPOSED FRAMEWORK

Q4.1

We fully agree with the aim of embedding a culture of fitness and propriety within financial services firms, and agree that this should form the first pillar of the regulatory controls exercised by IFSRA. We think it completely reasonable to expect all firms, regardless of size, to adopt this culture as an integral part of their operations. We do not oppose the proposal for the firm to perform the initial review of a new director’s IQ form and for the firm to have some responsibility for ensuring that the form is completed properly.

But we have reservations about the idea of requiring the firm to ‘verify’ the information provided by the director. The questions included in the draft questionnaire are numerous, and in some cases call for extensive detail to be provided. We query whether it is reasonable to expect the firm in all cases to accept responsibility for ensuring that all this information is factually correct. Aside from the extensive personal information required, the draft questionnaire calls for personal statements, for example question 1.10 which calls upon candidates to explain the contribution they hope to make to the firm, and other information which may not easily be objectively verifiable by the directors, for example, question 1.11 which asks for directors to declare that they are ‘fully aware’ of the obligations and duties of a company director. We believe therefore that the assurance to be provided by firms to the regulator must incorporate some form of disclaimer. We suggest that firms could be asked to confirm that they have carried out reasonable checks to verify the information provided by the director and on the basis of those checks have found nothing which causes them to believe that the information provided is not correct and which causes them to doubt that the candidate is a fit and proper person. It would still be open to the regulator to carry out its own checks on the information provided.

Above this, firms should be subject to a requirement to appoint as directors only those who they believe to be fit and proper persons. There should be sanctions for knowing breach of this requirement. There should also be sanctions against a candidate director who knowingly includes false information in his questionnaire.

4. PROPOSED FRAMEWORK
Operation of the Test

Q4.2

We acknowledge the practical concerns set out in the document. But if the appointment process is to involve a requirement for the formal agreement of the regulator, then directors cannot be appointed until that agreement is forthcoming.

It might be feasible for fitness and propriety checks to be carried out at the short-listing stage but the practical problems with that is that, given that the draft questionnaire is so comprehensive, it would require firms to carry out a considerable amount of work in checking them, even if our suggestion, above, to reduce the direct responsibility of directors with regard to the information in individual questionnaires is accepted. But the only real answer to this problem is that the regulator must commit itself to making its own decision with regard to the fitness and propriety of a candidate director within a fixed, short time. We would suggest two weeks for this purpose. If a quick decision can be guaranteed, this should be sufficient to avoid causing problems for firms and individual candidates alike. The regulator should of course still be able to intervene should the fitness and propriety of any director be subsequently called into question.

Q 4.3

Candidates should expect that relevant personal information may be scrutinised in the public interest. They should however be assured that any steps taken by the regulator to access and process personal data is done in full accordance with the data protection principles.

Q 4.4

Fitness and propriety is not a static state, and we agree that the fitness and propriety of individual directors should be subject to some form of on-going monitoring. But we would oppose the institution of a standard requirement for a full-scale annual review. This would be an excessively bureaucratic exercise particularly for the firms. An annual self-declaration procedure seems to us to be a sensible idea. If firms have an on-going requirement to ensure that their directors are fit and proper persons, they should be prepared to take effective action either at that stage or at any other stage, should an individual director fall short of expected standards.

Q 4.5

The regulator should make clear to all firms the standards of fitness and propriety which are expected, and the responsibilities of firms to ensure that directors meet those standards should apply across the board. But the new procedure should only apply to new appointments on the ground that it is only a procedure for testing eligibility and not a separate test in itself.

5. SCOPE OF FIT AND PROPER TEST

Q 5.1

Special requirements should apply to directors since they are empowered to act on behalf of the firm and it is at their level that all the most important decisions as to a firm’s activities should be taken. The institution of a culture of fitness and propriety within firms should extend to all persons employed on professional business within the firm, but we do not believe that the regulator should be involved in their selection or appointment. Rather, it should be an internal matter for the firm, albeit a matter on which the regulator should be entitled to be assured that the directors are acting effectively on.

Q 5.2

We have no comment to make on this question.

Q 5.3 Shadow Directors

We agree that it is reasonable for shadow directors to be covered by fitness and propriety standards. As long as the regulator makes clear what the definition of a shadow director is, it is reasonable to expect firms to identify them and disclose their identities to the regulator. The identification should be of the shadow directors, and not any shareholders who they might speak for or be associated with since the actual exercise of influence will be the activity which the regulator will need to regulate. We would not though expect shadow directors to be required to complete the standard questionnaire, since the nature of shadow directors is that they wish to avoid formal appointment. The institution of a requirement to identify and disclose shadow directors could conceivably in itself result in a diminution of shadow director activity.

Q 5.4 Alternate Directors

Yes, alternates will have the full powers of any other director so should be treated in the same way.

Q 5.5 Qualifying shareholdings

In our view, to extend suitability checks to shareholders whose interest is below the current 10% level would be disproportionate and of no obvious regulatory benefit. Those small shareholders who do exercise material influence over the board will be regarded as shadow directors and subject to the controls discussed above.

It is not clear to us how the regulator would assess the suitability of an investor company by reviewing its published financial statements. These can only provide an indication of the company’s financial position and prospects. By themselves they will give no substantive indication of its fitness or propriety. As regards individual shareholders, to impose standard tests of fitness and propriety on them would require substantial efforts and resources of the regulator. We query again whether it would be proportionate regulatory action for the regulator to require prospective shareholders to go through a fit and proper application test. We would agree that there should be arrangements made for the regulator to intervene where a shareholder is considered to be undesirable. For the most part though it will, we believe, be more productive to concentrate on imposing proper controls on the persons who control firms and act on behalf of it, rather than the persons who own minority shares in it.

Q 5.7 Unscheduled departure of Director or Manager

We agree that the regulator is entitled to be informed when a director steps down and the reasons for his doing so.

6. INDIVIDUAL QUESTIONNAIRE

Q 6.1

We consider that the questionnaire as drafted is too long and includes information which is not likely to have a clear significance for the issue of resolving the question of a person’s fitness and propriety. We suggest the following matters could be dropped:

1.8 – giving details of past addresses would not provide additional meaningful information for identification purposes.

2 - Sections 1 and 2 require the production of extensive detailed information about employment history and periods of non-employment. Section 2.4, which requires applicants to confirm their understanding of technical matters, is unrealistic in its present form. It should be essentially a matter for the directors to satisfy themselves that a new director is technically competent. We suggest that an alternative to the present approach would be for the directors to state to the regulator their confidence that a candidate is technically competent for the position he is to fill.

4.13 – it is unreasonable to expect a candidate to disclose whether he is currently being investigated. Only adverse findings should be discloseable.

6 – the requirement for candidates to disclose full details of their bank accounts seems excessive.

In the Declaration, we suggest that the information which companies may hold on the candidate would already be on the public record in any case.

In addition, question 1.12 calls on directors to state they are ‘fully aware’ of their obligations as a director. We suspect that a great many company directors would have difficulty in giving a categorical undertaking of this kind.

It is not clear to us what the meaning of question 5.5 is.

6.2

We strongly agree.

7. ROLE OF FIRM

7.1

We agree that the proposals in the document are likely to impose a disproportionate burden on smaller firms. But given that fitness and propriety is a benchmark which should be met in all firms, it is not evident how the test itself can be scaled down for smaller firms.

7.2

We consider that all firms should be subject to a standard requirement, though as suggested in our earlier response, we do not believe that a firm should be expected to ‘verify’ all the information provided by an individual director.

7.3

As already stated, we believe that the role of the firm in ‘verifying’ the director’s
IQ, and the range of information contained in the IQ, should be looked at with a view to reducing the administrative burden.

7.4

We would expect that a firm would not propose to appoint a director unless they were convinced that the candidate not only had the requisite skills and experience to act as director but was likely to meet the fitness and propriety test as well. The regulator’s intention to cultivate a culture of fitness and propriety within financial services firms should help to make it even more likely that firms will seek to satisfy themselves on these matters within the recruitment and selection process. This is probably something which firms should be doing for themselves in order to save time, although the regulator may well choose to issue guidance to them on how to incorporate the fitness and propriety standards into their processes.

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