Regulatory News

Merrion Stockbrokers Limited fined €200,00 in respect of failings pursuant to the Fitness and Probity regime.

18 Dec 2017 Press Release

Central Bank of Ireland

Settlement Agreement between the
Central Bank of Ireland and Merrion Stockbrokers Limited

Merrion
Stockbrokers Limited fined €200,000 by
the Central Bank of Ireland in respect of failings pursuant to the Fitness and
Probity regime.

On 12December 2017, the Central Bank of Ireland (the
‘Central Bank’) fined Merrion Stockbrokers Limited (‘Merrion’) €200,000 and
reprimanded it for a breach of section 21 of the Central Bank Reform Act 2010
(the ‘2010 Act’).  Merrion has admitted
this breach, which was identified during a Central Bank inspection of Merrion
in 2016.

Under the Fitness and Probity regime, individuals performing
certain influential and customer facing roles in regulated entities are
considered to be performing controlled functions (‘CFs’). The most significant
of these roles are pre-approval controlled functions (‘PCFs’) in respect of
which Central Bank approval is required prior to appointment. 

The
Central Bank’s enforcement investigation identified that Merrion failed to
introduce adequate systems or controls to ensure that individuals holding CFs
and PCFs complied with the Fitness and Probity Standards (the ‘Standards’).

The
breach occurred from the introduction of the Fitness and Probity Regime on 1
December 2011, and persisted for over 4 years. 
During this period, Merrion failed to: 

  • Introduce adequate systems or procedures to ensure compliance with its obligations under section 21 of the 2010 Act; and
  • Take reasonable steps to satisfy itself that its CFs and PCFs complied with the Standards.

A programme of
compliance improvements began following a management buy-out and the
appointment of a new Board in late 2014. Following the Central Bank’s
inspection in 2016, the current Board took appropriate steps to ensure that the
inadequacies in Merrion’s Fitness and Probity policies and procedures were
addressed.

Head of Enforcement Investigations, Brenda O’Neill, said:

“The Fitness and
Probity regime was introduced in the wake of the financial crisis because of
the need to ensure that the right individuals were working in the financial
services sector and that those individuals would be held accountable if their
conduct fell below the expected standards. 
  

Under the Fitness and
Probity regime, the Central Bank acts as a gatekeeper for individuals in senior
positions at supervised firms, known as pre-approval controlled functions
. Importantly however,
it is firms who have the ultimate responsibility for ensuring that the wider
population of individuals working in financial services, namely those in
controlled functions, are suitable.  This
is an obligation that firms have when appointing individuals to roles.  It is also an ongoing obligation for firms to
ensure individuals continue to meet the Standards.  If circumstances arise to suggest that an
individual no longer satisfies the Standards, firms must be in a position to
identify this and, if necessary, report any such circumstances to the Central
Bank.  Firms must take these obligations
seriously as the risks posed by failing to do so are significant.

In this case, Merrion
did not meet its obligations under the Fitness and Probity regime.  Until April 2015, there was an absence of any
written procedures. In addition, Merrion failed to correctly categorise a
number of employees performing controlled functions and failed to understand
that its obligation to monitor the Fitness and Probity of individuals does not
stop once initial due diligence has been completed.  The fine must reflect the significance of
these failings.

This is the first case
against a firm for a breach of its section 21 obligations.  We expect all firms to take note of this case
and understand that they play a crucial role in ensuring that the Fitness and
Probity regime works effectively”. 

 The Central Bank
confirms its investigation into Merrion in respect of this matter is closed.

BACKGROUND

Merrion is
authorised as an investment firm under Regulation 11(1) of the European
Communities (Markets in Financial Instruments) Regulations 2007.  Merrion offers a full service stockbroking
service across a number of business lines including advisory stockbroking,
wealth management and fixed income. 
Merrion is 100% owned by Merrion Capital Holdings Limited, which is a
holding company for a number of companies within the Merrion Group of
companies.

In February 2016,
the Central Bank conducted an on-site inspection at Merrion, with a focus on
Merrion’s Fitness and Probity processes. 

PRESCRIBED
CONTRAVENTIONS

The Central
Bank’s investigation identified the following grounds upon which section 21 of
the 2010 Act was breached by Merrion:

Due diligence failings

 Regulated firms
are required to conduct thorough due diligence to ensure that employees
performing CFs comply with the Standards. 
This due diligence is at the heart of the Fitness and Probity regime and
must be conducted, both upon initial appointment, and on an ongoing basis.  Strict adherence by regulated firms to these
requirements is crucial to ensure that persons in senior positions are
competent and capable, honest, ethical have integrity and are also financially
sound.

In addition,
firms are required to assess the appropriate CF or PCF categorisations
applicable to individuals. Failing to do so correctly can result in a firm not
knowing what parts of the Standards apply to those individuals.

For the period
covered by this breach, Merrion failed to conduct the requisite level of due
diligence for the ongoing assessment of CFs and PCFs.

Systems and controls deficiencies

 Regulated firms
cannot permit individuals to perform CF or PCF roles unless they have satisfied
themselves on reasonable grounds that those individuals comply with the
Standards.  For reasonable grounds to
exist and to be capable of objective demonstration, regulated firms must put in
place proper systems and controls against which compliance can be
monitored. 

Merrion did not
put in place written Fitness and Probity policies and procedures until 24 April
2015. However, these were not adequate, and as a result:

  1. By failing to properly document its due diligence when hiring individuals into CF roles, Merrion was unable to demonstrate how it satisfied itself on reasonable grounds:
  • As to the professional or other qualifications of individuals performing CFs as required under section 3 of the Standards;
  • As to the appropriate competence and skills of individuals performing CFs as required under section 3 of the Standards; and
  • As to individuals performing CFs acting with honesty, ethically and with integrity as required under section 4 of the Standards.

2.       Merrion did not
maintain written records to demonstrate how it fulfilled its ongoing obligation
to ensure individuals performing CFs continued to meet the Standards. 

3.      
Merrion erred in the classification of a number of individuals
performing CFs. 

4.      
Merrion’s Fitness and Probity records were not adequate, with no
centralised Fitness and Probity records for each individual covered by the
regime.  

PENALTY DECISION
FACTORS

In deciding the
appropriate penalty to impose, the Central Bank considered the following
matters:

  • The seriousness with which the conduct is viewed, particularly in circumstances where adherence to the Fitness and Probity regime is vital to ensuring that suitable individuals work in regulated entities. 
  • The period of time over which the breach occurred.
  • The need to impose an effective and dissuasive sanction on regulated entities.
  • The fact that Merrion took prompt and comprehensive steps to rectify the breach.
  • The co-operation of Merrion during the Central Bank’s investigation and in settling at an early stage in the Administrative Sanctions Procedure.

Notes to Editors

  • A list of the CFs can be found here and a list of the PCFs can be found here.
  • Pursuant to section 21 of the 2010 Act a regulated financial service provider shall not permit a person to perform a controlled function unless: a) the regulated financial service provider is satisfied on reasonable grounds that the person complies with the Standards, and; b) the person has agreed to abide by the Standards.
  • The 2010 Act is available here. The Standards are available to download here. Guidance to the Standards is available to download here.
  • The Central Bank conducted an on-site inspection at Merrion’s premises in February 2016 utilising its ‘authorised officer’ powers pursuant to Chapter 3 of the Central Bank (Supervision and Enforcement) Act 2013, which is available to download here.
  • The fine reflects the application of the maximum percentage settlement discount of 30%, as per the Early Discount Scheme set out in the Central Bank’s ‘Outline of the Administrative Sanctions Procedure’ linked here.
  • This is the Central Bank’s 115th settlement since 2006 under its Administrative Sanctions Procedure, bringing total fines imposed by the Central Bank to over €61 million.

Original Article Here

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