Joe Beashel is a partner with Matheson Ormsby Prentice.

Dialogue with Industry and Advisors

In the Consultation Paper, the Financial Regulator suggested that there be some curtailment of dialogue with industry so as to avoid possible compromise of the Administrative Sanctions Procedure. It is not a surprise that over 80% of submissions addressed this point and most expressed a concern at any move away from the current system. The Financial Regulator has agreed not to make any change noting that ‘informal dialogue is important in facilitating investment decisions in Ireland and it can play a valuable role as part of the on-going consultation process to ensure that regulatory requirements are proportionate and practical.’ We strongly support this decision.

Principles Based Approach

Many of the submissions received questioned how the rules of the Administrative Sanctions Procedure align with the ‘Principles Based’ approach to regulation espoused by the Financial Regulator. Is this the thin end of a, ‘rules and sanctions’, wedge? The Financial Regulator has been reassuringly strong in its assertion that its current approach will not change, in fact it states that ‘…many firms will never be subject to administrative sanctions…’ and ‘…The Financial Regulator does not see administrative sanctions as part of its day-to-day work with most regulated entities…’ Further, Martin Moloney, Secretary to the Financial Regulator, has stated (in ‘Regulatory Connection’) that ‘Administrative sanctions are an adjunct to our main approach to regulation for the small minority of cases where our preferred approach is not proving effective’.

There is a natural tension between regulator and regulated, the regulator wants to foster a culture of ‘openness and cooperation’ and the regulated would rather avoid financial penalty and public punishment as a consequence of its ‘openness and cooperation’. We welcome the clarification that will see the use of the Administrative Sanctions Procedure as an exception rather than the rule. Of course, the fact that these sanctions exist will be an important factor for industry in deciding how to tackle a compliance issue that arises, the executioner still has a very sharp sword even if it is hidden discretely behind his back!

SUMMARY OF ADMINISTRATIVE SANCTIONS PROCEDURE

The Administrative Sanctions Procedure (illustrated below) will only apply to ‘prescribed’ contraventions (as defined) (see below).

The Administrative Sanctions Procedure

A ‘prescribed contravention’ is defined in the second schedule to the 1942 Act (as updated by section 31 of the Central Bank and Financial Services Authority of Ireland Act 2003 and section 20 of the IFSRA No. 2 Act). It is widely drafted to include primary and secondary legislation and notices issued by the Financial Regulator, which in practical terms, will mean that most, if not all, contraventions could potentially be subject to the Administrative Sanctions Procedure. It is interesting to note that the Criminal Justice Act 1994 is not ‘prescribed’ therefore breach of anti-money laundering rules, while possibly a criminal offence, will not currently attract sanctions under the Administrative Sanctions Procedure.

Publicity

Aside from monetary penalties an important practical concern for the industry will be that the Financial Regulator will generally publish details of any sanction imposed. In certain circumstances, where for example the information is confidential, details will be published on an anonymous basis. The publication of sanctions is a significant difference between the current approach to enforcement and the Financial Regulator’s new approach. exactly what Sanctions can be imposed?

The following range of sanctions can be imposed:

The Financial Regulator has stated that it does not propose to develop a scheme of sanctions or scale of fines in advance rather it would like to see an approach develop over time taking into account the unique facts of each case. In particular, the distinction between a caution and a reprimand (the latter being the more serious of the two) and the scale of fines attaching to various breaches will be developed.

The power to disqualify persons from the Industry will be reserved for the most serious breaches or pattern of breaches.

Summary

These new enforcement powers are a significant increase in the Financial Regulator’s ability to regulate the financial services industry. In future, we will see a more formal and public enforcement process. The seriousness of the potential financial sanction and the attendant publicity will, no doubt, make the financial services industry apprehensive. Thankfully a clear message is being sent that the Administrative Sanctions Procedure will be the exception rather than the rule. Only time will tell whether this proves to be the case. What is clear, is that the ground rules of our industry are changing, at some point in the future, a financial institution will be fined and managers sanctioned in the unpleasant glare of publicity. There is no magic formula to avoid this happening to you and your organisation, rather it will be a combination of getting your compliance processes and procedures right, hiring and training the right people, building or supporting adequately your legal and compliance and internal audit functions and fostering an appropriate ‘compliance aware’ culture throughout your organisation and finally, establishing robust escalation procedures to deal with situations when they do arise.