The third President of the United States, Thomas Jefferson, remarked that “Banking institutions are more dangerous to our liberties than standing armies.” Whilst you may not concur entirely with this view, the global financial crisis has provided a dramatic reminder that mismanagement of credit institutions may indeed be extremely dangerous. In Ireland, a number of significant pieces of legislation have been introduced which will undoubtedly present new challenges from an employment law perspective. The Central Bank of Ireland (“CBI”) has also conducted a range of reviews of the practices of financial institutions, including in particular a review of the link between remuneration practices and risk taking, and it is in the process of introducing a number of measures which will lead to increased scrutiny and supervision of credit institutions operating in Ireland. In this article, I will examine some of the employment law issues potentially arising from a number of these initiatives.
2. Special orders and bonus payments where financial assistance has been provided by the state
The Credit Institutions (Stabilisation) Act 2010 was signed into law on 21 December 2010. It provides the legislative framework for the restructuring of the Irish banking system, as agreed in the EU/IMF Programme for Ireland. The Act applies to, amongst others, those financial institutions which have received funding support from the Irish state. The majority of the Act’s provisions will cease to have effect from 31 December 2012. However, it does contain a number of novel and interesting provisions which potentially raise employment law issues.
Special Management Orders
The Act empowers the Minister for Finance to make a “special management order” enabling him to appoint an appropriately qualified person as a “special manager” to a relevant financial institution for a period of six months. Such individual would be required to carry on the institution’s business as a going concern with the object of preserving and restoring its financial position. The Act gives a special manager extremely wide-ranging powers, including sole authority over and direction of officers and employees of the institution and statutory authority to remove any person who is a director, employee or consultant, without the necessity to give notice to such person.
Where an employee is dismissed in Ireland and has one year’s continuous service with his or her employer, he or she may bring a claim of unfair dismissal. If such claim is successful, then the employee may be awarded compensation of up to two years’ gross remuneration or an order may be made that he or she be reinstated or re-engaged. In the normal course, it may also be open to an employee to bring an application for an injunction or a claim of wrongful dismissal at common law, where he or she has not received the requisite contractual notice of termination of employment. Whilst the Act preserves an individual’s right to claim damages or compensation from the relevant institution for loss of office or employment, it expressly disentitles an employee to be reinstated or re-engaged and also curtails potential injunction applications. It is clear that these provisions may have a profound impact on the employment rights of individuals employed by a relevant institution in the event of the appointment of a special manager.
The Act empowers the Minister to impose terms and conditions when providing financial support to relevant institutions which any other provider of financial support would be entitled to impose. This provision, which not unsurprisingly has attracted much attention, can be used to prevent the making of bonus payments by relevant institutions to employees or officers where the Minister stipulates that a condition of further financial support is that such bonus payments are not made. Its purpose is to provide a relevant institution with a defence to a claim by an employee that he or she was entitled as a matter of contract or statute to be paid a bonus. This provision has not yet been examined by the Irish courts and it will be interesting to see how its precise parameters are interpreted where an employee claims to have earned a bonus and it remains unpaid.
3. Corporate Governance Code for Credit Institutions
On 8 November 2010, the CBI issued its Corporate Governance Code for Credit Institutions and Insurance Undertakings (the “Code”), which applies to such institutions’ existing boards and directors from 1 January 2011. Institutions have until 30 June 2011 to introduce changes to their systems and structures and where changes to board membership are necessitated by the Code, the period is extended to 31 December 2011. The Code imposes specific obligations on banks and insurance companies in relation to their corporate governance structures.
The Code seeks to ensure that by putting in place robust corporate governance arrangements, the boards of these institutions are in a position to manage risk and thereby minimise the prospect of future financial crises. On the introduction of the Code the Head of Financial Regulation, Mr Matthew Elderfield, commented that its provisions “are more demanding than those in place in other jurisdictions as we have decided that in the area of corporate governance we do not want to simply match best practice internationally but wish to set a higher standard.”
The Code includes provisions relating to matters such as board membership and the role and responsibilities of the chairman and other directors. From an employment law perspective, there are several interesting requirements set out in the Code. By way of example, the Code obliges a relevant institution to review the renewal of the Chief Executive Officer’s contract at least every five years. Where, as is generally the case, an individual is employed as Chief Executive Officer pursuant to a permanent contract of employment the above requirement will undoubtedly raise interesting issues lead to litigation where, for example, the conclusion of the review is that the individual should not continue in the position.
4. The fit and proper regime
Under the Central Bank Reform Act 2010 (the “2010 Act”), the CBI has been granted very significant statutory powers, which may have an impact on the employment relationship. In this respect, it now has power to regulate the appointment of individuals to influential positions in regulated financial services providers and to apply a rigorous fitness and probity regime to individuals occupying certain positions in such institutions. The ambit of the new regime is much broader than that which was previously in place in that it brings within its scope persons who perform “controlled functions” and not simply those in senior managerial positions.
In summary, the CBI is now empowered to: -
· designate certain positions as “pre-approval controlled functions” (PCF’s) or “controlled functions” (CF’s);
· compel the production of specified information/documentation from individuals or firms and compel persons to attend before the CBI for interview prior to any appointment being made to a PCF;
· impose statutory standards of fitness and probity which CF’s and PCF’s shall be obliged to meet. The CBI is empowered to issue a code which will prescribe such standards.
The CBI issued a consultation paper in March 2011 concerning two aspects of the new fit and proper regime, namely the designation of positions as either PCF’s or CF’s and the proposed standards of fitness and probity which must be met by such individuals. Interested parties were invited to make submissions by 20 May 2011.
CF’s and PCF’s
The 2010 Act contains an extremely broad definition of CF to include persons who carry out a function in relation to the provision of a financial service that is likely to enable them to exercise a significant influence on the conduct of the affairs of a regulated financial services provider. In addition, a CF is defined to include a function that is related to ensuring, controlling or monitoring compliance by a regulated financial service provider, the giving of advice to a customer, dealing with or having control over property of a customer or dealing with property on behalf of the financial service provider.
Where a person performs a CF role, the relevant institution must not permit that person to perform such function unless it is satisfied on reasonable grounds that the person complies with any fitness and probity standards set out in the forthcoming code to be finalised by the CBI and also that the person has agreed to abide by such standards.
From an employment law perspective, one significant provision of the 2010 Act is the extension of a power to the Head of Financial Regulation to investigate the fitness and probity of a person performing a controlled function. Such person may be suspended if the Head of Financial Regulation is of the opinion that there is sufficient reason to suspect that the person is not a fit and proper person. A suspension notice may endure for an initial ten day period and if confirmed it can apply for a further period of up to three months. The Head of Financial Regulation is also empowered to make an application to the High Court to extend the period of validity of the suspension notice.
The CBI may designate certain functions as PCF’s, where the function is one by which a person may exercise a significant influence on the conduct of the regulated financial institution’s affairs. Directors, secretaries and chief executive officers are deemed to be PCF’s by the 2010 Act.
One of the consequences of a position being designated as a PCF is that the relevant regulated financial institution is prohibited from offering to appoint a person to perform the function unless the CBI has approved the particular appointment in writing. In considering whether or not to approve a particular appointment, the CBI may request the production of documentation/information to it and it may also require the candidate or another person to attend before it for interview. Clearly, these powers are extremely significant and ensure that the CBI will play an active role in ensuring the fitness and probity of individuals appointed to senior and influential positions within regulated financial institutions.
Proposed Standards of Fitness and Probity
The draft standards of fitness and probity proposed by the CBI in its consultation paper raise a number of very interesting issues from an employment law perspective. An analysis of each of these issues would obviously be beyond the scope of this article. However, I have highlighted a number of matters below in order to give readers a flavour of the employment challenges which may arise.
One matter which is unclear is the level of due diligence which relevant institutions will be obliged to undertake to ensure that the standards prescribed are met. In this regard, for example, the draft standards require that a person must be able to demonstrate that his or her role in a CF or PCF is not adversely affected to a material degree by financial matters or credit or bankruptcy issues. The lengths to which an institution must go to satisfy the above are not entirely clear and this is likely to raise issues given the level of personal debt of many individuals in Ireland.
Some practical difficulties may also arise in recruiting external candidates to key roles in view of some of the requirements of the current draft code. One of the criteria that needs to be satisfied by a PCF candidate is obtaining a reference from his or her current employer. Many candidates will be reluctant to disclose to their current employer that they have applied for a new job prior to having a binding contractual commitment from the new employer to employ them and the 2010 Act prohibits any contractual commitments being entered into with PCF’s without CBI approval of the candidate. Further, in Ireland many employers do not issue references to former employees. Instead, employers tend to issue a statement of employment which would not address the ability of the individual and would be limited to basic factual information such as the position held by the individual, dates of employment and the nature of his or her duties.
It is clear from the various initiatives outlined above that the Irish legislature has introduced very significant stabilising and reforming measures in the financial services sector. The precise implications of many of these measures for the employment relationship between a financial institution and its employees will be likely to be the subject of litigation over the coming years.
Clients operating in the financial services sector, who may be affected by these measures, would be well advised to take a pro-active approach to these initiatives. Whilst the Irish legislature has certainly drawn legal battle lines, it will undoubtedly fall to Irish courts and tribunals to demarcate several of those lines in particular situations. Absent a pro-active approach to the new regime, the words of an old adage may ring true for many financial institutions and it may indeed prove too late for such institutions to sharpen their defence sword when the drum beats for legal battle!
Deidre Lynch is a Senior Associate Solicitor at Matheson Ormsby Prentice, Dublin, Ireland