Clarity on Ireland’s proposed Individual Accountability Framework

Summary

The Irish Government has published the general scheme of a bill which will introduce a proposed new individual accountability framework for regulated financial services providers into Irish law. The framework, which will include the Senior Executive Accountability Regime, largely follows the proposals put forward by the Central Bank in its 2018 behaviour and culture report. The framework is likely to be in force within the next 12 to 18 months.

Background

In July 2018, the Central Bank of Ireland (the "Central Bank") published a report on the Behaviour and Culture of the Irish Retail Banks (the "Report").  The Report was commissioned in connection with the tracker mortgage examination, and it proposed the introduction of a new individual accountability framework for regulated financial services providers ("RFSPs") which would include:

• A Senior Executive Accountability Regime (SEAR), designed to ensure clear accountability by requiring firms and senior individuals within them to map out the firm's governance and decision-making processes;

• Clear and enforceable Conduct Standards which would set out the behaviour the Central Bank expects of RFSPs and their employees;

• Enhancements to the current fitness and probity regime to require firms to proactively assess individuals in controlled functions on an ongoing basis; and

• A unified enforcement process, which would apply to all contraventions by firms or individuals of financial services legislation, and which would remove the "hurdle of participation".

The Department of Finance has now published the heads of the Central Bank (Individual Accountability Framework) Bill (the "Bill") which sets out the details of the individual accountability framework.  The framework is based on the UK's Senior Managers and Certification Regime ("SMCR") which the Department of Finance notes has received broadly positive feedback from the industry.  The regulatory impact assessment which accompanies the Bill also notes that the SMCR's requirements for regulatory references, which have been received with some reservations in the UK, will not be carried over to the proposed Irish regime. 

We have set out below the main features of the framework as proposed by the Bill, including where these proposals differ from the Report.

Individual accountability framework

SEAR
As indicated in the report, SEAR will initially apply to credit institutions (excluding credit unions), insurance undertakings (excluding reinsurance undertakings, captive (re)insurance undertakings and ISPVs), investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorised to hold client monies/assets and third country branches of the above.

Conduct Standards
In common with the Report, the Bill proposes three sets of conduct standards. The conduct standards will apply across the financial services sector, whereas SEAR will focus on those sectors with a greater consumer focus:

Enhancements to the Fitness and Probity Regime
The Bill’s provisions on enhancements to the Fitness and Probity regime are wider in scope than those suggested by the Report, and include the following:

Enforcement Investigations and Sanctions
The fourth pillar of the individual accountability framework consists of a series of amendments to the existing administrative sanctions procedure (the “ASP”), which are necessary to bring it into alignment with the new rules set out in the framework – for example by providing for the direct enforceability of breaches of the Common Conduct Standards and the duty of responsibility which will apply to SEFs.

In addition and as indicated in the Report, the ASP will be amended to remove the “hurdle of participation” or “participation link”. Under the current rules, the Central Bank cannot pursue individuals directly for breaches in their own right but must first prove a prescribed contravention against an RFSP before it can take an action against an individual who has participated in the breach. Under the new rules, the Central Bank will be empowered to commence an investigation where circumstances suggest that a person has committed or participated in a prescribed contravention.

Timing and next steps

The proposals set out in the Bill closely follow those of the Report, with some helpful clarifications on how the framework, including SEAR, will fit in with the existing Irish regime. As the Minister for Finance has said he hopes to have the new regime fully implemented within 12 to 18 months, there is limited time to prepare for the new rules and firms should begin making their preparations as soon as possible. Although the rules are not yet in final form, firms can take practical steps now, for example by identifying SEFs and by reviewing the associated job specifications, to prepare for the statements of responsibility. We will be closely following the development of the framework and will keep our clients informed of any developments.