Central Bank (Individual Accountability Framework) Bill 2022

Summary

The updated version of the Central Bank (Individual Accountability Framework) Bill 2022 (the “Bill”) was published on 28 July 2022, a year and a day after the publication of the general scheme of the Bill (the “General Scheme”), and four years after the publication of the Central Bank’s report on Behaviour and Culture of the Irish Retail Banks (the “Report”), which first set out the general outline of the proposed new Irish individual accountability framework. While the details of the proposed framework have been refined since the publication of the Report, its four main elements remain the same:

• three sets of clear and enforceable standards:

  • business standards which will apply to regulated firms;
  • common conduct standards, originally proposed to apply to all staff but now limited to those performing controlled functions; and
  • additional conduct standards, which will apply to those performing pre-approval controlled functions and other senior persons;

• a senior executive accountability regime (“SEAR”) which is based on the UK’s SMCR;

• enhancements to the existing fitness and probity regime (the “F&P Regime”); and

• a unified enforcement regime, including the removal of the existing participation link.

We have set out below ten features of the Bill, including where it differs from the previously published Report and General Scheme:

1. Structure of the Bill

The Bill is set out as a series of amendments and insertions to the following three existing Acts:

1. the Central Bank Act 1942;

2. the Central Bank Reform Act 2010; and

3. the Central Bank (Supervision and Enforcement) Act 2013.

As such, a large amount of the Bill consists of restatements of sections of the above legislation, and the Bill must also be read in conjunction with such legislation.

2. Standards

As referred to above, the Bill sets out further detail on the three sets of standards first proposed in the Report:

• business standards will apply to all regulated financial service providers, irrespective of sector. The standards are generally as set out previously in the General Scheme, although the duty to cooperate in good faith and without delay “with the Central Bank and other regulators” has been expanded to “with the [Central] Bank, and with authorities that perform functions in a jurisdiction other than the State that are comparable to one or more of the functions performed by the [Central] Bank under financial services legislation”.

  The Bill also includes provisions mandating the Central Bank to make regulations on the systems and controls, processes, policies and procedures that firms are to adopt for the purpose of ensuring that they comply with the business standards. The Bill provides that these regulations may apply either generally or to a specified class or classes of regulated financial service providers, customers or financial services, and that they may include different provisions in relation to different classes of regulated financial service providers, customers or financial services.

  A breach of the business standards will be a prescribed contravention, allowing the Central Bank to take direct enforcement action against, and impose sanctions on, the firm responsible for the breach;

• common conduct standards will apply to all individuals performing controlled functions. As with the business standards, the previous obligation to cooperate with the Central Bank and other regulators or authorities and deal with them in good faith and without delay has been expanded to include authorities outside of Ireland which are equivalent to the Central Bank. In addition, the obligation to observe proper standards of market conduct has been expanded to include any trading venue rules to which the relevant firm is subject by law and any market codes that apply to it. Each common conduct standard is accompanied by a non-exhaustive list of behaviours that would be expected to achieve compliance with the standard.

• additional conduct standards will apply to those performing pre-approval controlled functions or any other function by which the person may exercise a significant influence on the conduct of the regulated financial service provider’s affairs (together “senior persons”). These standards are substantially the same as those set out in the General Scheme.

The Bill imposes a duty on regulated firms, in order to ensure compliance with the common conduct standards and additional conduct standards, to notify persons of the standards which apply to them and to provide training on such standards. Firms must also establish policies on the integration of the common conduct standards into the conduct of the firm’s affairs.

3. Common and Additional Conduct Standards - Duty to Take Steps

The Bill provides for an obligation on persons performing controlled functions to take any steps that are reasonable in the circumstances to ensure that the common conduct standards are met. An equivalent obligation will apply to senior persons in respect of the additional conduct standards. A failure to take such reasonable steps will be a prescribed contravention, allowing the Central Bank to take direct enforcement action against, and impose sanctions on, the person responsible for the breach.

In determining the circumstances that are relevant for this purpose, matters to be considered will include:

• the nature of the business of the regulated financial service provider, including its scale and complexity;

• the functions of the person in relation to the regulated financial service provider, and the level of knowledge and experience that a person with such functions could reasonably be expected to have; and

• the level of knowledge and experience of the person.

4. F&P Regime - Holding Companies

As stated in the General Scheme, one of the enhancements to be made to the existing F&P Regime is to include directors and staff of holding companies within its scope. This is primarily achieved by including holding companies within the definitions of “controlled function” and “pre-approval controlled function”, with a large number of consequential amendments to the 2010 Act following after to include holding companies within its provisions.

In particular, the following Irish-incorporated holding companies will be in scope of the F&P Regime: financial holding companies, mixed financial holding companies, insurance holding companies, and investment holding companies.

5. F&P Regime - Certification of Fitness and Probity

Another enhancement to the F&P Regime will be that a regulated firm (and now a holding company) will not permit a person to perform a controlled function unless a certificate of compliance with standards of fitness and probity is in force in relation to that person. The detailed requirements for such certificates of compliance, including their format and period of validity, will be set out in regulations to be made by the Central Bank.

6. F&P Regime - Investigations

The Bill also provides that the power of the Central Bank’s Head of Financial Regulation to conduct an investigation in relation to the fitness and probity of a person performing a controlled function will be extended to apply to any person who performed a controlled function up to six years before the commencement of the investigation (subject to transitional provisions).

In addition, where a person is suspended by the Head of Financial Regulation from performing a controlled function, the maximum period of the suspension is extended from three to six months, and the period for which the suspension can be further extended by the High Court is extended to 24 months.

7. SEAR

SEAR will apply to persons performing senior executive functions (“SEFs”), which will be the same as those currently performing pre-approval controlled functions. The section of the Bill dealing with the SEAR does not provide a great amount of detail on the new regime, which will be set out in regulations to be made by the Central Bank. However, the main elements of the regime will be:

• inherent responsibilities which will apply automatically to a given SEF;

• allocated responsibilities which firms must ensure are allocated to individuals in senior roles;

• statements of responsibilities to be completed by persons performing SEFs, which will clearly set out their role and areas of responsibility; and

• management responsibility maps which will document the key management and governance arrangements in a comprehensive and accessible way within a single source of reference.

The details of SEAR will be set out in regulations to be made by the Central Bank, which we also expect to limit its application to credit institutions, insurance undertakings, 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 these entities.

8. SEAR – Duty of Responsibility

In common with the duty to take steps in connection with the conduct standards outlined above, the Bill provides that a person who has inherent or allocated responsibilities in relation to an aspect of a regulated financial service provider’s affairs (ie, a person within the scope of SEAR) will be required to take any steps that are reasonable in the circumstances to ensure that the aspect of the firm’s affairs is conducted so as to avoid contravention by it of its obligations under financial services legislation. A person subject to SEAR will commit a prescribed contravention if he or she fails to take such reasonable steps.

The matters to be considered in determining the relevant circumstances are the same as for the duty to take steps set out above.

9. Breaking the Participation Link

The “participation link”, which means that a firm must first be found to have breached financial services legislation before the Central Bank can pursue the relevant individuals, is removed by a series of amendments to the 1942 Act, which replace the concept of a person concerned in the management of a regulated firm with the concept of a person performing a controlled function in relation to a firm.

10. The Administrative Sanctions Procedure

As noted in the Report, in order for the new individual accountability framework to be effective, it must be underpinned by a unified enforcement process, to deal with issues arising from the current multiplicity of processes available to the Central Bank. In this regard, the Bill makes a number of amendments to the 1942 Act, both to clarify the operation of the Administrative Sanctions Procedure (the “ASP”) and to ensure that it conforms to the required standards of fairness in the administration of justice, in light of the decision of the Supreme Court in Zalewski v. An Adjudication Officer and Others (2021) (summarised below).
Some of the main changes to the ASP are:

• an amendment to bring holding companies within the ASP’s scope;

• a requirement for the Central Bank to keep the subject of an investigation updated as to its progress;

• requirements for the preparation of reports of investigations, including the right of the subject of the investigation to make submissions on the draft report and the confidentiality of the final report; and

• an alternative procedure which is available where a person acknowledges a contravention, which allows the Central Bank to dispense with an inquiry and impose a sanction on the person, which must be confirmed by the High Court in order to be effective.

Zalewski v An Adjudication Office, the Workplace Relations Commission, Ireland and the Attorney General [2021] IESC 24

In Zalewski, the Supreme Court considered the constitutionality of the Workplace Relations Commission (the “WRC”). The WRC is a statutory body established pursuant to the Workplace Relations Act 2015 (the “WRC Act”). Part of the function of the WRC is to adjudicate on certain workplace related complaints. Mr Zalewshi initiated a unfair dismissal claim against his employer in the WRC. When the parties attended for the hearing, the hearing was adjourned due to witness unavailability. When the parties subsequently returned to the WRC following the adjournment, the Adjudication Officer informed them that she had made her decision in respect of the claim, which issued shortly after, dismissing the claim. Mr Zalewski instituted judicial review proceedings seeking to quash the decision of the Adjudication Officer and challenge the constitutionality of the WRC Act. The case was ultimately appealed to the Supreme Court.

In terms of the function of the WRC, the Supreme Court held the WRC:

• carries out the administration of justice (which, pursuant to Article 34 of the Constitution, is to be administered in courts established by law); and
• exercises limited powers and functions of a judicial nature and is therefore covered by Article 37 of the Constitution (which permits bodies to exercise limited functions and powers of a judicial nature, in matters other than criminal matters).

In determining whether the WRC engaged in the administration of justice, O’Donnell J. stated that the traditional test was not an infallible guide and must be applied with some flexibility.

Following on from this, the Supreme Court held:

• a blanket prohibition on the holding of hearings in public is unconstitutional;
• the absence of provision for the administration of an oath, or any possibility of punishment for giving false evidence, is inconsistent with the Constitution; and
• the absence of an express procedure for cross-examination of witnesses (in this instance) was unsatisfactory but not unconstitutional, and it was to be presumed that an Act would be operated consistently with the Constitution.

The broader impact of this decision is that bodies exercising quasi-judicial functions, in particular when proceedings are held in private or involve contested facts not addressed through evidence given under oath, may be susceptible to challenge.

Conclusion

The publication of the Bill gives some welcome clarity on the possible final form of the new individual accountability framework, although much of the detail – particularly in relation to SEAR – will be included in regulations to be made by the Central Bank. We are closely following the evolution of this new regime, in light of the practical experience of our UK colleagues in implementing the SMCR.