Individual Accountability is Here – Are You Ready?

The Central Bank (Individual Accountability Framework) Act 2023 will require regulated financial services firms and senior management to spend significant time and effort to ensure the new standards are met. Hazel Doyle (Arthur Cox) discusses the main aspects of the framework which include SEAR, new conduct standards for regulated firms and their staff, an enhanced Fitness & Probity Regime and stronger enforcement capabilities for the Central Bank.

The Central Bank (Individual Accountability Framework) Act 2022 (the “Act”) was enacted on 9 March 2023 and represents one of the most significant changes for directors and others performing regulated functions in Irish firms in recent years.

The Act creates a framework giving the Central Bank of Ireland (“CBI”) powers to effectively implement the Individual Accountability Framework (“IAF”) and enhance individual accountability in the management and operation of regulated financial service providers (“RFSPs”).

Central Bank Consultation

On 13 March 2023, following the enactment of the Act, the CBI launched a three-month public consultation paper entitled “Enhanced governance, performance and accountability in financial services” (the “CP”). The CP includes draft regulations (the “Regulations”) and draft guidance (the “Guidance”) which seek to provide clarity in terms of the CBI’s expectations for the implementation of three aspects of the IAF:

1. the senior executive accountability regime (“SEAR”);

2. new conduct standards; and

3. enhancements to the CBI’s Fitness and Probity (“F&P”) regime.

Key Aspects of the Consultation

SEAR

SEAR will require in-scope firms to set out clearly and fully where responsibility and decision-making lie within the firm’s senior management.

The CP confirms that SEAR will initially apply to a defined range of firms, namely:

• credit institutions (excluding credit unions);

• insurance undertakings1;

• investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are permitted to hold client assets; and

• incoming third country branches of the above (with a proportionate approach to apply to low PRISM impact rated in-scope investment firms and incoming third-party branches).

Fund managers and fund boards are not therefore, in scope of the first wave of SEAR, however the CP clarifies that the Regulations will enable the CBI to roll-out SEAR to other sectors in due course.

The subjects of SEAR are those executives who perform Pre-Approval Controlled Functions (“PCFs”) within in-scope RFSPs. The Guidance confirms that the core features of SEAR will be:

• Prescribed Responsibilities which prescribe further responsibilities which an RFSP must allocate to PCFs;

• Inherent Responsibilities which specify a range of responsibilities that are inherent to each PCF;

• Other Responsibilities which are those material activities or risks which are not covered by the list of prescribed responsibilities applicable to the relevant RFSP. Such “other responsibilities” must be identified by the relevant RFSP and then allocated to individuals in a PCF role;

• Statements of Responsibilities requiring RFSPs to prepare statements of responsibilities for each of their PCF roles, assigning clear responsibilities to each role; and

• Management Responsibility Maps requiring RFSPs to produce a management responsibility map outlining key management and governance arrangements in a comprehensive and accessible way in a single source document.

As expected, the CBI proposes under the CP that SEAR will capture all PCF roles including independent non-executive directors and non-executive directors; However, the CBI states that the standards to be met by non-executive directors will relate to their non-executive oversight functions and will be limited to what should reasonably be expected of individuals in that context.

SEAR - Duty of responsibility

SEAR introduces a new “duty of responsibility” whereby all individuals with prescribed or inherent responsibility for an aspect of a RFSP’s affairs must “take any steps that it is reasonable in the circumstances for the person to take” to ensure that the affairs of the RFSP (for which the individual is responsible) are conducted in accordance with its obligations under financial services legislation.

Conduct Standards

The Regulations sets out three new sets of conduct standards which will apply to all RFSPs:

(1)   Business standards.

The purpose of which are to ensure that in the conduct of its affairs a firm acts in the best interests of customers and of the integrity of the market, acts honestly, fairly and professionally and acts with due skill, care and diligence.

The CP notes that business standards will be developed by the CBI in conjunction with the separate review and consultation on the Consumer Protection Code.

(2)   Common Conduct Standards

Common Conduct Standards are the standards of behaviour expected of individuals carrying out Controlled Functions (“CFs”) within RFSPs. They are basic standards such as acting with honesty and integrity, with due skill, care and diligence, and in the best interest of customers.

(3)   Additional Conduct Standards

Senior executives, which includes individuals performing PCF roles and other individuals who exercise significant influence on the conduct of a firm’s affairs, will also have Additional Conduct Standards related to running the part of the business for which they are responsible.

It is expected that an individual subject to the Conduct Standards shall take reasonable steps to achieve compliance with the standards. The Guidance has been developed to help individuals understand how to meet these Conduct Standards.

The CP also sets out the CBI's expectations regarding training. These include, for example, an expectation that, for firms within the scope of SEAR, the individual who is in the relevant PCF role with responsibility for embedding the Conduct Standards throughout the firm should oversee training in respect of the Conduct Standards.

Enhancements to the F&P Regime

The IAF provides for certain modifications to the existing F&P Regime including:

• firms and holding companies will be required to certify annually ongoing compliance with F&P standards of individuals carrying out CF roles;

• firms will not be required to submit details regarding such certifications to the CBI, however, this information should be available upon request; and

• as part of the existing annual PCF return, firms will be required to confirm completion of the new annual certification process;

• firms will be required to inform the CBI where formal disciplinary action has been taken against individuals in the firm in respect of breaches of the Conduct Standards; and

• the F&P regime will be extended to apply to holding companies established in Ireland. In this regard, the CBI is proposing to prescribe CFs and PCFs for holding companies.

Central Bank Powers

The CBI’s Administrative Sanctions Procedure (“ASP”) will be strengthened to ensure that the CBI has the ability to take enforcement action under the ASP directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.

The CBI intends to publish a separate consultation on the changes to the ASP in mid-2023. This package will include a revised ASP Outline, ASP Inquiry Guidelines and ASP Sanctions Guidance.

Timing

The main requirements of the Act which include SEAR, the conduct standards and ‘certification requirement’ regarding F&P, will not come into force until after the CP consultation process has concluded.

The CP proposes a number of deadlines for the implementation of the IAF package of reforms:

Next Steps for Firms

Now that the Act has become law, RFSP should review and take practical steps to progress their plans for implementation of the individual accountability legislation. Firms should also consider carefully the proposals in the CP and consider whether to provide feedback to the CBI on the proposals. The CP should also provide sufficient detail now for firms to ramp up their IAF/SEAR implementation projects.

1excluding reinsurance undertakings, captive (re)insurance undertakings and insurance special purpose vehicles.