Background to Central Bank of Ireland (Individual Accountability Framework) Bill 2022

The Central Bank of Ireland (Individual Accountability Framework) Bill 2022 (the Bill) is intended to improve the culture of the banking sector by creating an individual accountability framework and improving conduct and governance standards across financial services.  The Bill amends three key pieces of legislation, the Central Bank Act 1942, the Central Bank Reform Act 2010 and the Central Bank (Supervision and Enforcement) Act 2013. The Bill passed the Seanad on 22 February 2023 and was remitted to the Dáil, where it was passed following a final debate on 1 March 2023.  The Bill is expected to be signed into law by the President later this month.

The Bill contains the following key proposals:

• a new Senior Executive Accountability Regime (SEAR) for individuals performing a pre-approved controlled function in relation to the regulated financial service provider (PCF holder) based on similar standards to the UK’s Senior Managers and Certification Regime (SMCR);
• the introduction of new business and conduct standards;
• the enhancement of the existing fitness and probity (F&P) regime;
• the enhancement of the Central Bank of Ireland’s (CBI) enforcement, investigations and sanctions powers.

SEAR

SEAR will be implemented by way of amendments to the 2013 Act by granting the CBI "regulation-making powers" to impose obligations on in-scope regulated financial service providers (RFSPs) regarding their governance and management arrangements. The details of the sectors included in SEAR will be provided for by CBI implementing regulations which will be published by the CBI for public consultation shortly.  It is expected that SEAR’s application will be limited 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.  The main elements of SEAR which echo the UK’s SMCR are:

• inherent responsibilities which will apply automatically to a given PCF holder;
• allocated responsibilities which firms must ensure are allocated to individuals in senior roles;
• statements of responsibilities to be completed by persons performing PCFs which will clearly set out their role and areas of responsibility; and
• management responsibility maps to document the key management and governance arrangements in a comprehensive and accessible way within a single source of reference.

Business and conduct standards

The Bill proposes the introduction of three sets of business and conduct standards:

• Business standards which will apply to all RFSPs irrespective of sector.  These include a duty to cooperate in good faith and without delay with the CBI and other regulators. The CBI will be mandated 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.

• Common conduct standards will apply to all PCF holders and will include an obligation to observe proper standards of market conduct.

• Additional conduct standards will apply to PCF holders and those performing any other function by which the person may exercise a significant influence on the conduct of the RFSP’s affairs.

Enhanced F&P regime

The Bill proposes to extend the F&P regime to certain holding companies of credit institutions, insurance undertakings and investment firms. The Bill will also require RFSPs and holding companies to certify in writing that they are satisfied that PCF holders comply with the F&P standards. It is expected that the CBI may put in place a renewal requirement for certifications in its implementing regulations.

Additionally, the Bill widens the scope of the CBI's powers under the F&P regime allowing the CBI to investigate any PCF holders for up to six years prior to the investigation as to their F&P compliance. The CBI may suspend a PCF holder for a period of six months, which can in turn be extended by up to 24 months. (This stands in contrast to the current suspension period of 3 months which can be extended by up to 3 months).

Enforcement, sanctions and investigations

In order to create a comprehensive enforcement mechanism, the Bill proposes to amend the Central Bank Act 1942 to align the scope of the Administrative Sanctions Procedure (ASP) set out in that Act with the proposals under the Bill. This will be done by replacing the concept of a "person concerned in the management" of an RFSP with references to PCF holders in relation to an RFSP, and by extending the scope of the ASP to holding companies.

The Bill also proposes to amend the ASP by breaking the "participation link". This will allow the CBI to sanction accountable individuals within RFSPs, without first finding the RFSP to have breached financial services legislation.

The CBI will be able to consider a number of factors in determining whether to impose sanctions on a natural person, including: the seriousness of the prescribed contravention; the effect of the prescribed contravention; the conduct of the person during and after the person's commission of or participation in the prescribed contravention; the previous record of the person; any consideration relating to pending or possible criminal proceedings; and any matter relevant to the financial position of the person.

Similarities to the UK’s SMCR regime

The UK has operated a similar senior executive accountability regime to the SEAR, the SMCR, for the past seven years.  Whilst many firms in Ireland may be bracing themselves for an increase in sanctions towards individuals, this is not how the system has worked in practice in the UK so far. The UK’s Financial Conduct Authority has been modest in terms of the enforcement investigations that it has commenced in relation to senior managers and certified persons with only one enforcement action taken against a senior manager for failing to act with due skill care and diligence in breach of individual conduct rules.  The UK’s Prudential Regulation Authority has yet to take any enforcement action against a senior manager but it has stated that the SMCR has changed its approach to supervising firms and that “individual accountability has become the tool through which we deliver our supervisory approach”.  It is likely that a similar supervisory approach will be taken by the CBI.  Industry cooperation with the CBI will therefore be key to the new regime working effectively.

Next steps

The Bill is expected to be signed into law by the President later this month. The CBI is also due to issue a public consultation paper shortly which will contain draft implementing regulations which will underpin the provisions of the Bill and provide more granular detail on how to comply with the individual accountability framework.