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30/05/24
Republic Of Ireland: Examining The Individual Accountability Framework
Recognised as one of the most significant legislative reforms to affect the Irish financial sector in recent years, the Central Bank (Individual Accountability Framework) Act 2023 (the Act), is being implemented on a phased basis. The first set of provisions under the Act took effect on 29 December 2023, and further provisions will be implemented later in 2024. The Act sets out (i) new conduct standards for individuals that carry out control functions; (ii) enhancements to the Central Bank’s Fitness & Probity Regime; (iii) a new senior executive accountability regime (SEAR) for certain categories of regulated firms; and (iv) amendments to the Central Bank’s administrative sanctions procedure and enhanced enforcement powers for the Central Bank (not addressed in this article).
Setting The Bar For Ethical Practices
Under the Act, individuals working in a regulated financial services provider are required to comply with new conduct standards. The conduct standards comprise a set of relatively high-level principles such as the duty to act with due skill, care and diligence, and the duty to act in the best interests of customers, to name a few. An individual who is subject to the conduct standards is required to take any steps that are reasonable in the circumstances to ensure compliance with the conduct standards.
The Central Bank prescribed different categories of conduct standards: The Common Conduct Standards, the Additional Conduct Standards, and the Business Conduct Standards. The Common Conduct Standards and the Additional Conduct Standards apply to individuals that carry out a Controlled Function (CF) or a Pre-approval Controlled Function (PCF) as described in the chart below, and the Business Conduct Standards apply to regulated firms.
|
Type of Conduct Standard |
Conduct Standard Requirements |
Application |
|
Common Conduct Standards |
1. Act with honesty and integrity. 2. Act with due skill, care and diligence. 3. Co-operate with regulators in good faith and without delay. 4. Act in the best interests of customers and treat them professionally and fairly. 5. Operate in compliance with standards of market conduct and trading venue rules.
|
To individuals who hold a Controlled Function (CF) or a Pre-approval Controlled Function (PCF).
Effective from 29 December 2023 |
|
Additional Conduct Standards |
1. Ensure the firm’s business is controlled effectively. 2. Ensure the firm’s business is conducted in accordance with its obligations under financial services legislation. 3. Ensure tasks are delegated to the appropriate persons with effective oversight. 4. Ensure information concerning the business of the regulated financial service provider, of which the Central Bank may reasonably expect notice, is disclosed promptly and appropriately to the Central Bank. |
To individuals who hold a Pre-approval Controlled Function (PCF) or a CF1 (Executive director).
Effective from 29 December 2023 |
|
Business Conduct Standard |
The Act enables the Central Bank to prescribe standards to ensure that firms act: 1. In the best interests of customers and the integrity of the market.
2. Honestly, fairly and professionally.
3. With due skill, care and diligence. |
To regulated firms.
|
The Central Bank may take an enforcement action directly against an individual for failure to comply with the Common Conduct Standards or the Additional Conduct Standards. The Central Bank is not required to find that a firm has breached financial services legislation before taking enforcement action against an individual, thereby setting aside the “participation link”.
The Business Conduct Standards are to be developed by the Central Bank, and the Central Bank has advised that such standards will be developed as part of its review of the Consumer Protection Code which shall be published in due course.
Regulated firms are required to notify individuals of the application of conduct standards and provide training to individuals to ensure their awareness of and adherence to the standards. In addition, firms are required to adopt policies and procedures to ensure the conduct standards are integrated effectively into the firm’s organisational structure and conduct of business.
Enhancements To The Fitness And Probity Regime
The Central Bank’s Fitness and Probity standards were introduced in 2010 and they require firms to assess an individual’s suitability before being appointed to a ’Controlled Function’ and thereafter on an ongoing basis.
The Act amends the existing Fitness and Probity regime and requires firms to certify compliance with the fitness and probity standards for all Controlled Functions. Firms are required to maintain a written certification, which affirms their satisfaction that an individual undertaking a Controlled Function adheres to the Fitness and Probity standards. Firms are not permitted to allow an individual to assume a Controlled Function role unless a valid certificate of compliance with fitness and probity standards is in place. The certification process must be conducted by firms at the following intervals:
- Before appointment (or, in the case of a Pre-Approved Controlled Function (PCF), prior to the submission of an individual questionnaire, or IQ, to the Central Bank).
- On an annual basis.
- In the case of any new Controlled Function role(s) being appointed, the certification process should be completed in advance of an individual’s appointment to the role.
The Central Bank has been granted enhanced powers to investigate any concerns it may have in relation to an individual’s fitness and probity, indicating an increased emphasis on upholding high standards within the industry.
Senior Executive Accountability Regime (SEAR): Defining Responsibilities And Strengthening Accountability
The purpose of SEAR is to improve governance, performance and accountability in certain regulated firms, and SEAR will do this by placing obligations on firms and senior individuals to set out clearly where responsibilities and decision-making lies, and by identifying what those responsibilities entail.
SEAR requires firms to define the responsibilities of senior individuals within their organisation. SEAR applies to individuals who hold "senior executive functions," aligning with the categories of individuals who hold the ‘pre-approval controlled functions’ (PCF) under the Fitness and Probity regime. Notably, SEAR extends its application to independent and non-executive directors, recognising their role in overseeing and governing regulated firms.
Central Bank has categorised responsibilities under SEAR into Inherent Responsibilities, Prescribed Responsibilities, and Other Responsibilities, which are as follows:
- Inherent Responsibilities are responsibilities that are identified by the Central Bank and are automatically assigned to an individual based on the nature of the role.
- Prescribed Responsibilities are responsibilities identified by the Central Bank that a firm allocates to an individual.
- Other Responsibilities are responsibilities (other than Inherent and Prescribed Responsibilities) that are identified by a firm and allocated by the firm to an individual.
Regulated firms are required to prepare a statement of responsibilities for each PCF, defining the Inherent, Prescribed, and Other Responsibilities that the PCF is responsible for discharging. Additionally, regulated firms are required to develop a management responsibility map at the entity level, which explains the firm’s management and governance structure to promote proper conduct and to facilitate investigations by the Central Bank. Regulated firms should proactively engage in the preparation of statements of responsibility, recognising that the process may involve detailed review and compilation of the universe of categorised responsibilities and discussion regarding the allocation of such responsibilities within the firm.
The Act introduces a duty for individuals with assigned responsibilities to take any steps that are reasonable to ensure compliance by the firm with financial services legislation. This duty of responsibility introduces a new layer of accountability which may result in firms increasing evidence of their decision-making processes, particularly evidence of decision making for individuals subject to assigned responsibilities.
Initially, SEAR covers the following types of regulated firms:
- Credit institutions.
- Insurance undertakings (excluding reinsurance, captive, (re)insurance and special purpose insurance vehicles).
- Investment firms that underwrite placements, deal on own account, or are authorised to hold client assets.
- Incoming third country branches.
SEAR regulations will apply to in-scope firms from 1 July 2024 and to independent non-executive directors at in-scope firms from 1 July 2025.
Following its initial application to the categories of regulated firms listed above, the Central Bank is expected to expand the application SEAR to other financial services sectors, which may include AIFMs and UCITS management companies.
The Individual Accountability Framework represents a transformative change to Ireland’s regulatory landscape, which aims to strengthen accountability of senior management, improve firms’ governance and risk management frameworks, and ensure proper conduct in the Irish financial services sector. As regulated firms embed the implementation of SEAR and adjust to the new conduct standards and enhanced fitness and probity processes, it is clear that a new era of heightened responsibility, transparency and accountability applies to the financial services industry in Ireland.
Conor Durkin
Conor Durkin is head of Pinsent Masons' Investment group in Ireland. He specialises in investment funds and asset management.
