Preparing for Ireland's new financial services individual accountability regime

• Ireland

• Financial services and markets regulation
• Financial services

15-09-2022

The Central Bank (Individual Accountability Framework) Bill 2022 (the bill) was published on July 28, 2022. The bill is expected to be enacted toward the end of 2022. It sets out a framework for individual accountability in financial services, although much of the detail will be provided in subsequent Central Bank of Ireland (CBI) implementing regulations and guidance. The CBI has indicated that it will publish drafts of these implementing regulations and guidance for public consultation immediately after the bill is enacted.

This brief note sets out a few high-level thoughts comparing/contrasting the forthcoming individual accountability regime in Ireland, as set out in the bill, with the UK's Senior Managers and Certification Regime (SMCR). It also comments on what firms need to do now to prepare for the new regime in Ireland.

Comparing/contrasting SMCR and the forthcoming Irish regime

As indicated in the regulatory impact analysis document, which was published with the general scheme (a legislative precursor to the bill) of the forthcoming legislation in July 2021, the Irish regime is modelled on the SMCR. Inevitably, therefore, the bill includes the core features of the SMCR.

In particular, under the Senior Executive Accountability Regime (SEAR) elements of the bill, the CBI has powers to require those firms it deems to be within scope to ensure that each of their within-scope senior managers have an individual statement of responsibilities which sets out their inherent responsibilities. Firms must also ensure that responsibilities prescribed by the CBI are allocated to a within-scope senior manager. The bill also gives the CBI powers to adopt the equivalent of SMCR-style management responsibility maps. Furthermore, the bill includes a duty of responsibility that is similar to the duty of responsibility on senior managers under the SMCR.

The bill gives the CBI powers to implement these SEAR elements progressively. The CBI has indicated that, during an initial phase of the new regime, the SEAR will apply to about 150 regulated firms, covering credit institutions, insurance undertakings (other than certain categories) and higher-risk activity investment firms.

The bill also sets out — by way of amendments to the fitness and probity legislation set out in the Central Bank Reform Act 2010 (2010 act) — conduct standards for all regulated firms and for individuals, including additional conduct standards for more senior individuals.

These are similar to the SMCR conduct standards. Furthermore, the bill sets out a requirement on regulated firms not to permit a person to exercise certain roles (significant influence, or "controlled function" roles, including the more senior "pre-approval controlled function" (PCF) roles, as set out in the fitness and probity regime) unless they have been certified by their firm to be fit and proper for the role.

The certification is expected to be annual. This is similar to the SMCR certification requirement. Furthermore, as with the SMCR, under the bill the CBI may sanction an individual where the individual has infringed his or her duty of responsibility and/or the individual conduct standards. Importantly, the bill proposes to break the current "participation link", so that the CBI will be able to sanction individuals for misconduct without first having to establish a breach by the individual's firm and that the individual participated in that breach.

Divergence from SMCR

There are, however, a number of respects in which the bill diverges from the SMCR; these include:

• The above-described SEAR elements (statement of responsibilities; duty of responsibility) apply to all persons in within-scope firms who are in PCF roles — these include all executive and non-executive board directors of the firm. By contrast, not all board directors fall within scope of the equivalent SMCR requirements.

• The bill provides that individuals are required to take "any steps that it is reasonable in the circumstances for the person to take" to comply with the individual conduct standards. By contrast, the SMCR senior manager conduct rules refer to a requirement on senior managers to take "reasonable steps" to comply with specified senior manager conduct rules. It is arguable that the "any steps" requirement under the bill might be more onerous than the "reasonable steps" requirement under SMCR. Firms will have to await guidance from the CBI and, possibly, eventual judicial interpretation, to shine further light on this.

• The bill does not include an equivalent of the SMCR regulatory reference regime, which sets out requirements regarding the obtaining of references for applicants for roles, to avoid a problem of "rolling bad apples". The 2021 regulatory impact analysis stated that this system of regulatory references would not be included in the Irish regime and referred specifically, in this regard, to the constitutional rights of individuals. More generally, the constitutional rights afforded to individuals in Ireland, including due process rights, have the potential to be an important feature distinguishing the operation of the Irish regime from the SMCR.

More generally, even though the UK and forthcoming Irish regimes may be broadly similar, there are likely to be differences in the detail of the two regimes — further insight will be possible once the CBI's implementing regulations and guidance are available.

Moreover, in implementing the respective regimes in practice, the priorities and approaches of the respective regulators may well differ. In this regard, the CBI attaches particular significance to the approval process for PCF roles. In its public speeches, the CBI regularly highlights the number of individuals who withdraw their application for CBI approval for a PCF role following substantive engagement with the CBI during the application process.

It can be expected that this process will become more fraught for applicants in the future, in particular where the individuals are not in a position to demonstrate to the CBI's satisfaction that they have met the individual conduct standards where they were previously subject to them (under the 2010 act, the CBI can reject an application for a PCF role where it is of the opinion that the individual in question does not meet the applicable fitness and probity standards or if it is unable to decide based on the information available to it).

What firms need to do now to prepare for the new regime in Ireland

Firms will have to await the enactment of the legislation and the finalisation of the CBI's implementing regulations and guidance to get a clear picture of the new regime in Ireland. Nevertheless, all regulated financial services firms in Ireland should start preparing now for the new regime. In this regard, whereas in the early phase the SEAR, elements of the new regime will only apply to around 150 regulated firms, the conduct standards, fitness and probity certification requirements and changes to the sanctions regime in respect of firms and individuals will apply to all from the outset.

In particular, firms should ensure that:

• Their board is fully briefed on the expected requirements of the new regime and the implications for the firm, particularly in relation to ensuring compliance with the new requirements.

• A project team is set up, to include a sufficiently senior sponsor (likely to be at chief executive officer level) and cross-firm engagement (e.g., legal, risk, compliance, HR, heads of key business lines). Implementing the new requirements is likely to be a less successful process if it is treated as a compliance project to be led and run by compliance.

• The project team consider project planning at an early stage, to include issues such as:

• project budget;

• internal communications — particularly in respect of the SEAR requirements relating to the documentation of individual roles and responsibilities;

• embedding the conduct standards — this would include consideration of how the fitness and probity certification process can be managed effectively; the issue of review of employment contracts and HR policies and procedures; the documentation by individuals of steps they have taken to ensure compliance with the conduct standards — the new regime will, inevitably, lead to a greater level of documentation of internal decision-making;

• internal training.

It is clear from the author's experience with the SMCR that the sooner firms start preparing for this new regime, the better.

Original article written by Ciaran Walker, Consultant, Financial Services Regulation and Governance and published in Thomson Reuters: Regulatory Intelligence on the 01 September 2022.