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An overview. The Central Bank (Individual Accountability Framework) Act 2023

  • Ireland
  • Financial services and markets regulation - Briefings and articles

10-03-2023

Download the full report here.

Introduction

The Central Bank (Individual Accountability Framework) Act 2023 (“Act”) was finally enacted, on 9 March 2023, when the President of Ireland signed the relevant Bill into law.

This client briefing note summarises the main points of the Act. It should be read together with our separate client briefing note, Individual accountability: Preparing for the new regime.

Importantly, the Act is largely a framework which grants the Central Bank of Ireland (“CBI”) relevant powers to adopt detailed implementing regulations and guidelines which will set out much of the detail of the requirements to be imposed on fi rms and individuals under the Act.

Accordingly, the main requirements of the Act will not come into force until some time after this consultation process has concluded.

This briefing note outlines a number of the key points of the Act, specifically relating to:

– the Senior Executive Accountability Regime (“SEAR”)

– the Conduct Standards

– changes to the existing Fitness & Probity regime

– changes to the existing Administrative Sanctions Procedure (“ASP”)

SEAR

The SEAR is introduced by way of amendments to the Central Bank (Supervision and Enforcement) Act 2013 (“2013 Act”), section 48 of which authorises the CBI to adopt regulations “for the proper and effective regulation of regulated financial services providers”.

The Act amends section 48 of the 2013 Act, to enable the CBI to adopt regulations to, in particular:

– specify the aspects of the aff airs of a regulated firm for which a person in a Pre-approval Controlled Function (“PCF”) role has “inherent responsibility” (in essence, specify these aspects on the basis of the nature of the PCF role)

– specify the aspects of the affairs of a firm’s business for which responsibility must be allocated to a PCF

– make clear the management structure that identifies the lines of authority and accountability and specifies roles and responsibilities, in relation to the management of PCF holders and of other persons by PCF holders

– impose overall governance and documenting requirements

SEAR will apply to all regulated fi rms that fall within the scope of the relevant CBI implementing regulations. The CBI has indicated that, in an initial phase, SEAR will apply to about 150 regulated firms, covering credit institutions, insurance undertakings (other than certain categories) and higher risk activity investment firms.

These SEAR provisions enable the CBI to require inscope firms to put in place documented Statements of Responsibilities for each of its PCFs, together with a Management Responsibility Map, ensuring that there is clarity regarding who is responsible for what across the firm. Firms will also be required to allocate to a PCF certain prescribed responsibilities. Firms who fail to comply with the CBI regulations implementing SEAR are liable to sanctions under the ASP (eg fines of up to €10 million or 10% of turnover, whichever is greater).

Duty of responsibility

As part of SEAR, the Act introduces a new “Duty of Responsibility”, by way of amendment to the 2010 Act. This duty applies to all persons in a PCF role who fall within scope of SEAR under the above-described CBI regulations.

The Duty of Responsibility requires persons in a PCF role in in-scope fi rms to “take any steps that it is reasonable in the circumstances for the person to take” to ensure that the aspects of the individual’s firm for which the individual is individually responsible is conducted so as to avoid contravening fi nancial services legislation.

A failure by an individual to comply with this Duty of Responsibility will render the individual liable to potential sanctions under the ASP (eg fine of up to €1 million, disqualification).

Standards of conduct

The Act introduces/codifies standards of conduct, by way of amendments to the Central Bank Reform Act 2010 (“2010 Act”), which sets out the fitness and probity regime.

Business standards of conduct

The Act requires regulated firms to comply with regulations adopted by the CBI setting out business standards aimed at ensuring that firms act in the best interests of customers and the integrity of the market; act honestly, fairly and professionally; act with due skill, care and diligence.

The Act specifies a number of standards that must be included in the business standards to be adopted by the CBI in implementing regulations. These include standards such as those requiring regulated firms not to mislead a customer as to the advantages or disadvantages of any financial service. They must also include eg standards requiring regulated firms to engage and cooperate in good faith and without delay with the CBI and to disclose to the CBI “promptly, and in a manner appropriate to the circumstances”, any matter relating to the firm of which the CBI “would reasonably expect notice”.

A failure by a regulated firm to comply with these business conduct standards will subject the firm to potential sanctions under the ASP.

Duty on individuals to meet individual conduct standards

The Act amends the 2010 Act to impose individual conduct standards (“Common Conduct Standards”) on all individuals in a Controlled Function (“CF”) role in any regulated firm. It also imposes further conduct standards (“Additional Conduct Standards”) on those CFs in a PCF role in any regulated firm, together with those persons in (unspecified) functions whereby they can exercise “significant influence” on the regulated firm.

The Act requires persons in a CF, including PCF, role to “take any steps that it is reasonable in the circumstances to take to ensure that” these individual conduct standards are met.

The Common Conduct Standards are, in brief summary, that persons in a CF role act “with honesty and integrity” ; act “with due skill, care and diligence”; co-operate “ in good faith and without delay” with the CBI; act “ in the best interests of customers and treats them fairly and professionally”.

The Additional Conduct Standards are, in brief summary, that the business of the individual’s regulated firm is controlled effectively; is conducted in accordance with its financial services legislative obligations; “any delegated tasks are assigned to an appropriate person with effective oversight”; “any information of which the Bank would reasonably expect notice in respect of the business of the regulated financial service provider is disclosed promptly and appropriately to the Bank”.

An individual who fails to take the required reasonable steps to comply with the Common Conduct Standards and/or Additional Conduct Standards is liable to the above-mentioned potential sanctions that can be imposed on individuals under the ASP.

Regulated firms are required to inform persons in CF and PCF roles in their firm of the conduct standards and how they apply to the person performing the function in question. Regulated firms are also required to provide training to all such persons. A failure to comply with these requirements can open the firm to potential sanctions under the ASP.

Key amendments to the current Fitness and Probity regime

Certification of fitness and probity of individuals in CF roles

The Act amends the 2010 Act to require that regulated firms (and certain types of holding companies) do not permit an individual to carry out a CF role unless the firm has issued a certificate certifying that it is satisfied on reasonable grounds that the individual complies with an applicable standard of fitness and probity, set out in a code issued by the CBI under Section 50 2010 Act and the individual agrees to comply with any such standard.

The Act gives the CBI powers to adopt regulations in relation to the form, content and duration of validity of the certificates and due diligence to be carried out by firms (and reporting to the CBI “including, in particular, reports on disciplinary action relevant to compliance with standards of fitness and probity”). It is reasonably likely (given, for example, the approach adopted under the equivalent UK regime) that the CBI will provide that certificates would be valid for a year, so firms would need to carry out appropriate due diligence on the fitness and probity of their staff and senior executives at least annually.

Amendments to procedure for investigations of individuals under the Fitness and Probity regime

Chapters 3 and 4 of the 2010 Act set out the procedure for the CBI to investigate the fitness and probity of any individual in a CF role and, if appropriate following such investigation, to impose a prohibition notice on the individual, if the CBI or Governor of the CBI has reasonably formed the opinion that the individual is not of the requisite fitness and probity. The CBI has, to date, issued nine such prohibition notices.

The Act amends this fitness and probity mechanism in various respects, including to take account of the Supreme Court’s 2021 Zalewski judgement, which addressed standards of fairness to be applied in the administration of justice. The following amendments to the current investigation mechanism are useful to note:

– it enables the CBI to investigate an individual if the individual was in a CF position within six years of the commencement of the investigation (the CBI can currently investigate individuals under this mechanism only if the individual is in a CF position when the CBI commences the investigation)

– it significantly extends the duration of suspension notices (notices suspending an individual pending the outcome of the investigation). Where the CBI commences an investigation into an individual, the CBI may currently suspend the individual from their role for a period of 10 days, followed by a further period of three months if confirmed by the CBI – the Act extends this three-month period to six months. The CBI may then apply to the court to extend the suspension by no more than a further three months. The Act, however, enables a court to grant successive periods of suspension for up to six months each, up to a total of 24 months from the end of the CBI’s six-month period of confirmation of the suspension. This significantly extended permissible period of suspension may make the suspension tool a more useful tool to the CBI than is currently the case

– regarding the standard of proof in order to impose a prohibition order on an individual, the Act states that any finding of fact used by the CBI or Governor for the purposes of imposing a prohibition order is to be made on the balance of probabilities

Amendments to the ASP

The Act contains a considerable number of detailed amendments to the ASP, including a number to take account of the Supreme Court’s Zalewski judgement.

For present purposes, the following changes are worth noting:

– under the ASP, the CBI may investigate and sanction a person who has participated, while in a CF, in a breach of regulatory requirements (ie a “prescribed contravention”) by the CF’s firm

– the CBI has powers to enter into settlement agreements with firms under either section 33AR or 33AV Central Bank Act 1942, as amended (“1942 Act”). The pre-Act text of section 33AR states that this provision applies where a contravention has been admitted, but the pre-Act section 33AV does not include this stipulation. In its 2018 Outline of the ASP, the CBI refers to section 33AV (but not section 33AR), as the statutory basis for settlements; this CBI Outline also sets out the CBI’s consistent position that admissions of contraventions must be made before a settlement agreement can be reached.

The Act amends these provisions in important respects.

Under the revised section 33AV, a settlement could not be entered into under this provision where the relevant firm or individual “acknowledges the commission of or participation in the prescribed contravention”. The CBI might find it unsatisfactory to enter into a settlement agreement with a firm or individual without any such admission, in light of its above-stated policy.

Settlements could, however, be reached under Section 33AR, where the firm or individual admits to the breach in question. For the purposes of concluding a settlement under the amended section 33AR, however, no sanction can take effect until confirmed by the High Court. The Act also provides that the High Court shall confirm the imposition of the sanction, unless it is satisfied that the sanction is “manifestly disproportionate”.

– the Act provides that the standard of proof for Inquiries, under the ASP, in order to conclude that an infringement has occurred is the balance of probabilities. This issue is important, in the context an ASP that can be used to impose very significant sanctions on firms and individuals

– the Act sets out considerations to which the CBI must have regard when determining whether to sanction in a particular case and the level of the sanction (these reflect considerations identified in the CBI’s 2019 guidance document on ASP sanctions). It also provides that, when considering sanctions, the CBI “shall have regard to the importance of promoting a culture of compliance with the common conduct standards and additional conduct standards

– the Bill extends the scope of the ASP to cover certain types of holding companies

Holding companies

As indicated above, parts of the Act apply to certain types of holding companies established in the state (it does not apply to holding companies established outside the state). SEAR, the business conduct standards and the individual conduct standards outlined above do not apply to unregulated holding companies, established in the state, of regulated firms. The Act does, however, give the CBI powers to prescribe functions in certain types of holding companies as CF or PCF functions (so persons seeking a PCF role in such holding companies will require prior CBI approval). Furthermore, these holding companies will be required to ensure compliance with the above fitness and probity certification requirement for all its so-prescribed CFs, including PCFs.

The CBI’s powers to investigate the fitness and probity of persons in a CF role will extend to persons in a CF role in these holding companies. Also, the Act gives the CBI powers to sanction these holding companies, under the ASP, for breaches of specified requirements (in essence relating to the above-mentioned fitness and probity requirements applicable to them). The Act also gives powers to the CBI to sanction persons concerned in the management of such holding companies, under the ASP, for participation in such breaches.

How we can help you prepare for the new regime

Please see our separate brochure, which provides details on what firms should do next to prepare for the new regime and how we can help.

We in Eversheds Sutherland have unrivalled expertise in assisting firms to prepare for the new individual accountability regime. In particular:

– we are leading experts in financial services regulation, employment law and the overlap of regulatory and employment law in financial services

– our consultant, Ciaran Walker, who was formerly Deputy Head of Enforcement at the CBI, has recently co-authored a major book on the new individual accountability regimes in the UK, Australia and Ireland, “New accountability in fi nancial services: Changing individual behaviour and culture”

– we have extensive experience advising on the equivalent regime in the UK, the Senior Managers and Certification Regime (SMCR), which has been in place since 2016 and upon which the forthcoming Irish regime is largely based. We are supported by the financial services team within Konexo, the global alternative legal and compliance division of Eversheds Sutherland. Through Konexo we are able to field financial services compliance specialists and programme management personnel alongside our lawyers to provide you with a ‘one stop shop’ in circumstances where you would otherwise have to instruct separate law and consulting fi rms

We will therefore be able to bring you the latest thinking on the UK’s approach to SMCR, the strategies that worked and pitfalls to avoid, together with the processes and technology to support implementing the key elements of the new Individual Accountability Regime.

For further information, please contact: