Culture and accountability: Irish and EU developments - Thomson Reuters - Regulatory Intelligence

• Ireland

• Employment law
• Financial services and markets regulation

01-12-2022

Culture and accountability remain live issues in 2022. Ireland has introduced gender pay gap reporting and is legislating to create a long-awaited individual accountability regime, while the European Central Bank (ECB) recently revised its policy on "fit and proper" person assessments. The Irish accountability regime will take time to become law, but the prospect means the efficacy of the UK's existing similar regime may fall under the microscope.

Reviewing a development on gender pay gap reporting alongside ones concerning managerial suitability and accountability should not seem incongruous. The European supervisory authorities believe that the excessive risk-taking and misbehaviour that afflicted many firms in the 2000s and 2010s were partly caused by "groupthink" at senior levels. The argument is that boardrooms became monocultural salons that waved through bad and inappropriate practices because the managers perpetrating them were like-minded men.

Groupthink is not restricted to old men in traditional firms. The collapsed crypto-exchange FTX has been criticised for a "complete failure of corporate controls" by John J Ray III, the insolvency professional who was appointed to oversee its bankruptcy. Decision-making and oversight were concentrated in a small coterie of friends with similar backgrounds, several of whom shared a house.

Gender pay gap reporting

Recital 60 of the Fourth Capital Requirements Directive (CRD IV) said "the lack of monitoring by management bodies of management decisions is partly due to the phenomenon of groupthink. This phenomenon is, inter alia, caused by a lack of diversity in the composition of management bodies. ... Gender balance is of particular importance to ensure adequate representation of the population."

CRD IV art 88(2)(a) required firms to set targets for the representation of the under-represented gender, meaning women, on boards, and form policies for achieving them. Appointing more women to boards requires women to have progressed sufficiently far up a firm, however. Gender pay gap reporting has emerged as a way of checking whether firms are promoting women, as well as identifying unfair reward practices.

The Fifth Capital Requirements Directive (CRD V) required remuneration policies to be gender-neutral. Guidelines issued by the European Banking Authority (EBA) regarding CRD V and the Investment Firms Directive in 2021 both require firms to monitor the difference between male and female average gross hourly pay. Separate measurements of the gap should be taken for members of the executive board, members of the supervisory board, identified staff below board level, and for other staff.

The new Irish regime, which goes further than the EBA guidelines and applies across the economy, arises under the Gender Pay Gap Information Act 2021 (GPGIA) and associated regulations, which entered into force this May. Initially only applying to organisations with 250 or more employees, it will be extended over time to those employing more than 50 people. Under GPGIA, firms must calculate and disclose seven different sets of gender pay gap information on an annual basis. Firms first had to choose a "snapshot" date in June to use as the basis of their calculations, then had six months in which to make their disclosures, meaning a December 2022 deadline. GPGIA's seven information sets are:

1. the difference between both the mean and median hourly remuneration of male and female employees;

2. the difference between both the mean and median hourly remuneration of male and female part-time employees;

3. the difference between both the mean and median hourly remuneration of male and female temporary employees;

4. the difference between both the mean and median bonuses paid to male and female employees;

5. the percentage of male and female employees that receive bonuses, including cash, vouchers and share incentives;

6. the percentage of male and female employees who receive benefits in kind; and

7. the percentage of male and female employees in each of four pay bands: lower, lower middle, upper middle and upper.

If disclosures show pay differences referrable to gender, the employer must produce a written statement setting out the reasons for those differences and any measures it is taking or proposes to take to eliminate or reduce them.

"The employer must publish its gender pay gap information and its written statement on its website in a manner that is accessible to its employees and the public," said Ciaran Walker, a consultant in the Irish financial services regulation and governance group of law firm Eversheds Sutherland and a former deputy head of enforcement at the Central Bank of Ireland (CBI). "If the employer does not have a website, then it must make a hard copy available for inspection.

Significant differences between SEAR and SMCR

GPGIA resembles the UK's Gender Pay Gap Reporting Regulations 2017 (GPGR) structurally, but requires different data to be disclosed. Similarly, Ireland's proposed managerial accountability regime, set out in the Central Bank (Individual Accountability Framework) Bill 2022, (the IAF Bill) is modelled on the UK's Senior Managers and Certification Regime (SMCR), which initially entered force in 2016 and was subsequently extended to almost all firms, but there are significant differences between the two.

Regulatory Intelligence described the IAF Bill and its divergences from the SMCR here, but it contains five main elements. They are: a long-expected senior executive accountability regime (SEAR) that has its origins in a 2018 CBI report; conduct standards, enhanced "fitness and probity" provisions; and changes allowing individuals to be sanctioned without having to prove wrongdoing by a firm, breaking the "participation link".

"It will be a matter for the CBI to determine, in implementing legislation, what types and sizes of firms will be subject to the SEAR parts of the legislation," Walker said. "The CBI has given repeated public indications that SEAR will initially apply to a defined range of regulated financial firms. The initial scope will include credit institutions, insurance undertakings — other than certain specific categories — and higher-risk activity investment firms amounting in total to approximately 150 firms."

ECB concerns

The IAF Bill is still with the Dáil and is likely to undergo minor amendments before becoming an act. An ECB opinion requested clarification regarding its exclusive competence to vet appointments to pre-approval control functions at significant credit institutions. Regarding that power, in a November 17 supervisory newsletter the ECB revised its policy on attaching ancillary provisions to "fit and proper" decisions about prospective board members.

Ancillary provisions are conditions, recommendations or obligations attached to positive "fit and proper" decisions to address ECB concerns ( ECB assessments guide section 7.2). Under the revised policy, ancillary provisions will set clear objectives and deadlines for achieving them. The ECB expects this to roughly halve the number of decisions with ancillary provisions and make those that are imposed sharper and a more useful supervisory tool. It described the move as part of its "more intrusive and streamlined approach" to assessments and improving banks' governance.

CBI must show SEAR has teeth

Whatever its final form, SEAR and the wider Irish accountability regime are bound to face comparisons with SMCR. The UK Financial Conduct Authority (FCA) introduced and oversees SMCR and frequently holds it out as an umbrella regime allowing it to intervene and to sanction individuals even in areas where regulation is otherwise scant. Critics say that in practice it is underused, despite imposing a considerable compliance burden on firms.

Whether SEAR proves a success will depend upon the extent to which the CBI can demonstrate that it has teeth, said Ben Blackett-Ord, executive chair of the international regulatory consultancy Bovill.

"It would be hard to see it having less success than the FCA's scheme has had in terms of holding individuals to account," Blackett-Ord said. "As we have repeatedly pointed out, the FCA has so far singularly failed to use [SMCR] to hold senior individuals to account, which was the whole point in the first place. Given this, the time taken to approve individuals and the apparent rigour being applied to the process looks disproportionate."

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