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Publication of the Central Bank (Individual Accountability Framework) Bill 2022

Introduction

The Central Bank (Individual Accountability Framework) Bill 2022 (“Bill”), together with accompanying Explanatory Memorandum, was published on 28 July.

It is currently anticipated that the Bill will be enacted by end-2022. Once enacted, the Central Bank of Ireland (“CBI”) will shortly thereafter issue detailed draft implementing regulations and guidance, for public consultation. Following this period of public consultation and subsequent finalisation of the CBI regulations and guidance, the substance of the new regime will enter into force.

The Bill, to a large extent, mirrors the substance of the General Scheme of the then proposed Bill (“General Scheme”), published in July 2021. There are, however, a number of important differences.

This briefing note outlines a number of the key points of the Bill, specifically relating to;

• The Senior Executive Accountability Regime (“SEAR”)

• The Conduct Standards

• Changes to the Fitness & Probity regime

• Changes to the CBI’s Administrative Sanctions Procedure (“ASP”)

Important points to note in the Bill, discussed further below, include:

• The requirement on individuals to “take any steps that it is reasonable in the circumstances for the person to take” to ensure compliance with relevant requirements. This requirement appears to be a higher standard than the standard of “reasonable steps” set out in the General Scheme and may be the subject of debate during the Oireachtas process leading to enactment of the Bill.

• The CBI will be able to investigate individuals under the fitness and probity regime even if they are no longer in a Controlled Function (“CF”) role, if they were in a CF role within 6 years of commencement of the CBI’s investigation. Also, the length of time an individual may be suspended while the CBI is investigating the individual under the fitness and probity regime has been significantly extended.

• The Bill contains a significant number of amendments to investigation processes under the ASP and fitness and probity regimes, including for purposes of taking account of the Supreme Court’s 2021 Zalewski judgement which addressed standards of fairness to be applied in the administration of justice. For example, for settlements under the ASP, where the breaches in question are admitted (which the CBI would typically expect), sanctions under the settlement could not take effect without High Court confirmation.

SEAR

The proposed SEAR is to be introduced in particular 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”.

Proposed amendments to the 2013 Act extend section 48 of the 2013 Act to authorise the CBI to adopt regulations to, in particular:

• Specify the aspects of the affairs of a regulated firm for which a person in a Pre-approval Controlled Function (“PCF”) role has “inherent responsibility” (in essence, specify that a person in a PCF role is individually responsible for specified areas of a firm’s business because of the nature of the PCF role);

• Specify the aspects of the affairs of a firm’s business that must be allocated to a PCF (these are described in the General Scheme as “prescribed responsibilities”;

• Impose overall governance requirements.

The Bill simply gives relevant regulation-making powers to the CBI and does not provide any details as to the proposed inherent/prescribed responsibilities or the relevant governance requirements, which will be set out in relevant CBI implementing regulations. The implementing regulations will cover issues such as details of the inherent/prescribed responsibilities, requirements in relation to individual Statements of Responsibility for PCF-holders and Management Responsibility Maps (to ensure overall clarity regarding who is responsible for what across the main activities of a regulated firm’s business).

SEAR will apply to all regulated firms 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.

Duty of responsibility

As part of SEAR, a new “Duty of Responsibility” is to be introduced, by way of amendment to the Central Bank Reform Act 2010 (“2010 Act”). This duty apply 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 firms 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 financial services legislation.

This formulation of the Duty of Responsibility is different to the formulation of the duty in the General Scheme, which required individuals to take “reasonable steps”. The formulation of the duty in the Bill appears to require a higher standard of individuals than the duty as set out in the General Scheme.

Business standards of conduct

The Bill proposes to amend the 2010 Act to enable the CBI to adopt regulations prescribing relevant “business standards” of conduct, for the purposes of ensuring that regulated firms act in the best interests of customers and of the integrity of the market, act honestly, fairly and professionally, and act with due skill, care and diligence. Breach of the implementing regulations would amount to a prescribed contravention, enabling the CBI to pursue the regulated firm under the ASP.

The Bill 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 e.g. 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”.

The Bill provides that the CBI’s implementing regulations may apply generally or only to specified categories of regulated firms and may include different provisions for different types of firms. This will enable the CBI to apply business conduct requirements proportionately, depending on the size and operations of firms.

Duty on individuals to meet individual conduct standards

The Bill proposes to amend the 2010 Act to impose new individual conduct standards (“Common Conduct Standards”) on all individuals in a CF role in any regulated firm. It also proposes to impose 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.

Individuals in a CF/PCF role are required to take “any steps that it is reasonable in the circumstances for the person to take” to comply with the applicable conduct standards and, if they fail to do so, they can be pursued by the CBI under the ASP. This requirement, to take “any steps that it is reasonable…in the circumstances” is different to the “acted reasonably” defence set out in the General Scheme and appears closer to the “all reasonable steps” requirement that the CBI had recommended be applied to PCFs in its July 2018 report into the culture of the five retail banks in Ireland, in which it recommended the new individual accountability regime and that was the subject of some criticism.

The CBI is to issue “practical guidelines” on these standards.

As to the detail of the Common Conduct Standards and Additional Conduct Standards, there are a number of differences between the text of the Bill and the prior General Scheme. The following differences are useful to note:

• There had been some concern about the Additional Conduct Standard, set out in the General Scheme, requiring senior managers to “participate effectively in collective decision-making”. This has been deleted from the list of Additional Conduct Standards in the Bill.

On the other hand, however, the Common Conduct Standards includes a more general requirement to act “appropriately in any decision-making, including collective decision-making, ensuring decisions are properly informed and exercising sound judgement.” It may be that the CBI guidelines to be implemented will contain more details on the standards expected of senior persons, including Board directors, relating to participation in collective decision-making.

• The Bill (unlike the General Scheme) contains explicit Common Conduct Standards requiring within-scope individuals to have “appropriate knowledge” of the business activities and legal and regulatory framework relevant to their role. This requirement, to ensure that individuals are suitably up-to-date with the relevant technical, business and legal context of their role, may be very relevant for example for the purposes of certification of individuals (discussed below). In this regard, the Bill provides that regulated firms are required to notify relevant individuals in the firm of the conduct standards applicable to them and to provide appropriate training on the conduct standards.

Regulated firms are also required to establish and give effect to policies within the firm on how the common conduct standards are to be integrated into how the firm does business.

Certification of fitness and probity of individuals in CF roles

The Bill amends the 2010 Act to provide that regulated firms (and certain types of holding companies) do not permit an individual to carry out a CF role unless it 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.

Accordingly, the CBI will need to update the current Fitness and Probity Standards Code it has in place, pursuant to section 50 of the 2010 Act, to take account of the new requirements.

The CBI has been given 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, 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 Bill 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 extends the scope of the investigation mechanism to include persons in CF positions in holding companies.

• It enables the CBI to investigate an individual if they were in a CF position within 6 years of the commencement of the investigation (the CBI can currently investigate individuals under this mechanism if they are in a CF position when the CBI commences the investigation).

• It provides statutory requirements in relation to aspects of the investigation procedure e.g., requirement to state reasons for the opinion suspecting the individual’s fitness and probity (for purposes of commencing the investigation); providing a copy of such material on which the opinion is based that the Head of Financial Regulation considers appropriate.

• It significantly extends the duration of suspension notices (notices suspending an individual pending 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 3 months if confirmed by the CBI – the Bill extends this 3-month period to 6 months. The CBI may then apply to the court to extend the suspension by no more than a further 3 months – the Bill enables a court to grant successive periods of suspension for up to 6 months each, up to a total of 24 months from the end of the CBI’s 6-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 Bill 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 Bill 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:

• Currently, 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 current text of section 33AR states that this provision applies where a contravention has been admitted, whereas section 33AV does not include this stipulation. In its 2018 Outline of the ASP, the CBI refers to section 33AV (but not section 33 AR), 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 Bill proposes to amend these provisions in important respects.

Under a 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. Settlements could, however, be reached under Section 33 AR, where the firm or individual admits to the breach in question. In order to conclude a settlement under the amendments to section 33AR in the Bill, however, no sanction can take effect until confirmed by the High Court. The Bill also provides that the High Court shall confirm the sanction, unless it is satisfied on the basis of evidence that was before the CBI, that the CBI made a manifest error of law or that the sanction is “manifestly disproportionate”.

• The Bill 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 Bill 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.

What firms should do next to prepare for the new regime

Our multi-disciplinary team has been helping businesses across all affected sectors prepare for the new regime. We can help you understand your obligations and practically implement any changes to ensure the requirements are properly embedded and remain fit for purpose:

• 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 financial 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 firms. 

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;