The Central Bank's Individual Accountability Framework is much-anticipated, with draft heads of Bill originally promised for year-end 2019. Although the Bill is on the government's legislative programme, no draft has been published as yet. Compatibility with the Irish Constitution may well be a key consideration and the disruption of the pandemic may have understandably delayed progress.
Summary of the Individual Accountability Framework
In brief, the proposals when enacted, will impose a certain level of conduct standards on all staff in regulated firms. As currently proposed, these five conduct standards would be enforceable against individuals and require them to:
- Act honestly, ethically and with integrity
- Act with due skill, care and diligence
- Be open and cooperative with the Central Bank and other regulators and deal with them in good faith
- Act in the best interests of customers and treat them fairly and professionally
- Observe proper standards of market conduct.
Additional standards will apply to key senior staff ('Senior Executives') under the senior executive accountability regime (SEAR) with firms being required to map responsibility for all aspects of their business to an individual. Enhanced conduct standards will also apply to Senior Executives including a duty of responsibility to ensure their areas of responsibility are effectively controlled, that they do not give rise to regulatory breaches, that any delegation is to an appropriate person and effectively overseen. Senior Executives will be accountable to the regulator where they have not taken all reasonable steps to avoid regulatory contraventions occurring, or enabling them to continue, in an area for which they are responsible.
The Bill is also expected to make amendments to the Fitness and Probity regime and simplify the existing enforcement process used by the Central Bank when investigating persons concerned in the management of firms who are suspected of participating in contraventions by the firm.
Individual Accountability in 2020
In the meantime, as a backdrop to the introduction of this new legislation, the Central Bank focused on 'individual accountability' throughout 2020, across various announcements and supervisory activities.
- The Central Bank priorities for 2020 outlined a strong focus on individual accountability as enforcement and policy priorities. Indeed, last year is notable for the number of enforcement outcomes against individuals under the Central Bank's Administrative Sanctions Procedure, with half of the published outcomes being against individuals.
- The Consumer Protection Outlook Report for 2020 sets the Central Bank's expectation that firms must focus on values and conduct and individual accountability in order to improve culture. On the subject of culture, there is an ongoing focus by the Central Bank on diversity and inclusion, given the benefits for resilience, risk management and decision-making where firms have diverse leadership.
- In the October AML Bulletin the Central Bank noted that an Anti-Money Laundering inspection had focused on the role of the Board and Senior Management in taking appropriate measures to address weaknesses identified by Compliance and Internal Audit with transaction monitoring processes.
- In the insurance sector, the Business Interruption Insurance Supervisory Framework includes Central Bank expectations on senior management and Board accountability for managing COVID-19 related business interruption claims.
- In a Dear CEO letter following a review of differential pricing in the motor and home insurance sectors, the Central Bank highlighted the need for boards and senior management to take responsibility for the impact of certain practices on customers. The letter also sets the expectation that roles and responsibilities for pricing practices should be clearly defined. These expectations have clear parallels with the objectives of the Central Bank's proposed Individual Accountability Framework.
Fitness and Probity Reforms
2020 was notable for the reforms to the Fitness and Probity regime, with further reforms to follow under the Individual Accountability Framework. Several new roles were added to the list of pre-approval controlled functions in 2020. Roles captured in this list require Central Bank pre-approval for appointments and impose standards of behaviour and competence requirements on individuals.
A Dear CEO letter on Fitness and Probity was issued in November, following the results of a themed inspection. Banks and insurers were the subject of the inspection but the findings were shared with and are relevant to, all regulated financial services providers.
When the UK rolled out its Senior Managers and Certification Regime, which is similar in many respects to the Central Bank's proposals for SEAR, banks and then insurers were the first industry sectors subject to the regime. There appear to be clear parallels with that experience with banks and insurers being the subject of the Central Bank's recent Fitness and Probity inspection.
While draft legislation has been delayed, the Bill is expected to be published in the near future with consultation expected thereafter. Our SEAR team is comprised of our Financial Regulation, Employment, Banking and Insurance groups, specialised at operating within the Irish regulatory and constitutional environment. The SEAR team has observed a clear and continuing regulatory focus on accountability in the Central Bank's engagements with industry. We are advising firms who have commenced or are planning projects to prepare for the anticipated Individual Accountability Framework and SEAR.