Since the beginning of 2016, the Central Bank of Ireland (“CBI”) has concluded 44 settlement agreements with regulated entities/individuals, resulting in the payment of €85.7m in fines. CBI’s recent imposition of a fine of €4.1m on Davy Stockbrokers serves as yet another reminder of the importance of CBI’s role as a watchdog of the financial services sector, but it is also likely to inject real impetus behind the CBI’s efforts to secure enhanced powers to hold individuals to account. In this Insight we look at the accountability of individuals and focus in particular on the likely elements of the new Senior Executive Accountability Regime.
Accountability of Individuals
The CBI already has some powers that enable it to hold individuals to account, but it is widely accepted that those powers fall far short of what is needed to serve as an adequate deterrent to poor conduct.
Since 2016, the CBI has entered into a small number of settlement agreements relating to individuals. In each case the enforcement action against the individual essentially flowed from an earlier enforcement action taken by the CBI against the firm in which that person previously served. In addition to imposing a reprimand and fine on an individual, the CBI can also issue a Prohibition Notice, which in practice means that the individual is prohibited from performing a controlled function for a specified period or even indefinitely.
For some time now, the CBI has vocalised its ambition to be afforded greater scope to hold individuals to account. The proposals were signalled in the CBI’s submission to the Law Reform Commission in December 2017 and they were further fleshed out in the CBI’s Report on Behaviour and Culture of the Irish Retail Banks in 2018 and in several keynote speeches made since that time.
It is clear that the main driving force behind its reform proposals has been the problematic conduct and poor culture within Ireland’s banking system – the type of conduct and culture which was a major contributing factor to Ireland’s financial crisis and previously described by the former Governor of the Central Bank, Patrick Honohan, as “egregiously reckless risk-taking”.
It seems that another driver of CBI’s desire to increase its powers to hold individuals to account lies in its deep frustration at having had to almost coerce certain banks to do the right thing in relation to remedying the worst effects of the tracker mortgage scandal.
In its Report on Behaviour and Culture of the Irish Retail Banks, the CBI asserted that under the current regime it is more difficult for it to pursue individuals involved in corporate wrongdoing than it is to pursue a firm. This is because of the additional complexity of the CBI having to establish that the individual concerned participated in the wrongdoing and that the individual was involved at a senior level in management of the firm. The Report recommended that in order to engender greater trust in financial services this limiting aspect of the framework needs to be corrected by legislative amendment to allow for a much more straightforward process of enforcing individual accountability. This is based on a belief by the CBI that increased individual accountability will ultimately drive a cultural shift towards more meaningful customer-focused decision making in financial services.
Elements of Planned Reforms
There are four pillars to the package of reforms being advocated by CBI:
- the introduction of a Senior Executive Accountability Regime (SEAR), which would oblige firms and senior individuals within them to set out clearly where responsibility and decision-making lie for their business;
- the introduction of enforceable Conduct Standards which would set out the behaviour the CBI expects of regulated firms and the individuals working within them;
- enhancements to the current fitness and probity regime to strengthen the onus on firms to proactively assess individuals in controlled functions on an ongoing basis, and to surmount some current limitations of the Fitness and Probity regime; and
- a unified enforcement process, which would apply to all breaches by firms or individuals of financial services legislation, and the removal of the hurdle of participation so as to pave the way for the CBI to pursue individuals, rather than only in circumstances where they are proven to have participated in a firm’s wrongdoing.
Senior Executive Accountability Regime
The focus of this Insight is very much on the likely elements that will feature as part of SEAR. It is expected that there will be a number of elements to SEAR.
Mandatory Responsibilities of Senior Executive Functions
It is expected that the legislation, or guidance accompanying legislation, will specify all mandatory responsibilities which will be allocated to Senior Executive Functions (“SEFs”) across key conduct and prudential risks. There will be a general list of prescribed responsibilities applicable to all firms and also a more tailored list for industry sectors depending on a firms scale and complexity.
Statement of Responsibilities
Central to the imposition of liability on an individual will be the statement of responsibilities which will be prepared for each SEF and must be submitted to the CBI. The statement of responsibilities will be specify the role and responsibilities assigned to the SEF and will facilitate a straightforward assessment of the SEF’s competence, knowledge, experience and qualifications against their statement of responsibilities.
Accountability will be further reinforced by the requirement for firms to produce, and submit to CBI, responsibility maps. It is expected that these will document key management and governance arrangements across the firm. Information contained in the maps will include matters relating to board matters, key board committees, and reporting lines of SEFs to individuals. For group entities, there is likely to be a requirement that they provide details of the relevant governance arrangements.
Application of SEAR
It is expected that SEAR would apply initially to credit institutions, insurance undertakings, investment firms and third country branches authorised to operate in Ireland. Specifically, the CBI has excluded credit unions, reinsurance, captive insurers, (re)insurance, and Special Purpose Vehicles.
SEAR will apply to all SEFs which seems set to include board members, executives reporting directly to the board and heads of critical business areas. In practice this would translate as all Pre-Approval Controlled functions under the Fitness and Probity regime being in-scope. Beyond SEFs there is an element of flexibility for firms to structure their senior management team as they see fit provided that all prescribed responsibilities are assigned to SEFs within the respective firm.
Implementation of SEAR and Other Reforms
For CBI, the journey towards realising SEAR has been a slow and undoubtedly, frustrating one.
The introduction of the package of measures, of which SEAR is a key component, will require implementation in the form of primary legislation - Central Bank (Amendment) Bill and can expected to be supplemented by secondary legislation and/or standards and guidance.
The current Programme for Government pledges to “[i]ntroduce the Senior Executive Accountability Regime to deliver heightened accountability with the banking system”. The Government’s most recent Legislation Programme sheds no further light on the progress made so far on the drafting of the proposed Bill, merely indicating that “work is underway”.
While we can speculate that delayed progression of these reform proposals over the past 18 months may be attributed in part to the impacts of Brexit, the Covid-19 pandemic, and other competing demands, it is well known that the terms of the Constitution are likely to put the brakes on some of the more stringent aspects of the UK’s Senior Managers and Certification Regime (SMCR) that the CBI had been hopeful of including within SEAR.
Speaking in October 2019, Minister Pascal Donohoe stated that while the SMCR provides a good starting point, one major difference between the UK and Ireland is the existence of a written constitution: “Our Constitution establishes clear individual rights, such as the right to earn a livelihood, and clear provisions on the administration of justice. Therefore, a careful balance must be struck between giving the Central Bank the powers it needs to do its job effectively, and the protection of these individual constitutional rights.” In September 2020, a Department of Finance spokesperson was reported to have said that “The Department is currently engaging with the Attorney General’s office in advance of submitting draft heads of Bill to Government so as to ensure that the correct balance between additional powers for the Central Bank and the protection of individuals’ constitutional rights is struck and that the provisions of the Bill are constitutionally sound in the event of legal challenge”.
It is understood that draft legislation may now be finalised before this year’s Dáil summer recess. The fine imposed by CBI on Davy Stockbrokers has served as a very public reminder of the importance of the CBI being able to hold not just firms, but also individuals within those firms, to account for their actions.
It is expected that once the draft legislation is prepared, the proposals will be the subject of a consultation process. However, it is expected that the consultation process may be somewhat curtailed so that the CBI can proceed more quickly towards implementation.
On this basis it is worth highlighting some areas where firms can now begin preparations in anticipation of the implementation of SEAR.
Practical Steps that Firms Can Take Now
Based on what we currently know about the key elements of the proposed CBI reforms, there are steps that Boards and senior management within regulated firms can begin to take now, even in advance of the publication of the proposed legislation.
Some of those steps include, assessing the current reform proposals so as to:
- determine if your firm is likely to be within scope for SEAR;
- ensure that the Board, Executive Committee and heads of critical functions are well-briefed on the CBI's proposed framework and the progression of proposals towards implementation;
- ensure that the Board is aware of resources required to ensure compliance in respect of each of the elements of CBI's proposed framework including improved conduct standards, SEAR, streamlined enforcement processes, and strengthened Fitness and Probity requirements;
- decide on where responsibility will rest for the implementation of each element of SEAR and the ongoing compliance requirements as well as Board involvement and oversight;
- begin the task of identifying the mandatory responsibilities across conduct and prudential functions which will likely be designated a SEF; and
- begin preparatory work on identifying the responsibilities and developing an initial map of key management and governance arrangements across the firm.
In the next Insight in this series we will be looking more closely at the UK’s Senior Managers and Certification Regime (SMCR) which will serve as the model for SEAR, as well as looking at other comparable regimes in other jurisdictions including Australia, Hong Kong and Singapore.