Practical Law: New Individual Accountability…

Asset Management and Investment FundsMay 25, 2023

Practical Law: New Individual Accountability Framework in Ireland

Development and Aim of Individual Accountability Regime

The initial proposals for the IAF were originally outlined by the Central Bank of Ireland (CBI) in its report, Behaviour and Culture of the Irish Retail Banks, which was published in July 2018. The report analysed the behaviour and culture in Irish retail banks during the period of the tracker mortgage scandal in Ireland.

The CBI concluded in the report that significant cultural change in the Irish financial services industry was unlikely to materialise without the introduction of an IAF that allows the CBI to pursue individuals directly for their misconduct. This would need to apply regardless of whether or not the firm for which an individual works has breached financial services legislation.

The aim of the IAF is to enhance the CBI's toolkit to support its regulatory and enforcement strategies, and promote effective management and governance to ensure that individuals responsible for wrongdoing can be pursued by the CBI. In particular, an important element of the IAF is increasing transparency between individuals performing senior executive functions within firms and the CBI.

On 9 March 2023, the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act), which underpins the IAF, was signed into law. The IAF Act amends the following pieces of legislation:

The Central Bank Reform Act, 2010 (2010 Act).

The Central Bank (Supervision and Enforcement) Act, 2013.

The Central Bank Act, 1942 (1942 Act).

Key Elements and Scope of Individual Accountability Framework

The IAF comprises of four elements:

SEAR. This will initially only apply to certain categories of firm. These in-scope firms will be required to set out clearly and fully where responsibility and decision-making lie within the firm's senior management (see Senior Executive Accountability Regime (SEAR)).
Conduct Standards. These will incorporate new conduct standards for all firms and their management and employees (see Conduct Standards).
Enhancements to the current F&P regime. This will include enhanced certification requirements for firms in respect of certain employees and the application of F&P requirements to holding companies (see Changes to Fitness and Probity Regime).
Amendments to the ASP. A key change will be the CBI's ability to take enforcement action under the ASP directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm (see Changes to CBI's Enforcement Procedures).

It is worth noting that the new SEAR framework has been largely modelled on the UK's Senior Managers and Certification Regime (SM&CR), which came into force in 2016. Like the IAF, it aims to make individuals more accountable for their conduct and therefore make it easier for both firms, and regulators, to hold individuals to account. For more information on the SM&CR, see Practice Note, Overview of the SM&CR.

CBI Consultation Paper, Draft Regulations and Guidance

In March 2023, following the introduction of the IAF Act, the CBI published:

Consultation paper 153 (Enhanced governance, performance and accountability in financial services) (CP153).

Annex 1 to CP153, which contains the following draft regulations:
- Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Senior Executive Accountability Regime) Regulations 20XX (SEAR Regulations);
- Central Bank Reform Act 2010 (Section 21(6)) Regulations 20XX; and
- Central Bank Reform Act 2010 (Sections 20(1) and 22(2A) – Holding Companies) Regulations 20XX.

(Collectively, the Regulations.)

Annex 2 to CP153, which contains draft detailed guidance setting out the CBI's expectations for the implementation of the SEAR, the Conduct Standards and certain aspects of the enhancements to the F&P regime (IAF Guidance).

In CP153, the CBI notes that the IAF is built on the twin pillars of proportionality and reasonable expectations and these are embedded in its approach to implementation. It further notes that the role of collective responsibility and decision making should remain central to firms, despite the increased focus on individual responsibility through the IAF.

CP153 is open to feedback until 13 June 2023.

Timeframe: Next Steps

The timeline below sets out details of the key next steps relating to the CBI's proposals for the IAF.

Date	Action
13 June 2023	CP153 closes to comments.
H2 2023	CBI to publish final rules and policy to CP153.
H2 2023	CBI to consult on amendments to ASP.
31 December 2023	Date from which the Conduct Standards (except the business standards (see Business Standards)) and changes to the F&P regime apply.
1 July 2024	Date from which SEAR applies.

Senior Executive Accountability Regime (SEAR)

The purpose of the SEAR is to improve governance, performance, and accountability in firms. It will do this by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies and by identifying what those responsibilities entail.

The SEAR will apply to all individuals performing a pre-approved controlled function (PCF) role at the following types of firm (collectively referred to in this Note as "in-scope firms"):

Credit institutions (excluding credit unions).

Insurance undertakings.

Investment firms that underwrite on a firm commitment basis or deal on own account (or both), or are permitted to hold client assets (or both).
Incoming third country branches of the above (with a proportionate approach to apply to low PRISM (that is, low risk) impact rated in-scope investment firms and incoming third-party branches).

The CBI intends to extend the application of the SEAR to other firms over time. It will not apply to other categories of regulated firms, such as fund managers, until a later date with the CBI noting in CP153 that it has "the power via regulations to rollout the SEAR to other sectors in due course".

Appendix 1 to the draft IAF guidance sets out the list of PCFs that are relevant for in-scope firms.

Duty of Responsibility

The IAF introduces, by way of amendment to the 2010 Act, a new duty of responsibility.

The duty of responsibility applies to any PCF, at an in-scope firm, who has "inherent" or "prescribed" responsibility for any aspect of the affairs of the firm (see Inherent Responsibilities and Prescribed Responsibilities). It requires these individuals to take "any steps that it is reasonable in the circumstances for the person to take" to avoid a contravention by their firm of its obligations under financial services legislation in relation to an aspect of the firm's affairs for which the PCF role holder is responsible under the SEAR.

In CP153, the CBI has confirmed that avoiding a contravention includes avoiding the continuation of a contravention.

When considering whether a relevant individual has discharged their duty of responsibility and taken the necessary reasonable steps, the IAF Act requires the CBI to consider all "relevant circumstances". These include:

The function being performed.

The person's level of knowledge and experience.

The level of knowledge and experience that a person performing the role should have.

The existence and application of appropriate and effective systems.

In Chapter 3 of the draft IAF Guidance, the CBI has set out a non-exhaustive list of considerations that it may take into account in determining whether the necessary reasonable steps were taken. These include:

The regulatory landscape in place at the time.

The role of judgement.

The nature, scale and complexity of the firm.

The prevailing environment in which the individual was operating at the time.

The level of seniority of the individual's role.

A breach of the duty of responsibility will be a prescribed contravention and the CBI will be able to take action against the individual directly under the ASP. This action may lead to sanctions including monetary penalties.

Different Types of Responsibilities

Under the SEAR, there will be three different types of responsibilities:

Inherent responsibilities (see Inherent Responsibilities).

Prescribed responsibilities (see Prescribed Responsibilities).

Other responsibilities (see Other Responsibilities).

Inherent Responsibilities

Inherent responsibilities are defined in CP153 as those responsibilities that are inherent in the role being performed by the PCF holder (that is, they are intrinsic to a specific PCF role).

In the draft SEAR Regulations, the CBI has set out the responsibilities which it considers "inherent" to each PCF that must be carried out by the relevant PCF holder. For example:

The Head of Finance will have an inherent responsibility for managing the operation of the finance function and reporting to the Board and other senior management on how that finance function is operating.
Non-executive directors (NEDs) and independent NEDs will have inherent responsibility for overseeing and monitoring the strategy and management of the firm.

Prescribed Responsibilities

Prescribed responsibilities are defined in CP153 as those responsibilities identified by the CBI in the draft SEAR Regulations that must be allocated to individual PCFs within the firm. The purpose of prescribed responsibilities is to ensure that the relevant responsibilities, including the management or oversight of key risks, have been allocated to a PCF role holder. However, unlike "inherent responsibilities", the firm has discretion as to which PCF role holder should assume responsibility for the relevant prescribed responsibility. This approach gives firms the flexibility to allocate responsibilities in a way that accommodates different business models.

There is a general list of prescribed responsibilities applicable to all firms, with tailored lists for industry sectors in Schedule 2 to the draft SEAR Regulations. Examples of prescribed responsibilities are:

Responsibility for managing the firm's approach to identifying, assessing and managing climate-related and environmental risks across the firm.
Responsibility for overseeing the development of, and embedding positive culture, consumer protection and conduct risk in the firm.

Where responsibilities are non-executive in nature (such as responsibility for leading the development of the firm's culture), these must be allocated to NEDs.

The CBI considers that both inherent and prescribed responsibilities are integral to the relevant PCF role. Accordingly, sharing or splitting PCF roles among individuals will not be permitted under the SEAR, except in the case of job sharing.

Other Responsibilities

The SEAR also provides for a residual category of "other responsibilities". This captures any other material activities or risks in the case of a given firm to the extent that they are not captured by the list of inherent and prescribed responsibilities. These responsibilities are identified by firms and must be allocated to individuals in a PCF role.

The purpose of the other responsibilities category is to ensure that:

There is clarity surrounding the allocation of responsibilities in relation to any material functions, business areas or projects.
All the key risks at a firm are identified and appropriately allocated to a PCF role holder.

All responsibilities applicable to an in-scope firm are captured under the relevant statement of responsibilities (see Statements of Responsibilities).

Statements of Responsibilities

Under the SEAR, in-scope firms will have to prepare a statement of responsibilities for each individual in a PCF role.

The statement of responsibilities must clearly set out the role and areas of responsibilities of the relevant PCF role holder, including all inherent, prescribed and other responsibilities (see Different Types of Responsibilities), so that there can be no ambiguity as to the scope of their duties. This will also enhance the CBI's ability to hold individuals accountable for regulatory breaches in areas for which the PCF role holder is responsible.

In CP153, the CBI confirmed that there will be no obligation to file statements of responsibilities with the CBI. However, they will need to be filed alongside any individual questionnaire for persons seeking approval by the CBI to perform a PCF. In addition, statements of responsibilities must be provided to the CBI if requested. They must be kept up to date and reviewed on a regular basis by firms.

There is a template for a statement of responsibilities in Appendix 3 to the draft IAF Guidance.

Management Responsibilities Maps

The SEAR will require each in-scope firm to have a comprehensive and up-to-date management responsibilities map that describes its management and governance arrangements.

The purpose of the responsibilities map is to clearly set out where responsibilities and decision-making lies within the firm and should be used by firms to embed an effective governance framework. It should document key management and governance and reporting arrangements in a comprehensive and easily accessible way within a single source of reference. Where relevant, the responsibilities map should reference reporting lines within the relevant firm's group and the group's governance and management arrangements. While responsibilities maps may be extensive and complex in some cases, they may be short and simple in the case of small non-complex firms.

As with statements of responsibilities, the CBI confirms in CP153 that there will be no obligation to file the management responsibilities map with the CBI (apart from with an initial application for authorisation of a firm). However, the responsibilities map will need to be provided to the CBI on request.

There is an illustrative diagram for a management responsibilities map in Appendix 4 to the draft IAF Guidance.

Conduct Standards

The Conduct Standards are broader in scope than the SEAR and will apply to individuals performing controlled functions (CFs) in all firms, irrespective of which sector a firm is in.

The purpose of the Conduct Standards is to both:

Impose an obligation on each person performing a CF to act appropriately.

Ensure that any individual who has engaged in misconduct is held accountable for that misconduct.

Different types of Conduct Standard

Under the IAF, there will be three types of Conduct Standard:

Common conduct standards that will apply broadly across all firms (see Common Conduct Standards).

Additional conduct standards that will apply to specific parts of the firm for which certain PCFs and other individuals who may exercise significant influence on the conducts of a firm's affairs (CF1 roles) are responsible (see Additional Conduct Standards).
Business conduct rules that will apply to firms (see Business Standards).

Common Conduct Standards

Persons subject to common conduct standards must take any steps that are reasonable in the circumstances to take to:

Act with honesty and integrity.

Act with due, skill, care and diligence.

Co-operate in good faith and without delay with regulators.

Act in the best interests of customers and treat them fairly and professionally.

Operate in compliance with standards of market conduct and trading venue rules.

In determining if reasonable steps have been taken in discharging the common conduct standards, the CBI will be required to consider all "relevant circumstances" in the same way as under the SEAR (see Duty of Responsibility).

Chapter 5 of the draft IAF Guidance sets out the regulatory expectations for compliance with each of the common conduct standards.

Additional Conduct Standards

The IAF introduces a small number of additional conduct standards that will be imposed on individuals carrying out PCF roles as well as individuals in a CF1 role (that is, those individuals who may exercise significant influence on the conduct of the firm's affairs). This is to ensure that the framework is not circumvented by the creation of shadow structures or responsibilities.

Persons subject to additional conduct standards must take any steps that are reasonable in the circumstances to take to:

Ensure that the business of the firm for which they are responsible is controlled effectively.

Ensure that the business of the firm for which they are responsible is conducted in accordance with its obligations under financial services legislation.
Ensure that any delegated tasks are assigned to an appropriate person with effective oversight.

Disclose promptly to the CBI any information in respect of a firm of which the CBI would reasonably expect notice.

Again, in determining if reasonable steps have been taken in the discharge of the additional conduct standards, the CBI will be required to consider all "relevant circumstances" in the same way as under the SEAR (see Duty of Responsibility).

Chapter 6 of the draft IAF Guidance sets out the regulatory expectations for compliance with each of the additional conduct standards.

Business Standards

The IAF also introduces business standards of conduct that will apply to all firms irrespective of whether or not they fall within scope of the SEAR. The business standards are intended to create a single benchmark of conduct that all firms must meet, regardless of sector.

The IAF Act provides for the CBI to set out standards to be met by firms for the purpose of ensuring that firms act:

In the best interests of customers and the integrity of the market.

Honestly, fairly and professionally.

With due skill, care and diligence.

Currently, the standards are set out in the Consumer Protection Code (Code). The CBI confirms in CP153 that the business standards are being reviewed as part of the CBI's review of the Code and will be updated separately as part of that review.

Conduct Standards Training and Notification Obligations

Under the IAF, all firms will have an obligation to notify employees of, and provide training on, the new Conduct Standards.

Firms must notify those performing CF, PCF or significant influence functions of the Conduct Standards and how they apply to them. Firms will also be required to maintain up-to-date records regarding the notification of the standards to the relevant individuals. The purpose of the training is to ensure that in-scope individuals have appropriate knowledge of the Conduct Standards and how they apply to them.

Chapter 4 of the draft IAF Guidance sets out how a firm should comply with the notification and training obligations. Although records in relation to notification and training obligations do not need to be submitted to the CBI, they must be retained by the firm and made available for review on request.

In addition, under the IAF, firms must establish, maintain and give effect to policies on how the common conduct standards are integrated into the conduct of the affairs of the firm to drive the right behaviours and standards.

Breaches of Conduct Standards

If an individual is found to have failed to comply with the Conduct Standards, this will amount to a "prescribed contravention" within the meaning of the 1942 Act. This means that the CBI will be able to take action against the individual directly under the ASP. This action may lead to sanctions, including monetary penalties.

When considering a proportionate sanction, the CBI will consider various factors including:

The nature, seriousness and impact of the contravention.

The conduct of the individual during and after the contravention.

The individual's previous record.

The individual's financial position.

In circumstances where a firm fails to comply with the obligation to ensure compliance with the Conduct Standards, the CBI can also take enforcement action against the firm itself through its ASP (see Changes to CBI's Enforcement Procedures). This may include cases where the firm has not established policies that embed the Conduct Standards.

Changes to Fitness and Probity Regime

The CBI's F&P regime, which was introduced by the CBI under the 2010 Act, is designed to ensure that individuals in CF and PCF roles in firms meet minimum standards of fitness (that is, competence and capability) and probity (that is, honesty, ethical behaviour, integrity and financial soundness).

Although the Conduct Standards are concerned with the ongoing conduct of individuals on appointment, the F&P standards are relevant to assessing the suitability of individuals before appointment and on an ongoing basis while performing a CF.

Additional Certification Obligations

Under the existing F&P regime, firms must satisfy themselves on reasonable grounds of compliance by CF holders with the F&P standards and must obtain CF holders' agreement to abide by the standards.

Under the IAF, firms will be required to issue a "certificate of compliance" confirming that they are satisfied on reasonable grounds that the CF holder complies with the standards and that the person has agreed, in writing, to comply with the standards. As part of the existing annual PCF return, firms will be required to confirm the completion of the certification process.

Failure on the part of the firm to certify that the CF meets and abides by the F&P standards will amount to a "prescribed contravention", within the meaning of the 1942 Act, for which the CBI can invoke its ASP.

CBI Investigations

Currently, the CBI can only investigate individuals if the individual is in a CF position when the CBI starts the investigation. The IAF will enable the CBI to investigate an individual if the individual was in a CF position within six years of the date of the start of the investigation. This is likely to throw up issues concerning, for example, employment contracts and directors' contracts of services, and the ability of the individual to access records after they leave the firm.

Where a person is suspended from performing a CF, the maximum period of suspension will be extended to six months, which may further be extended by the High Court to 24 months.

Where a person is prohibited by the CBI from performing a CF, the CBI will be required to apply to the High Court for confirmation of the prohibition. This is unless the CBI and the individual enter into an agreement whereby the individual agrees to abide by the prohibition notice.

Extending F&P Requirements to Holding Companies

The F&P regime does not currently apply to Irish holding companies, or directors or other individuals performing CFs within Irish holding companies, as holding companies are unregulated entities. This position will change under the IAF as it extends the F&P requirements to:

Financial holding companies.

Mixed financial holding companies.

Insurance holding companies.

Investment holding companies established in Ireland.

Reporting Disciplinary Action

As part of the IAF, a firm or holding company will be required to report to the CBI any disciplinary action taken by the firm against a person performing a CF where that disciplinary action is relevant to compliance with the F&P standards. In particular, this refers to disciplinary action relating to a breach of the additional conduct standards, the common conduct standards, or any other provision of financial services legislation.

A disciplinary action in relation to an individual may involve the CBI:

Issuing a formal written warning.

Suspending or dismissing the individual.

Reducing or recovering some (or all) of the individual's remuneration.

Changes to CBI's Enforcement Procedures

A key change introduced by the IAF will be the CBI's ability to take enforcement action under the ASP directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.

This development, often referred to as breaking the "participation link" (so as to facilitate the direct pursuit of individuals for contraventions of the Conduct Standards or responsibilities under the SEAR) has been introduced via a number of amendments to the 1942 Act, the legislation which underpins the ASP.

A further significant amendment to the ASP will be the High Court's oversight of the settlement process under the ASP, with the High Court required to confirm sanctions imposed by the CBI. The amended legislation provides that the High Court will confirm the CBI decision unless it is satisfied that the CBI "made an error of law" in its decision or that a sanction "is manifestly disproportionate". The High Court's oversight of the settlement process is only required in circumstances where the firm or individual acknowledges the commission of a contravention.

The 1942 Act has also been amended to include a statutory list of relevant considerations that the CBI must take into account in determining potential sanctions or the level of financial penalties to be imposed on a natural person as part of the ASP. These considerations include:

The seriousness of the prescribed contravention.

The effect of the prescribed contravention.

The conduct of the person during and after the person's commission of participation in the prescribed contravention.

The placing of these considerations on a statutory footing reflects that the proposed amendments to the ASP seek to conform to the required standards of fairness in the administration of justice, as required by the Supreme Court decision in the case of Zalewski v An Adjudication Officer and Others [2021] IESC 24.

Notably, the draft Regulations and IAF Guidance did not include the anticipated changes to the ASP. However, the CBI has confirmed that a separate consultation will occur later in 2023 in respect of amendments to the ASP "including the updating of all core ASP documents", which will include the revised ASP Outline, ASP Inquiry Guidelines and ASP Guidelines.

Limited Waiver Agreements

"Privileged legal material" is defined in Part 5 of the IAF Act as meaning "information which a person is entitled to refuse to produce on the grounds of legal professional privilege".

Legal professional privilege (which includes legal advice privilege and litigation privilege) allows a client to withhold producing a communication that may otherwise require to be provided.

A client can waive a claim to privilege. However, the courts are reluctant to infer any implied waiver of privilege in circumstances where documents are disclosed to third parties. Once privilege has been waived, it is not then possible to restate it.

Privilege can be preserved where there has been a limited disclosure (see Fyffes v DCC [2005] 1 IR 59, where documents were disclosed to a regulator).

The IAF Act puts the ability of the CBI to enter into a "disclosure agreement" under which a person may disclose privileged legal material to the CBI, without otherwise waiving the privilege attaching to such material, on a statutory footing. This is a voluntary mechanism to enable disclosure to the CBI of privileged legal material without waiving privilege generally.

The disclosure must be for the purposes of the performance by the CBI of its functions under financial services legislation. The agreement must specify the purposes of the disclosure.

Where the CBI, or a specified person, proposes to give disclosed material in evidence in proceedings under financial services legislation, the proceedings, or part of them, may be heard "in camera" (that is, in private) to maintain the confidentiality of the disclosed material.

The IAF Act provides that the following do not apply to disclosed material:

Section 47 of the 2010 Act (this relates to use of information by the CBI in certain circumstances).

The Freedom of Information Act 2014.

Determination by High Court as to Whether Legal Professional Privilege Applies

The CBI may apply to the High Court for a determination as to whether information is privileged legal material. This arises where a person refuses to produce or give access to information, pursuant to a requirement imposed by a relevant person under financial services legislation, on the ground that the information contains privileged legal material in circumstances where both:

In relation to the information concerned, the CBI has reasonable grounds to believe it is not privileged legal material, or due to the way in which the information is presented together with any other information, it is not possible to extract only such information.
The CBI has reasonable grounds to suspect that the information contains evidence relating to the commission of a prescribed contravention or an offence under financial services legislation.

Pending a determination by the High Court, the person must preserve the information and keep it in a safe and secure place and manner. If the High Court determines that the information is not privileged legal material, then the person must produce it in accordance with such order, as the court considers appropriate.

The High Court can also make any interim or interlocutory directions, as it considers appropriate, including requesting the preparation of a report with a view to assisting or facilitating it in the making its determination as to whether the information is privileged legal material. In addition, the High Court may direct that any such applications are heard "in camera".

Next Steps for Firms

The following are examples of steps that in-scope firms should be taking now to prepare for implementation of the IAF:

Develop an internal project implementation plan and communication strategy.

Identify all employees who will be impacted by the IAF.

Conduct gap analysis and assess resource, timing, support and stakeholder requirements.

Plan provision of appropriate training to all CFs to ensure that they have an adequate understanding of the applicable legal and regulatory framework in which the firm operates.
Prepare to embed the Conduct Standards into the firm's operations.

Ensure that internal governance procedures are reviewed, monitored and updated as necessary.

Initiate the process of preparing statements of responsibilities for all individuals in a PCF role.

Initiate the process of preparing a management responsibilities map, documenting management and governance arrangements.
Consider the impact of the revised F&P processes to:
- extend the certification to all CFs; and
- the impact of the new requirements on Irish holding companies.
Review director and officer insurance policies.

Reproduced from Practical Law with the permission of the publishers. For further information, visit practicallaw.com

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