The Central Bank (Individual Accountability Framework) Act 2023 introduces an Individual Accountability Framework (IAF) that strengthens the responsibility of senior managers in financial services firms for corporate breaches. Effective from December 29, 2023, the IAF will mandate conduct standards and tighter restrictions to the Fitness and Probity Regime. Key points include a deferral of the Senior Executive Accountability Framework (SEAR) for Non-Executive Directors until July 2025, introducing a materiality threshold for outgoing branches, addressing concerns about proportional responsibilities, clarifying sharing/splitting roles of a Pre-Approval Controlled Function (PCF) holder, and limiting the scope of enhanced due diligence in certification. Disciplinary reporting obligations have also been adjusted. The Central Bank aims to publish a report on the operation of the IAF in three years' time.
Senior managers will have increased personal responsibility for corporate breaches under a new regime introduced under the Central Bank (Individual Accountability Framework) Act 2023. The Act introduces an Individual Accountability Framework (IAF) which is intended to improve governance and accountability in firms providing financial services to individuals and businesses.
Conduct standards, including accountability of senior individuals for running their parts of the business effectively, will apply from 29 December 2023 as will the enhancement to the Fitness and Probity Regime. In-scope firms have until 1 July 2024 to allocate responsibilities and decision-making roles to relevant personnel
Following the introduction of the Act in March 2023, a three-month consultation process took place during which the Central Bank engaged with the financial industry and interested stakeholders about mobilising the provisions of the Act.
In November the Central Bank published updated draft Regulations and Guidance as well as a Feedback Statement. This revealed the responses that the Central Bank received during the consultation process from interested stakeholders to the initial draft Regulations and Guidance.
Those stakeholders consisted of representative bodies, financial services providers, legal firms or bodies. They were asked to respond to 18 questions relating to how the Central Bank proposes to implement the new IAF as set out in its consultation paper. The questions also sought the stakeholders' views on the draft Regulations and Guidance on the IAF. The key areas of the IAF are the Senior Executive Accountability Framework (SEAR), the Conduct Standards, and the enhancements to the current Fitness and Probity Regime.
The main responses received from participating stakeholders and the Central Bank's reaction were as follows.
(Independent) Non-Executive Directors (I) (NEDs)
Bringing (I)NEDs within the scope of SEAR conflicts with their role and functions. The draft Guidance proposes to assign (I)NEDs the responsibility for leading the development of the firm's culture. However, stakeholders who commented on this proposal considered this responsibility to be more suited to the management of the firm. While the Central Bank is not prepared to exclude (I)NEDs from SEAR, it has decided to defer the introduction of SEAR for (I)NEDs until 1 July 2025. The Central Bank believes that this additional time will allow firms to become more accustomed to their executives complying with the regime and this, in turn, should streamline compliance measures for (I)NEDs by the deferred date.
Application of SEAR to outgoing branches
In light of the feedback received, a materiality threshold will be devised by the Central Bank in the coming weeks. Once this threshold has been attained, managers within those outgoing branches of in-scope firms will need to comply with SEAR.
Inherent and Prescribed Responsibilities
A common theme running through the responses received from the 26 participants in the consultation process related to proportionality and the concept that what may apply and be manageable to a larger firm will not necessarily apply to a smaller firm and could have drastic consequences. The Regulations identify a large number of General Prescribed Responsibilities that could overwhelm individuals in the smaller firms who hold a pre-approved controlled function or it could deter individuals from taking up roles with those firms. The Central Bank has therefore removed some Prescribed Responsibilities from the list contained in the Regulations and it has merged or moved other items from the General Prescribed Responsibilities list to other lists within the Regulations that are applicable to specific firms.
Sharing/Splitting of Roles and Responsibilities
As pointed out in our previous article in relation to this legislation, there was a risk that employees would be overwhelmed with workload if they were also required to perform the duties of a PCF holder. In written submissions to the Central Bank, some stakeholders identified a discrepancy between the Guidance and the Regulations. On the one hand, save as to job sharing, the draft Guidance prohibits the sharing or splitting of PCF roles amongst individuals under the SEAR, but on the other hand the draft Regulations provides for the allocation of responsibilities to more than one PCF holder. In response to this, the Central Bank amended the draft Guidance to bring it more in line with the draft Regulations and it now sets out circumstances in which the sharing of a PCF role amongst several individuals may be permitted.
Certification
The Act enhances the fitness and probity regime by only permitting a person to perform a controlled function if a certificate of compliance with standards of fitness and probity has been issued by the financial service provider or firm to that person and if the certificate remains in force. During the consultation process, the Central Bank was informed that intermediaries such as brokers will incur additional costs in attempting to observe this onerous requirement because it applies to the entire controlled function population. Statistics issued by the European Commission were also put to the Central Bank in advancing this point which informs that for every euro per employee spent by a large firm to comply with a regulatory duty, a medium-sized firm may have to spend approximately four euro per employee and a small business will spend up to ten euro per employee. The draft Guidance has been amended to limit the scope of the enhanced due diligence aspect of the certification requirement to specific categories of controlled functions.
Disciplinary actions
Initially, the draft Regulations obliged a firm to report to the Central Bank details of any disciplinary action taken against a PCF holder in relation to compliance with the fitness and probity standards or in relation to a breach of the Conduct Standards. The Regulations require a firm to issue a certificate of compliance within 5 days of the firm being established or as may be agreed with the Central Bank. Queries and concerns were raised to the Central Bank during the consultation process about the logistics of reporting a disciplinary action and clarification was sought in relation to the timeframe within which to do so. In acknowledging those concerns, the Central Bank has removed the obligation for a firm to report to the Central Bank where formal disciplinary action has been initiated and concluded against a PCF holder concerning a breach of the conduct standards. Whilst firms will welcome this amendment, the Central Bank has reminded those within the industry that they are still obliged under other pieces of legislation such as the Central Bank Reform Act, 2010 and the Central Bank (Supervision and Enforcement) Act, 2013 to inform the Central Bank of any 'prescribed contraventions' which would include violations of conduct standards.
The Central Bank intends to publish a report in three years' time in relation to the operation of the IAF which may bring about further regulatory changes. While regulatory bodies do tend to periodically take stock of how new legislative measures are affecting an industry, the collaborative and transparent attitude of the Central Bank during the consultation process and since its conclusion in June 2023 may signal a positive shift away from the culture that existed within the financial industry and which contributed to the most recent banking crisis.
