Individual accountability in financial services: report on pre-legislative scrutiny of the Central Bank (Individual Accountability Framework) Bill 2021

The Joint Committee on Finance, Public Expenditure and Reform and Taoiseach (Committee) recently published its Report on Pre-Legislative Scrutiny of the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021 (the General Scheme).

The Committee’s recommendations deal with legal and practical issues at a high level. Nevertheless they indicate some of the issues which industry have already been considering and should be noted by firms currently working through implementation plans ahead of the fuller legislative text.

Following the Committee’s review of the General Scheme and submissions received from the Banking and Payments Federation of Ireland (BPFI) and the Irish Banking Culture Board, and meetings with representatives from the Minister for Finance and the Central Bank of Ireland (CBI), the Committee makes four key recommendations. All of these concern the Senior Executive Accountability Regime (SEAR), most of which focus on the scope of that regime.

Recommendation 1

The Committee recommends that, upon conclusion of the extensive consultation exercise with the financial services sector proposed, the CBI reports back to the Committee with any revisions or changes to the scheme based on the consultation.

This recommendation concerns the proposed requirement on firms to document their key management and government arrangements in a comprehensive and accessible way to give a sense of where responsibility and decision-making lies.

This recommendation appears to have been made in the context, for example, of industry feedback that greater clarity could be given regarding the scope and nature of the responsibility mapping that the legislation will require. The Committee supports the proposed responsibility mapping (via statements of responsibilities and a management responsibility map) and is of the opinion that it would have a significant impact on increased individual accountability.

In response to the BPFI’s submission seeking further clarification around the statement of responsibilities, such as the documentation of “key elements of each role and the responsibilities and expectations of the office holder“, the Committee comments that further guidance would be welcome; however, it accepts that there will be significant engagement and consultation with stakeholders from the financial services sector following the commencement of the legislation, and makes the above recommendation.

Recommendation 2

The Committee recommends that the CBI report on the possible inclusion in the SEAR of the entities currently proposed to be excluded (credit unions, reinsurance/captive reinsurance undertakings and Insurance Special Purpose Vehicles) within one year of commencement of the Act.

This recommendation concerns the scope of the SEAR and the proposed requirement that it will initially apply to:

  • credit institutions (excluding credit unions)
  • insurance undertakings (excluding reinsurance undertakings, captive reinsurance undertakings and Insurance Special Purpose Vehicles)
  • investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorized to hold client monies/assets
  • third country branches of these regulated financial service providers

The Committee acknowledges that the proposed initial application of the SEAR does not encompass all the financial institutions that could potentially be included within its scope, and that the position may change and evolve over time, and makes the above recommendation. This reflects the approach taken in the UK, where additional categories of firms were included in the equivalent Senior Managers and Certification Regime (SMCR) after its initial roll-out. Given the breadth of the SEAR requirements, and given the positive governance impact of the arrangements required by the regime, significant regulated firms who are not yet in scope for SEAR should still pay attention to the practical guidance that is expected from the CBI on, for example, governance, reporting lines and delegation alongside the anticipated legislation.

Recommendation 3

The Committee recommends that the Department of Finance clarify the intended meaning of ‘third country branches’ of the regulated financial service providers included in the SEAR.

This recommendation concerns the scope of the SEAR and seeks clarification of the meaning of ‘third country branches’.

In particular, the Committee seeks clarification on whether the intention is to include Irish firms operating in other jurisdictions or firms from outside of Ireland operating with branches in the country, and makes the above recommendation. Whilst references to ‘third country branches’ has commonly been understood to cover branches in Ireland of firms with their head office in third countries, the lack of clarity in this regard in the General Scheme has been the subject of some discussion across industry. This could obviously have an important impact on firms, particularly given that, at a general level, the CBI’s designation of pre-approved controlled functions apply to the heads of foreign branches of Irish firms but not to branches in Ireland of overseas firms.

Recommendation 4

The Committee recommends that the Department of Finance should clarify if certain payment gateways are to be excluded from the SEAR.

This recommendation concerns the scope of the SEAR and relates to FinTech firms, specifically payment gateway services. The Committee queries the potential inclusion of payment gateway services in the SEAR, and makes the above recommendation on this basis.

Further Committee comments

The Committee also makes the following observations on the General Scheme:

Part 2, Head 5 of the General Scheme – duty of responsibility of persons performing Senior Executive Functions

The Committee, when addressing the obligation on senior individuals to take ‘reasonable steps’ to avoid their firm contravening legal and regulatory requirements in the business area for which they are responsible, accepts the CBI’s confirmation that, despite an overall desire for clarity with regard to what exactly is meant by ‘reasonable steps’, it is purposefully flexible to allow it to fit the range of the institutions to which it will apply. It remains to be seen whether, as in the UK following Financial Conduct Authority and Prudential Regulation Authority industry engagement, further guidance issued by the CBI will give more practical pointers for senior executives and non-executives within the scope of SEAR as to how to comply with the ‘reasonable steps’ requirements on a day to day basis.

Part 3 of the General Scheme – conduct standards

The conduct standards underline the expectation that firms operate honestly and ethically in the best interests of their customers. The Committee is in full support of the proposal for the introduction of conduct standards. This is particularly important for firms who may not currently deal with consumers or customers who engaged the ‘general principles’ of for example the Consumer Protection Code. The introduction of the conduct standards effectively incorporates the concept of this type of general principle into more business to business engagements.

Part 4 of the General Scheme – fitness and probity regime

The proposed enhancements to the current fitness and probity regime would engender a shift towards more responsible practices for firms and individuals and the Committee is supportive of these proposals. As industry will already be aware, the requirement to certify fitness and probity on a recurring basis may well impose additional practical requirements on firms, as has been the experience in implementing the UK SMCR.

Part 5 – enforcement investigations and sanctions

The Committee supports these proposals and believes that in order for the SEAR to be successful, there must be adequate measures in place to stop individuals and firms contravening the regime.

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