Introduction

On 28 July 2022, the Department of Finance published the Bill, together with an accompanying Explanatory Memorandum.

The publication of the Bill follows the publication of the General Scheme for the individual accountability framework (the “General Scheme”) in July 2021 (covered in our briefing of 28 July 2021).

The Minister for Finance has identified the Bill as a priority for the Government, and it is expected to be enacted by the end of 2022. Following enactment, the Central Bank of Ireland (the “CBI”) will issue draft implementing regulations and guidance for public consultation.

The Bill aims to enhance individual accountability in the financial services industry. It grants regulation-making powers to the CBI to effectively implement the Individual Accountability Framework (“IAF”) in respect of senior executives in regulated financial service providers (“RFSPs”).

Overview of the Bill’s updates to the General Scheme

Mirroring the approach set out in the General Scheme, the Bill sets out four key pillars to the IAF:

• The new Senior Accountability Executive Regime (“SEAR”);
• New conduct standards for RFSPs and their management and staff;
• Enhancements to the CBI’s Fitness and Probity (“F&P”) regime; and
• Stronger CBI enforcement capabilities.

Important updates made by the Bill to the General Scheme include:

• the requirement on individuals to “take any steps that it is reasonable in the circumstances for the person to take” to ensure compliance with common conduct standards, which is a higher standard than was provided for in the General Scheme;
• additional details on the scope of the requirements under the conduct standards to disclose any information which the CBI would reasonably expect notice of;
• the power of the CBI to investigate individuals under the F&P regime even if they are no longer in a controlled function, if they were in the role within 6 years of commencement of the CBI investigation; and
• amendments to the investigation process under the administrative sanctions procedure (“ASP”) and F&P.

These updates are discussed further below.

SEAR

Implementation

SEAR is to be introduced mainly by amendments to the Central Bank (Supervision and Enforcement) Act 2013.

The Bill provides regulation-making powers to the CBI and we expect that the CBI will set out details of the proposed inherent/allocated responsibilities as well as requirements with respect to management responsibility maps and statements of responsibilities.

Scope

The Bill does not prescribe the sectors to be included in SEAR, as this will be provided for by CBI regulations, but the General Scheme noted that it is intended that initially SEAR will apply to banks, insurance undertakings, certain investment firms, and (in each case) their third country branches. Other categories of RFSP may be brought into scope at a later date.

Which investment firms are captured?
Subject to CBI regulations, SEAR is expected to apply first to investment firms which: underwrite on a firm commitment basis; and/or deal on own account; and/or are authorised to hold client monies/assets.

The subjects of SEAR are those executives who perform Pre-Approval Controlled Functions (“PCFs”) within in-scope RFSPs. The term “Senior Executive Function”, which appeared in the General Scheme, does not feature in the Bill itself, though it may be reprised in future CBI regulations.

Key impacts

The CBI will give effect to SEAR in four key areas.

Inherent Responsibilities	Specifying a range of responsibilities that are inherent to each PCF
Allocated Responsibilities	Prescribing further responsibilities which an RFSP must allocate to PCFs
Statements of Responsibilities	Requiring RFSPs to prepare statements of responsibilities for each of their PCF roles, assigning clear responsibilities to each role
Management Responsibility Maps	Requiring RFSPs to produce a management responsibility map outlining key management and governance arrangements in a comprehensive and accessible way in a single source document

Duty of responsibility

A “duty of responsibility” will be introduced, by way of amendment to the Central Bank Reform Act 2010. All individuals with inherent or allocated responsibility for an aspect of a RFSP’s affairs will have a duty of responsibility to “take any steps that it is reasonable in the circumstances for the person to take” to secure that the affairs of the RFSP (for which the individual is responsible) are conducted so as to avoid contravention by the RFSP of its obligations under financial services legislation.

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 Administrative Sanctions Procedure.

The standards with respect to the duty of responsibility set out in the Bill appear to be higher than those provided for in the General Scheme (which required individuals only to take “reasonable steps”). We will monitor any developments in this wording as the Bill moves through the government process.

Conduct standards

Overview of conduct standards

Three new sets of conduct standards will apply to all RFSPs, regardless of whether they fall within the scope of SEAR:

Business Standards (applicable to all RFSPs, though CBI regulations may prescribe different provisions in respect of different classes of RFSP)	CBI regulations will provide precise business standards which will require an RFSP to:  act in the best interests of customers and of the integrity of the market; act honestly, fairly and professionally; act with due skill, care and diligence; not mislead a customer as to the advantages or disadvantages of any financial service; maintain adequate financial resources; control and manage its affairs and systems sustainably, responsibly, and in a sound and prudent manner; prevent, or identify and appropriately manage, conflicts of interest; arrange adequate protection for assets held on behalf of a customer; engage and cooperate in good faith and without delay with regulators; and promptly disclose to the CBI any matter relating to the RFSP of which the CBI would reasonably expect notice.
Common Conduct Standards (applicable to all individuals performing Controlled Functions (“CFs”) within RFSPs	A CF role-holder must take reasonable steps to: act honestly and with integrity; act with due skill, care and diligence, including acting appropriately in any decision-making, including collective decision-making, ensuring decisions are properly informed; be cooperative with the CBI and other regulators or authorities and deal with them in good faith and without delay; act in the best interests of customers and treat them fairly and professionally; and observe proper standards of market conduct.
Additional Conduct Standards (applicable to (i) those performing PCFs and (ii) others who may exercise a significant influence on the conduct of the RFSP’s affairs)	Such individuals must take reasonable steps to: ensure that the business of the RFSP for which the person is responsible is controlled effectively; ensure that the business of the RFSP for which the person is responsible complies with relevant regulatory requirements; ensure that any delegation of tasks for which they are responsible is to an appropriate person and that they oversee the discharge of the delegated task effectively; disclose promptly and appropriately to the CBI any information of which the CBI would reasonably expect notice, including information relevant to, or giving rise to a suspicion or expectation of, any of the following: commission of an offence by the RFSP or a person performing a CF in relation to it; commission of a prescribed contravention or any other breach of obligations under financial services legislation by the RFSP or a person performing a controlled function in relation to it; concealment or deliberate destruction of evidence in relation to an offence or prescribed contravention; provision of false or misleading information to the CBI in relation to an offence or prescribed contravention; obstruction or impeding of an investigation; commencement of legal proceedings by or against the RFSP arising from its obligations under financial services legislation; commencement of legal proceedings against the RFSP which may impact on its ability to continue to trade; anything that may otherwise interfere significantly with the operation of the RFSP or its compliance with its obligations under financial services legislation; or a decision by the RFSP to cease to provide financial services of a particular description.

Duty of an RFSP in respect of individual conduct standards

An RFSP must establish and maintain policies setting out how it will embed the conduct standards within the organisation. In particular, an RFSP must:

• notify individuals of the conduct standards applicable to them; and
• provide suitable training to staff on relevant conduct standards.

The CBI will issue practical guidelines with respect to individual conduct standards in due course.

Amendment to the F&P regime

New certification requirement

As expected, a certification requirement will be introduced into the F&P regime. Please refer to our briefing of 28 July 2021 for further background information.

The Bill provides that the CBI may make regulations in relation to the form and content of a certificate, the period of the validity of the certificates and procedures to be followed by RFSPs. By way of comparison, under the equivalent UK Regime, a firm must confirm at least annually that each individual performing a role falling within the certification regime has been certified as fit and proper to perform that role. We would expect a similar period of validity to be set by the CBI with respect to these certificates.

Amendments to CBI Process

The Bill amends the F&P regime to align with standards of fairness in the administration of justice in light of the Supreme Court decision in Zalewski v An Adjudication Officer and Others (discussed in our briefing of 24 May 2022). In addition, the Bill:

• extends the scope of the investigation mechanism to include persons in CF positions in holding companies;
• allows the CBI to conduct an investigation in relation to the F&P of any person who performed a CF up to six years prior to the investigation (the CBI can currently investigate individuals if they are in a CF position when the CBI commences the investigation); and
• allows the CBI to suspend a person from performing a CF for an increased period of six months (previously 3), which can be extended to 24 months by the High Court.

Enhanced CBI enforcement capabilities

The General Scheme had provided for amendments to the Administrative Sanctions Procedure, including the breaking of the “participation link” whereby an RFSP must first be found to have breached financial services legislation before relevant individuals can be pursued by the CBI. Breaking the “participation link” is intended to facilitate individual accountability as the CBI will not be required to prove breaches against an RFSP before sanctioning an accountable individual. In addition to these previously flagged amendments, the Bill contains further provisions and clarifications on the extension of the CBI’s capabilities, including as follows:

• The High Court will have oversight of the settlement process under the ASP and will have to confirm sanctions imposed by the CBI.
• The Bill provides a statutory list of relevant considerations that the CBI is mandated to take into account in determining potential sanctions or the level of a financial penalties to be imposed on a natural person, including:
  • any consideration affecting the seriousness of the prescribed contravention concerned e.g.: seniority and level of responsibility, seriousness of the offence, duration of participation in the prescribed contravention etc.;
  • the effect of the prescribed contravention e.g.: loss or determinant to consumers or affect on orderliness of markets;
  • the conduct of the person during and after the commission of or participation in the prescribed contravention, e.g.: level of cooperation with the CBI;
  • the previous record of the person, e.g.: previous sanctions or convictions;
  • any consideration relating to pending or possible criminal proceedings, including whether such proceedings may be prejudiced by the imposition of a sanction;
  • any matter relevant to the financial position of the person; and, in the case of a contravention of the conduct standards applicable to CFs; and
  • more generally, the importance of promoting a culture of compliance with the conduct standards.

Next Steps for Firms

• Consider the proposals put forward in the Bill.
• Discuss with relevant internal stakeholders and senior management.
• Identify the staff that may be subject to new or updated requirements.
• Keep existing governance procedures under review.
• Consider any updates required to F&P.
• Monitor any additional CBI guidance, including with respect to responsibilities maps or statements of responsibilities.
• Consider how to put in place effective training for all employees subject to the new regime.
• In the medium term, consider whether job descriptions for staff should be updated along with existing HR policies (as applicable) and consider whether changes to employment contracts will be required.

Contact

Please get in touch with any member of our market-leading Financial Regulation: Investigation and Enforcement team if you wish to discuss the potential impact of the proposed IAF on your business. We advise and support clients on a wide range of financial regulatory investigations and enforcement issues, and have deep specialist knowledge of the financial services regulatory environment and experience in managing complex contentious regulatory matters.