The Central Bank’s Individual Accountability Framework action for Irish fund management companies and Irish fund boards
The Central Bank (Individual Accountability Framework) Act 2023 (the “Act”) provides for the introduction of the new Individual Accountability Framework (“IAF”), which is designed to improve governance, performance and accountability in firms, including Irish fund management companies and Irish fund boards among others, providing financial services to individuals and businesses.
Central Bank Consultation (“CP153”)
Following the enactment of the Act, the Central Bank launched a three-month public consultation via its paper entitled “Enhanced governance, performance and accountability in financial services”. The consultation closed on 13 June 2023.
The Irish Funds Industry has provided responses to CP153 and we await the Central Bank’s response.
CP153 included draft regulations (the “Regulations”) which provide details on the requirements under the IAF and draft guidance (the “Guidance”) which seeks to provide clarity in terms of the Central Bank’s expectations for the implementation of the IAF.
IAF – Four Pillars
There are four pillars to the IAF, some of which apply to all regulated financial service providers (“RFSPs”) and others which initially only apply to in-scope firms.
The four pillars are as follows:
The Senior Accountability Executive Regime (“SEAR”) |
Conduct standards for regulated financial service providers (“RFSPs”) and their management and staff |
Enhancements to the Central Bank’s Fitness and Probity (“F&P”) regime |
Stronger Central Bank enforcement capabilities |
SEAR
While much of the industry commentary and focus has been on the requirements imposed by SEAR, this is just one element of the overall framework.
CP153 confirms that SEAR will initially apply to a defined range of firms, namely:
- credit institutions (excluding credit unions);
- insurance undertakings[1];
- investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are permitted to hold client assets; and
- incoming third country branches of the above (with a proportionate approach to apply to low PRISM impact rated in-scope investment firms and incoming third-party branches).
Irish fund management companies and Irish fund boards are not in scope of SEAR at this time however, the CP153 clarifies that the Regulations will enable the Central Bank to roll-out SEAR to other financial service sectors in due course.
Conduct Standards
The Regulations set out three new sets of conduct standards which apply to all RFSPs including Irish fund management companies and Irish fund boards [2].
The new conduct standards include the following:
- Common conduct standards which will apply to individuals carrying out controlled functions (“CFs”) within RFSPs including pre-approval controlled function (“PCF”) holders and controlled function holders. This will include, but is not limited to, directors and designated persons of Irish fund management companies, directors of Irish fund boards and money laundering reporting officers.
- Additional conduct standards which will apply to individuals performing PCF roles and others who may exercise a significant influence on the conduct of the RFSP’s affairs including controlled function 1 holders (“CF1”). This will include, but is not limited to, directors of Irish fund boards and heads of functions within Irish fund management companies.
- Business standards which will apply to all RFSPs and are to be developed in conjunction with the separate Consumer Protection Code review and consultation.
Set out below is a summary of the conduct standards:
Common Conduct Standards
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Additional Conduct Standards
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Business Standards
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It is expected that an individual subject to the conduct standards shall take reasonable steps to achieve compliance with the conduct standards. The Guidance has been developed to help individuals understand how to meet these conduct standards.
Action Areas
We set out some practical steps to be taken by RFSPs to progress their plans for implementation of the IAF:
Common Conduct Standards
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Additional Conduct Standards
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Other Actions
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Enhancements to the F&P Regime
The IAF provides for certain modifications to the existing F&P Regime which applies to individuals performing PCF and controlled function roles in Irish fund management companies and Irish fund boards.
The modifications include the following:
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Action Areas
Review existing F&P due diligence processes and requirements in respect of the appointment and ongoing review of PCF and controlled function holders |
Review letters of engagement to incorporate the requirements of the F&P regime |
Ensure that PCF and controlled function holders are aware of the full scope of the regime |
Ensure that there is escalation and review processes for concerns regarding compliance with either conduct standards and the F&P regime |
Ensure that there is a process in place to take account of this additional certification requirement |
Central Bank enforcement capabilities
On 22 June 2023, the Central Bank published a twelve week consultation on the changes to the Central Bank’s Administrative Sanctions Procedure (“ASP”). One of the key changes to the ASP is to strengthen the procedures under it to ensure that the Central Bank has the 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. The enhanced ASP is designed to underpin and support the introduction of the IAF and in particular the SEAR and the conduct standards for firms and individuals. The Central Bank has prepared draft composite guidelines in relation to the ASP which consolidate the existing published ASP Outline 2018, Inquiry Guidelines 2014 and ASP Sanctions Guidance 2019.
Timing
April 2023 | Central Bank issues revised F&P Investigations Regulations and F&P Investigations, Suspensions and Prohibitions Guidance |
13 June 2023 | Consultation period for CP153 closed. The Central Bank will publish a Feedback Statement on the Central Bank’s website in due course |
14 September 2023 | Central Bank consultation on enhancements to ASP closes |
29 December 2023 | Conduct standards start to apply (including accountability of senior individuals for running their parts of the business effectively) |
29 December 2023 | F&P regime – certification and inclusion of individuals with positions in holding companies start to apply |
1 July 2024 | SEAR to applies to firms listed as being initially in scope |
If you would like to discuss these requirements or action areas described above, please contact your usual Arthur Cox contact.
For more information on how our experienced multi-disciplinary Individual Accountability and SEAR Group can help you navigate the Individual Accountability Framework, go to www.arthurcox.com/iaf.
[1] Excluding reinsurance undertakings, captive (re)insurance undertakings and insurance special purpose vehicles.
[2] We note that the Central Bank has been asked to confirm whether it intends for the new conduct standards to apply to externally managed funds in order to eliminate any doubt on this matter.