1. INTRODUCTION

It is time for the regulated financial services industry to take action to progress preparations for individual accountability in this sector in Ireland, with the enactment on 9 March 2023, of the Central Bank (Individual Accountability Framework) Act 2023 (the Act).

The Act lays the foundations of an individual accountability framework (IAF) comprising of four pillars:

  1. Conduct standards.
  2. Enhanced fitness and probity (F&P) regime.
  3. Reforms to simplify regulatory enforcement against individuals.
  4. The senior executive accountability regime (SEAR).

On 13 March 2023, the Central Bank of Ireland (the Central Bank) published a consultation paper CP153 (CP153) together with draft regulations and extensive draft guidance on the IAF and launched a three-month consultation period closing on 13 June 2023.

Although CP153 provides regulated firms (firms) with considerable additional detail about the Central Bank's proposals, it does not cover the following key aspects of the IAF:

  • Business conduct standards under the conduct standards pillar - these will be developed as part of a separate consultation on proposed updates to the Consumer Protection Code.
  • Changes to fitness and probity investigations - proposed updates to the Central Bank's investigations regulations and guidance reflecting the individual accountability legislation will follow separately in March 2023 and will not be subject to a consultation.
  • Changes to the administrative sanctions procedure (ASP) - a separate consultation will be launched in mid-2023 on updates to the Central Bank's core ASP documents.

However, we believe firms now have a sufficient basis for making real progress in their implementation of their IAF/SEAR projects. In this context, we examine the conduct standards, fitness and probity reforms and SEAR pillars in detail based on new information available in CP153. We also recommend practical actions which firms can take now regarding each pillar.

2. IMPLEMENTATION TIMEFRAME

CP153 proposes that:

  • Conduct standards will apply from 31 December 2023
  • The main fitness and probity updates (including certification of fitness and probity and extension of the fitness and probity regime to holding companies established in Ireland) will apply from 31 December 2023.
  • SEAR will apply to firms falling within the initial phase of SEAR from 1 July 2024.

3. INDIVIDUAL ACCOUNTABILITY FRAMEWORK

The Act is the primary legislation for the IAF and it confers broad powers on the Central Bank to prescribe, through implementing regulations or guidance, measures to strengthen and enhance individual accountability in the financial services sector. The Act provides for amendments to existing Central Bank Acts, as amended from time to time, including:

  • The Central Bank Act 1942 (1942 Act);
  • The Central Bank Reform Act 2010 (2010 Act);
  • The Central Bank (Supervision and Enforcement) Act 2013 (2013 Act).

We have been helping many of our clients for some time to prepare for the individual accountability regime.

In this client briefing, taking account of the enactment of the primary legislation and the Central Bank consultation paper CP153 and appended draft regulations and guidance, we set out key actions to benchmark your firm's implementation action plan under each of the four pillars of the individual accountability framework.

A. CONDUCT STANDARDS

The three categories of conduct standards under IAF are:

  • Business conduct standards;
  • Common conduct standards; and
  • Additional conduct standards.

Chapter 4 of the Central Bank's draft guidance sets out overarching guidance on the conduct standards. Guidance on common conduct standards is in Chapter 5, and guidance on additional conduct standards is in Chapter 6. The detail included in both the Act and the guidance is extensive. The key issues and the steps individuals and firms can take in response are set out below.

I. BUSINESS CONDUCT STANDARDS

The business conduct standards are intended to create a single benchmark of conduct that all firms must meet, regardless of sector. They reflect the general principles of the Consumer Protection Code and will therefore be standards that firms will be already operating towards.

As outlined earlier, business conduct standards will be developed as part of a separate Central Bank review of the Consumer Protection Code.

Under the Act, business conduct standards applicable to all firms include:

  • To act in the best interests of customers and of the integrity of the market.
  • To act honestly, fairly and professionally.
  • To act with due skill, care and diligence.
  • To not mislead a customer as to the advantages or disadvantages of any financial service.
  • To maintain adequate financial resources.
  • To control and manage its affairs and systems sustainably, responsibly, and in a sound and prudent manner.
  • To prevent or identify and appropriately manage, conflicts of interest.
  • To arrange adequate protection for assets held by the firm on behalf of a customer.
  • To engage and cooperate in good faith and without delay with the Central Bank and other relevant regulatory authorities.
  • To disclose to the Central Bank promptly, and in a manner appropriate to the circumstances, any matter relating to the firm of which the Central Bank would reasonably expect notice.

II. COMMON CONDUCT STANDARDS

Under the Act, 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.
  • Cooperate in good faith and without delay with the Central Bank and other comparable authorities.
  • 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 to which the firm is subject by law and any market codes that apply to the affairs of the firm.

Common conduct standards set out the standards of behaviour expected of individuals carrying out controlled function (CF) roles. The common conduct standards will apply to all CFs (including pre-approval controlled functions or PCFs) in all regulated firms, including Non-Executive Directors (NEDs), Independent Non-Executive Directors (INEDs) and those exempt from the F&P regime (e.g. outsourced CF roles and intra-group arrangements).

According to the Central Bank, these are basic standards of behaviour that "should underpin the provision of financial services and the relationships of trust that are central in this area".

The common conduct standards are standards to which most individuals in regulated firms already hold themselves. However, under the IAF legislation, any individual performing a CF role (including a PCF role), must take any steps that it is reasonable in the circumstances for the individual to take to ensure that the common conduct standards are met. Under the IAF, a breach of the common conduct standards by an individual holding a CF role will be directly enforceable by the Central Bank against that individual.

III. ADDITIONAL CONDUCT STANDARDS

The additional conduct standards will apply (in addition to the common conduct standards) to more senior persons, namely, those performing PCF roles and to CF1s (being individuals with the ability to exercise a significant influence on the conduct of the affairs of a firm) in any firm, including temporary PCF appointments.

However, unlike the common conduct standards, the additional standards do not apply to those PCF roles exempt from preapproval under the F&P outsourcing exemption unless the holder is a CF1.

There are four additional conduct standards under the Act concerning control, compliance, delegation and disclosure. Specifically, the Act imposes an obligation on PCFs and CF1s to take any steps that are reasonable in the circumstances 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 for which they are responsible are assigned to an appropriate person with effective oversight.
  • Disclose promptly and appropriately to the Central Bank any information of which the Central Bank would reasonably expect notice including, information relating to the following:
    • commission of an offence;
    • commission of a prescribed contravention or any other breach of obligations under financial services legislation;
    • concealment or deliberate destruction of evidence;
    • provision of false or misleading information to the Central Bank;
    • obstruction or impeding of an investigation;
    • commencement of legal proceedings (relating to financial services legislative breaches) by or against the firm;
    • commencement of legal proceedings (impacting the firm's ability to trade) against the firm;
    • anything that may otherwise interfere significantly with the operation of the firm or its compliance with financial services legislation;
    • a decision by the firm to cease to provide financial services.

The Central Bank has provided draft guidance on the regulatory expectations for compliance with the additional conduct standards (in Chapter 6 of the draft guidance). As with the draft guidance on common conduct standards, this provides significant insight into the Central Banks' expectations, and familiarity with this Guidance will be crucial for every impacted individual.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.