knowledge 29 March 2022 |

Individual Accountability Framework – What Practical Steps should Firms take now?

The Central Bank of Ireland (the “CBI”) has recently provided welcome clarifications on key aspects of the IAF¹. We have summarised these clarifications below and also highlighted practical steps the CBI is encouraging regulated firms to take now.

Expected timeline for the IAF

The CBI has confirmed that it is hopeful the Bill will be enacted in the course of the months ahead. The Bill will provide the CBI with extensive regulation-making powers (in particular, in relation to the senior executive accountability regime (“SEAR”), conduct standards and fitness and probity certifications). The CBI has confirmed that it is developing these regulations as the Bill progresses through the Oireachtas. On this basis, the CBI expects to move quickly to publicly consult and engage with key stakeholders once the Bill has been enacted.

Fitness and probity certification

The CBI’s Director General of Financial Conduct, Ms Derville Rowland, has recently highlighted the new IAF requirement for regulated firms to certify on an annual basis that individuals exercising a controlled function remain fit and proper. The CBI considers that the introduction of a positive duty on firms to certify each controlled function will strengthen the focus on the responsibility of firms for the conduct of their staff and their corporate culture.

A recent CBI enforcement action in relation to failures to comply with the CBI’s fitness and probity regime emphasises the importance the CBI places on same. On 1 March 2022, the CBI reprimanded and fined a retail intermediary that operates in the commercial and retail insurance market in respect of three breaches of fitness and probity obligations under the Central Bank Reform Act 2010 here. In this case, the CBI found that the firm in question failed to obtain the CBI’s prior approval before appointing three individuals to pre-approval controlled function (“PCF”) roles.

The CBI’s Director of Enforcement and Anti-Money Laundering, Seána Cunningham, commenting on the case stated ‘As well as acting as a deterrent to this firm, this enforcement action serves as a reminder to all regulated firms, in all sectors and regardless of size, of the importance which the Central Bank attaches to F&P compliance. We are committed to following through to hold firms accountable for F&P failures and to raising compliance standards in this critical protection for customers of regulated firms’.

Substance and form

The CBI’s Director of Financial Regulation – Policy Risk, Mr Gerry Cross, recently highlighted the dynamic that exists between substance and form in the IAF and the risk of ‘juniorisation’, that is ‘where a formal title is applied to a less senior executive while the more senior person seeks to stay out of the regulatory picture’. Mr Cross confirmed that the IAF is focused on the substance of roles and not their titles. In the case of ‘juniorisation’, Mr Cross stated that the more senior executive will be identified as the person actually carrying out the role and therefore deemed to be the role-holder and to hold the relevant responsibilities under the IAF.

Outsourcing and SEAR

Regulated firms will be aware that outsourcing continues to be a key focus for the CBI and will already be in the process of analysing and implementing the recent Cross-Industry Guidance on Outsourcing published by the CBI in December 2021 here. Mr. Cross has confirmed that the CBI expects that where outsourcing arrangements are in place in a firm subject to SEAR there will be a senior executive function with responsibility for same. In addition, the outsourced role-holder will fall under the oversight of a PCF role holder within that firm. In-scope firms will need to reflect this in the relevant statement of responsibilities and responsibility maps. The CBI states that this approach will ensure that the overall responsibility and related individual accountability is retained within the firm.

Culture of both regulated firms and their professional advisors

The CBI has also stated that it is not sufficient for regulated firms to focus solely on their own organisation to achieve cultural change, regulated firms will need to look at the broader landscape which must include professional industry bodies. Ms Rowland has stated that all participants in the financial services industry, including key legal and accountancy advisors, must play their part in the cultural transformation. Ms Rowland emphasised that this will require “the conscientious professional to advise firms to comply not only with the letter of the rules, but also with the spirit”.

What practical steps should firms take now?

The CBI has strongly encouraged firms to take the following practical steps now:

• Understand and assess their obligations under the IAF
  
  Regulated firms need to understand their obligations under the IAF and assess their current governance structures in order to identify ownership of responsibilities and implement any necessary changes to their existing business model.

• Review fitness and probity processes
  
  Regulated firms should review their fitness and probity processes to assess any enhancements required to meet the annual certification requirements. Regulated firms should also consider what training and monitoring will be required to embed the proposed conduct standards as expected standards of behaviour.

• Examine their internal culture and values
  
  Regulated firms should more broadly examine their internal culture and values as against the IAF principles. The CBI encourages regulated firms to assess how IAF principles could meaningfully be reflected in practice in a firm’s business.

• Engagement
  
  Consideration should be given to effective ways of engaging with staff, customers and other stakeholders to spread awareness of and embed standards and positive behaviours.

• Education and training
  
  The CBI has also stated that education and training together with consistent internal and external messaging will play an important part in embedding standards and positive behaviours.

How can we help?

Our brochure ‘The Individual Accountability Framework and Senior Executive Accountability Regime supporting our clients in ensuring a positive and customer-focused culture’ here provides further detail on steps which regulated firms can take to prepare for the introduction of the IAF.

Our Employment, Pensions & Incentives and Financial Services Regulation Groups have significant experience in advising on the employment of senior executives and individuals in controlled functions and would be happy to assist with any queries you may have.

Alternatively, your usual contact in McCann FitzGerald LLP would be pleased to provide further information.