knowledge 22 November 2023 |

Stakeholders outline views on CBI’s implementation of the IAF

The Central Bank has published a long-awaited feedback statement (here) to its consultation (CP153) on the implementation of the Individual Accountability Framework (“IAF”), along with updated draft IAF Guidance (here) and the draft Regulations (here) regarding the Senior Executive Accountability Regime (“SEAR”).

Our briefing provides an overview of the outcomes of the CBI’s consultation, and will be of interest to regulated firms, particularly as they begin preparations for key aspects of the IAF to come into application from 29 December 2023.

Background

The Central Bank (Individual Accountability Framework) Act 2023 was signed into law on 9 March 2023, after which the Central Bank of Ireland (the “CBI”) launched a three-month consultative process, seeking stakeholder views on key aspects of the IAF, including on:

  • the conduct standards (already commenced1; to apply2 from 29 December 2023);
  • enhancements to the CBI’s fitness and probity (“F&P”) regime (already commenced, as above; to apply from 29 December 2023); and
  • SEAR (proposed to apply to in-scope firms from 1 July 2024, as part of its first phase; its applicability to (independent) non-executive directors (“(I)NEDs”) has now been deferred to 1 July 2025).

For more information and background into the CBI’s consultation, see our previous briefing (here).

Stakeholders’ General Views

According to the CBI, feedback received, both through the formal stakeholder consultation and at engagement events, was generally positive.  Stakeholders broadly agreed that, once in operation, the IAF will clarify the responsibilities of regulated firms and individuals, in respect of expected standards of conduct, and will help promote sound governance practices in the financial services sector, enhancing the culture of accountability within firms.

The CBI continues to emphasise that its approach to implementing the IAF is based on principles of proportionality, predictability and reasonableness.

Stakeholders consulted, however, expressed some concerns in relation to the proposed timeline for the IAF’s applicability.  The period for implementation may present challenges in relation to, amongst other matters, the provision of training on the conduct standards, or developing Statements of Responsibility (“SoRs”) and Management Responsibilities Maps.

In this regard, the CBI has made some clarificatory updates, and has, notably, deferred SEAR’s applicability in respect of (I)NEDs until 1 July 2025.

Key Outcomes of the Consultation

  • Deferral of SEAR’s Applicability in respect of (I)NEDs

    The CBI has acknowledged concerns regarding the inclusion of (I)NEDs within the scope of SEAR.  There is an imperative of ensuring that employees would not be dissuaded from undertaking non-executive roles within a firm’s leadership, out of a perception that they would be required to meet unduly burdensome regulatory standards.

    In view of feedback received, the CBI has confirmed that it will defer SEAR’s applicability in respect of (I)NEDs until 1 July 2025.  According to the CBI, this will enable firms, as well as the regulator itself, to learn from the application of the regime to executives in the first instance.

    The CBI has additionally updated its IAF Guidance, to provide greater clarity to firms regarding SEAR’s applicability.  It will update guidance further, if deemed necessary, following a planned three-year post-implementation review of the SEAR Regulations and the IAF more generally.
  • SEAR’s Applicability in respect of Outgoing Branches

    The CBI has acknowledged feedback received in relation to SEAR’s application to managers of outgoing branches of firms that are within the scope of SEAR.  Accordingly, the CBI is considering the introduction of a materiality threshold, meaning that SEAR would only apply to managers of outgoing branches when the branch exceeds a certain threshold.

    The introduction of such a materiality threshold would require amendment to the PCF Regulations, which the CBI plans to make in the coming weeks; it will also publish related updated guidance.
  • Inherent and Prescribed Responsibilities

    The CBI has acknowledged feedback received in relation to the number and scope of Prescribed Responsibilities.  Taking feedback into account, it has amended the list of Prescribed Responsibilities, removing some responsibilities, merging others, and moving certain responsibilities from the general list to the sectoral or circumstance-specific lists.
  • Sharing of Roles and Responsibilities

    The CBI has amended its IAF Guidance, providing greater clarity in respect of job-sharing, and has outlined examples whereby the sharing of a Pre-approval Controlled Function (“PCF”) role may be permitted, and how that might impact Prescribed Responsibilities.
  • Certification Requirement

    Noting stakeholder concerns, the CBI has amended its guidance to limit the scope of the enhanced due diligence aspect of certification requirements to PCFs, CF1s and CF2s, and to facilitate self-certification in respect of CF3–CF113.
  • Disciplinary Action

    The CBI received robust feedback in relation to disciplinary actions taken under the IAF, which included requests that notification timelines be extended, and requests for further clarity on procedure and the notification of breaches to the CBI.

    Given the nature of the responses received, the CBI has removed the obligation for firms to report to it where formal disciplinary action has been taken and concluded against an individual in respect of a breach of the IAF’s conduct standards.

    According to the CBI, firms have a responsibility to embed conduct standards across their practices, and it expects to have already received notification of the relevant detail where a firm or individual has been reported under new or existing legislative requirements.  For example, Section 38(2) of the Central Bank (Supervision and Enforcement) Act 2013 requires PCFs to report in relation to “prescribed contraventions” that may have been or are being committed, where the PCF believes that they will be of material assistance to the CBI.

Comment

This update provides important clarification for firms as they begin preparations for key aspects of the IAF to begin to apply from 29 December 2023.

The IAF stands as a pivotal development within the Irish regulatory framework, potentially elevating Ireland’s standing in financial services. Successful implementation, guided by the CBI and industry, is essential. Yet, the intricate and novel nature of the IAF poses significant legal challenges for both firms and individuals, necessitating a cautious approach. The CBI’s commitment to proportionality, predictability, and reasonable expectations is crucial for preventing potential deterrents to investment and disincentives for talented individuals in Irish financial services.

How can we help?

As always, McCann FitzGerald LLP is happy to assist with any queries.  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.

More information is also available from our dedicated IAF Hub (here).

Also contributed to by David O'Keeffe Ioiart

  1. S.I. No. 349 of 2023 (here).
  2. With the exception of the business standards, which are being reviewed separately as part of the CBI’s review of the Consumer Protection Code, and will only apply following implementation of a revised Code.
  3. A Controlled Function (“CF”) is a function in relation to the provision of a financial service, prescribed by the Central Bank Reform Act 2010, and related Regulations. Those Regulations designate various roles, held by persons in key and customer facing positions, as CFs. A full list of CF roles in available here.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.