OUT-LAW ANALYSIS 7 min. read
02 Mar 2022, 2:54 pm
While Ireland might be moving away from the UK in a number of key areas of financial regulation, the UK’s experience of applying the Senior Managers and Certification Regime (SMCR) will be invaluable as we prepare for the senior executive accountability regime (SEAR).
There has been a huge amount of commentary in the Irish market about SEAR and its accompanying individual accountability framework without any concrete details as to what that framework will look like. While the general scheme of the heads of bill of the Central Bank (Individual Accountability Framework) Bill (‘Heads of Bill’) published on 28 July 2021 now provides this, it does not set out the legislative text which will be in the bill itself – rather, it provides a description of what will be in the bill and an explanation of the proposed approach.
The Central Bank of Ireland (CBI) has recently indicated that it can be expected that the Heads of Bill will be enacted “during the course of the months ahead”. However, given that the Heads of Bill has not progressed through any of the stages for enactment of legislation before the Oireachtas at the time of writing, it is likely that it will be the second half of 2022 before SEAR is enacted.
In those circumstances, regulated financial services providers coming within the scope of SEAR (RFSPs) can look at the broad obligations which are set down in the Heads of Bill. However, to understand what the practical impact of those obligations will be and how the CBI is likely to apply them, the only place that those undertakings can look to is the UK experience of the equivalent regime upon which the CBI have explicitly stated SEAR is based. Until such time as the Central Bank (Individual Accountability Framework) Bill is actually enacted, there are few other sources where RFSPs can glean knowledge and insight as to what the regime will look like in practice.
The Heads of Bill confirms that insurance undertakings, but not reinsurance undertakings or captives, will constitute RFSPs coming within the scope of SEAR.
The Heads of Bill does not attempt to set out all the matters which will make up the individual accountability framework. Instead, it confirms that the CBI will be given a general regulation making power under section 48 of the Central Bank (Supervision and Enforcement) Act 2013 to give effect to SEAR.
The CBI will be able to impose obligations on regulated financial services providers to set out clearly where responsibility and decision-making lies for persons in “senior executive functions” (SEFs) within the regulated financial services provider, including by making provisions for the following:
Therefore, while the Heads of Bill is helpful in that RFSPs now have something tangible to work from, it really sets down the high-level requirements only and full details will not be available until the regulations supporting SEAR to be made by the CBI are published. The regulations to be made by the CBI with respect to SEAR constitute secondary legislation and so cannot come into force until the primary legislation is in force following the enactment of the Bill.
The CBI has also recently confirmed that it intends to publish the proposed regulations supporting SEAR for consultation “very shortly after the finalisation of the legislation”. There will therefore be a consultation period before the CBI regulations supporting SEAR are finalised and come into effect.
Two of the key obligations in relation to SEAR set down in the Heads of Bill are the requirements for the RFSPs to produce statements of responsibility for SEFs and management responsibility maps. However, despite extensive market commentary on SEAR and the Heads of Bill, nobody knows how the regime will be applied in practice and how undertakings will seek to comply with its responsibilities.
Despite extensive market commentary on SEAR and the Heads of Bill, nobody knows how the regime will be applied in practice and how undertakings will seek to comply with its responsibilities. The obvious thing to do in those circumstances is to look to the UK experience under the SMCR
The obvious thing to do in those circumstances is to look to the UK experience under the SMCR. Pinsent Masons’ UK employment teams have been advising on the SMCR for a number of years and have some interesting insights here. They have confirmed that the UK Financial Conduct Authority (FCA) has provided a template responsibility statement that must be completed by in-scope senior managers and that the practice which has arisen in the UK is that the responsibility statements tend to be quite high level.
In contrast, one of the main issues which has arisen in the UK with the management responsibility maps has been overcomplication and complexity making them difficult to comprehend. In some cases, the management responsibility statements have ended up being large submissions to the FCA. Management responsibility statements running to such length and being that complicated potentially do not achieve their intended purpose which is to have a clear, single source of reference for management, governance and reporting arrangements. Those practical insights are quite helpful and something RFSPs should be aware of when preparing for SEAR.
A legal duty is imposed on individuals performing SEFs in RFSPs within the scope of SEAR to take reasonable steps to avoid their firm committing a “prescribed contravention” in relation to the areas of the business for which they are individually responsible. An individual will breach this legal duty where:
The Heads of Bill provide that breach of this duty will itself be a prescribed contravention and therefore enforceable against that individual by way of administrative sanction so obviously this is extremely relevant to directors and other holders of pre-approval controlled functions which hold SEFs. The Heads of Bill continues that the CBI will be required, when assessing whether the individual took reasonable steps to avoid the prescribed contravention occurring or continuing, to have regard to all relevant circumstances and to provide a non-exhaustive list of examples of those circumstances.
The level of knowledge which the CBI will assume from the SEF will be a mixed objective/subjective standard in that it will assume a reasonable level of knowledge that a person performing that function will have but will also take into consideration the particular level of knowledge and experience of that senior executive.
The Heads of Bill also sets out new conduct standards which will apply. These are catered for in standards of business, common conduct standards and additional conduct standards for persons in senior roles.
The standards of business are intended to create a single reference point setting out in clear and simple terms the conduct standards that all RFSPs must meet. Breach of the standards of business will be a prescribed contravention and therefore enforceable against the RFSP itself.
HR functions will have a key role to play in preparing and embedding the new regime by ensuring that employment documents are updated to take into account the RFSP’s and its employees’ obligations under the new regime and to ensure that staff are given training so that they understand what those obligations are and how to comply with them
The common conduct standards are an additional set of standards which are applied to persons undertaking controlled functions and pre-approval controlled functions in the RFSP. The introduction of the common conduct standards is intended to provide clarity as to the standards of behaviour the CBI expects of individuals working in the financial services industry. A breach of the common conduct standards will be a prescribed contravention and the CBI can take direct enforcement action against an individual on account of that breach. Obviously, it remains to be seen how common conduct standards will be applied by the CBI but this appears to mean that the CBI can initiate administrative sanctions procedures against persons carrying out a controlled function who may not be in a senior pre-approval controlled function role which will obviously have serious implications for that person.
The additional conduct standards are applied to persons carrying out pre-approval controlled functions and persons who have a significant influence on the conduct of a regulated financial services provider. These are additional obligations over and above the common conduct standards. A breach of the additional conduct standards will be a prescribed contravention and so the CBI can apply administrative sanctions to an individual which breaches those standards.
A breach of the common conduct standards or the additional conduct standards will permit the CBI to take appropriate action under the fitness and probity regime or the administrative sanction regime. If a person is found not to be fit and proper, the CBI has the power to issue a prohibition notice preventing the person from performing a controlled function or restricting them in the performance of some or all controlled functions.
Section 21 of the Central Bank Reform Act 2010 will be amended so that a RFSP may not allow a person to perform a controlled function unless the firm has certified in writing that it is satisfied that the person complies with the applicable standards of fitness and probity. Section 21 will also be amended to confirm the period of validity of such certification – so that, for example, it may need to be refreshed on an annual basis. Regulated financial services providers will have initial and ongoing due diligence obligations and, importantly, will no longer be able to rely on self-certification by the controlled function holder.
The Heads of Bill confirm that the fitness and probity regime applies to insurance holding companies incorporated in Ireland as well as to Irish authorised insurance undertakings.
The Heads of Bill provides that fines will be dissuasive and proportionate but individuals can be fined up to €1 million by the CBI under an administrative sanction procedure. A balance in how the regime is applied will be quite important here. This is important from a policy perspective so individuals are not dissuaded from taking up important managerial positions in RFSPs in the future particularly at a time where the CBI are looking for greater diversity on boards and there are some skills shortages.
In the UK, there was a concern when the SMCR commenced that there may be a push for increased fees for directors taking on additional responsibilities, such as head of audit committee, but this never materialised in practice. Concerns about rising fees for those holding SEFs in the Irish market may therefore be misplaced.