The General Scheme broadly reflects the reforms proposed in the Central Bank of Ireland's 2018 report "Behaviour and Culture of the Irish Retail Banks" (the "Culture Report"), and has been welcomed by the Central Bank. While the contents of the General Scheme are not unexpected there are a number of aspects of the which will be of interest to our clients and will no doubt be brought into focus during the Central Bank's consultation process.
In this Insight we will outline:
- Our observations of the General Scheme, in comparison to the Central Bank's past recommendations
- Four key components of the reforms
- Next steps
In terms of how the proposals contained in the General Scheme compares to the Central Bank's past recommendations, we have made the following initial observations.
- The "in scope" firms for the Senior Executive Accountability Regime ("SEAR") under the General Scheme are the same as identified in the Culture Report. They will be credit institutions (except credit unions); insurance companies' undertakings (except reinsurance, captive (re)insurance and ISPVs) and "investment firms" which underwrite on a firm commitment basis and / or deal on own account and / or are authorised to hold client monies / assets. Such investment firms would typically be larger MiFID firms but we will have to await the final legislation; depending on how it is worded, it could include some fund service providers. The Central Bank has previously indicated that it intends the regime to apply first to larger higher PRISM-rated insurance companies. We await further detail but it appears it will be a matter for the Central Bank to decide on the scale of the initial roll-out of the regime.
- Based on the General Scheme "Senior Executives Functions" ("SEFs") will align to the existing pre-approval controlled functions ("PCFs") (as expected). It seems that this will include non-executive directors (" NEDs") where they are performing PCF roles. That NEDs would be in scope was not clear from the Culture Report and this is something that we will be seeking further clarification from the Central Bank during the consultation process.
- There is no express carve-out for the role of Head of Legal, although (not being a PCF) it will not automatically constitute a SEF. The General Scheme envisages the Additional Conduct Standards (see below for details) will be imposed on SEFs and "other persons who exercise significant influence on the conduct of a Regulated Financial Service Provider ("RFSP")", which might bring the Head of Legal into scope. We expect this to be a key issue during the consultation process and we will be liaising with our clients to get your views and make appropriate submissions to the Central Bank.
- There is no reference in the General Scheme to whether the regime will include something similar to the UK regulatory reference requirements for regulated roles. RFSPs familiar with the UK model have been particularly interested in this piece, given the additional burden it has created for employers in managing internal investigations and disciplinary procedures in the UK. The reference in the Minister's press release to balancing the Central Bank's new powers against individuals' constitutional rights also highlights how significant an issue this is. This is something we had first identified as a critical difference in 2019 when the proposals were first outlined, compared to the UK model.
- Under the General Scheme Financial Holding Companies could be in scope. Currently, these companies are not otherwise regulated apart from capital requirements.
- In its initial proposals the Central Bank referenced the need for individuals to take "all reasonable steps" to comply with the standards. The General Scheme however refers to "reasonable steps", which we perceive to be a less absolute standard and a better choice. No guidance is provided however as to what exactly would constitute "reasonable steps".
- Much of the detail of SEAR is left to the Central Bank to introduce by way of guidance and regulation.
- Beyond the IAF and SEAR itself, there are also several proposals for enhancements to the Central Bank's enforcement process.
- No clarity has been provided on the timelines for draft heads of bill, implementation target dates, or commencement dates. Minister Paschal Donohoe indicated, upon publication of the General Scheme, that it may be a further 18 months before the new regime is in place as it will take up to six months for the proposals to go through pre-legislative scrutiny with the Oireachtas Finance Committee.
The proposed reforms are by now very familiar to all those working in RFSPs.1 There are four key components, as follows:
- Responsibility Mapping: the SEAR is the bedrock of the individual accountability framework. SEAR will require firms to identify and map out the roles, responsibilities and decision making powers of senior management within their firms. The aim of SEAR is to overcome the difficulties the Central Bank has said it often encounters in identifying precisely who was in charge of which decisions at the firms it regulates and supervises: "Assigning responsibility to individuals in a regulatory context aims to decrease their ability to claim that the culpability for wrongdoing lay outside their sphere of responsibility."2 Firms will have to create statements of responsibilities and responsibilities maps describing their governance arrangements and demonstrating there are no gaps. These will be the primary source of truth for the regulator, so firms must ensure they are clear, comprehensive and current.
- Enforceable Conduct Standards: all RFSPs must
comply with the Conduct Standards. The Conduct Standards set out
the Central Bank's expectations for behaviour of RFSPs and
their employees. They include obligations to conduct themselves
with honesty and integrity, to act with due skill, care and
diligence, and in the best interest of consumers. There will
- Common Conduct Standards which will apply to all persons in controlled function roles;
- Additional Conduct Standards pertaining to those holding senior positions (PCFs and others with significant influence); and
- Business Conduct Standards for RFSPs
- Enhancements to the Central Bank Fitness and Probity
Regime: firms will have to do more to ensure and
proactively certify that the individuals who are responsible for
carrying out controlled functions have the competencies and
integrity to fulfil those roles, and that they are held to account
if they fall short. "Effective culture is about people.
And people are at the heart of the Fitness & Probity
For more information on the Fitness and Probity Regime, please read our Fitness and Probity Handbook.
- Removal of the "participation link" in the Administrative Sanctions Procedure: under the administrative sanctions procedure "which is one of the toughest powers"4 available to the Central Bank, it must prove the breaches against the firm before it is able to sanction an accountable individual (otherwise known as the "participation link"). Under the IAF the participation link will be broken, and the Central Bank will be able to sanction an individual directly for their misconduct.
The Central Bank's ambition is to achieve positive cultures of compliance in regulated firms, by setting the tone from the top of regulated firms and ensuring it is cascaded throughout the entire organisation. It believes that the proposed reforms to strengthen individual accountability are an important step in that direction.
Although we are still some way away from having the regime in place, the General Scheme provides much more certainty for RFSPs who wish to move ahead and progress their preparations to ensure they are ready for the new regime when it, inevitably, arrives. Matheson is already working with a number of clients on their preparations for the IAF and SEAR and we are here to help clients through this process. When more clarity emerges on the timeline for implementation, we will keep our clients informed of these developments. We are keeping abreast of developments on this topic and we will continue to provide our insight and analysis.
The publication of the General Scheme provides direction to enable RFSPs to consider the impact that the IAF and SEAR will have on their business. In particular, RFSPs will be able to start the mapping process to identify which individuals within their organisations will be SEFs as envisaged under the General Scheme. Importantly, include individuals who do not hold PCF roles. RFSPs should also consider additional training and gap analyses of its existing control environment to ensure that they are prepared for the additional regulatory obligations that the IAF and SEAR will inevitably bring.
Originally published 30/07/2021
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