Prompted by the key findings of the Central Bank of Ireland's Tracker Mortgage Examination (the "Examination"), the Minister for Finance in October 2017, pursuant to Section 6A of the Central Bank Act 1942, requested the Central Bank of Ireland (the "Central Bank") to prepare a report on the "current cultures and behaviours and the associated risks in the retail banks today and the actions that may be taken to ensure that banks prioritise customer interests in the future".
It was on this basis that the Central Bank undertook behaviour and culture reviews (the "Reviews") at the five main Irish retail banks – AIB Group, Bank of Ireland Group, Permanent tsb, Ulster Bank Ireland and KBC Bank Ireland (the "Banks"). In addition, the Central Bank, as part of this process, conducted diversity and inclusion assessments (the "Assessments") of the Banks.
The Central Bank Report on the Behaviour and Culture of the Irish Retail Banks
The details of the Reviews, Assessments, methodologies applied and the main, aggregated and anonymised outcomes are detailed in the Central Bank report on the Behaviour and Culture of the Irish Retail Banks (the "Report") published in July 2018
The Reviews and Assessments focused primarily on the Banks' executive leadership teams. The rationale for this, the Central Bank states, was due to the importance of these teams "in driving effective cultures in which customer interests are adequately identified, discussed and taken into account". The Reviews analysed the behaviour of these teams in the context of Group Think along with their interactions with internal stakeholders in respect of strategic decision making.
The methodologies applied included desk based research, surveys, self-assessment questionnaires and meeting observations.
The following is a brief outline of the primary outcomes:
(a) Behaviour and Culture Reviews
The Reviews concluded that while the Banks "are at different stages of embedding the consumer in all aspects of decision making, all have significant work to do". The Central Bank's response to these particular findings has been two fold. In the first instance, it has provided individual reports to each of the Banks with specific feedback on its findings, the contents of these reports have been accepted by the Banks. Following on from this, the Central Bank will now issue a Risk Mitigation Programme to each of the Banks requiring them to submit a detailed action plan to "appropriately" address issues identified and to ensure that these risks are being mitigated. These responses will be managed by the Banks' supervisory desk teams.
(b) The Assessments
The Assessments of the Banks indicated that diversity and inclusion have only recently become a focus for them and that progress in this area is falling well short of where the Central Bank expects it to be. Ed Sibley, Deputy Governor, Prudential Regulation, in a recent interview on this topic, stated that while it is the Central Bank's preference for the Banks "to deliver the necessary improvements themselves.......if diversity does not improve at senior levels, the central bank will have to consider whether further specific requirements should be introduced".
Having regard to the foregoing, the Banks, at board and senior management level, are required to put in place an action plan which specifically addresses the findings and outcomes of the Assessment and present it to the Central Bank for review.
(c) Individual Accountability Framework
In the Report, the Central Bank proposes reforms to its current "legal and policy framework", arising out of its supervisory and regulatory experiences as well as issues which became evident during the Examination. This is identified as the Individual Accountability Framework (the "IAF"). The Central Bank maintains that, without the adoption and implementation of the IAF, "the likelihood of profound cultural change in the regulated financial services sector is reduced".
The proposed IAF is comprised of four components:
- Standards of behaviour for regulated financial services providers and the individuals working within them which are identified as Conduct Standards;
- A Senior Executive Accountability Regime (the "SEAR") which ensures clearer accountability;
- Enhancements to the current Fitness and Probity Regime; and
- A unified enforcement process applicable to all contraventions by firms and individuals which fall within the remit of the financial services legislation.
The Central Bank explains that it envisages that the Conduct Standards along with the SEAR will be assisted by enhancements to the Fitness and Probity Regime and a unified enforcement process.
In the Report, the Central Bank states that it "researched the underlying policy and practical implementation of accountability frameworks in a number of jurisdictions, including Australia, the United Kingdom and Malaysia". It appears therefore, that in the decision to put forward the IAF, the Central Bank would have been influenced by the Senior Manager and Certification Regime (the "SM& CR") put in place by the Financial Conduct Authority (the "FCA") in the UK in 2016. This is evidenced by the broad similarities between the two schemes. For example; the Conduct Standards in the proposed IAF are largely identical to the UK's equivalent, the Conduct Rules. The requirements underpinning the SEAR are also representative of the SM&CR with the adoption of a new category of senior executive functions and the placing of obligations on firms to allocate senior staff with such guidance as prescribed responsibilities and responsibilities maps etc.
Of particular importance to those individuals who hold senior executive functions within financial services firms, will be the extent of personal accountability at a regulatory level which will be significantly strengthened with the introduction of the SEAR. Such an individual will not only be accountable to its employer but also to the Central Bank and will not be in a position to argue that they did not have responsibility for a given misconduct / wrong doing where such a responsibility for a particular area / process etc is clearly assigned to that individual and detailed in their newly required Statement of Responsibilities. This, we anticipate, is set to become one of the considerable challenges facing the financial services industry going forward.
To understand the Central Bank's thinking on this issue, we quote directly from the Report where it states that "insisting on clarity in respect of individual responsibility reflects the priority that is placed on a culture of good conduct and the need for accountability. Lack of clarity makes it difficult to hold individuals accountable for their actions and decisions, alongside reasonably managing the actions and behaviours of those in their areas of responsibility". More recently, at a speech made at a financial services industry event, Seana Cunnigham, Director of Enforcement and Anti-Money Laundering, stated that "these reforms will constrain the ability of senior executives to escape liability for wrongdoing; the days of individuals hiding behind the collective will be numbered".
While the Report is the first introduction to the IAF by the Central Bank, it clarifies that "these reforms will apply more widely than to retail banks alone". However, it should be noted that in respect of the SEAR, it identifies an "Initial Scope" to include broadly speaking; Credit Institutions, Insurance Undertakings, Investment Firms and Third country branches of the these firms.
In the Report, the Central Bank calls on the Minister for Finance to "consider the proposals as set out and, if considered appropriate, that engagement would commence between the Department of Finance and the Central Bank on the detail of the legislative changes required". Consequently, the IAF will not be an immediate obligation on financial services entities and their staff, as the framework will need to go through a number of steps before it is finalised and implemented into law. However, it is a clear statement of the Central Bank's direction for regulation over the coming years and should be considered in that light.
While the findings of the Reviews and Assessments, as detailed in the Report, are specific to the Banks, it is clear that the Central Bank deems them of relevance across the financial services sector more generally, mentioning this specifically in the context of the IAF, as detailed above.
Financial services entities would be well advised to analyse 1) their approach to behaviours and cultures within their organisation and 2) their policies in respect of diversity and inclusion; in the context of the outcomes and action points highlighted in the Report. The Report provides the financial services sector with a detailed insight into the Central Bank's current supervisory and regulatory priorities and the expectations which it has of financial services entities as a consequence. This results in an opportunity for such firms to be prepared should the Central Bank inquire on the firms' approach to these issues.
In respect of the IAF, the Central Bank's proposals are extensive and will require significant industry consultation and engagement before the final legislative steps are taken. The Central Bank acknowledges this in the Report when it states that "the design, implementation and operationalisation of such a framework would therefore be a multi-year project."
So while the proposed IAF is a significant movement forward by the Central Bank to align itself with similar processes in other Member States, firms will have an opportunity to consider the impact of these proposals in the context of their current processes before full implementation is required. Firms should also take this time to carry out an initial review of how they compare against the requirements of the IAF and what steps would need to be taken in order to be deemed compliant. As part of this process, firms should also begin liaising with industry groups to lobby the Central Bank for amendments, clarifications or exclusions, where relevant.
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