Karen Reynolds, partner: "As discussed above in relation to the government's Summer Legislative Programme, there is still no sight of the draft legislation for the IAF / SEAR some 3 years after the publication of the Central Bank's Behaviour and Culture Report. However, the recent J&E Davy ("Davy") enforcement action has shone a spotlight on its absence and brought significant pressure upon the Central Bank and government to publish heads of bill.
On 1 March 2021, Davy was fined €4,130,000 for breaching MiFID Regulations when 16 Davy employees entered into a transaction, in their personal capacity, with a Davy client. The subsequent focus and fallout from the enforcement action, however, has had a more far reaching impact for Davy than the financial sanction imposed.
The Central Bank's enforcement process and powers also faced public scrutiny at a Joint Committee of Finance, Public Expenditure and Reform ("Joint Committee") on 9 March 2021. The fact that only the firm – and no individuals – had been sanctioned by Central Bank was the subject of intense questioning by the Joint Committee. The Central Bank explained that it had "recourse to its statutory toolkit" but that it is not possible, under the current legislative framework, to impose an administrative sanction on an individual unless the firm has first been subject to sanction1. The Central Bank indicated there is a "very good case for improvements ... to our enforcement powers in the form of direct enforceable conduct standards, directly enforceable against individuals...". Following this, there has been a renewed focus on SEAR, and draft legislation is anticipated before government's summer recess.
It is worth also briefly noting some of the familiar themes and regulatory expectations highlighted in the enforcement notice and at the Joint Committee.
The Central Bank identified a "... lack of candour ... as an aggravating factor" in determining the appropriate outcome for Davy. When quizzed on this by the Joint Committee, the Central Bank indicated it believed that Davy had sought "... to minimise the transaction and mischaracterise the seriousness of the events"; contrary to the Central Bank's expectations of firms to be open and transparent in all matters. In fact, under the proposed SEAR it is likely that senior executives will be required to inform the Central Bank of all matters of which it could reasonably wish to be informed; creating mini-regulators within firms.
Additionally the Central Bank concluded that "[t]he compliance function could not do its job because it was bypassed" - "a coach and horses" had been driven through certain customer protections. The Central Bank emphasised the gravity of this in its enforcement notice: "A compliance function can only discharge its role effectively when it has access to all relevant information". In this case, compliance was "sidestepped" and "kept in the dark". Looking the other way when misconduct occurs, or allowing it to continue will not be tolerated; this is also a key element of the proposed SEAR.
The Central Bank's view of the importance of openness and transparency, respect for control functions and, crucially, the role of senior leaders in embedding a culture of compliance within a firm cannot be overstated. The implementation of SEAR, the Central Bank believes, will result, over time, in improved governance across the financial sector."
Footnote
1. An example of such a case is the recent enforcement action taken against Mr Gary McCollum, the former Head of Commercial Lending (UK) and UK Branch Manager of Irish Nationwide Building Society ("INBS") who was fined €200,000 and disqualified from being a person concerned in the management of a Central Bank regulated financial service provider for a period of 15 years. This followed the Central Bank's settlement agreement with INBS which concluded in 2015.
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