On 9 March 2023, the Central Bank (Individual Accountability Framework) Act 2023 (Act) was enacted.
The Act lays the foundations of an Individual Accountability Framework (IAF) comprising four key pillars:
- Conduct standards
- Enhanced fitness and probity regime
- Reforms to simplify regulatory enforcement against individuals
- Senior executive accountability rating (SEAR).
We have addressed these Pillars and key reforms in those areas in detail here.
On 22 June 2023, the Central Bank of Ireland (Central Bank) published the consultation paper CP154 and draft guidelines regarding the Central Bank Administrative Sanctions Procedure (ASP) under Pillar 3. In this briefing, we examine key enforcement reforms as provided for in CP154.
CP154 provides an important opportunity for the Central Bank to seek feedback and views from relevant stakeholders on key issues. The consultation will remain open for twelve weeks, from 22 June to 14 September 2023. We set out some key changes below.
The Act introduces some notable changes to enhance the Central Bank’s ASP under Part III C of the Central Bank Act 1942. The strengthened ASP is designed to underpin and support the introduction of the IAF, SEAR and conduct standards for firms and individuals. More general amendments to the ASP have also been made to incorporate additional safeguards to fortify the existing process.
The Act places the investigation phase of an ASP case on an express statutory footing. The power to commence an ASP Investigation was not previously expressly provided for in Central Bank legislation. It was considered to be ancillary to the function of the Central Bank to hold an inquiry.
1. Introduction of a Statutory Role of Responsible Authorised Officer (RAO)
The Act creates a new role of RAO, which the Central Bank must appoint on the commencement of an ASP investigation. The Act defines the RAO as the person “responsible for the investigation”.
The RAO has several responsibilities and certain limited discretions in making decisions concerning the conduct of an ASP Investigation. In particular, the RAO is responsible for issuing a Notice of Investigation and/or an amended Notice of Investigation and drafting an Investigation Report.
Discretions to be exercised by the RAO include:
- Determining the level of material for disclosure with the Notice of Investigation and draft and final investigation reports;
- Preparation of the draft investigation report considering all relevant information or evidence gathered during the investigation.
It is also the responsibility of the RAO to keep the subject informed about the progress of an investigation and to issue a notice if the investigation is changed, extended or discontinued.
2. Notice of Investigation to Replace Investigation Letter
As soon as practicable after the Central Bank decides to conduct an ASP investigation, the RAO will give the subject formal written notice of the ASP investigation in the form of a Notice of Investigation. This will replace the Investigation Letter.
The Notice of Investigation will contain the following information, including:
- A statement identifying each suspected breach;
- A copy of material relating to the matters referred to in the statement; and
- Confirmation that a written response from the subject will be considered if provided within a stipulated timeframe or such longer period as the RAO may allow.
3. Discontinuance of an Investigation and the Provision of Reasons
As provided for in the Act and explained in the draft ASP Guidelines, the Central Bank may discontinue an ASP investigation and take no further action. The RAO must inform the subject in writing of the discontinuance as soon as possible and provide the reason for the discontinuance.
4. Investigation Report
The Act prescribes a new process around the investigation report to be prepared following the completion of an ASP investigation. The subject will be invited to make submissions on the draft investigation report. The RAO will consider these submissions before finalising the report. The RAO will then make any revisions necessary to the draft report. The final ASP investigation report may then be provided to the ASP investigation subject.
5. Disclosure Agreements Relating to Privileged Material
Information relevant to ASP investigations may be subject to legal professional privilege. The use of disclosure agreements is now expressly provided for in the Act, including a statutory power for the Central Bank to enter into disclosure agreements relating to privileged material. Accordingly, these agreements will benefit from the associated statutory protections, including freedom of information requests.
The Act introduces some important amendments to the Central Bank’s ASP inquiry process. In particular, the Act has introduced several procedural safeguards aimed at strengthening the independence of the inquiry decision-making process.
1. Standard of Proof
The Act has clarified that the standard of proof concerning matters subject to an inquiry under the ASP is the civil standard (i.e. on the balance of probabilities).
2. Inquiry Decision
The Act requires that the inquiry members notify the subject of their decision at the conclusion of an inquiry. The inquiry decision must set out in writing the finding as to whether a prescribed contravention has been or is being committed, the grounds upon which the finding is based, and the sanctions (if any) imposed. Following the notification, the subject may exercise their right of appeal.
To ensure fair procedures are afforded to a subject in determining the sanction to be imposed, the draft ASP Guidelines propose that the finding be notified to the inquiry subject and the Central Bank Enforcement team, both of whom will then be invited to make submissions on the appropriate sanction to be imposed.
3. Inquiry Publication Notice
After an inquiry, the inquiry members will publish certain details of the decision through an inquiry publication notice. The draft ASP Guidelines outline the procedure determining the form and content of the inquiry publication notice, which will be published as soon as possible once the inquiry decision has been notified to the inquiry subject.
The Central Bank’s position remains that, in some instances resolving cases by way of settlement can often be in the public interest. Settlement can benefit the Central Bank and the ASP subject and constitute the best use of public resources.
There are three distinct settlement procedures provided for in the Act. The Central Bank may use these procedures at its discretion to resolve an ASP investigation and/or an inquiry. Two of these settlement procedures are new and require the subject of the investigation to admit the breaches. The third settlement procedure, which formalises the existing ability to settle on a no-admissions basis, is predicated on a scenario where admissions are not provided or required.
1. New Settlement Procedure – Undisputed Facts Settlement
The Act allows the Central Bank to enter into an undisputed facts settlement where:
- The subject has agreed to the undisputed facts provided by the Central Bank;
- The undisputed facts are such that they render an ASP investigation (or the continuation of an investigation) unnecessary;
- The subject has admitted in writing the prescribed contravention(s);
- The subject has consented in writing to the sanction(s) proposed; and
- The subject has acknowledged the proposed publication of the details of the admitted prescribed contraventions and the agreed sanctions.
While the Act provides that the undisputed facts settlement process is available up until the completion of the investigation, the draft ASP Guidelines highlight that it will be at the sole discretion of the Central Bank as to whether or not and at what stage of an investigation the undisputed facts settlement process is utilised in any particular case. This process will no longer be available once the ASP investigation is completed.
The Central Bank may, in its absolute discretion, incentivise an undisputed facts settlement by applying a percentage reduction of up to 30% of any agreed monetary penalty proposed under the settlement.
2. New Settlement Procedure – Investigation Report Settlement
The second new settlement procedure introduced by the Act and set out in the draft ASP Guidelines may be utilised by the Central Bank following the completion of an investigation in the following circumstances:
- The Central Bank has provided to the subject a copy of the final investigation report and a copy of any submissions provided to it by the subject;
- The Central Bank has considered the final investigation report and submissions and suspects that the subject has committed and/or participated in a prescribed contravention(s);
- The subject has admitted to the prescribed contravention(s) in writing;
- The subject agrees in writing to dispense with an ASP inquiry;
- The subject has consented in writing to the sanction(s) proposed; and
- The subject has acknowledged the proposed publication of the details of the admitted prescribed contravention(s) and the sanction(s) proposed.
In contrast to the undisputed facts settlement procedure which ceases to be available on completion of an ASP investigation, the ability to enter an investigation report settlement can only arise after the ASP investigation has been completed and the Central Bank has considered the final report of the ASP investigation. This means that in the intervening period (the period between the completion of the ASP investigation and the final investigation report being available), there will have been a potentially lengthy process involving the preparation of a draft investigation report, provision of documentation to the subject, receiving and considering any submissions from the subject to finalise the investigation report.
In line with the Central Bank’s policy to optimise resources and seek a settlement as early as possible, the potential discount available for this settlement process is significantly lower (up to 10%) than the maximum potentially available under the undisputed facts settlement. It reflects the likely additional costs, time and resources that may be expended at this stage of the ASP.
1. Application of Sanctions for Individuals
The applicable sanctions for individuals remain broadly the same, with two important exceptions.
The first is a change to the disqualification sanction for individuals. This change was sought by the Central Bank and is aimed at ensuring that disqualification is capable of being more proportionately tailored to the particular circumstances of a case. Previously an individual who was disqualified was disqualified from being concerned in the management of a regulated financial service provider, but now, individuals may be disqualified on a more targeted basis from performing any controlled function, a particular controlled function or specified parts of a controlled function. This is important given the significant impact such a sanction could have on individuals and their livelihoods.
The second key change to the individual sanctions is the introduction of a sanction providing for a direction imposing conditions on the performance of any controlled function or part of it by an individual. This is an alternative to disqualification in appropriate circumstances where the Central Bank may want to address or restrict aspects of an individual’s performance.
2. New Sanctioning Factors for Individuals
The Act introduces a new requirement for the Central Bank to regard an individual’s financial position when it proposes sanctioning that individual. This means the Central Bank will consider whether an individual’s financial position is a relevant sanctioning factor, and, where relevant, the Central Bank will consider the proportionality of any proposed sanction in light of the individual’s financial position. This may result in an adjustment to the sanctions imposed.
The Act also introduces a new requirement that in determining sanctioning matters involving a breach of the common and additional conduct standards for individuals, the Central Bank shall have regard to the importance of promoting a culture of compliance with these standards. This provision recognises the broader regulatory and legislative aims of achieving greater individual accountability in furtherance of enhanced governance, a sound financial system and the protection of customers. How this factor will operate in practice, and its impact on any final sanction(s), will depend on the particular case in question.
Finally, the Act introduces a new sanctioning factor which allows the Central Bank to consider an individual’s seniority and level of responsibility and the nature of any role performed by the individual at the time of the individual’s commission of and/or participation in the prescribed contravention.
3. Methodology for the Determination of Monetary Penalties
The Central Bank is now publishing its methodologies for determining monetary penalties for firms and individuals for the first time as part of the draft ASP Guidelines.
The methodologies amount to a seven-step framework that the Central Bank will employ when assessing monetary penalties. The following specific aspects of these methodologies are noteworthy:
- The methodologies do not operate in an arithmetic fashion and instead outline the Central Bank’s general approach to determining monetary penalties. Certain aspects of the methodologies may be adjusted to ensure that the monetary penalty is just and proportionate.
- The methodologies for firms and individuals are largely identical. However, the starting point for assessing
Court Confirmation and Appeal
1. High Court Confirmation of Sanctions Following Settlement
The Act introduces a new requirement that sanctions agreed as part of the (i) undisputed facts and (ii) investigation report settlement procedures be confirmed in the High Court to take effect. This aims to strengthen fair procedures by incorporating an additional safeguard such that the High Court can remit the matter to the Central Bank, where it considers such a sanction disproportionate.
2. Appeal of Inquiry Decision to IFSAT
In reaching a decision after an inquiry, the Central Bank must include in the notification of its decision to the subject a statement outlining the right of the subject to appeal against the decision to the Irish Financial Services Appeals Tribunal (IFSAT) within 28 days of being notified.
3. High Court Confirmation of Inquiry Decision or IFSAT Appeal Decision
As soon as practicable after making the inquiry decision and/or the IFSAT appeal decision, the Central Bank must apply to the High Court to confirm the relevant decision. The High Court must confirm the decision unless it is satisfied that:
- The inquiry members and/or IFSAT made an error of law; or
- That any sanction imposed is manifestly disproportionate.
If the High Court confirms the decision, it takes effect as an order of the court and may be enforced as such. If the decision is not confirmed, the High Court can either substitute it or set it aside and remit the matter for reconsideration by the inquiry members and/or IFSAT.
We recommend that regulated financial service providers review and update their systems and processes, if they still need to do so, to ensure an individual’s compliance with their responsibilities under the IAF. It is important for individuals not only to comply with their regulatory obligations but also to be able to demonstrate such compliance by reference to documentation if challenged.
It is also essential for regulated financial service providers to review their D&O cover to ensure it makes appropriate provision for relevant individuals, bearing in mind that the scope for relevant individuals will expand beyond those concerned in the management of the firm.
William Fry has been assisting firms with their preparations for the individual accountability regime for some time, and now is a sensible time to engage or re-engage with the William Fry IAF/SEAR team.
See our IAF and SEAR web page here.
Contributed by Joanne Ryan