The Central Bank of Ireland (CBI), like other international regulators, has focussed on the capability and accountability of individuals performing designated roles in regulated financial service providers (firms) for a number of years. Ireland has a regulatory Fitness & Probity (F&P) regime since 2011, the core function of which is to ensure that persons performing designated roles in firms meet standards of competence, honesty, integrity and financial soundness. During the past two years, the CBI has demonstrated an increased focus on compliance with the requirements of that regime. Following recent “Dear CEO” letters published by the CBI, firms are encouraged to undertake assessments of their F&P compliance, to take remedial steps to address deficiencies and to plan for the additional compliance and HR requirements that a new Senior Executive Accountability Regime (SEAR) will involve.
Fitness and Probity – Renewed Focus
Ireland’s existing F&P regime imposes prescribed standards of fitness and probity for designated “Controlled Functions” (CFs). CFs include a subset of “Pre-approval Controlled Functions” (PCFs) and any appointment to a PCF requires CBI approval. Firms have obligations to satisfy themselves that persons performing CFs and PCFs meet the F&P standards at the time of appointment and on an ongoing basis. F&P rules require that any issue arising during the employment or engagement which calls into question an individual’s F&P be investigated and, where appropriate, that action be taken and disclosed to the CBI.
A heightened emphasis by the CBI on F&P has recently been evident. In April 2019, the CBI wrote to firms’ CEOs identifying F&P compliance deficiencies within firms and emphasising the need for improved compliance and ongoing engagement. The CBI then conducted a number of onsite thematic inspections, the results of which prompted the CBI to again write to industry CEOs in November 2020. This “Dear CEO” letter, which should be read in conjunction with the April 2019 letter, highlighted a number of compliance deficiencies in general terms and called for:
- greater scrutiny and formality around Board appointments;
- more robust due diligence around persons performing designated PCFs and CFs;
- due diligence to be understood as an ongoing obligation as distinct from a one-off obligation upon appointment;
- adverse information discovered during the application process about a PCF candidate to be brought to the CBI’s attention; and
- more proactive identification and reporting by firms of F&P concerns arising during the employment/engagement concerned.
Other indicators of an increased F&P focus include:
- the recent designation of a number of new roles as PCFs;
- evidence that the PCF application process has become more rigorous, with an increase in the number of candidates required to attend one or more CBI interviews;
- the CBI’s pursuit of enforcement actions and prohibition notices against PCF holders. Since the April 2019 “Dear CEO” letter, the CBI has imposed measures (two Prohibition Notices and one Enforcement Action) against individuals in three cases; and
- a proposal to strengthen existing F&P obligations under the proposed new accountability framework (see below).
Individual Accountability – Anticipated SEAR
Legislation establishing a SEAR is expected in the coming months, following the CBI’s recommendations in its 2018 report on “Behaviour and Culture of the Irish Retail Banks”. The fundamental objective underlying SEAR is to rebuild trust in our financial sector.
SEAR will bolster individual accountability by having persons in senior roles taking ultimate responsibility for conduct within their remit. It is anticipated that the SEAR framework will allow the CBI pursue enforcement action against an individual directly for breaches of conduct standards within her area of responsibility. At present, to pursue enforcement action against an individual, the CBI has to establish firstly that there has been wrongdoing in the firm concerned and secondly that the individual has participated in that wrongdoing. This is known as the “participation hurdle”. SEAR will remove this complexity, making it very difficult for senior employees to “wash their hands” of wrongdoing. SEAR will involve an onerous extension of accountability for individuals working in a senior capacity in firms. The cultural shift required at a macro level in firms to allow for implementation of SEAR should not be underestimated.
It is anticipated that SEAR will impose baseline conduct rules on all staff in firms and introduce more onerous conduct rules for senior individuals, reflecting their influence over a firm’s culture and behaviour. We anticipate in this connection a blurring of the lines between what has traditionally been viewed as HR or non-financial misconduct (for example harassment) and misconduct involving financial wrongdoing or dishonesty. It is noteworthy that the FCA’s position is that non-financial misconduct is a matter within its regulatory remit and goes to an individual’s ability to meet the UK regulatory standard of propriety.
A cornerstone of SEAR implementation will be the clear demarcation by firms of their senior employees’ duties and responsibilities and the effective incorporation of statements of responsibility into the employment contractual framework.
Firms should now step up their preparations for SEAR. In conjunction with the mapping of roles and responsibilities, a multi-disciplinary readiness exercise is advisable, to include:
- review of existing contracts/appointment letters and role specifications against how functions are actually being managed and supervised in practice;
- identification of necessary amendments/refinements (to contracts or to role specifications). Sophisticated executives may seek comfort from firms on possible supports through regulatory investigations/actions and firms can expect the issue of indemnification to be in focus;
- review D&O insurance arrangements;
- review the firm’s governance framework more generally;
- review and, where appropriate, update disciplinary and performance management processes (indeed it may sometimes be appropriate to put in place bespoke performance management processes for more senior roles).
This article is Part 4 in this series.
Contributed by Lisa Shannon & Ciarán O’Brien