The Central Bank of Ireland (CBI) has become increasingly proactive in its efforts to reform culture and behaviour in regulated financial services providers (including (re)insurers) (RFSPs) and drive accountability among individuals working in them.
In July 2018, the CBI published its proposal for an enhanced Individual Accountability Framework (Framework) for RFSPs. The proposed Framework includes enforceable conduct standards, changes to the existing Fitness & Probity (F&P) regime and a new Senior Executive Accountability Regime (SEAR). However, prior to the adoption of such a Framework, the CBI requires to be granted legislative powers to introduce such a regime.
On 18 September 2020, the government published its Autumn 2020 legislative agenda which provides for the prioritisation of amendments to the Central Bank Act 1942 to ‘support the advancement of an improved culture in the Irish financial system through greater accountability in the regulated sector’. during the upcoming legislative term. Once the necessary legislation is in place, the Central Bank has indicated its intention to issue a consultation on the Framework, seeking industry feedback on its proposals.
It is not initially proposed to apply SEAR to all RFSPs (see more below). For those in scope, it’s aim is to ensure clearer responsibility and accountability by placing obligations on those firms, and senior individuals within them, to set out clearly where responsibility and decision-making lie for their business. The CBI believes these reforms will drive “effective and sustained cultural change within the Irish financial services sector”. Within in-scope RFSPs, it is envisaged that SEAR will be applicable to board members, executives reporting directly to the board, and heads of critical business areas.
The insurance industry needs to be aware of the proposed reforms and their potential impact.
The Scope of SEAR in terms of the Insurance Industry
Initially, SEAR is proposed to apply to insurance undertakings and CBI authorised third country branches of insurance undertakings (Insurers). Current proposals exclude the following undertakings from the initial scope of SEAR:
- reinsurance undertakings.
- captive (re)insurance undertakings.
- insurance SPVs.
Any exclusion of entities from the scope of SEAR will, however, depend on the form of finalised Framework adopted by the CBI.
For Insurers, the following are key elements of the CBI’s proposals for a SEAR:
- Prescribed Responsibilities
The Framework provides that each individual performing senior executive functions (SEF), within an in-scope RFSP, be allocated responsibilities inherent to their role. The CBI also proposes publishing a general list of CBI-mandated responsibilities for firms which should ensure that there is a ‘SEF accountable for all key conduct and prudential risks’. In recognition of the individuality of RFSPs’ business models, the CBI also intends publishing tailored lists for different industry sectors, based on firms’ scale and complexity.
Once published, insurers will need to be cognisant of the general and industry specific mandatory responsibilities required to be allocated to SEFs.
- Statements of Responsibility
The Framework provides for the adoption and CBI-submission, by in-scope RFSPs (including Insurers), of statements of responsibility documenting the assignment of specific responsibilities to individual senior managers. Insurers would be well-advised to prepare for compliance with a review of insurance activities to identify any missing links in the chain of responsibility. Insurers will need to include pre-approval controlled function (PCF) roles in their statements of responsibility.
- Management Responsibilities Map
The Framework would oblige Insurers to create, and maintain, management responsibility maps, identifying the senior individual(s) responsible for any given workstream at any point in time.
Actions for Insurers – Responsibility Maps & Policies
Insurers should begin considering how to approach the proposed increase in mapping and documentation of responsibilities including policies across their business under the Framework. Insurers should also consider assessing if their Directors and Officers insurance policy adequately covers enforcement actions against individuals.
F&P Certification Regime
In addition to SEAR, the CBI plans to increase the responsibility on all RFSPs via the introduction of a new F&P certification regime. The proposed certification regime will differ from the current regime by placing a positive obligation on RFSPs (as opposed to the role holder) to certify annually that the relevant individuals comply with the F&P Standards.
This will heighten the F&P compliance obligations for (re)insurers and make it imperative for (re)insurers to ensure adequate systems are in place for monitoring and maintaining records of individual compliance with F&P Standards.
The CBI has reiterated its belief that certain previously suggested reforms to the F&P regime should be adopted, such as granting the CBI the power to:
- publish refusals of appointment to PCF roles.
- investigate individuals who performed such roles in the past.
Under the CBI’s F&P regime, (re)insurers must ensure compliance by a Controlled Function or PCF role holder with the F&P requirements from the outset of their employment through to termination. (Re)insurers should review contracts of employment with the proposed Framework in mind. This might entail a review focussed on ensuring employment contracts contain:
- a detailed job description;
- precise description of an individual’s responsibilities;
- demarcation of responsibilities of others; and
- defining clear reporting channels.
In a regulatory landscape in which there must be no gaps in responsibility, practical challenges may arise where there is a change in the senior manager who is responsible for a particular area. Where a senior manager is leaving in difficult circumstances or at short notice, he or she may be unwilling to cooperate fully with the handover process to a replacement including describing issues which have arisen under his or her watch within the area for which he or she is responsible. There is evidence of UK regulated entities having dealt with these challenges by making completion of handovers a contractual requirement or a factor determining the release of deferred remuneration. In any event, detailed succession planning is reframed from a business to a regulatory imperative.
Recent CBI enforcement actions are a timely reminder for senior individuals of the severe penalties that apply, not only to (re)insurers, but also to senior executives of a (re)insurer who fail to comply with the F&P standards of the CBI, as well as the profound impact of a negative determination on both their reputation and their ability to work in the (re)insurance services industry. With SEAR on the horizon, senior executives in Insurers should take the time to ensure that they have processes in place to effectively manage their obligations under this new regime.
Contributed by Shannon O’Neill