Central Bank (Individual Accountability Framework) Act
Heads of Bills published by the Department of Finance
Details of the long-awaited draft legislation for an Individual Accountability Framework (“IAF”) and Senior Executive Accountability Regime (“SEAR”), as called for by the Central Bank of Ireland (the “CBI” or the “Central Bank”) in 2018, have been published. Our Banking team explain the possible impacts of this legislation.
The contents of the draft IAF legislation
The draft Heads of Bill, released on the 27th July, outlines details on the four main areas of upcoming changes covered in the legislation as follows:
Senior Executive Accountability Regime (“SEAR”)
SEAR will place obligations on in-scope firms and senior individuals within them, to set out clearly where responsibility and decision-making lie. This will require firms to allocate responsibilities to senior individuals, document these in a Statement of Responsibility (“SoR”) and produce a Management Responsibilities Map (“MRM”) in a single source reference document to be provided to the Central Bank.
These assigned responsibilities will be underpinned by a legal obligation and “duty of responsibility” on senior individuals. Senior individuals will be required to take reasonable steps to avoid their firm contravening legal and regulatory requirements in the areas of the firm’s business for which they are individually responsible. The Central Bank will be able to take enforcement action and impose administrative sanctions on individuals who breach the duty of responsibility and / or the conduct standards set out below.
SEAR will apply to at least the Pre-Approval Control Functions (“PCFs”) under the current Fitness and Probity Regime (the “F&P Regime”) who will become Senior Executive Functions (“SEFs”) under SEAR. It is expected that it will initially apply to banks, insurance, and investment firms, as well as third country branches of these firms.
The IAF will introduce three sets of Conduct Standards applicable to all Regulated Financial Services Providers (“RFSPs”). These are as follows:
- Business Conduct Standards which will apply at a legal entity level;
- Common Conduct Standards to apply to all persons in Controlled Functions(“CFs”) (as well as PCFs and SEFs); and
- Additional Conduct Standards will apply to SEFs. In addition, they will apply to all senior persons performing PCF roles and other persons who exercise significant influence on the conduct of an RFSP’s affairs - regardless of whether the RFSP in which they perform the role is in scope of SEAR.
The introduction of these conduct standards will give the Central Bank powers to set and impose binding and enforceable obligations on all RFSPs and individuals working within them with respect to expected standards of conduct. Breaches of these standards will constitute a prescribed contravention under the Central Bank Act 1942 and therefore, will be enforceable against the RFSP or individual concerned, who may be subject to administrative sanctions.
Enhancements to the Fitness & Probity Regime
The IAF will also introduce a Certification Regime (amending Section 21 of the Central Bank Reform Act). This is one of the most significant enhancements to the current Fitness and Probity Regime. The Certification Regime will place a positive obligation on all RFSPs to certify in writing for each person in a Controlled Function role that they are satisfied that the person meets the Fitness and Probity (“F&P”) standards. These enhancements aim to strengthen the existing obligations on firms in relation to the fitness and probity of their key personnel.
Furthermore, the changes introduced with this legislation also confirm the scope of the European Central Bank (ECB), and its competence in conducting fit and proper assessments for persons in senior roles. Amendments under the IAF Bill specifically provide for changes in Section 23A of the 2010 Act to align with Article 4 of the Single Supervisory Mechanism (SSM) Regulation, noting that the ECB, and not the Central Bank of Ireland, has competence for the Pre-Approval Controlled Function (PCF) assessment of Key Function Holders (KFHs) in significant institutions. These assessments are conducted in line with the ECB guide to fit and proper assessments (2021), in addition to the joint ESMA and EBA Guidelines on the assessment of the suitability of the members of the management body and key function holders (EBA/GL/2017/12).
In addition, the F&P Regime will be also extended to apply to the directors / staff of holding companies (unregulated entities) established in Ireland.
Breaking the “participation link”
Amendments in the new legislation will address the known deficiency in the current legislation which requires the Central Bank to first prove a contravention of financial services legislation against an RFSP before it can then take action against an individual. This is known as the participation link and will allow the Central Bank to take enforcement actions directly against individuals in scope of the IAF.
The legislative process
The Minister has indicated that the legislative process may require 12 - 18 months for the full rulebook to be implemented. It will involve a consultation process with the relevant sectors prior to the legislation being enacted by order of the Minister of Finance, at a future date yet to be finalised. It is expected that the scope of SEAR will be expanded to cover additional financial services sectors in the future. However, as noted, the Heads of Bill indicate that many aspects of the IAF will apply immediately to all RFSPs irrespective of whether or not SEAR yet applies.
Despite the lead-in time indicated by the Minister, given that the IAF proposals have been known since July 2018 and the CBI’s feedback on the F&P regime in its Dear CEO letters of 2019 and 2020, the Central Bank expects that firms already have started preparation for the introduction of the IAF.
For details of key questions that you should address now and on how KPMG can assist you in preparing for the introduction of the IAF, read our article Are you ready for SEAR? 6 questions to ask your business.