The new Individual Accountability Framework and the Senior Executive Accountability Regime

17 December, 2019

The Individual Accountability Framework, which includes the Senior Executive Accountability Regime (SEAR), will create a fundamental shift in regulatory accountability in Ireland when it comes into effect. Existing regulatory requirements such as Fitness and Probity will be enhanced, and new elements in the area of senior management accountability and conduct. While we await the official legislation, there is much we do know. Firms should already be preparing for the forthcoming changes.

What is the Individual Accountability Framework?

Following the Behaviour and Culture of the Irish Retail Banks report in July 2018, the Central Bank of Ireland (CBI) outlined their proposals for an enhanced Individual Accountability Regime, including SEAR. The purpose of the reform is to create a framework that will facilitate cultural change and greater individual accountability.

The Individual Accountability Framework is not just one single piece of new legislation. It consists of some fundamental changes and enhancements:

Enforceable conduct standards
Common conduct standards for all staff within regulated financial services providers (RFSPs). Additional standards for senior individuals in those organisations
Business standards for RFSPs, building on existing obligations set out in the Consumer Protection Code
Senior Executive Accountability Regime (SEAR)
Clearer responsibility and accountability on firms and senior individuals within them. Obligations to set out clearly where responsibility and decision-making lie for their business
Enhancements to the existing Fitness and Probity requirements
Introduction of a certification requirement, obliging all RFSPs to annually certify that all persons performing controlled functions are fit and proper (industry practice to date has put the onus on the individual to self-certify)
An enhanced enforcement process
Proposed legislation to facilitate more straight forward enforcement and sanctions against an individual rather than the RFSP

The key elements of SEAR

The senior executive accountability proposals follow a trend across the globe in recent years. There is an increased focus by regulators on accountability, culture and conduct for financial services in the UK, Hong Kong, Australia and Singapore.

Although legislation and frameworks differ across countries, common to all is the focus on improved individual accountability through a sound risk culture, effective corporate governance and imposing stronger consequences for conduct that is not in line with expectations.

The key aspects of SEAR are outlined below.

Key aspects of SEAR

1. Initial scope: whom will it impact?
2. Senior Executive Functions (SEFs): who in the entity?
3. Mandatory responsibilities: what will be required?
4. Comprehensive Statements of Responsibilities: increased accountability
5. Responsibility Maps: a single source of reference

1. Initial scope: whom will it impact?

Credit institutions (excluding credit unions);
Insurance undertakings (excluding reinsurance undertakings, captive (re)insurance undertakings and Insurance Special Purpose Vehicles);
Investment firms which underwrite on a firm commitment basis or dealing on own account or are authorised to hold client monies or assets or both; and
Third-country branches of the above.

2. Senior Executive Functions (SEFs): who in the entity?

Board members, executives reporting directly to the Board and heads of critical business areas. These should broadly correspond to PCF roles under the current Fitness and Probity Regime.

Certain SEFs may be mandatory: firms will have the flexibility to structure their senior management team as they consider appropriate provided that all prescribed responsibilities, as set out by the Central Bank, are assigned to SEFs.

3. Mandatory responsibilities: what will be required?

The CBI will prescribe mandatory responsibilities for firms, which must be allocated to individuals carrying out SEFs.

This will ensure that there is an SEF accountable for all key conduct and prudential risks.

There is a general list of prescribed responsibilities applicable to all firms, with tailored lists for industry sectors and based on firms' scale and complexity.

4. Comprehensive Statements of Responsibilities: increased accountability

Each SEF will be required to have a documented Statement of Responsibilities which sets out their role and areas of responsibility.

Statements of Responsibilities will be required to be kept up to date and submitted to the Central Bank.

5. Responsibility Maps: a single source of reference

Responsibility Maps document key management and governance arrangements in a comprehensive, accessible and transparent single source of reference.

Responsibility Maps will be required to be kept up to date and submitted to the Central Bank.

When will IAF come into effect?

Draft legislation is waiting to go through the Dáil. A public consultation will follow that. There are constitutional considerations concerning the rights of an individual, which the legal community are currently discussing. It will be necessary for all firms to review the draft legislation when published. Based on the timeframes for other legislation, it is likely that the new act will not come into effect before the second half of 2020.

When and how should you start preparing?

We recommend that all firms start preparing for IAF and SEAR now. Training and awareness should commence at board level. It would be best if you were compliant with existing regulatory requirements such as Fitness and Probity, Minimum Competency Requirements and Suitability Assessments. As a first step, firms should be starting to look at preparing responsibility maps. Firms need to consider all their financial services activities and identify which individuals are accountable for what to ensure there are no gaps.

What we do know is that it will have implications for board members, executive committee members and senior leaders with critical decision-making roles within the business. It will also impact on areas that will be involved with implementing the legislation including HR, legal, compliance, risk and corporate affairs.

The legislation will also directly impact areas such as governance, MI, risk controls, policies, procedures, recruitment practices, training and will focus on improving culture, especially concerning leadership and decisions affecting customers.

To assist firms in managing the forthcoming changes, we will be publishing insights to help you prepare.