Irish Minister of Finance, Paschal Donohoe announces agreement to draft Central Bank (Individual Accountability Framework) Bill and Statement of Central Bank of Ireland

Using an image with a colour scheme reminiscent of a nearby overseas regulator with a similar senior executive regime, Ireland's Minister of Finance, Paschal Donohoe, has announced that today (27 July 2021) he has received agreement from Cabinet to approve the drafting of the Central Bank (Individual Accountability Framework) Bill, the main purpose of which is to improve accountability in the financial sector.

​What does this mean for regulated firms and individuals particularly senior executives? Read below where you can download both the (i) General Scheme - Central Bank (Individual Accountability Framework) Bill and (ii) Regulatory Impact Assessment - Central Bank (Individual Accountability Framework) Bill.

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Ministerial announcement by Paschal Donohue

​“The changes to Central Bank legislation will put individual accountability at the centre of decision making in financial services organisations. The provisions will ensure that there is clarity around the roles and functions of senior executives.

There are four main aspects to the proposed Heads along with necessary technical changes to existing legal processes. All of these make up the Individual Accountability Framework.
This draft legislation provides for:

1. The introduction of a Senior Executive Accountability Regime (SEAR), which places obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies.

SEAR will apply to those in management roles within:

• 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 and/or deal on own account and/or are authorised to hold client monies/assets; and
• Third country branches of the above.

2. The introduction of:

a. Common conduct standards to apply to all persons in controlled function roles;
b. Additional conduct standards for individuals in senior positions; and
c. Business conduct standards for all regulated firms in the financial sector.
The introduction of these conduct standards will give the Central Bank powers to set and impose binding and enforceable obligations on all Regulated Financial Service Providers (RFSPs) and individuals working within them with respect to expected standards of conduct.

3. Enhancements to the Fitness & Probity Regime to ensure the effective operation of and ability of the regime to support the Individual Accountability Framework and the conduct standards for individuals and firms.

4. Breaking the “Participation Link”, which addresses the known deficiency in the legislation which requires the Central Bank to first prove a contravention of financial services legislation against an RFSP before it can take action against an individual.

Sanctions to apply under the Central Bank’s Administrative Sanctions Procedure for breaches of SEAR or Conduct Standards; and Technical amendments to improve existing legislation and clarify certain statutory processes.

The additional powers that will be provided to the Central Bank are significant and, in drafting these Heads, care has been taken to adopt the correct balance between these powers and the protection of individuals’ constitutional rights.

SEAR’s focus is on preventing misbehaviour or mismanagement by senior management. By requiring individual accountability from senior management, supported by enforcement powers, there is an incentive for senior management to comply with financial services law. SEAR also fulfils the purpose of incentivising and assisting regulated firms in strengthening their internal processes through management responsibility maps and clarification of senior management responsibilities.

The adoption of conduct standards across all regulated financial service providers sets out the standards expected of relevant individuals who work in such firms. Given that more junior staff will be in scope of the common conduct standards being introduced, there is a range of safeguards included, so that staff will be aware of what is expected of them.

Ultimately a key challenge will be the rebuilding of trust in the financial sector. The rebuilding of trust will require ongoing cultural and practical change in the banking sector and throughout the financial services industry. The Central Bank (Individual Accountability Framework) Bill will make a significant contribution to bringing about this needed cultural change.
​
It is anticipated that the introduction of the Framework will mean that:

• Customers will benefit from financial service providers that are fully accountable for the level of service and advice they provide;
• Employees of financial institutions will benefit from having greater clarity as to their exact roles and responsibilities and will be empowered to speak up when they see failings;
• Firms and their shareholders will benefit through the creation of real accountability for senior executives; and
• The wider economy and society will benefit from a more stable financial system by reducing the ability of senior decision makers to make risky decisions for which they will be unaccountable and will pay no cost.

Next steps
The Minister for Finance will write to the Chair of the Committee on Finance, Public Expenditure and Reform and the Taoiseach regarding pre-legislative scrutiny. Officials will engage with the Office of the Parliamentary Counsel to the Government to begin drafting the legislation on the basis of the General Scheme published today.

General Scheme - Central Bank (Individual Accountability Framework) Bill

Regulatory Impact Assessment - Central Bank (Individual Accountability Framework) Bill

​Statement - Central Bank (Individual Accountability Framework) Bill 2021

Coinciding with Minister Donohue's announcement, the Central Bank of Ireland released a statement today (27 July 2021) saying:

"The Central Bank of Ireland welcomes today’s publication of the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021 by the Department of Finance.
The Central Bank has been actively engaged with the Department of Finance on these proposals and will continue to work with the Department of Finance throughout subsequent stages as the legislation progresses through the Oireachtas to enactment.

Experience has shown that in order for a regulatory framework to work well, it should stimulate strong and effective governance within firms. To achieve this:

• the allocation of responsibilities within firms needs to be transparent, clear and comprehensive; and
• individuals need to know what they are responsible and accountable for, be clear what standards of behaviour are expected of them, and recognise that where their actions fall short of expected standards, they will be held accountable.

​The following four key components of the Individual Accountability Framework (IAF), proposed in the Central Bank’s Behaviour and Culture Report into Irish Retail Banks, set out to achieve these behavioural, cultural and regulatory objectives:

• The Senior Executive Accountability Regime will require firms to set out clearly and comprehensively where responsibility and decision-making lie in order to achieve transparency as to who is accountable for what within firms.
• The enforceable Conduct Standards set out the behaviour expected of firms and their staff, including obligations to conduct themselves with honesty and integrity, to act with due skill, care and diligence, and in the best interest of consumers.
• The Central Bank’s Fitness & Probity Regime will be enhanced and will place a greater onus on firms to proactively certify that certain staff are fit and proper and capable of performing their roles with integrity and competence.
• The Central Bank’s Administrative Sanctions Procedure will be strengthened to ensure that individuals can be pursued directly for their misconduct rather than only where they have participated in a firm’s wrongdoing. The reforms will also provide for greater process efficiency, clarity and administrative consistency to all involved, including those who may be the subject of enforcement action. A continued focus by the Central Bank on proportionality and fair procedures is a key theme of its IAF proposals.

The various separate aspects of the IAF complement each other to achieve the ultimate goals of better outcomes for consumers and a more sustainable financial system by driving higher standards of behaviour for individuals in financial services firms.

The IAF is ultimately about incentivising positive behaviours and promoting an improved culture within firms while strengthening the Central Bank’s enforcement toolkit, particularly with respect to individuals, to allow the Central Bank to more effectively hold to account those that fall below the expected standards.

Once the Bill has been enacted the Central Bank intends to publicly consult on the implementation of the IAF."