The Individual Accountability Framework

The Central Bank of Ireland (‘CBI’) has recently issued Regulations and Guidance to firms on the Individual Accountability Framework (‘IAF’).  The Guidance provides further detail in respect of the implementation of:

1. The Senior Executive Accountability Regime Framework (‘SEAR’) – which is a framework to outline where the decision making responsibilities lie within financial institutions;
2. The Conduct Standards – which are the expected set of standards in respect of Controlled Functions and Pre-Approved Controlled Functions; and
3. Certain aspects of the enhancements to the Fitness & Probity Regime.

The Central Bank (Individual Accountability Framework) Act 2023 (the ‘IAF Act’) was passed earlier in the year but it is worth noting that the Conduct Standards, as well as the enhancements to the Fitness & Probity Regime, will come into force from 29 December 2023.  However, further to the feedback on the IAF Act, it has been decided that SEARS will not apply to (Independent) Non-Executive Directors until 1 July 2025.

The IAF Act

The IAF Act confers powers on the CBI to strengthen and enhance individual accountability in the management and operation of regulated financial service providers.  The IAF Act does this through the following:

• It provides for a regulation making power for the CBI which gives effect to the Senior Executive Accountability Regime;
• It imposes a statutory duty on individuals who carry out Pre-Approved Controlled Functions at in-scope firms to take any reasonable steps to avoid a contravention by their form of its obligations under financial services legislation;
• It provides the CBI with a regulation making power to prescribe certain standards to ensure that it conducts its affairs in the best interests of customers and of the integrity of the market; acts honestly, fairly and professionally; and, acts with due skill, care and diligence;
• Imposes certain expected standards of conduct on individuals performing Controlled Functions;
• Imposts certain expected standards of conduct on senior individuals performing Pre-Approved Controlled Functions;
• Imposes a requirement on the CBI to provide guidance on the expected standards of conduct; and
• Imposes a requirement on the CBI to provide guidance on the notification and training that firms must provide to Controlled Functions subject to the expected standards of conduct.

The CBI’s Feedback Statement has gone through a consultation and has provided further Guidance in light of the comments arising from the consultation.  This includes:

• (Independent) Non-Executive Directors (as referred to above);
• The application of the SEAR to outgoing branches – it is being considered whether a materiality threshold should apply to managers of outgoing branches, and if so further legislation will need to be amended;
• Inherent and Prescribed Responsibilities – amendments have been made to the list of Prescribed Responsibilities to remove certain responsibilities and others have been merged or moved to the General List of Prescribed Responsibilities to the Sector or Circumstance Specific list of Prescribed Responsibilities;
• Sharing/Splitting of Roles and Responsibilities – the Guidance on the IAF has been amended to provide further detail in respect of job-sharing and details examples where sharing of roles could take place in certain limited circumstances and how that would impact the related responsibilities of such roles. It is worth noting that one of the reasons for the SEAR is to ensure that the most senior individual should be solely accountable for the relevant responsibilities;
• Certification – this will limit the need for enhanced due diligence to particular roles and allows for a certain level of self-certification;
• Disciplinary Actions – the obligation for a firm to report to the CBI where a formal disciplinary action has been concluded against an individual in respect of a breach of conduct standards has been removed.

Conclusion

With the drafting of the updated Regulations and Guidance, financial institutions will need to consider the issues relating to the IAF once again, but may be encouraged in respect of some of the amendments which have been made. The CBI has confirmed that its approach to implementing the IAF is based on principles of proportionality, predictability and reasonable expectations, and it is hoped that these amendments will further those principles.  A useful update has been provided in relation to (Independent) Non-Executive Directors and the timeline for the SEAR to apply to them, meaning that the legislation will be coming into force in a phased manner which may benefit the institutions who are grappling with the IAF and its effects.

For further information on this topic, please contact Laura Graham at lgraham@reddycharlton.ie