IAF Update: Launch of Central Bank of Ireland Consultation
Further to last week's enactment of the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act), the Central Bank of Ireland (Central Bank) has now launched a three-month Consultation on key aspects of the implementation of the Individual Accountability Framework (IAF/Framework), including the publication of draft Regulations (Regulations) and draft Guidance (Guidance).
Overview and Implementation
The Consultation Paper, Regulations and Guidance seek to provide clarity in terms of the Central Bank's expectations for the implementation of, and seeks stakeholder feedback with respect to, the Senior Executive Accountability Regime (SEAR), the Conduct Standards and certain enhancements to the Fitness and Probity (F&P) regime.
The Consultation Paper sets out the following implementation timeline for the IAF package of reforms:
From 31 December 2023
Conduct Standards, including accountability of senior individuals for running their parts of the business effectively (which appears to be a reference to individuals holding pre-approval controlled function (PCF) roles, or who otherwise exercise a significant influence on the conduct of a firm's affairs, complying with the 'Additional Conduct Standards')
From 31 December 2023
F&P regime enhancements, including certification requirements and the inclusion of holding companies within the regime
From 1 July 2024
SEAR (which appears to include the separate statutory 'Duty of Responsibility' imposed on individuals holding PCF roles with the responsibilities set out under SEAR) to apply to firms listed as being initially in scope
Key issues consulted upon
The Consultation Paper confirms that SEAR will initially apply to the following regulated firms:
- 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 permitted to hold client assets
- Incoming third country branches of the above
The Consultation Paper clarifies that it is the Central Bank's intention to increase the scope of application of SEAR to other regulated firms over time. However, in the meantime, there is much in the spirit of SEAR that firms not initially falling within scope should consider as aligned with clarity of roles and responsibilities and overall good governance.
As expected, the Draft Regulations set out 'inherent responsibilities' (which are those core responsibilities that are intrinsic to a specific PCF role) and 'prescribed responsibilities' (which each in scope firm must allocate to an individual in a PCF role in the firm).
The Consultation Paper clarifies that firms will also be required to identify 'other responsibilities'. These are other material functions, business areas or projects to the extent not captured by 'prescribed' or 'inherent' responsibilities. These must be identified within any particular firm to ensure clarity relating to the allocation of responsibilities regarding those material functions, business areas or projects, and/or to ensure that the key risks at a firm are all identified and appropriately allocated to a PCF role holder. Firms in scope will also be required to allocate these 'other responsibilities' to individuals in a PCF role.
As regards Statements of Responsibilities (Statements) and the Management Responsibility Maps (MRMs), the Regulations set out a template Statement for consideration during the consultation. The Guidance also provides detailed direction on completing MRMs, including information to be included and key questions for consideration by firms in compiling these documents.
Duty of Responsibility and 'Reasonable Steps'
SEAR introduces a 'Duty of Responsibility' for individuals performing PCF roles at in-scope firms to take reasonable steps to ensure that the areas of the firm for which they are responsible conform to legislative and regulatory requirements. To provide clarity as to what is expected in this context, and given that reasonable steps also apply in respect of the Conduct Standards, the Guidance sets out specific information on the meaning of "reasonable steps" in practice.
The Consultation Paper also sets out the Central Bank's proposed approach to other practical issues that industry has identified since these proposals were first recommended, including, for example, the allocation of responsibilities between individuals when job sharing, the application of SEAR to INEDS/NEDS and how the operation of the SEAR regime, and the implementation of SEAR compliance steps by firms, is expected to be impacted by firms' outsourcing arrangements.
The Guidance sets out the Central Bank's expectations in relation to the Conduct Standards, together with non-exhaustive examples of the steps that may be reasonable in the circumstances for an individual to take to ensure the Conduct Standards are met in practice.
The Consultation Paper sets out the Central Bank's expectations regarding training. These include, for example, an expectation that, for firms within the scope of SEAR, the individual in the relevant PCF role allocated the prescribed responsibility for embedding the Conduct Standards throughout the firm should oversee training in respect of the Conduct Standards.
Importantly, the Consultation Paper also outlines that, whilst the legislation provides for the Central Bank to set out Business Standards, currently these standards are set out in the Consumer Protection Code (the CPC). The paper further clarifies that these standards are being reviewed as part of the current CPC review and that they will be updated as part of that separate review.
Enhancements to the F&P regime
The Guidance provides further detail on the practical operation of the new F&P certification requirements, together with the Central Bank's expectations in this regard.
Key aspects include:
- As already indicated, regulated firms and relevant holding companies will need to annually certify the ongoing compliance with standards F&P of individuals carrying out controlled function (CF) roles;
- The Central Bank does not propose to require firms to submit details regarding such certification to the Central Bank, although this information must be available to the Central Bank on request;
- As part of the existing annual PCF return, firms will be required to confirm completion of the new annual certification process;
- Firms will be required to inform the Central Bank where formal disciplinary action has been taken against individuals in the firm in respect of breaches of the Conduct Standards;
- The F&P regime will be extended to apply to holding companies established in Ireland. In this regard, the Central Bank is proposing to prescribe CFs and PCFs for relevant holding companies in draft holding companies Regulations.
Other issues addressed
Further to the introduction of a new PCF-50 Head of Material Business Line for credit institutions in October 2020, the Consultation Paper proposes the introduction of a similar Head of Material Business Line role for insurance undertakings and investment firms.
The Consultation Paper also sets out the Central Bank's approach to a number of other practical issues, including the enforcement of requirements in the IAF regime, the interaction of the IAF and F&P regimes and the Central Bank's approach to temporary PCF appointments.
The ALG cross practice IAF/SEAR team will provide you with further updates on what the Regulations and Guidance mean for you and your firm over the coming days.
The consultation will remain open for 3 months from 13 March 2023 to 13 June 2023 and responses to the consultation will be published on the Central Bank website.
This consultation is a critically important stage in the implementation of both SEAR and the IAF in our regulatory framework, and one which we would encourage all stakeholders to actively engage with. To aid clients/stakeholders in this engagement, we will be publishing a detailed analysis of the consultation shortly.
The Central Bank expects to publish updated F&P Investigations Regulations and F&P Investigations Guidance in March 2023. The Central Bank also intends to launch a separate consultation on the changes to the Administrative Sanctions Procedure (ASP) in mid-2023. This consultation package will included the revised ASP Outline, ASP Inquiry Guidelines and ASP Sanctions Guidance for consideration by all relevant stakeholders. We will provide further updates as this Central Bank guidance and consultation process develops.
Visit our Individual Accountability Framework website for further materials, including our 'IAF and SEAR Guide', and thought leadership on this important topic.
As part of ALG's Regulatory Series, we will be holding a webinar on 30 March to update you on the latest expectations under SEAR and the IAF from the final legislation. Register your interest to attend HERE.
For further information on the Individual Accountability Framework and SEAR, and how ALG can assist your business, please contact Dario Dagostino, Partner, Mark Devane, Partner, Patrick Brandt, Partner, Christopher Martin, Of Counsel, Sian Langley, Knowledge Lawyer, Duncan Inverarity, Partner, Noeleen Meehan, Partner, Michael Doyle, Partner, James Grennan, Partner, Laura Mulleady, Partner, Sinéad Lynch, Partner, Emma Martin, Of Counsel, Kerill O'Shaughnessy, Partner, Charlie Carroll, Partner, Gillian McDonald, Partner. Or your usual contact on the ALG SEAR team.
Date Published: 13 March 2023