SEAR and individual accountability: General Scheme published
The Department of Finance announced today details on the long-awaited Individual Accountability Framework (the IAF) including the Senior Executive Accountability Regime (SEAR).
The General Scheme for the anticipated legislation was also published during the day and we will provide a more detailed analysis shortly. In the meantime, we highlight below some interesting points from today's announcement for all regulated entities that have been following and preparing for this legislation.
SEAR will be one of the most impactful regulatory changes of recent years, requiring firms to map regulatory responsibilities to a senior individual within the organisation who is accountable for regulatory contraventions that may occur in their remit. In addition to enhancing the regulator's ability to hold individuals to account for regulatory contraventions, the reforms will impose 'conduct standards' on many individuals working in financial services in Ireland, not just senior executives.
As expected, today's announcement confirms that the IAF will include the following elements:
- Conduct Standards - both a set of 'Common Conduct Standards' applying across a wide range of individuals within regulated entities and 'Additional Conduct Standards' applying to senior executives as well as broad 'Standards for Businesses' applying to firms themselves.
- The SEAR regime - obliging firms to clarify roles and responsibilities for senior executives. This will include the creation of 'statements of responsibility' with each senior executive being accountable for all key risks within their area of responsibility and the development of 'management responsibility maps' showing how senior executives fit within a firm's governance, committee, business unit and reporting structures.
- Enhancements to the Administrative Sanctions Procedure and Fitness & Probity Regimes - most notably breaking the 'participation link' by which the Central Bank was required to prove that a person concerned in the management of a firm had 'participated' in that firm's regulatory contravention before they could sanction that individual directly.
At this stage, the Department of Finance's announcement contains a number of interesting points for firms preparing for this regime:
- As expected, SEAR will be introduced on a phased basis but will apply, in the first instance, to: (i) credit institutions (excluding credit unions) (ii) insurance undertakings (excluding reinsurance undertakings, captive (re)insurance undertakings and Insurance Special Purpose Vehicles) and (iii) investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorised to hold client monies/assets.
- Third country branches of the above categories of firms will also fall within the first phase of SEAR.
- The 'Common Conduct Standards' are stated to apply to individuals holding 'Controlled Function' roles under the current Fitness and Probity Regime, rather than all individuals employed within a regulated firm.
- The 'Additional Conduct Standards' for more senior executives are stated to apply to individuals holding 'Pre-Approved Controlled Function' roles under the current Fitness and Probity Regime as well as individuals who have the ability to exercise significant influence over the affairs of a regulated financial service provider, which would appear to map to the current description of the 'CF1' role under the Fitness and Probity Regime.
- The 'Additional Conduct Standards' are also stated to apply to senior executives in any regulated financial service provider, whether or not the firm is itself within the scope of SEAR. This appears to mean that the substantial steps required to address these standards will apply to all regulated firms. These include ensuring senior executives understand and abide by such conduct standards and that appropriate compliance, HR and disciplinary policies and processes are updated. Similarly it appears that the Standards for Businesses will apply to all regulated firms.
- Contraventions of the Common Conduct Standards, the Additional Conduct Standards or the Standards for Businesses are proposed to be subject to potential enforcement under the Central Bank's Administrative Sanctions Procedure and (in the case of the Common and Additional Conduct Standards) separate investigations under the Fitness and Probity regime. The Administrative Sanctions Procedure is a flexible enforcement tool, with potential material financial sanctions, that will now apply directly to a broad range of conduct of senior executives and senior staff.
A&L Goodbody has been preparing for the IAF and SEAR for some time, developing systems and processes to assist clients in assessing their current frameworks and understanding and implementing the requirements in the proposals. We have also been designing and progressing 'pilot programmes' for this purpose and to assist clients in preparing for anticipated regulatory consultation processes.
Our thought leadership on the IAF and SEAR is available here. We will be publishing further insights on the IAF and SEAR proposals in the coming days.
For further information on the IAF and SEAR and how ALG can assist your business, please contact Dario Dagostino, Partner, Patrick Brandt, Partner, Mark Devane, Partner, Kevin Allen, Partner, Sinead Prunty, Knowledge Lawyer, Duncan Inverarity, Partner, Noeleen Meehan, Partner, Michael Doyle, Partner, James Grennan, Partner, Laura Mulleady, Partner, Sinead 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: 27 July 2021