Some early warnings about a late arrival

The oft heralded and long delayed expansion of administrative sanction to individuals holding positions of authority in the financial services sector has grown a step closer with the publication of the Central Bank (Individual Accountability Framework) Bill 2022 (“IAF 2022”). This legislation seeks to strengthen the pre-existing compliance regime through the imposition of a common conduct standard on individuals performing controlled functions for Regulated Financial Service Providers (“RFSPs”), alongside additional conduct standards for individuals in positions of authority and more general business standards for RFSPs and associated holding companies. The imposition of heightened standards alongside the recent Supreme Court ruling in Zalewski v. An Adjudication Officer & Others [2021] IESC 24, regarding the requirements of fairness in administrative procedure, have necessitated a reframing of both the administrative sanction procedure (ASP) and the fitness and probity regime underpinning it. Such a reframing was necessary to comply with the requirements of fairness and natural justice post-Zalewski and the precise implications of these changes on RFSPs will be of profound importance for the financial services sector going forward.
Here is a summary of the principal features of the new regime:

Senior Executive Accountability Regime (“SEAR”)

SEAR will apply to individuals performing senior executive functions (“SEF”) for RFSPs and will correspond with current pre-approval controlled functions. While much of the operational details of the regime remains to be fleshed out via Central Bank regulations, IAF 2022 provides a framework that includes:

• Inherent responsibility – SEF applying automatically to the RFSP and the individual in a defined role.
• Allocated responsibility – SEF allocated by the RFSP to the individual.
• Statement of responsibility – completed by the individual responsible for the SEF and not the RSFP, the statement should clearly set out the role required and its remit.
• Management responsibility map – documentation which outlines the key governance and management arrangements, to be contained within a single accessible reference source.

As the regulatory regime has yet to be defined, the precise ambit of SEAR has not been outlined but it is expected to be limited to credit institutions and investment firms: those authorised to underwrite on a firm commitment basis, engage in proprietary and position trading and/or hold client money on account. This implies that the SEAR regime will impact Credit Unions as well as banks.

Common Conduct Standard

The most eye-catching reform proposed is the introduction of a common conduct standard on individuals performing controlled functions and pre-approval controlled functions for RFSPs. The standards of honesty, integrity and due care imposed on RFSPs since the introduction of the Central Bank Reform Act 2010 (“CB 2010”) have been expanded to natural persons performing such functions for RFSPs, alongside additional reporting requirements to both customers and regulators. Individuals are expected to act fairly and professionally with regard to customers, observing proper standards of market conduct. To ensure compliance, RFSPs will be expected to provide notification to the individuals of their new responsibilities in respect of controlled functions, alongside appropriate training to ensure compliance. Unlike the pre-existing legislative regime, the reforms do not preclude credit unions from their oversight. This is clear from the repeal of the credit union exception afforded by Section 18(2) of the CB 2010. The common conduct standard is accompanied by a non-exhaustive list of the behavior required to comply with the standard.

Additional Conduct Standards

Alongside the introduction of common conduct standards, IAF 2022 will also impose equivalent obligations on individuals who exercise significant influence over the RFSP’s affairs. Such individuals must ensure that the business is conducted effectively, in accordance with the legislative regime and that controlled functions are delegated to appropriate persons with effective oversight. As well as these additional requirements, those in senior roles within a RFSP will also be expected to comply with the general conduct standards outlined in the new common conduct regime governing individuals with responsibility over controlled functions. With respect to both common and additional standards, individuals who are under such obligations are expected to take reasonable steps to ensure that these conduct standards are met.

Fitness and Probity Regime

The extension of obligations to the individual has been mirrored in the expansion of the fitness and probity regime to holding companies, their directors, and staff. Unsurprisingly, given the increase in responsibility and reach of the new regime, the legislation underpinning it has also been reformed. Accordingly, individuals will no longer be allowed to perform a controlled function unless they hold a certificate of compliance corresponding with the standards of fitness and probity from the RFSP. The requirement for such a certificate will be set out in more detail in the Central Bank regulations that will follow.
The ambit of Central Bank investigation into suspected breaches of the fitness and probity regime has likewise been increased, with the extension from supervision to performance of a controlled function mirrored by increasing the time period to 6 years for commencing and investigation. Likewise, the suspension period imposed for a violation of the regime has also been extended from three to six months with the possibility of further extension sanctioned by the High Court for up to twenty-four months. The financial penalties imposed remain unchanged, with an individual’s monetary penalty capped at €1,000,000 while an RFSPs maximum liability remains €10,000,000. In deciding the correct level of sanction to be imposed, the Central Bank will need to consider the scale and complexity of the function alongside the level of skill and experience of the individual.

Administrative Sanctions Procedure (“ASP”)

As alluded to earlier, the ASP has also been the subject of reform, following the Zalewski decision which brought into focus the standards of procedural fairness and judicial oversight of disciplinary bodies. These requirements coupled with the need to unify the various disciplinary processes which have been formulated since the Central Bank Act 1942 and its many amendments have sparked these reforms. Reforms include the requirement for ongoing notification to the subject of an investigation, allowing the subject to make submissions to the panel and ensuring the confidentiality of any final report issued by the disciplinary panel. The Zalweski standards to be observed by any panel performing quasi-judicial functions include taking evidence under oath and the requirement for the ASP to be confirmed by the High Court unless the contravention has been acknowledged by the subject. All ASP inquiries will be judged on the civil standard of proof, i.e., that on the balance of probability, the subject contravened the fitness and probity regime and the standard of conduct required.
The IAF 2022 is expected to progress through the Oireachtas later this year and may become law in late 2022 or early 2023. Its commencement however, in whole or in part, may be postponed pending the Central Bank’s adoption of the required regulations following consultation with stakeholders. What is clear is that the new regime represents a sea change in regulatory approach, expanding the ambit of Central Bank investigations while also shifting much of the responsibility for compliance away from the RFSP to the individuals charged with the performance of controlled functions.

OCWM Law LLP

For further information contact:

Michael Walshe: [email protected]
or
Edel Conway: [email protected]