SEAR: Draft legislation expected shortly
The Minister for Finance has signalled that the draft legislation in relation to the proposed senior executive accountability regime for regulated firms and related ‘behaviour and culture’ requirements may be published this month.
The Minister for Finance has signalled that Heads of Bill for the Central Bank (Amendment) Bill 2021 are likely to be published this month. The Bill is a key part of the proposed individual accountability framework for regulated firms and their senior managers, which will comprise:
- a new senior executive accountability framework (SEAR);
- new conduct standards;
- changes to the Central Bank’s Fitness and Probity framework to enhance its gatekeeper role; and
- changes designed to strengthen the Central Bank’s enforcement capabilities by breaking the ‘participation link’ whereby a regulated firm must first be found to have breached financial services legislation before the relevant individual can be pursued by the Central Bank
The Department of Finance has been engaging with the Attorney General’s office to ensure that individuals’ constitutional rights and the Central Bank’s powers are appropriately balanced, so the final shape of the proposed framework is not yet confirmed.
The Central Bank is expected to consult on related aspects of the individual accountability framework shortly after the Heads of Bill are published.
Keeping you Informed
These developments are critically important for our clients and we have been monitoring them closely. For more details on the background to these proposals, read our earlier briefings:
Once the Heads of Bill are available, we will publish analysis designed to help you navigate the proposed framework.
We are hosting a series of events on this topic in September and October. If you are interested in attending please reach out to your usual Arthur Cox contact or email firstname.lastname@example.org for further details.
The new framework is expected to address the following component parts of the Central Bank’s recommendation, in its July 2018 report on ‘Behaviour and Culture of the Irish Retail Banks’, that an individual accountability framework for banks and other regulated firms be introduced:
- a SEAR under which regulated firms and senior managers within those regulated firms would clearly frame where responsibility and decision-making rests within their organisation;
- conduct standards, setting out the standards of behaviour expected by the Central Bank of regulated firms, their senior management teams, and their other staff;
- improvements to the Fitness and Probity framework; and
- a “unified enforcement process” that would apply to all breaches by regulated firms and individuals of financial services legislation. As mentioned above, this would include breaking the current ‘participation link’.
The July 2018 Report and subsequent speeches by senior personnel within the Central Bank have provided more detail on what we might expect from the Department of Finance and Central Bank over the coming months. However, as mentioned above the Department of Finance has been engaging with the Attorney General’s office to ensure that individuals’ constitutional rights and the Central Bank’s powers are appropriately balanced, so the final shape of the proposed framework is not yet confirmed.
It is expected that, at least initially, the SEAR will be introduced for banks, insurance undertakings, certain investment firms, and (in each case) their third country branches, with other categories of regulated firm being brought into scope at a later date. However, it is possible that more regulated firms will be brought into scope from the outset.
In-scope senior management roles are expected to include board members, executives that report directly to the board, and heads of critical business areas. These roles are likely to broadly correspond to those who carry out pre-approval controlled functions under the Fitness and Probity framework.
We expect that firms will be required to develop allocations of prescribed responsibilities, responsibilities maps, and statements of responsibility.
|Prescribed responsibilities||The Central Bank is expected to prescribe mandatory responsibilities for regulated firms which the firms must, in turn, allocate to the individuals carrying out in-scope senior management roles.
This is to ensure that, for every key conduct risk and key prudential risk, responsibility is clearly allocated to a senior manager.
It is expected that the lists of prescribed mandatory responsibilities will be tailored to industry sector and firm size.
|Responsibilities maps||We expect that each in-scope regulated firm will be required to draw up a responsibilities map and submit it to the Central Bank. That map is expected to contain the firm’s key management and governance arrangements, and will need to include matters reserved to the firm’s board, the terms of reference for committees, and reporting lines for all those carrying out senior management functions.
|Statement of responsibilities||We expect that each person carrying out a senior management function will be required to have a documented statement of responsibilities, setting out their role and responsibilities. The Central Bank’s aim is to ensure that the experience, qualifications, knowledge and competence of each such person can be measured against the responsibilities allocated to them.
We expect the proposed Conduct Standards to include:
- common conduct standards that will apply to all staff within in-scope regulated firms;
- additional conduct standards that will apply to pre-approval controlled functions and other senior managers within in-scope regulated firms, reflecting their level of influence over the firm’s business; and
- business standards that will apply to the regulated firms themselves, building on the obligations set out in the Central Bank’s Consumer Protection Code (which will also be the subject of a public consultation by the Central Bank later this year).
Fitness and Probity Framework
Those appointed to pre-approval controlled functions require prior approval from the Central Bank as part of its Fitness and Probity framework. We expect that the Fitness and Probity framework will be amended in conjunction with the SEAR framework, but the scope of any changes is not yet known. However, we anticipate that an ongoing annual certification requirement will be imposed on regulated firms regarding whether persons performing senior management functions continue to be fit and proper persons.
The Fitness and Probity framework has remained towards the top of the Central Bank’s supervisory and enforcement agenda over the last three years. It issued ‘Dear CEO’ letters to regulated firms in both 2019 and 2020 highlighting poor awareness of key obligations at senior level, and an absence of robust processes for escalating concerns about the fitness and probity of key office holders. For further information, read our briefings:
As mentioned above, we expect that the ‘participation link’ will be broken but it is not yet clear what other aspects of the Central Bank’s suite of enforcement tools will be strengthened as part of the incoming individual accountability framework.
Our market-leading Financial Regulation: Investigation and Enforcement team advises and supports clients on a wide range of financial regulatory investigations and enforcement issues. We advise and support financial institutions and individuals who require deep specialist knowledge of the financial services regulatory environment and experience in managing complex contentious regulatory matters.
Please get in touch with any member of our Financial Regulation: Investigation and Enforcement team if you wish to discuss the potential impact of the proposed SEAR and related ‘behaviour and culture’ requirements on your business.