Central Bank Consultation (“CP153”)

Following the enactment of the Act, the Central Bank launched a three-month public consultation via its paper entitled “Enhanced governance, performance and accountability in financial services”. The consultation closed on 13 June 2023.

The Irish Funds Industry has provided responses to CP153 and we await the Central Bank’s response.

CP153 included draft regulations (the “Regulations”) which provide details on the requirements under the IAF and draft guidance (the “Guidance”) which seeks to provide clarity in terms of the Central Bank’s expectations for the implementation of the IAF.

IAF – Four Pillars

There are four pillars to the IAF, some of which apply to all regulated financial service providers (“RFSPs”) and others which initially only apply to in-scope firms.

The four pillars are as follows:

The Senior Accountability Executive Regime (“SEAR”)

Conduct standards for regulated financial service providers (“RFSPs”) and their management and staff

Enhancements to the Central Bank’s Fitness and Probity (“F&P”) regime

Stronger Central Bank enforcement capabilities

SEAR

While much of the industry commentary and focus has been on the requirements imposed by SEAR, this is just one element of the overall framework.

CP153 confirms that SEAR will initially apply to a defined range of firms, namely:

• credit institutions (excluding credit unions);
• insurance undertakings^[1];
• investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are permitted to hold client assets; and
• incoming third country branches of the above (with a proportionate approach to apply to low PRISM impact rated in-scope investment firms and incoming third-party branches).

Irish fund management companies and Irish fund boards are not in scope of SEAR at this time however, the CP153 clarifies that the Regulations will enable the Central Bank to roll-out SEAR to other financial service sectors in due course.

Conduct Standards

The Regulations set out three new sets of conduct standards which apply to all RFSPs including Irish fund management companies and Irish fund boards ^[2].

The new conduct standards include the following:

• Common conduct standards which will apply to individuals carrying out controlled functions (“CFs”) within RFSPs including pre-approval controlled function (“PCF”) holders and controlled function holders. This will include, but is not limited to, directors and designated persons of Irish fund management companies, directors of Irish fund boards and money laundering reporting officers.

• Additional conduct standards which will apply to individuals performing PCF roles and others who may exercise a significant influence on the conduct of the RFSP’s affairs including controlled function 1 holders (“CF1”). This will include, but is not limited to, directors of Irish fund boards and heads of functions within Irish fund management companies.

• Business standards which will apply to all RFSPs and are to be developed in conjunction with the separate Consumer Protection Code review and consultation.

Set out below is a summary of the conduct standards:

Common Conduct Standards Applies to CFs (including PCF holders and controlled function holders)	Act with honesty and integrity Act with due skill, care and diligence Co-operate in good faith and without delay with the Central Bank and any other relevant regulatory authorities  Act in the best interests of customers and treat them fairly and professionally Observe proper standards of market conduct
Additional Conduct Standards Applies to PCFs (and others who may exercise a significant influence on the conduct of the RFSP’s affairs)	Ensure that the business of the RFSP is controlled effectively Ensure that the business of the RFSP is conducted in accordance with its obligations under financial services legislation Ensure that any delegated tasks are assigned to an appropriate person with effective oversight Disclose promptly and appropriately any information of which the Central Bank would reasonably expect notice of
Business Standards Applies to all RFSPs	Act in the best interests of their customers and of the integrity of the market Act honestly, fairly and professionally Act with due skill, care and diligence Not mislead customers as to the advantages or disadvantages of any financial service Maintain adequate financial resources Control and manage the RFSP’s affairs and systems sustainably, responsibly, and in a sound and prudent manner Prevent, or identify and appropriately manage, conflicts of interest Engage and co-operate in good faith and without delay with the Central Bank, and with equivalent regulators in other jurisdictions Promptly disclose to the Central Bank any matter relating to the RFSP of which the Central Bank would reasonably expect notice of

It is expected that an individual subject to the conduct standards shall take reasonable steps to achieve compliance with the conduct standards. The Guidance has been developed to help individuals understand how to meet these conduct standards.

Action Areas

We set out some practical steps to be taken by RFSPs to progress their plans for implementation of the IAF:

Common Conduct Standards Applies to CFs (including PCF holders and controlled function holders)	Identify and notify the staff subject to the common conduct standards Provide training to individuals in CF roles on the common conduct standards to ensure that they have appropriate knowledge of them and how the standards apply to an individual performing that function Provide appropriate induction training for newly appointed individuals to these roles to ensure that individuals are clear on their obligations in respect of the conduct standards and specifically what is expected of them in the context of their role Provide appropriate training on an ongoing basis to ensure that individuals are clear on their obligations in respect of the conduct standards and specifically what is expected of them in the context of their role Up to date records of completed relevant training should be kept and made available for review upon Central Bank request The training programme and information provided in relation to training should be subject to oversight and challenge by senior management to ensure its regulatory compliance Establish, maintain and give effect to policies on how the common conduct standards are integrated into the conduct of the affairs of the RFSP Current policies should be reviewed to assess their compliance with the general nature of the common conduct standards
Additional Conduct Standards Applies to PCFs (and others who may exercise a significant influence on the conduct of the RFSP’s affairs)	Provide training to individuals in PCF/CF1 roles on the additional conduct standards to ensure that they have appropriate knowledge of them and how they apply to them Identify and notify the staff subject to the additional conduct standards Provide appropriate induction training for newly appointed individuals to in PCF/CF1 roles on the additional conduct standards to ensure that they have appropriate knowledge of them and how they apply to them
Other Actions Applies to all RFSPs	Ensure effective communication channels are in place to allow for timely and efficient notices and disclosures to be made to the Central Bank as necessary Ensure structures are in place to monitor updated Central Bank Guidance on the IAF D&O insurance to be reviewed and assessed in light of the introduction of the conduct standards

Enhancements to the F&P Regime

The IAF provides for certain modifications to the existing F&P Regime which applies to individuals performing PCF and controlled function roles in Irish fund management companies and Irish fund boards.

The modifications include the following:

Firms and holding companies will be required to certify annually ongoing compliance with F&P standards of individuals carrying out CF roles

Firms will not be required to submit details regarding such certifications to the Central Bank, however, this information should be available upon 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 PCF and controlled functions for holding companies

Action Areas

Review existing F&P due diligence processes and requirements in respect of the appointment and ongoing review of PCF and controlled function holders

Review letters of engagement to incorporate the requirements of the F&P regime

Ensure that PCF and controlled function holders are aware of the full scope of the regime

Ensure that there is escalation and review processes for concerns regarding compliance with either conduct standards and the F&P regime

Ensure that there is a process in place to take account of this additional certification requirement

Central Bank enforcement capabilities

On 22 June 2023, the Central Bank published a twelve week consultation on the changes to the Central Bank’s Administrative Sanctions Procedure (“ASP”). One of the key changes to the ASP is to strengthen the procedures under it to ensure that the Central Bank has the ability to take enforcement action under the ASP directly against individuals for breaches of their obligations rather than only for their participation in breaches committed by a firm.  The enhanced ASP is designed to underpin and support the introduction of the IAF and in particular the SEAR and the conduct standards for firms and individuals. The Central Bank has prepared draft composite guidelines in relation to the ASP which consolidate the existing published ASP Outline 2018, Inquiry Guidelines 2014 and ASP Sanctions Guidance 2019.

Timing

If you would like to discuss these requirements or action areas described above, please contact your usual Arthur Cox contact.

For more information on how our experienced multi-disciplinary Individual Accountability and SEAR Group can help you navigate the Individual Accountability Framework, go to www.arthurcox.com/iaf.

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[1] Excluding reinsurance undertakings, captive (re)insurance undertakings and insurance special purpose vehicles.

[2] We note that the Central Bank has been asked to confirm whether it intends for the new conduct standards to apply to externally managed funds in order to eliminate any doubt on this matter.