General Scheme of Individual Accountability Framework and SEAR published
On 27 July 2021, the Department of Finance (DOF) published the General Scheme for the long anticipated Individual Accountability Framework (IAF), which includes a Senior Executive Accountability Regime (SEAR).
The IAF, when introduced, will have a significant impact on the financial services industry in Ireland. With the introduction of the Conduct Standards described below, impacting many more individuals employed in the sector than just the most senior executives. The Minister for Justice Paschal Donohoe has indicated that he expects pre-legislative scrutiny of the Bill to take between four and six months followed by a four to six-month legislative process with the hope that the legislation will be enacted and passed by the Dáil in the second half of 2022.
The four key elements of the IAF are:
We have set out below some of the key components that will make up the IAF as well as describing which Regulated Financial Service Providers will be impacted by the new regime:
|Section||Description||Which individuals does it impact?||Which RFSPs will be affected?|
|SEAR Regime||Places obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies, including a requirement to provide a statement of responsibilities to the Central Bank of Ireland (CBI) for Senior Executive Functions (SEF). The statement of responsibilities must clearly setting out each SEF’s role and area of responsibility. In addition, RFSPs must produce a management responsibility map. ||Individuals in a Senior Executive Function (SEF), (aligned to the list of pre-approval controlled functions (PCFs)) || |
SEAR will be introduced 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.
Other sectors may be brought within the scope of SEAR in the future, after the legislation is enacted. It is likely that the DoF and CBI will keep a close eye on and developments with regards to the UK regime, on which IAF is closely based.
International Note: Third country branches of the above categories of firms will also fall within the first phase of SEAR
|Duty of responsibility:||A legal obligation will be imposed on senior individuals in relation to the discharge of their responsibilities. SEFs will be required to take reasonable steps to avoid their firm committing a “prescribed contravention” (essentially a breach of financial services regulation) in the areas of the firm’s business for which they are individually responsible. The CBI will be able to take enforcement action and impose administrative sanctions directly on individuals who breach their duty of responsibility.||Senior Executive Function (SEF) (essentially all in a PCF role who fall within the scope of SEAR) ||RFSPs subject to SEAR |
|Conduct Standards|| |
Common Conduct Standards
Standards of conduct will impose binding obligations on individuals in the performance of their roles in RFSPs
RFSPs will also be required to establish and maintain policies setting out how the RFSP will embed the common conduct standards throughout its organisations
|Individuals holding “Controlled Function” roles under the current Fitness and Probity Regime (including PCF roles). ||All RFSPs |
Additional Conduct Standards
Additional binding obligations will be imposed on persons in senior roles with respect to expected standards of conduct in the performance of their roles. For example the additional conduct standards will require persons in senior roles to participate effectively in collective decision making and to ensure that the business of the RFSP for which the person is responsible is controlled effectively.
Individuals holding “Pre-Approved Controlled Function” roles.
Individuals who have the ability to exercise significant influence over the affairs of a regulated financial service provider.
|All RFSPs, irrespective of whether or not the firm is itself within the scope of SEAR. 1 |
Business conduct standards
Introduction of Standards for Businesses that will apply to RFSPs.
The new obligations include that a RFSP will arrange adequate protection for clients’ assets when responsible for them and conduct its business professionally, honestly, ethically and with integrity.
The new standards are intended as a counterbalance to conduct standards imposed on individuals under the Common Conduct Standards and the Additional Conduct Standards. These are quite similar to the General Principles in the Consumer Protection Code 2012, with a notable addition on an RFSP to:
“deal with its regulators in good faith and in an open and cooperative way and shall disclose to the Central Bank promptly, proactively and appropriately anything relating to the firm of which the Central Bank would reasonably expect notice.”
|n/a ||All RFSPs |
|Enhancements to the Fitness & Probity Regime|| |
Strengthening of existing obligations in relation to fitness and probity (F&P) of key personnel. For example certification will be required from a RFSP that it is satisfied that each person in a controlled function role meets the Fitness & Probity Standards.
The CBI will be also be able to investigate individuals who they suspect pose a danger to consumers or the financial system, irrespective of whether they are in a Controlled Function role at the commencement of the investigation (within a specified time period).
|n/a || |
All existing RFSPs who fall within remit of F&P regime.
International Note: The F&P Regime will also be extended to apply to financial holding companies based in Ireland.
It is proposed that breaches of the Common Conduct Standards, the Additional Conduct Standards or the Standards for Businesses will be subject to potential enforcement under the Central Bank's Administrative Sanctions Procedure (ASP) and contraventions of the Common and Additional Conduct Standards may also be subject to separate investigations under the F&P regimeThe CBI would be able to sanction individuals for such breaches without having to initially establish that the individual participated in a regulatory breach by their firm.
This is currently the case and has hindered the CBI’s ability to bring actions against individuals. Under the ASP, the CBI can impose various sanctions on individuals, including disqualifications and fines of up to EUR1 million.
The introduction of the IAF represents a key challenge for all financial services employers. We are uniquely placed to advise on and assist clients with all aspects of preparing for the IAF (including its international reach) due to our significant experience advising on the equivalent UK regime (the SMCR), which has been in place since 2016.
For further information on IAF or SEAR and how DLA Piper Ireland can help, please contact authors.