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Individual accountability is crucial in a post-COVID, post-Brexit world

Jul 23, 2021

With the forthcoming introduction of the Senior Executive Accountability Regime, Michelle McNamara explains what banking and insurance firms need to do to prepare and why accountability is key to that preparation.

The past decade has seen a seismic shift in global focus towards greater accountability for decision-making in the financial sector, undoubtedly influenced by the fallout of the financial crisis. In 2018, the US Federal Reserve’s response was to launch a set of guidelines for how large financial institutions could manage risk and, in particular, individual accountability. Closer to home, the UK has sought to strengthen its market integrity within the banking and insurance sectors – giving firms and regulators greater powers to hold individuals to account through its Senior Managers and Certification Regime (SMCR). However, most jurisdictions within Europe have not yet moved toward regimes specifically designed to assign individual accountability. The Central Bank of Ireland’s (CBI) Senior Executive Accountability Regime (SEAR) may well change that.

Together with other measures, SEAR is part of the CBI’s wider framework to boost transparency in the financial sector and will require firms to clearly set out where responsibility and decision-making lie. The regime is expected to apply to the Pre-Approval Control functions (PCFs) under the current fitness and probity regime. It will have implications for board members, executive committee members and senior leaders with critical decision-making roles.

Put simply, SEAR will enable every senior member of an organisation to be clear about what is expected of them and the consequences of deviating from standards.

Sitting alongside SEAR, enforceable Conduct Standards will set out the behaviour expected of regulated financial services firms and individuals working within them. These standards will oblige individuals to conduct themselves with honesty and integrity, act with due skill, care and diligence in the interest of consumers, and co-operate with regulatory authorities. All these elements are aligned with the SMCR’s Individual Conduct Rules. A further element is the enhanced administrative sanctions regime, which will allow the CBI to hold individuals to account directly for their misconduct rather than having to link the misconduct to a regulatory breach by their firm.

Regulated financial services firms in Ireland can look to the UK for guidance. The SMCR has been in force for UK banks, building societies, credit unions and PRA-designated investment firms since March 2016. It was extended to cover all Financial Conduct Authority (FCA) solo-regulated financial services firms from 9 December 2019. The SMCR’s overarching aim is to reduce harm to consumers and to strengthen market integrity.

Despite being in the early stages of establishing SEAR, Irish firms must prepare for what lies ahead. Given the importance of Ireland’s financial system in a post-COVID, post-Brexit environment, and the subsequent potential risks posed to our broader economy and society, individual accountability needs to be top of mind now more than ever. The lessons from the pandemic and the experience in the UK pose a unique opportunity for Irish firms to start preparing for SEAR and reap the benefits.

While implementing SMCR at Pershing, we quickly identified that a significant change project would be required. Firms should start their SEAR planning early to allow plenty of time to account for unexpected setbacks, re-evaluate existing processes and ensure that the right people are around the table. This includes senior management, human resources, compliance and legal teams. Communication and training will be integral to build awareness and trust from employees subject to the regime. Firms may also need to involve information technology teams, as there could be a need for system changes. Dedicated resources will be required, with a strong internal communications stream to educate employees, as SEAR will directly impact areas such as governance, policies, procedures, recruitment practices and training.

Although the timeframe for implementation is yet to be announced, firms should create statements of responsibilities and responsibility maps at an early stage to help them allocate the prescribed responsibilities with supplementary training. This step will be helpful in the overall implementation process. Statements of responsibilities and responsibility maps should set out senior executive functions’ roles and areas of responsibility and document key management and governance arrangements. Clear processes for replacing senior executives should also be established.

Based on the experiences of firms in other jurisdictions that have been through the process of embedding individual accountability, the overarching responsibility is to fully understand how the firm’s culture aligns with what SEAR is trying to achieve: greater accountability for individual decision-making and a positive cultural change to drive higher quality outcomes.

Michelle McNamara is Vice President of Compliance at BNY Mellon | Pershing.

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