Since the publication of the Central Bank (Individual Accountability Framework) Bill 2021, many practical and culture changes have needed to be considered. The CBI has now provided welcome clarification on what needs to be done next. Darragh Murphy and Donal Hamilton explain.
The Central Bank of Ireland (CBI) recently provided clarifications on key aspects of the Central Bank (Individual Accountability Framework) Bill 2021 (IAF).
The purpose of the bill is to empower the CBI with extensive regulation-making powers—particularly regarding the Senior Executive Accountability Regime (SEAR)—conduct standards and fitness and probity certifications.
Fitness and probity certification
The CBI’s Director General of Financial Conduct, Derville Rowland, highlighted the new IAF requirement for regulated firms to certify on an annual basis that individuals exercising a controlled function remain fit and proper.
The introduction of a positive duty on firms to certify each controlled function will strengthen the focus on the responsibility of firms for the conduct of their staff and their corporate culture.
Substance and form
Gerry Cross, CBI Director of Financial Regulation – Policy Risk, emphasised the dynamic that exists between substance and form in the IAF and the risk of ‘juniorisation’—i.e. “where a formal title is applied to a less senior executive while the more senior person seeks to stay out of the regulatory picture.”
Cross confirmed that the IAF is focused on the substance of roles rather than titles. In the case of ‘juniorisation,’ he stated that the more senior executive would be identified as the person carrying out the role and, therefore, as the person deemed to hold the relevant responsibilities under the IAF.
Outsourcing and SEAR
Outsourcing continues to be a key focus of analysis and implementation for the CBI, particularly with regard to its recent publication of the Cross-Industry Guidance on Outsourcing (December 2021).
Cross has confirmed that the CBI expects that, where outsourcing arrangements are in place at a firm subject to SEAR, a senior executive function will be responsible for it.
The outsourced role-holder will also fall under the oversight of a preapproval, controlled functions role-holder within that firm. In-scope firms will need to reflect this in the relevant statement of responsibilities and responsibility maps.
Culture of regulated financial services firms and professional advisors
It is not sufficient for regulated financial services firms to focus solely on their own organisation to achieve cultural change, the CBI has stated. They will also need to look at the broader landscape, which must include professional industry bodies.
All participants in the financial services industry, including key legal and accountancy advisors, must play their part in the cultural transformation. This will require the conscientious professional to advise firms to comply, not only with the letter of the rules, but also with the spirit.
What practical steps should firms take now?
The CBI has strongly encouraged firms to take the following practical steps now:
- Understand and assess their obligations under the IAF
Regulated firms need to understand their obligations under the IAF and assess their current governance structures to identify ownership of responsibilities and implement any necessary changes to their existing business model.
- Review fitness and probity processes
Regulated firms should review their fitness and probity processes to assess any enhancements required to meet the annual certification requirements. Regulated firms should also consider what training and monitoring will be required to embed the proposed conduct standards as expected standards of behaviour.
- Examine internal culture and values
Regulated firms should examine their internal culture and values as against the IAF principles more broadly. The CBI encourages regulated firms to assess how IAF principles could be reflected meaningfully in practice.
- Engagement
Consideration should be given to effective ways of engaging with staff, customers, and other stakeholders to spread awareness of and embed standards and positive behaviours.
- Education and training
The CBI has stated that education and training, together with consistent internal and external messaging, will play an important part in embedding standards and positive behaviours.
Darragh Murphy and Donal Hamilton are Partners at McCann FitzGerald LLP.