The Central Bank of Ireland (CBI) announced on 18 June 2020, that former chief financial officer (CFO) and executive director of RSA Ireland Insurance DAC (RSA Ireland), Mr. Rory O’Connor has been disqualified from involvement in the management of a regulated financial services provider (RFSP) for the next 8 years and 4 months and has been fined €70,000 under the CBI’s administrative sanctions procedure (ASP).

Mr. O’Connor’s reprimand follows a separate investigation in 2018 by the CBI into RSA Ireland’s “deliberate and wrongful under-reserving of large loss claim reserve estimates” which resulted in incorrect information being used to calculate its technical reserves.  As a result of the under-reserving, there was a material shortfall between the claim estimates recorded on RSA’s claims database and the recommended estimates from RSA’s claims handlers. Consequently, a significant capital injection from RSA Insurance Group PLC was required.

In the 2018 investigation, the CBI concluded that Mr. O’Connor engaged in undocumented meetings during which the reserve estimates were “deliberately and wrongfully under-reserved”. The false declaration of reserves is a breach of Article 13(1)(a) of the EC (Non-Life Insurance) Framework Regulations 1994, the applicable regulations at the time the contraventions took place. In addition, the concealment of the under-reserving from the CBI was an aggravating factor.

The CBI noted, in its press release about the action against Mr. O’Connor, that it

“takes enforcement action against senior individuals in regulated financial services firms in order to hold them accountable where they have participated in serious or significant breaches of regulatory requirements”

The CBI consistently messages its intention in this respect. Although this is the 136th settlement reached by the CBI since 2006, only a small number of those were entered into with senior individuals; the rest were entered into with the relevant RFSPs.

The low number of enforcement actions against individuals to date is explained by the requirement for the CBI to overcome the ‘participation hurdle’ under the current ASP.  This requires the CBI to establish firstly that there has been wrongdoing on the part of the RFSP and secondly, that the senior individual participated in the alleged wrongdoing.  This can often be difficult and time consuming for the CBI. In this case, the CBI had already reached a settlement with RSA Ireland in December 2018 (which resulted in a fine of €3.5m), and Mr. O’Connor admitted to his participation in the contravention.

Senior Executive Accountability Regime

We anticipate that the new senior executive accountability regime (SEAR) will make it easier for the CBI to hold senior individuals accountable because the concept of the ‘participation hurdle’ will be simplified under SEAR. The proposal under SEAR is to allow the CBI to bring enforcement actions against executives based on their own individual actions rather than, as is currently the case, having to link their misconduct to a breach by the RSFP to which they are connected.

RFSPs should also be aware that more onerous requirements will be placed on them under SEAR. The proposed introduction of ‘responsibility maps’ and more frequent verification of compliance with fitness and probity standards are just some of the many changes for RFSPs being introduced by SEAR. In our earlier briefing we break down the key features of SEAR in full.

This enforcement action is a timely reminder for senior individuals in RFSPs of the severe penalties that apply, not only to RFSPs, but also to senior executives of a RFSP who fail to comply with the fit and proper standards required by the CBI, as well as the profound impact of a negative determination on both their reputation and their ability to work in the financial services industry.  Furthermore, with SEAR on the horizon, senior executives in RFSPs should take the time to ensure that they have processes in place to effectively manage their obligations under this new regime.

For advice on SEAR or the current fitness and probity regime, please contact your usual William Fry contact or a member of our Financial Regulation Unit.

Contributed by James Grogan