Breaking Bad; the Central Bank's Expectations of Senior Executive Accountability

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Breaking Bad; the Central Bank's Expectations of Senior Executive Accountability

September 25, 2020

Gráinne Varian, Catherine Carrigy and Lisa Shannonshare some insights in the area of Fitness & Probity to better understand the Central Bank’s current expectations for culture, behaviour and individual accountability within the Financial Services (FS) industry in Ireland.

Ireland’s Fitness & Probity (F&P) regime is in place since 2011, however, the last 2 years has seen an increasing focus by the Central Bank of Ireland (Central Bank) on the FS industry’s compliance with the regime coinciding with a significant increase in pre-approval-controlled functions (PCF) applications for senior executives in FS firms in the wake of Brexit.

The Central Bank has been very vocal in its role as “gatekeeper” for actors in the FS industry in Ireland. In April 2019, the Central Bank wrote to FS industry CEOs identifying F&P compliance deficiencies by FS firms and emphasising the need for a heightened level of compliance and engagement in relation to ongoing F&P obligations. Other indicators of this increased F&P focus include:

the imminent introduction of a number of new PCF roles; and
evidence that the PCF application process has become more rigorous, with an increase in the number of candidates required to attend one or more Central Bank interviews;

Perhaps the most significant indication of this focus, however, is the Central Bank’s pursuit of enforcement actions and prohibition notices against PCF holders. Since the April 2019 Dear CEO letter, there have been three very significant decisions against individuals; 2 Prohibition Notices and one Enforcement Action, the outcome of each of which, turned on its own facts.

In September 2019, a Prohibition Notice was served on an individual prohibiting him from carrying out a CF (including PCF) role for two years. In his Central Bank application, this individual confirmed that he had left his previous role as a result of an unfair dismissal claim. The Central Bank raised further queries on this issue which were answered, and the applicant was authorised. However, at a later point the Central Bank became aware of a determination by the Employment Appeals Tribunal (EAT) of gross misconduct. In issuing the Prohibition Notice, the Central Bank referenced the provision of “false and misleading” information that “demonstrate failure to act honestly, ethically and with integrity”, in breach of the F&P Standards.

In July 2020, a Prohibition Notice issued to an Executive Director in a mortgage intermediary prohibiting the individual from performing any controlled function in a regulated firm for ten years. The Central Bank referred to the provision of mis-leading answers during the course of the Central Bank application for a PCF position and failure to co-operate with the Central Bank’s investigation.

Prior to that, in June 2020, an Executive Director and CFO of an insurance company was disqualified from working in a regulated financial firm for more than eight years over his role in, what the Central Bank found to be, deliberate and wrongful under reserving. The individual was found to have knowingly and actively participated in the failure and provided “misleading financial information” to the Central Bank.

The deterrent nature of the prohibitions under these notices demonstrates a clear intention on the part of the Central Bank to hold individuals in controlled functions to account and the serious consequences for the provision of false and/or misleading information by PCF applicants.

Right across the financial services landscape, we are seeing the increased Central Bank focus on F&P, and the insurance sector is certainly no different. The Central Bank recently published the findings of its thematic inspection on the approach to diversity and inclusion amongst Irish insurers. One of its key findings was that diversity, in all its forms, was not being sufficiently considered in the appointment of senior executives. We are seeing inclusion and diversity considerations feature more and more prominently in the PCF application process.

The seeming lack of progress on diversity and inclusion in the insurance sector is seen as a leading indicator of cultural issues within a firm. This forms part of the regulator’s wider strategic focus on culture and behaviour within FS firms. The importance of individual accountability by senior executives is seen as critical to developing a positive and customer-focused culture within an organisation. The incoming Senior Executive Accountability Regime (SEAR) is expected to facilitate a significant cultural shift in terms of emphasis on individual behaviours.

The SEAR regime will form part of the proposed Central Bank ‘Individual Accountability Framework’. Designed to ensure clearer accountability, the proposed regime will present both challenges and opportunities for FS firms. Firms and senior managers will be required to set out clearly where responsibility and decision-making lies by way of “responsibility-maps”. In terms of enhancements to the current F&P regime, it is proposed that firms will proactively certify, on an annual basis, that all in-scope employees are fit and proper to perform their functions.

The trend for senior executive accountability proposals across the globe in recent years is to establish a common framework for cultural change and greater individual accountability. Also common across other jurisdictions with such a regime, is the introduction of an enhanced enforcement process for conduct that is not in line with expectations. In its proposals for the Individual Accountability Framework, the Central Bank has recommended that the hurdle of participation be removed so that it can pursue individuals directly, rather than only where they are proven to have participated in a firm’s wrongdoing, as is currently the case.

We are expecting the draft legislation underpinning these changes to be published in the coming months, though we understand there is some delay given other legislative priorities right now. We can hopefully learn some lessons from the UK’s experience of its Senior Managers Regime and the key message from the UK is not to delay preparations for this. This is a project that will require sizable resourcing and input from all aspects of the business, not simply HR and Compliance.

William Fry has produced a number of Briefing documents on the incoming SEAR regime; Prohibition Notices and the Central Bank’s recent Sanctions Guidance, all of which are linked below.

If you wish to discuss this topic further, please feel free to contact Lisa, Gráinne or Catherine or reach out to your usual William Fry contact in the normal way.