Senior Executive Accountability Regime – Is your Organisation HR ready?

Financial services employers will be aware that legislation is currently being drafted for the introduction of a Senior Executive Accountability Regime (“SEAR”).

The General Scheme of the Central Bank (Amendment) Bill is expected to be published in the near future, following which the Central Bank will engage in a public consultation on the new regime.

SEAR is part of a new framework (the "Individual Accountability Framework") designed to ensure clearer accountability by placing obligations on financial service firms and individuals within them to set out clearly where responsibility and decision making lies for their business.

While introduction of the regime will take some time, having been described as a ‘multi-year project’, it is likely to require significant changes to organisational structures and HR practices within financial services providers. It is important, therefore, that financial services employers begin to consider what compliance will involve so that they can both make meaningful representations through the public consultation process and to begin preparations to ensure and simplify compliance before the regime comes into force.  

What will the regime look like?

Individual accountability already exists under current rules. Financial services firms and their executives will be aware that the Central Bank has the power to sanction individuals concerned in the management of regulated entities, including with monetary penalties of up to €1m. Further, through its fitness and probity rules, the Central Bank also has the power to suspend individuals or prohibit them from working in regulated financial services.

However, in its report on the “Behaviour and Culture of the Irish Retail Banks”, the Central Bank expressed the view that a more holistic approach to individual accountability is necessary to promote cultural change. Its proposals for the new Individual Accountability Framework, aim to ‘go significantly beyond the current requirements for staff to be fit and proper, set Conduct Standards for staff, and ensure clearer lines of accountability within firms.’

The proposed regime includes the following elements:

  1. A Senior Executive Accountability Regime for individuals occupying prescribed Senior Executive Functions (SEFs).  The Central Bank has proposed that, in the
    first instance, this will apply to credit institutions, insurance undertakings and certain investment firms and stated that it is likely to cover board members, executives reporting directly to the board, and heads of critical business areas;
  2. Conduct Standards which will operate at three levels comprising of Common Conduct Standards for all staff, Additional Conduct Standards for senior management and Standards for Business applicable to all firms across the regulated financial services sector;
  3. A Certification Regime which will include the enhancement of the existing Fitness and Probity Regime. This Certification Regime will require firms to certify on an annual basis that individuals subject to the Fitness and Probity Regime (which may be a wider pool of individuals than SEFs) are fit and proper persons to perform their functions. Currently in order to be fit and proper, an individual must be (i) competent and capable (ii) honest, ethical and of integrity and (iii) financially sound; and
  4. Increased powers of enforcement which would allow the Central Bank to pursue individuals directly for their own misconduct (for example breach of applicable Conduct Standards), rather than having to link the misconduct to a regulatory breach by their firm. This will be a significant departure from current practice, and will make enforcement proceedings against individuals more likely. 

The Individual Accountability Framework proposals are broadly similar to the UK’s Senior Managers and Certification Regime (known as the SMCR). The SMCR was introduced in March 2016 for banks, building societies, credit unions and insurers, and is continuing its phased roll out, with all Financial Conduct Authority regulated firms coming within scope of the regime later this year. While levels of enforcement action under the SMCR have to date been relatively low, with only one successful FCA enforcement action out of ten completed investigations, the FCA has indicated its intention to increase its supervisory focus on conduct rules, meaning that more investigations, and more enforcement action, is inevitable. The Central Bank has also recently stated that it intends to intensify its focus on conduct regulation over the next three years.

What should financial services employers consider at this stage?

The introduction of an Individual Accountability Framework is likely to affect many aspects of the employment relationship but as the Central Bank has indicated its intention to carry out a consultation process later this year, there is an opportunity for financial services employers to identify and flag any practical issues that will arise so they can be addressed before the regime comes into force.

In particular, financial services employers should consider:

Responsibility Maps and Statements of Responsibilities: The preparation of Responsibility Maps and Statements of Responsibilities will be necessary in order to demonstrate compliance with the new regime. This will require a wholesale review of individual roles within the organisation as well as the responsibilities of the Board and its committees and will therefore necessitate the involvement of key stakeholders from all relevant departments including the Board itself.
Performance Reviews: The Certification Regime will require organisations to certify the fitness and propriety of senior executives and individuals occupying controlled functions on at least an annual basis. This may require a re-assessment of reporting and record keeping in this area as well as appropriate training for the individuals responsible for the management of the review process. It will also require detailed and up to date job descriptions for each individual who is subject to the regime so that those individuals can be fairly evaluated.
Policies: Organisations may need to examine their Disciplinary and Conduct policies to ensure that they provide for appropriate mechanisms to deal with failure to comply with the standards mandated by the Individual Accountability Framework and that they adequately capture the Conduct Standards which will apply to all staff. New policies may also be required such as a handover policy and a certification policy.
Certification in the context of Investigations, Performance Management and Grievance/Disciplinary Proceedings: The operation of the Certification Regime in the UK has given rise to some questions around the procedures to be adopted, the factors to be taken into account and the consequences of a finding that an individual is not fit to perform a given function. For example, to what extent is an individual’s private life to be taken into account in assessing the honesty and integrity of that individual? If an individual has been accused of engaging in discriminatory or inappropriate conduct should this affect their certification? If so, should the decision maker involved in the original complaint or allegation of misconduct be the same decision maker for the purposes of the Certification Regime? Are performance issues now regulatory conduct issues? Can an individual who is not certified as fit and proper become fit and proper with appropriate training? If an individual is not certified as fit and proper, what are the consequences for their employment? Are they to be re-deployed or simply dismissed?

These questions are of particular importance in an Irish context given the constitutional protections of rights such as the right to fair procedures, privacy, the right to a good name and the right to earn a living. Operating the Individual Accountability Regime in a manner which observes those rights will involve a delicate balancing act and this is hopefully a matter which will be considered in detail in the course of the drafting and consultation processes.
Employment Contracts: Firms likely to be subject to the Individual Accountability Framework should review their contracts of employment to ensure they are fit for purpose. This would include, for example, verifying that the duties and job descriptions outlined in contracts with SEFs are sufficiently broad to encompass the responsibilities contained in the SEF’s Statement of Responsibilities. Contracts will need to be reviewed to ensure that the new regime is appropriately reflected.
Recruitment: Financial services employers will need to consider the import of the Individual Accountability Framework from the early stages of their recruitment process both from the point of view of job specifications and criteria (i.e. whether the role requires an individual with understanding of the regime and the necessary skills to discharge their responsibilities appropriately) and when considering the appropriate checks and necessary pre-conditions connected to the offer of employment.
D&O Insurance: Many financial services firms will have insurance in place to protect directors and officers from claims that could arise from decisions made by them in the course of their regular duties. These firms would be well advised to closely monitor the incoming individual accountability regime and consult with their insurance brokers to ensure that enforcement action against individuals is appropriately covered.

How can we help?

Our Employment, Pensions & Incentives and Financial Services Regulation Groups have significant experience in advising on the employment of senior executives and individuals in controlled functions and would be happy to assist with any queries you may have.

Alternatively, your usual contact in McCann FitzGerald would be pleased to provide further information.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.