The four key components of the new Regime have been extensively trailed:
- The Senior Executive Accountability Regime (SEAR), comprising:
- Statements of Responsibilities
- Responsibility Maps
- Inherent Responsibilities applied to specific roles
- Mandatory Prescribed Responsibilities
- Conduct standards comprising:
- Common Conduct Standards for persons performing Controlled Functions (CF and PCF)
- Additional Conduct Standards for persons in senior roles (PCFs and 'other persons who exercise significant influence on the conduct of a regulated financial service provider's (RFSPs) affairs') The additional Conduct Standards will apply regardless of whether the firm is in scope of SEAR and importantly for firms who are part of a wider group, these obligations bind individuals who are not employed by the regulated entity but: 'have the ability to exercise significant influence' over it
- Standards for Business comprising common standards for all regulated firms
- Changes to the Fitness and Probity Regime:
Obligation on firms to certify CFs are fit and proper on annual basis
- Enforcement, investigations and sanctions;
Duty of Responsibility imposed on senior individuals, enabling direct enforceability for prescribed contraventions
The Heads of Bill however provides some shading to those broad outlines that should be noted.
Senior Executive Accountability Regime
The Department of Finance's impact analysis explains SEAR will focus on sectors with 'greater customer focus' - essentially credit institutions (excluding Credit Unions), insurers (excluding reinsurance, captive (re)insurance and Insurance Special Purpose Vehicles), investment firms which underwrite on a firm commitment basis and/or deal on own account and/or are authorised to hold client monies/assets; and third country branches of the same. However this does not mean the Individual Accountability Framework is solely a 'retail conduct' matter. Other sectors can be brought into scope of SEAR in the future. It should also be noted the Deputy Governor for Prudential Regulation has the power to initiate an investigation into a CF's fitness and probity, a reminder the framework has Prudential as well as Conduct elements.
Whilst the UK's SMCR regime is clearly a significant influence on the CBI's proposals, there are some important differences:
- As noted in the introduction, the Additional Conduct Standards will capture senior individuals even if their firm is not subject to SEAR
- The conduct standards (Common and Additional) will only apply to CFs/PCFs. This is a departure from the original CBI proposals which covered all employees in financial services. Instead, Regulated Firms will be required to meet six Standards for Business. These replicate a number of the UK's FCA's Principles, breaches of which have been used to initiate enforcement action
Firms will need to review governance and control arrangements to ensure compliance with these Standards for Business.
It is also noteworthy that the Additional Conduct Standards require those who are captured by it to: 'participate effectively in collaborative decision-making'. This is included as a reminder that any individual accountability responsibilities complement rather than compete with collective responsibilities and that discussion, constructive challenge and collective decision-making remain essential components of an effective governance framework.
Fitness and probity
The nexus of the individual accountability framework is to ensure firms take responsibility for assessing controlled functions on an ongoing basis, by certifying in scope individuals are in compliance with F&P requirements. The two 'Dear CEO' letters issued by the CBI in 2019 and 2020 are a clear indication that the regulator's expectations are not being met around existing F&P obligations. Going forward, firms will also need to consider the additional steps they will take to ensure there is proactive communication to CFs of their obligations, training programmes for CFs, ongoing compliance monitoring and reporting.
Financial Holding Companies established in Ireland should also note that the F&P regime will be extended to directors and staff as well.
Administrative Sanctions Procedure (ASP)
Amendments to the ASP are designed to break the 'participation link' by imposing a 'Duty of Responsibility' on Senior Executive Functions (SEFs- which map to existing PCF roles). These individuals will be required to demonstrate they took 'Reasonable Steps' to avoid their firm contravening legal and regulatory requirements in the areas of the firm's business for which they are individually responsible.
The new Regime is therefore less of a "tick box" Compliance or HR exercise and more a mindset and behavioural shift to embed individual accountability and effective culture in the firm. Devising processes for assessing and demonstrating 'Reasonable Steps', by clarifying individual responsibilities and evidencing how key decisions are made, will be a critical element of a firm's preparations for the new regime. This will require senior management buy in and commitment to communicating and modelling expected behaviours.
The key actions to take now
The Minister for Finance has stated he hopes the IAF will be implemented in the next 12-18 months.
While the precise requirements of the regime won't be finalised until after the CBI's consultation with the industry, there are a number of key actions in-scope firms should take now, to ensure they avoid implementation mistakes by starting too late.
- Understand the Regime:
- Review current proposals and drive education and awareness of the Regime
- Consider any lessons learned from other jurisdictions e.g., UK SMCR
- Review current practices:
- Determine whether existing governance frameworks (Board and Exec.) are fit for purpose
- Collate key activities of the business and identify who is responsible for them. Determine any gaps or overlaps and if there are any responsibilities held at Group level
- Review current people processes to assess enhancements required to meet F&P requirements
- Identify how collective decision-making is supported
- Stand up the Project:
- Identify senior stakeholders to oversee the project
- Socialise regulatory expectations across the organisation and consider what training and communications requirements will be required to embed expected behaviours and desired culture
- Consider what processes need to be changed or developed to:
- Evidence Reasonable Steps by SEFs and
- Embed the conduct standards in the firm
We have extensive experience and expertise advising clients on compliance with fitness and probity and corporate governance matters as well as in-depth experience supporting clients in both the UK and Australia with the implementation of similar individual accountability regimes.