There are concerns in the financial services sector that new laws which holds senior executives accountable for the decisions made in their firms, could be a barrier to investment in Ireland.
A powerful enforcement tool for the Central Bank, the Individual Accountability Framework Act 2023 will see the scope for personal exposure and senior executive liability within Irish regulated financial firms expand.
Financial Services Ireland, the Ibec group that represents the financial services sector, wants to ensure the new regulations will be deployed dissuasively and where necessary, against willful acts of wrongdoing.
"It must not operate to dissuade people from choosing financial services as a career or investing and doing business in Ireland," said FSI Director Patricia Callan.
What is the Individual Accountability Framework Act 2023?
The legislation places obligations on firms and senior individuals within them to clearly set out where decision-making and responsibility lies.
Once implemented, it will give clarity to regulators on the ownership of any improper or irregular conduct in financial services organisations, with specific focus on the involvement of senior managers.
It also includes enhancements to the existing fitness and probity regime to ensure it operates more effectively.
Deputy Governor Derville Rowland said the new framework will underpin sound governance across the financial sector.
"It will achieve this by setting out clearly the good practices expected of firms and role-holders and their accountability," she said.
"The framework provides clarity as to standards that must be met by firms and individuals. These are the right standards to underpin the provision of financial services."
"As regulators, our approach to implementation of the framework will be founded on the principles of proportionality, predictability and reasonable expectations, underpinned by effective enforcement."
Why does the Central Bank want an accountability regime?
"It is not only what we do, but also what we do not do, for which we are accountable." - Moliere
Nobody who remembers the financial crisis following the reckless lending during the so-called Celtic Tiger-era, or the subsequent tracker mortgage scandal, needs an answer to that question.
In her role as director general of financial conduct at the Central Bank, Ms Rowland said accountability was needed due to a "very long list of global (financial service) misconduct scandals" that had eroded trusts in banks.
The regulator has been seeking additional powers for some time to give it the ability to hold senior executives in regulated firms to account for their actions and for the actions of their staff.
Despite handing down fines totalling hundreds of millions of euro over the affair, no individual in any bank has yet faced sanctions from the Central Bank for their involvement in the tracker mortgage scandal.
What are the concerns of firms in the sector?
Business law firm Mason Hayes & Curran conducted a survey late last year which found 57% of Ireland's financial services sector is worried about personal exposure to liability, while 65% of respondents said they feared future talent shortages for the industry as a result of the new regime.
A separate survey on the matter, this time by the Compliance Institute and Mazars, found 89% think the requirement will bring about meaningful positive change in culture and behaviour in the financial services industry.
However, the survey of senior compliance officers warned the rules would make it difficult for companies to recruit senior executives.
The responses beg the question; why would it be difficult to recruit to a sector that has undergone 'meaningful positive change'?
Speaking at its annual conference, President of the Compliance Institute, Diarmuid Whyte, cautioned that the new rules needed to be both workable and proportionate.
"There is a clear need to hold directors and officials to a higher standard and ensure customer outcome focus is key. It is also a necessity that we do not lose high-calibre individuals for fear of the personal liability associated with a senior executive position" Mr Whyte said.
"This would not only be a detriment to the financial services sector, but also those customers who we all strive to protect."
Commenting on the potential impact on foreign direct investment, Liam Flynn, Partner & Co-Head of the Financial Regulation Team at Mason Hayes & Curran, said the practical application of financial regulation is a key factor in firms' decisions regarding inward investment.
"One issue that's certainly going to be front of mind for foreign firms who are considering Ireland as a location for setting up or expanding is going to be the potential exposure of their senior executives to personal fines and personal sanctions as a result of issues within the firm."
Will new regulations add to the workload of financial firms?
Inevitably, yes, the regulations will require resources to ensure a firm's compliance.
Sarah Cloonan, Financial Services partner at Mason Hayes & Curran, said: "Firms’ resources will be focused on the initial papering exercise, getting policies and procedures in place and adapting governance frameworks for day-one compliance."
She said, while this is important, firms mustn’t forget that it isn't going to be a once-off "tick box" exercise. "There will need to be ongoing commitment of resources, for example to new processes for monitoring responsibility maps and making sure that they're still fit for purpose. Firms need to find a way to leverage all these new processes to extract added business value."
How do similar regulations work elsewhere?
In moving to a regime of individual accountability, Ireland is following the example established in the UK which introduced the Senior Managers and Certification Regime in 2016.
Like the Individual Accountability Framework, the SM&CR seeks to promote safety and soundness, reduce harm to consumers and strengthen market functioning by requiring that financial services professionals are individually accountable to their employers and to the regulators.
The UK government is in the process of reforming the SM&CR this year, as part of a wider plan to streamline financial services regulation in the UK and to promote investment and growth.
The Central Bank's Derville Rowland told an audience of financial professionals that, "Internationally it is recognised that a lack of individual accountability is a key cultural driver of misconduct, prompting the Financial Stability Board (based in Switzerland) to recommend that national authorities hold individuals accountable."
Chris Finney, partner with Fox Williams Financial Services regulatory practice based in London, said that in the UK fears of future talent shortages proved to be unfounded.
"It's not had the devastating impact on recruitment and retention that the markets feared it would have", he said.
"I do really believe that talent growing through an organisation gets used to whatever the new regime is…it's all about trying to use it to bring some added value to the organisation."
When will the new regulations be implemented?
The Individual Accountability Framework Act was signed into law by President Michael D Higgins in March.
The Central Bank then launched a three-month consultation around how it should implement aspects of the new laws.
As part of the consultation process, the regulator published draft regulations and guidance which set out the bank's expectations around implementation of the new rules.
Among those that the bank is seeking the views of are the public, regulated firms, staff, representative bodies, consultancies and service providers.
The Central Bank is planning to implement the new conduct standards and accountability rules for senior executives in the financial services sector from the end of the year.
Parts of the new rules governing fitness and probity will also have to be implemented from December 31 onwards.
But regulations laying out the responsibilities of different roles as well as the requirements on businesses to clearly set out allocation of those responsibilities and decision making will not come into effect until July 1 of next year.
"The enhancements to our Fitness and Probity investigation, suspension and prohibition processes will be the subject of separate regulations and guidance which will be published once the underlying legal provisions have been brought into effect," the bank said.
"As part of our phased plan, we will launch a second consultation on these changes later this year."
Details of the consultation process can be found at www.centralbank.ie/IAF.
