The Central Bank is now seeking industry feedback on the recently published administrative sanctions procedure (ASP) Consultation Paper and Guidance. This is the second and likely final instalment of the Central Bank’s implementation proposals for IAF/SEAR. Once again, it is critical that Ireland’s financial services sector takes this opportunity to influence the impending changes. Our Financial Regulation team give their views on the proposals.
The Central Bank of Ireland has published its consultation paper on proposed changes to its Administrative Sanctions Procedure arising out of the implementation of the Individual Accountability Framework (IAF) and the Senior Executive Accountability Regime (SEAR). As part of the ASP Consultation Paper, the Central Bank has prepared draft composite guidelines to consolidate existing guidance (ASP Guidelines).
This follows the signing into law of the Central Bank (Individual Accountability Framework) Act 2023 (IAF Act) on 9 March 2023, and the completion of the Central Bank’s recent consultation on the IAF which concluded on 13 June 2023. The Central Bank gave stakeholders until 14 September 2023 to provide feedback on the ASP Consultation Paper. Read our recently published analysis of the Central Bank’s first IAF/SEAR Consultation Paper here.
The importance of engagement
As anticipated, the IAF Act introduced several changes to the ASP under Part IIIC of the Central Bank Act 1942. In publishing the ASP Consultation Paper and the draft ASP Guidelines, the Central Bank has stressed that it wishes to provide clarity on the proposed amendments, whilst also inviting feedback from across the financial services sector. The Central Bank has sought to frame this feedback via 26 questions, which address multiple aspects of the ASP, including:
- Investigations
- Inquiries
- Settlements
- Sanctions, and
- High Court approvals
As with the IAF/SEAR Consultation, it is critical that the industry takes this opportunity to put forward its views on the Central Bank’s proposals. Stakeholders will need to comment on whether the proposals are realistic in the real-world business context, as well as how they will be implemented and evidenced in practice. This will be of particular importance for the enforcement process. This is because anyone in a pre-approval-controlled function or controlled function role (PCF/CF) that is unable to demonstrate that s/he took reasonable steps to discharge relevant duties and responsibilities will be subject to individual enforcement and potential direct sanction by the Central Bank under the new regime.
Law of attraction
Since the introduction of an individual accountability regime in Ireland was first mooted, there have been fears amongst industry that introducing onerous personal exposures for senior staff is not likely to enhance Ireland’s attractiveness against competitor domiciles like Luxembourg, the Netherlands or Belgium.
The Central Bank argues that exposure to personal liability should not dissuade the honest and competent. Evidence from the other jurisdictions with similar regimes would suggest that although there may not be a mass exodus of personnel, the increased personal risks to which managers are exposed may, over time, drive up managerial pay rates, which would not help Ireland’s long-term competitiveness.
UK approach to enforcement
Many of the industry fears which are currently being voiced in Ireland reflect those previously heard in the UK. It was anticipated that the implementation of the Senior Managers Certification Regime (SMCR) would have a detrimental impact on the UK financial services industry. This was due to two factors: an uptick in enforcement decisions against individuals, and a reluctance from individuals in taking up senior roles.
Since the implementation of the SMCR, UK regulators were keen to stress that it should not be seen merely as a strengthening of their enforcement powers. The FCA’s Executive Director of Enforcement and Market Oversight, Mark Steward, said at the FCA’s 2020 Annual Public Meeting:
“When the Senior Managers Regime was first mooted, it was seen very much as a big enforcement stick … In practice, though, I think it’s been quite different, in that it has led to firms really remediating their internal systems and controls to ensure that senior managers have much greater line of sight and much greater traction over what is happening in their business. To the extent that it’s had the effect that you’d want a new regime to have, it’s actually improved the quality of management oversight in most firms.”
Recent commentary has sought to highlight the seemingly low numbers of enforcement actions and subsequent fines which have been levied against individuals under the SMCR. However, an analysis of the underlying figures serves to query how much comfort the Irish financial services industry can actually take from this. The FCA’s 2022/2023 annual report, published in July 2023, highlights that the FCA has 591 open enforcement actions, relating to 228 separate investigations. Of the open enforcement actions, there are 385 open actions against individuals and 206 open against firms. These figures point to substantially increased (and increasing) enforcement risk for individuals in the UK industry. One only has to consider the recent £632,000 fine imposed on a UK MLRO by the FCA under the SMCR to see that the UK’s individual accountability regime has some fairly serious teeth.
Conclusion
In regulated firms across Ireland, IAF/SEAR implementation plans are in full swing, readying firms and individuals for the upcoming December 2023 compliance deadline. Despite these efforts, there will inevitably be instances when enforcement action by the Central Bank is required. It is at this stage that the reality of the new regime will set in.
Those to whom the IAF/SEAR will apply can only hope that the regulator enforces it in a moderate and proportionate way. Post-tracker mortgages, the public may have limited sympathy for senior bankers. Despite this, the Central Bank needs to exercise its enhanced enforcement powers without losing sight of the wider economic consequences of its regulatory actions.
In light of this, it is imperative that stakeholders across the sector engage in the consultation process and provide feedback to the Central Bank on the proposed amendments to the ASP.
Your comments on this article would be greatly welcomed and we encourage readers to contact the authors directly.
For more information and expert advice on navigating the new regime and its likely impact on your organisation, please contact a member of our Financial Regulation team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
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