Sponsored briefing: What you need to know: Ireland’s Individual Accountability Framework (IAF)

Introduction

The Central Bank (Individual Accountability Framework) Act 2023 (the Act) was signed into law on 9 March 2023 and provides for the introduction of Ireland’s IAF, which represents a significant development in Ireland’s regulatory landscape. The Act’s origins can be traced back to the Central Bank’s 2017 recommendation for enhancing senior individuals’ accountability within regulated financial service providers (RFSPs). It aligns with international efforts to mitigate misconduct risks and addresses cultural failings identified in RFSPs during the 2008 financial crisis.

This comprehensive piece of legislation introduces a framework designed to enhance risk management within RFSPs while prioritising consumer protection. The IAF has four main pillars:

1. Senior Executive Accountability Regime (SEAR):

One of the IAF’s primary pillars is the establishment of the SEAR. Initially, SEAR will apply to specific sectors only, including credit institutions, insurance undertakings, certain investment firms and incoming third-country branches. However, the Central Bank intends to broaden its scope in the future. SEAR redefines the responsibilities of senior individuals within these organisations, aiming to strengthen the Central Bank’s authority to hold individuals accountable for regulatory breaches in their respective areas of responsibility.

2. Enhancements to the Fitness and Probity Regime (F&P Regime):

The IAF introduces enhancements to the existing F&P Regime. Under the new provisions, RFSPs will be required to certify that individuals performing controlled functions (CFs) (to include pre-approval-controlled functions (PCFs)) comply with the F&P standards. Furthermore, RFSPs will not be permitted to allow an individual to perform a CF role without a valid certificate of compliance with F&P standards. This certification process must occur before appointment (or in the case of a PCF, prior to submitting an individual questionnaire to the Central Bank), on an annual basis, and prior to the appointment of an individual to a CF role.

3. New Conduct Standards:

The Act introduces a set of new conduct rules that apply to CFs and PCFs, namely the Common Conduct Standards and Additional Conduct Standards. They serve as a framework for establishing general conduct guidelines that can be directly enforced by the Central Bank. The concept of ‘reasonable steps’ is central to these standards, requiring in-scope individuals to take reasonable steps to achieve compliance. RFSPs will be required to providing initial and ongoing training to CFs to ensure their understanding and adherence to these standards.

4. Enhanced Central Bank enforcement powers:

The Act introduces important changes to enhance the Central Bank’s enforcement toolkit. It removes the so-called ‘participation link’ requirement, enabling the Central Bank to pursue individuals independently for failure to prevent breaches of financial services legislation. While the overall structure of the enforcement process remains the same, certain procedural amendments have been made to incorporate additional safeguards to and to facilitate the expanded population of individuals coming within the scope of the Central Bank’s enforcement remit.

Timeline and application

The IAF will come into force on a phased basis. SEAR will apply to certain sectors only in its initial phase. Enhancements to the F&P Regime and the introduction of the Conduct Standards are expected to take effect by January 2024 (subject to confirmation by the Central Bank).

Conclusion

The IAF represents a significant regulatory milestone in the Irish financial services regime. It redefines the roles and responsibilities of senior individuals within RFSPs, aiming to enhance risk management, consumer protection and overall accountability. RFSPs must prepare for these changes, ensuring compliance with the new framework. The IAF’s phased implementation allows for a smooth transition while promoting a culture of responsibility and accountability within Ireland’s financial services sector.