General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021: Central Bank

Our witnesses are all very welcome to the committee meeting. I welcome members and viewers who may be watching the proceedings on Oireachtas TV to this public session meeting of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach. The purpose of today's meeting is to begin pre-legislative scrutiny of the general scheme of the Central Bank (Individual Accountability Framework) Bill 2021. We are joined from the Central Bank by Mr. Gerry Cross, director of financial regulation policy and risk, and Ms Seána Cunningham, director of enforcement and anti-money laundering. The format of the meeting is that the witnesses will make some brief opening remarks, which will be followed by a question and answer session with the members.

The usual notice about privilege applies. For the information of members who are not accustomed and visitors, we should avoid making statements that in any way impugn or malign anybody outside of the committee or mentioning them in such a way that they may be identified. That would be regarded as a breach of privilege.

I remind members attending remotely of the constitutional requirement that members must be physically present within the confines of the place in which Parliament has chosen to sit, namely Leinster House, in order to participate in public meetings.

I now invite Mr. Cross to make his opening remarks.

Mr. Gerry Cross

We welcome the opportunity to discuss the general scheme of the Central Bank (Individual Accountability Framework) Bill 2021, as published by the Minister for Finance in July. I am joined by my colleague, Ms Seána Cunningham, director of enforcement and anti-money laundering.

The Central Bank is responsible for maintaining monetary and financial stability and ensuring that the financial system works in the interests of the community. The proper and effective regulation of financial services providers is an essential component of that mission. Households and businesses reliant on financial services require a resilient and trustworthy sector in which firms and individuals adhere to a culture of fairness and high standards. Experience has shown that in order for a regulatory framework to work well, it should stimulate high-quality governance and behaviours within firms. Firms need to be effectively managed and organised, individuals need to be clear as to what they are responsible for, and both need to be accountable if they fall short of expected standards.

The Central Bank's behaviour and culture report on Irish retail banks recommended the introduction of an enhanced individual accountability framework for individuals working in regulated firms. Our recommendations are reflected in the four key components of the general scheme: first, conduct standards which set out the standards of behaviour the Central Bank expects of regulated firms and individuals working in financial services, with additional standards for senior executives; second, senior executive accountability, which requires clarity as to where responsibility and decision-making lie for different aspects of a firm's business, and accountability in discharging those responsibilities; third, enhancements to the current fitness and probity regime to strengthen the onus on firms to assess proactively individuals in controlled functions on an ongoing basis; and, fourth, an improved enforcement process to ensure we can pursue individuals for misconduct without first having to demonstrate a breach of regulation by the firm itself. These four components complement one another to incentivise positive behaviours and promote improved governance and culture within firms. They will provide a proportionate and predictable framework to help the financial sector fulfil its role of supporting the economy and serving the best interests of consumers and other users of financial services.

The Central Bank operates a framework of assertive risk-based supervision underpinned by the credible threat of enforcement. As at the end of September 2021, the Central Bank has concluded 144 enforcement actions, imposing fines amounting to more than €166.5 million under the administrative sanctions procedure. Individual accountability is already a core focus of our work. We have pursued and sanctioned individual wrongdoing by way of monetary penalty and disqualification. In our gatekeeper role we have prevented unfit individuals from being appointed to senior positions in the financial services industry. The proposed new framework will enhance the effectiveness of our processes for holding firms and individuals to account.

Turning to the key aspects of the general scheme, the proposed conduct standards will apply to all regulated firms, irrespective of sector, comprising common conduct standards for individuals carrying out controlled functions, additional conduct standards for senior executives, and the important general standards for businesses themselves. The conduct standards set out the behaviour expected of firms and their staff, including obligations to conduct themselves with honesty and integrity and to act with due skill, care and diligence and in the interests of consumers. We consider these to be the basic standards that should underpin the provision of financial services and the relationships of trust that are central in this area.

We also believe they are the standards to which most firms and individuals already hold themselves. The additional conduct standards will be applied to senior executives and will require them to meet a standard of reasonable care in how they manage their respective areas of the business.

Effective culture requires both firms and the individuals within them to adhere to high standards. The proposed framework therefore retains the existing accountability requirements for the collective actions of firms and adds effective participation in collective decision-making as a component of individual accountability. We believe this represents an important integration of these two components. The senior executive accountability element of the framework requires in-scope firms to set out clearly and comprehensively where responsibility and decision-making lie in order to ensure transparency. Firms will be required to provide statements of responsibility for each senior executive function which clearly set out his or her role and responsibilities, in addition to a management responsibilities map for the firm documenting key management and governance arrangements.

We expect that implementation of the senior executive accountability regime, SEAR, will support senior management in implementing an effective governance framework by identifying how risks are managed and any gaps which may arise. This has been the experience in the UK, whereby the senior manager and certification regime has been credited by firms as providing a sound framework for enhancing governance.

The fitness and probity framework will be enhanced by including a requirement for firms to certify, on an annual basis, that individuals exercising a controlled function remain fit and proper. This introduction of a positive duty on firms to certify each control function strengthens the focus on the responsibility of firms for the conduct of their staff and their corporate culture. The Central Bank’s primary enforcement process, the administrative sanctions procedure, ASP, will be enhanced to enable us to take enforcement action against individuals without first needing to establish wrongdoing by the firm. The general scheme provides the Central Bank with regulation-making and guidance powers. Once the proposed Bill has been enacted, we will move quickly to consult on these.

The objective of the individual accountability framework, IAF, proposals is to ensure good standards of governance and behaviour amongst financial firms to the ultimate benefit of consumers and investors while respecting the key principles of proportionality and predictability. It will help firms identify risks before they crystallise, facilitate greater internal challenge and ultimately should result in fewer serious issues in the sector. Where serious issues do arise, we will not hesitate to take enforcement action, using the enhanced toolkit of the framework to ensure individual as well as firm-level accountability.

We welcome the publication of the general scheme and will continue to work with the Department, the Oireachtas and this committee to progress this important proposed legislation. We look forward to questions from members.

I welcome the witnesses. I also welcome that we are dealing with the heads of this proposed Bill. It was mentioned the Central Bank's behaviour and culture report into Irish retail banks which called for this type of legislation was published in July 2018. We are now coming to the end of 2021 and we still do not have the legislation, only heads of the proposed Bill. What is disappointing for me is that the eventual legislation will not be implemented until January 2023, which is more than four years after the Central Bank's report. Given what this country has been through, it is unacceptable that, in the context of holding senior individuals within the financial sector accountable, four years on from the Central Bank's report, the necessary powers are still not in place. That said, we are where we are.

As already stated, I welcome the general scheme, which we need to deal with in quite some detail. We have, like the Central Bank, called for an individual accountability framework for bankers and those within financial institutions. Head 4 provides for the role and responsibilities of regulated institutions to map out the key management governance in reporting respect of arrangements, including the reporting lines of senior executive functions, SEFs. If a senior employee who comes under the scope of an SEF takes all reasonable steps to avoid the firm committing or continuing to commit a prescribed contravention and reports that action further up the chain of command and the contravention continues and he or she reports that further up the chain of command, would the framework hold those further up the reporting line responsible, such as the CEO?

We know that many former senior bankers during the financial crash waltzed off into the sunset with their savings and were not held accountable. What is proposed in the general scheme would bring former employees under the scope of the proposed legislation. Head 5 includes the criteria that must be satisfied for a person to have committed a prescribed contravention. Would the general scheme allow for a former employee, who is no longer working in the financial services sector to be investigated and sanctioned under this legislation, because, according to the heads of Bill, this action can be taken to ensure no further damage would be done in the financial services. I am talking about former senior bankers. We all know their names, which are common knowledge. They left the country and the banks bust. They behaved recklessly, but are no longer working in financial services. They have retired. Do they still fall within the scope of the proposed legislation?

Mr. Gerry Cross

I'll take the first question and Ms Cunningham will take the second. The scheme is designed to be both clear and demanding, but also flexible. The issue the Deputy identified on the reasonable steps is very important. Of course, I know the banks and others would like us to be very clear about what reasonable steps are. It is important we provide guidance and clarity and we will do that in our consultation, but it is also important for the banks, insurers and those caught by this regime to think about and put in place the appropriate steps without us leading them by the hand.

In the example the Deputy provides, it can be the case if a more junior member of staff with responsibilities does everything he or she reasonably should to address and bring an end to the issue, which includes taking it up the line. Then the view is that there was not much more he or she could reasonably do, he or she can have discharge of duty. It may be that is not case. It may be, given the circumstances, that something else could have reasonably been done. That would be a different story. If the view of the steps taken is that all reasonable measures have been taken by that employee and he or she has really tried to get that job done in the firm, the employee could have discharged his or her duty. It depends on the circumstances, but the scheme is designed to be flexible and allow people to discharge.

That is clear in the legislation and is not my question. Each of these regulated financial institutions will have to map out the structures and roles each individual has. This person would have that area of management. He or she has taken all reasonable steps and therefore absolves himself or herself from action by the Central Bank, but by reporting the issue further up the line to the CEO, if the CEO is not mapped to have those responsibilities, can this now capture them? The person at a lower level has taken the necessary steps. How will we ensure the more senior managers up the line are also mapped as having responsibility in this area, even though it is delegated to somebody below them?

How are we going to ensure that the more senior managers up the line are also mapped here, as this is an area of their responsibility, even though it is delegated to somebody below them?

Mr. Gerry Cross

I understand. When the Central Bank regulation is drafted and consulted on, in respect of the role of CEO, for example, we will ask what the inherent responsibilities are in that role and what is expected of a CEO. That will include the overall responsibility for the management of the firm and for leading that firm. The answer to the Deputy's question is that in that case, yes, the CEO can certainly be responsible, and be held responsible and accountable, because there is a fitting together of the structure of the firm and an articulated responsibility at different levels of abstraction, if I can put it like that. Yes, they can be held responsible.

Ms Seána Cunningham

On the Deputy's second question, I might talk about the administrative sanctions procedure, ASP, and the fitness and probity regime. What is changing under the general scheme in terms of the administrative sanctions procedure is the pool of people to which it is applicable. Currently, the ASP does extend to people who are formally concerned in the management of regulated entities. It has been the case that the Central Bank has sanctioned people who are formally concerned in the management of entities. The general scheme also looks at the fitness and probity regime, and talks about investigating a person who held, but no longer holds, a controlled function, and using the legislation to look at a period, pursuant to which an investigation may be commenced after a person departs a controlled function.

The explanatory note states that this is done to ensure that no further damage will be done to financial services. The key question is whether this will be applicable to somebody who no longer holds a controlled function and no longer operates in the financial services sector. Does the reach still go that far?

Ms Seána Cunningham

That is what is envisaged. There is some detail that is yet to be worked out through the legislative process. The detail on the applicable period, etc., has yet to be determined.

The explanatory note of Head 11 states:

This head provides for the amendment of section 25 of the 2010 Act to ensure that the Central Bank can investigate individuals who the Bank suspects pose a danger to consumers or the financial system, irrespective of whether they continue to perform a CF role at the time when an investigation is being commenced.

The problem is that the explanatory note states clearly that even with this new legislation, the Central Bank will have no reach in cases such as those concerning, for example, Michael Fingleton or another banker who retires and is no longer in the financial services sector, because they no longer pose a danger to consumers or the financial system. That is a concern I have in relation to what has been drafted.

Ms Seána Cunningham

It is a proposed enhancement to the fitness and probity regime, which is our protective regime, which seeks to ensure that people who, as the Deputy has said, pose a risk to consumers or financial stability do not hold key functions in financial services. What the scheme is looking at is the idea of whether there should be a timeframe, after a person has left a controlled function in financial services, during which the Central Bank, nonetheless, could commence a fitness and probity investigation.

I will run out of time, but what is envisaged in this scheme is that we can fine individuals who held those roles, so it is not just about whether they are fit to carry out a function again in the future. Many of them cut and run; they sell up the company. We have seen it with the Davy Group, and so on. We need to have reach in a situation where somebody has been caught red handed, leaves, and is no longer in that role. We must have the power to individually hold them accountable, whether it is through the imposition of a fine or taking legal sanctions against them which could end up in imprisonment or whatever. I know that we are not talking about imprisonment here; we are talking about administrative sanctions and the ability to impose fines on individuals, in particular.

Ms Seána Cunningham

I apologise to the Deputy; I do not think I was clear. Under the administrative sanctions regime, we would be able to do that. If you have left financial services, we would still have reach under the ASP.

I am satisfied with that. On defining a prescribed contravention, it is the same as set out in the Central Bank Act 1942. It includes the mistreatment of consumers under a breach of the consumer code. I presume that that will be the same and it will be in the scope of the legislation. The question is how that will be defined and how the mistreatment of consumers will be defined under the consumer protection code.

Mr. Cross mentioned breaking the participation link. This has been a big problem, as the regulated firm must be found guilty before one can take individual action. My reading of this legislation is that that will still be the case. I would like to tease that out. My understanding is that the change under the new legislation is that there will no longer be a requirement to prove participation in the original finding against the firm. My view, from reading the heads of bill, is that the firm will have to be found guilty of a contravention before the individual can be pursued. Is that the case, or have I got a wrong reading of this?

Ms Seána Cunningham

If you think about the duty of responsibility for senior executive functions, they are responsible for an area and for ensuring that the firm has not committed a prescribed contravention. We are not losing entirely the idea that a firm has committed a prescribed contravention and an individual can be sanctioned, now that we know who was responsible for oversight of that. However, looking at the conduct standards themselves, this is where we see the directly enforceable obligations on individuals that are not necessarily tied to the firm having committed a contravention. It is about having a suite of options available in order to appropriately address the problem that you find yourself dealing with. The common conduct standards and the additional conduct standards for those in senior roles are a very significant enhancement in that they are common and additional conduct standards that people must abide by that are directly imposed on them and enforceable against them. The concept of participating in firm contravention remains, and is still important. However, I think part of the challenge, and what one finds sometimes under the current framework, is that the contravention committed by the firm does not necessarily equate with the conduct of the individual. This gives us a great deal more optionality.

I understand that it is an enhancement to where we are at, but I want to get it crystal clear in my own head. Whatever about common standards, a breach of that is committing a prescribed contravention. Clearly, in this legislation, it is defined how somebody commits a prescribed contravention. Therefore, you will have to find that the regulated firm is in breach first before you can find the individual in breach, because it states very clearly: "there has at that time been (or continued to be) a prescribed contravention by the regulated financial service provider". Therefore, you will have to find a prescribed contravention by the firm before you can actually look at the individual. Is that still the case, although it is now better than it was because you do not have to prove that that individual actually had hand, act or part? Basically, ignorance is no longer a defence if that person has an area of responsibility. It still creates a problem for us in terms of the process and length of time it will take if we have to prove that the firm committed the act before we can pursue the individual.

Mr. Gerry Cross

That is not how we would see the construct here. Basically, what is being said in the scheme is that once you are a senior executive, you will be held accountable. Without anything to do with the firm, you will be held accountable for the general conduct standards and the additional conduct standards. The additional conduct standards are about how you run your area of the firm, for example, whether you run it properly, set up the proper systems and ensure that there are no breaches, etc. The important point, and the duty of responsibility to which I think the Deputy has referred, is that in addition, if an offence or breach is committed by the firm, and it is in your area, then you are also responsible for that. It is an additional thing which is built on top of a person's responsibility for what goes on in their area of the firm. The only way you can discharge that responsibility is by showing that you have taken the reasonable steps needed or expected in that case. The Deputy is absolutely right in how he has described the particular provision to which he has referred. However, it is an additional provision which states that where there has been a breach, then you are on the hook for it.

The legislation states, if an individual is not in compliance with the common conduct standards, that is a prescribed contravention under Part IIIC of the Central Bank Act. Are we right there, yes?

Mr. Gerry Cross

Yes.

My problem concerns Head 5, which reads:

A person commits a prescribed contravention for the purposes of Part IIIC of the Central Bank Act 1942 where all of the following are satisfied:

(a) the person is performing, or has at any time performed, a senior executive function in relation to a regulated financial service provider,

(b) there has at that time been (or continued to be) a prescribed contravention by the regulated financial service provider.

That last line ties the individual to the firm. I am not coming from a legal point of view but I presume there is a defence in this instance that it must be proved there was a contravention by the regulated financial service provider before it can be said that person is, therefore, responsible.

Mr. Gerry Cross

For that particular offence, yes, but there are all these other offences around breaching the common or additional conduct standards for which that does not need to be shown. Maybe there is something in the wording we need to look at.

Ms Seána Cunningham

Yes. We are not losing entirely the concept of a firm committing a breach and somebody, through his or her seniority, being part of that breach in terms of holding him or her accountable. There are directly enforceable obligations against individuals envisaged that are not dependent on establishing a contravention by a firm.

Having said that, again it will be when you are looking at a particular issue that you would look to decide how best to come at this in the context of what this tells us. Is it that a firm has failed across systems and controls in a particular area? Is it that I am then looking at this senior person or am I actually looking at a failure by a senior person to act with integrity and honesty? The more high-level common conduct standards may come into play as of themselves.

Earlier I mentioned somebody who acted in good faith, tried to stop the contravention and reported the matter up the line. Head 5, section 1(c) reads, "the senior executive function performed by the person was at that time responsible for the management or oversight of the regulated financial service provider's activities in relation to which the contravention" was happening, and that is my concern. It is crucial that more senior people are captured in terms of their responsibility in terms of management or oversight on those so that no junior people are caught out. I am not satisfied that is fully got in subsection (c) but perhaps the Central Bank regulations can deal with that.

I would like the witnesses' views on this. The tracker mortgage scandal was one of the biggest scandals. We can call it theft as €1 billion has had to be paid back into the accounts of more than 40,000 people. Family homes and buy-to-lets were taken off people, and we know the misery that has caused. Do the witnesses believe, had we had this legislation five or ten years ago, the Central Bank would have been able to hold individuals to account and fine them as a result of their actions? I ask because that is the slat tomhais or barometer we want to use when assessing whether this legislation will work in the future.

My last point is about holding people to account and, it is hoped, dissuading practices that went on in the past, but we need to find out about these practices. If it had not been for the handful of individuals taking their case to the Financial Services and Pensions Ombudsman, we may never have heard about the tracker mortgage scandal in the first place. Is it not now appropriate to introduce a proper whistleblowing regime in the financial services industry? It is too small of a club and there is too much fear in terms of moving up the ladder and so on. That has been seen in terms of what happened in America where, following a scandal there, legislation was introduced that allowed for a financial benefit for those who blew the whistle on what was happening within the sectors. Is that something the Central Bank would support? Are there other areas the Central Bank would like to see in this legislation? For example, I am conscious that payment gateways, such as Revolut and Stripe, are not included. These are new platforms that allow people, using their phones, to invest thousands of euro in cryptocurrency, yet none of that comes under the scope of this legislation.

Ms Seána Cunningham

Regarding the tracker mortgage examination and more generally, we are very happy to be here today to engage with the committee on the general scheme. We believe these are very good proposals to enhance the framework we have at the moment.

In terms of the tracker mortgage examination, it is important I make the following point. We made a commitment in the context of enforcement arising out of the tracker mortgage examination. PTSB was fined €21 million in 2019, last year KBC was fined €18 million, this year Ulster Bank was fined €37 million, and Springboard was fined €4.5 million in 2016. We were very clear in saying that, in conducting those investigations, under our current framework, we would be looking at the actions of individuals.

Our work on the tracker mortgage examination and enforcement is ongoing. We are using the framework we have currently, but we are very happy to be here today to engage in the general scheme. We think the enhancements proposed will serve to drive what it is we seek to achieve, which is better management risk, better governance and higher standards in financial services. My colleague, Mr. Cross, will respond to the question on scope and application.

Mr. Gerry Cross

I will also mention the whistleblowing question. It is a very good question for us to ask ourselves and it is not covered in this legislation. As the Deputy said, protected disclosures or whistleblowing are a very important aspect of a well-functioning supervisory and regulatory framework because they are a very good source of information and they provide very important information. It is also the case that enhancing the governance and culture within firms, especially around speak-up, so there is an indirect benefit from this framework, will help with that.

On the question of financial incentives, we do not have a formulated final view on this at the moment. It is something worth considering but it needs a lot of consideration because there are pros and cons. The positive aspects can be seen but it brings aspects about which we would want to think very carefully. It is something worth further discussion.

On the issue of scope, the draft legislation potentially does have a wide scope. In terms of the conduct standards, it applies to all regulated financial service providers. On the senior executive accountability regime, SEAR, in the first instance the proposal is that it would apply to the most high-impact firms.

Again, it is very important to say the financial system is evolving very quickly, as the Deputy has said. There are all sorts of opportunities and potential benefits but also challenges and risks on how technology companies of different types and business models are engaging. Certainly for the future it is something we will need to be very alive to and think about how this fits there. We are moving more quickly and fully than the UK did in its first steps because we have had the benefit of seeing their experience, but it will be a case of we apply this legislation in a broad yet limited way in the first instance and then roll it out further over time.

I thank the witnesses for coming before the committee and I welcome the publication of the general scheme of the Bill. I note the Bill does not seek to transpose a European directive. Is the Bill modelled on legislation in other jurisdictions such as the United States or any European countries? If so, how effective has the legislation been in those countries?

Mr. Gerry Cross

The first scheme of this type was the UK's senior manager regime and that has been followed in a number of countries. Australia is particularly notable in this regard, as are Singapore and other countries. Other EU countries such as the Netherlands and Belgium have aspects of it but not in this comprehensive way. As the Deputy has intimated, Ireland will be the first country in the EU to introduce such a scheme. There is quite a bit of interest in Europe. Indeed, in the recently published Commission proposal for the capital requirements regulation, based on Basel III, there is reference to this type of scheme.

It is not proposed to implement it in a full-blown way, but our experience and that of others is being considered in that regard. It is something that is of interest and it is being looked at elsewhere.

Turning to lessons learned, the timing of developments in the UK has been useful for us. The Prudential Regulation Authority and the Financial Conduct Authority in that country have recently carried out reviews and they have seen the real benefit. I think that is how they have assessed it. That description refers to how the firms themselves consider it, the enhancement it has been for the firms in respect of their governance, how they enhance and improve their cultures, and generally in the sense it has been a real foundation and boost for effective governance and standards in the UK regime.

Regarding areas where we are a little different from the UK situation, I mentioned in my opening comments the issue of collective responsibility. That is an important aspect for us. The UK authorities have also noted this point in their reports. It is obviously important that individuals are held to account, but we do not want to end up in a situation where that is the whole story and everybody is looking after his or her own part of the business. It is important we also have the elements of collective decision-making and collective responsibility functioning. We have tried to do that and this scheme seeks to create a good bridge between individual and collective responsibility. The UK system does not have that, but the deficiency was called out in a report as something for the relevant authorities there to think about further.

The other thing we have decided to do that is not in the UK scheme per se is to include non-executive directors in the senior executive accountability regime. The UK did not take that approach, although non-executive directors who head committees are included. We have thought long and hard about this aspect and engaged with the Department on it. On balance, we think it is right to include them because non-executive directors are such an important part of the effective functioning of financial firms. It is also important to say, however, that the proposed legislation does not expand their duties or impose additional duties on them. Rather, it is simply stated we must be clear how the non-executive directors fit into the governance of the firm, that they must be clear about what they are responsible for, and that they must also take reasonable steps in discharging their responsibilities. We think this facet of what is proposed is proportionate and we do not think it will have an adverse effect. It was important to have that comprehensiveness.

Regarding the additional conduct standards, those are set to deal with people occupying senior positions. How will it be possible to get around a situation where a person within a firm may not have a specific position ascribed to him or her but may in fact be exerting significant influence over the firm?

Mr. Gerry Cross

This is a question that has also had to be wrestled with to a degree in the UK. We cannot just say everything will be fine in this regard. It is a context we must think about as we implement the framework. We do three things that are relevant to how it will work effectively. We call out the senior executive functions, such as the chief risk officer, the chief credit officer etc. We state the inherent responsibilities of those functions, such as what the job of the chief credit officer is. Separate from all that, we stipulate a list of responsibilities that must be ascribed to people within a bank. That is to ensure there cannot be any gaps.

I think a firm that tried to game the system to its advantage by putting a person in charge of credit but without giving him or her the title of chief credit officer would quickly end up with two problems. First, there would be a mismatch between the inherent responsibilities of a role and the name of a role. I do not think it would work. If such an attempt was pursued, however, that would be one of those instances where we would immediately say there was a problem with the governance and culture of the firm concerned. It would be possible to see the mismatch between a more junior person holding the title in question and the more senior person really making decisions. That would set off alarm bells everywhere and we would quickly be saying we must intervene.

A breach of conduct standards and a breach of additional conduct standards are not criminal offences, but they do give rise to the administrative sanctions procedure. What is envisaged will happen if there is behaviour which also could constitute criminal behaviour?

Ms Seána Cunningham

As matters stand, what would happen is that if we suspect a criminal offence, we would make a report to the appropriate authority, such as An Garda Síochána or potentially other agencies. It would form part of an engagement thereafter in respect of what would be the appropriate course to follow in the context of whether a matter is going to be dealt with by way of criminal law or by way of sanctions or civil proceedings.

Returning to the point raised by Deputy Doherty about the participation link, I would like to clarify my understanding of that point. Is it the case the participation link remains under head 5 of this proposed legislation, which deals with the duty of responsibility of persons performing senior executive functions, but that as a result of head 19 and other duties under the proposed Bill, the participation link will be broken?

Ms Seána Cunningham

The duty of responsibility is partly centred on the idea that a person is responsible for a particular area and, therefore, part of the oversight requirement involves ensuring a firm is in compliance with its obligations. That is where that aspect remains relevant in the context of a senior person, the oversight of a particular area and ensuring the firm is compliant with the regulations in that particular area. I say that because, in the main, all the obligations are placed on firms.

Taking a situation where a person faces an allegation of breach of conduct standards or a breach of additional conduct standards, would an oral hearing be held? Is that option available to the individual?

Ms Seána Cunningham

The administrative sanctions procedure, ASP, remains as it is but with the enhancements envisaged in this proposed legislation. The way that would work in the context of an investigation is that typically people would be interviewed by officers authorised by the Central Bank enforcement division. Ultimately, sanctions could be imposed by one of two ways. It could be by way of a settlement between the Central Bank and the firm and-or an individual. If such a course of action is not appropriate as a resolution, then a case would go to an inquiry. It would be a Central Bank inquiry which would have powers in respect of calling witnesses before it, allowing them to present their evidence and be examined on their evidence and the documentary evidence.

If a sanction is imposed on an individual, is there any way to ensure the fine is not just paid by the firm and, as a result, there is no real personal sanction?

Ms Seána Cunningham

A variety of circumstances could be in play, but there is no legislative assurance in that regard.

I thank the witnesses.

I thank the witnesses for appearing before the committee and it is good to see this issue being discussed here. Many questions have been asked already, but one aspect I wish to ask about is the monetary sanctions involved for individuals. Head 5 of this proposed legislation deals with monetary sanctions. It states they shall be “effective, proportionate and dissuasive", while also taking into account "The financial position of the individual concerned”. I ask the witnesses to outline, by way of example, the range of monetary sanctions which will be possible for breaches of the conduct standards. My colleague, Deputy Doherty, for instance, mentioned the tracker mortgage scandal. I would also like the witnesses to confirm that under head 5 it would not be possible for the employer or service provider to pay or contribute towards a monetary sanction imposed on an individual.

Ms Seána Cunningham

Under the current legislation, there are two constraints on the monetary sanction that can be imposed on an individual under the ASP. First, it is capped at €1 million. The sanction was capped at €500,000 before 2013, but then increased to €1 million. Second, the sanction cannot have the effect of rendering someone bankrupt. We have published extensive guidance on how we sanction firms and individuals.

The general scheme envisages that what we have set out by way of guidance will now be enshrined in legislation applying the key principles that would cover any sanctioning process based on its seriousness, nature, duration, proportionality etc. The sanctions imposed to date by the Central Bank under ASP range from €5,000 to €200,000. We have that range in our toolkit to impose an appropriate fine, based on the seniority of the person, the expectation of the person and the level of the misconduct.

The Deputy asked who will pay the fine. As that will depend on a particular case, I do not have a clear answer to give on that.

Mr. Cross mentioned that by the end of September, the Central Bank had taken 144 enforcement actions and imposed fines amounting to more than €166.5 million under the ASP. Much of the discussion has been on the fact that individual accountability is a core focus of the Central Bank's work. As a number of the questions I had have already been asked, I would like to focus on the Cum-ex scandal that has been in the news recently. This involves billions of euro and several firms across Europe. I looked at the Companies Registration Office, CRO, database to see if any of the directors had been disqualified. While looking at the database, I noticed that some people are directors of more than 100 companies simultaneously and that some had more than 300 previous directorships. One person currently holds more than 150 directorships. Based on media reports, we are aware that a non-executive director of one of the funds had met officials from the Central Bank and had offered to resign at the time but was requested to stay on. I would be interested if Mr. Cross could advise about this. Given that a person can hold multiple directorships simultaneously, possibly involving hundreds of companies, is this conducive to a culture of high standards and an ability to perform fiduciary duties?

Mr. Gerry Cross

I obviously cannot comment on individual firms, individual cases or supervisory restrictions. There are several aspects. The cum-ex issue is very important. It potentially involves a range of issues of concern, including whether the firm is in compliance with the basic regulations that apply to it or the individuals. It is fundamentally about the culture and behaviour within a firm as evinced by its business model. We would look very closely at that aspect in that context. As the Deputy indicated, it is very relevant in our considerations about the fitness, probity and suitability of the person. It is a really important issue which manifests itself in a number of ways. In addition, there could be criminal aspects to it. That is how we think about it. Of course, it is a very complicated context. We have engaged closely with the European Securities and Markets Authority, ESMA, the European Banking Authority, EBA, and other European authorities on this. It is a complex picture and it is necessary to look at the circumstances of each individual case.

I agree with the Deputy on the issue of directorships of several different companies. We have pressed quite hard on the issue over recent years. I do not have the numbers to hand but we have set out the appropriate numbers including hours, commitments, etc. We can do the maths on how much time an individual should commit to a directorship and therefore how many directorships can be legitimately or appropriately held. It is an important issue. If it goes beyond a certain level, we would have questions and we have been pressing quite hard on that issue.

There can be umbrella structures where a director has several directorships of sub-entities within that. That is a slightly different picture. On the whole, I agree with the Deputy that a limited number of directorships should be held in order for a job to be done well.

I agree with Mr. Cross about the cum-ex scandal being complicated. Those people were able to defraud billions of euro from European tax authorities over a number of years precisely because it was complicated and it took time for what was happening to be noticed. The reality is that it is not a victimless crime. They took that money from tax authorities, meaning that ordinary people suffered because they do not get the services that they should as provided from the state. That is a simple fact.

With some of the firms related to this cum-ex scandal, all the directors are still in place and some of the directors still hold 100 or 150 directorships. That this happened before their noses is deeply concerning. I know that the Central Bank engaged with the EBA. I read online the Central Bank's responses to the EBA questionnaire. Some of the responses are quite interesting. It was asked about the various investigations that were being carried out by other European regulators into the scandal. When asked if it was aware of any criminal investigations being carried out relating to the dividend arbitrage trading schemes and if it was taking any specific actions, the Central Bank stated:

The Central Bank of Ireland (CBI) has not carried out, nor are there any current plans to carry out, supervisory reviews/actions to detect tax related operational and compliance risks in the context of dividend arbitrage schemes.

The Central Bank also noted that it was aware that two credit institutions were included in the German tax authority’s case investigating such schemes but that no supervisory actions were taken against either. I find that of concern. Why did the Central Bank not sanction any of the funds or firms involved in this?

The Central Bank also advised European financial regulators that it was not resourced to investigate these complex cases. We are all aware that these are complex trading schemes. The Central Bank stated that market surveillance for such suspected tax-retained schemes were outside its remit. Why does Mr. Cross believe it is outside the Central Bank's remit?

Mr. Gerry Cross

As there are complexities, the Deputy will forgive me if my answer tries to address some of those complexities. There is the issue of how we, as a jurisdiction across Europe, approach the schemes of tax evasion, avoidance, etc. We do not have a specific tax remit per se.

That is what we were trying to convey in our response to the EBA. However, and this is very important, we absolutely do have that mandate and remit in regard to regulated financial services firms and, as Deputy Mairéad Farrell said - and I could not agree more - this is not a victimless issue. This is not something to be accepted as part of business. That is not the case. As already stated, this type of activity raises questions about regulatory compliance, culture, conduct, behaviour, the fitness and probity of the people who are doing it, and so on. I cannot comment on individual cases; that is not permitted. What I will say is that in our supervision, we need to engage with all of the facts as we find them. We need to understand what happened, what did not happen and what the case was. That is as much as I can say. I fully agree that this is not something that is somehow outside our mandate or that we would not at all be worried about.

I thank Mr. Cross for that. What I am very concerned about is that because this is complex, it can go over people's heads. It is a really bad mark against this State to be linked to this in any way. It was a fraud involving billions of euro. Clearly, Mr. Cross cannot comment specifically on individual cases, but I would like to see something very clear coming from the Central Bank - a statement in whatever form is permissible - that the matter is going to be pursued and that we cannot have such a thing happen again. As we both agree, it is not a victimless crime. What happened is absolutely outrageous.

I thank Mr. Cross and Ms Cunningham for attending. I welcome discussion. Many of us were frustrated at the long time it has taken for the heads of Bill to come before us, but we have them now. I have two questions. One relates to head 5 and the identification documentation of the responsibilities of senior individuals. Under that head, what will be the reporting requirement to the Central Bank? Will the Central Bank have a function to ensure that the documentation process is up to date? If we look at the UK experience, I note that a directory of certified persons was established at the end of 2020. Does Mr. Cross believe that is necessary or should be included in proposed legislation such as that before us?

Mr. Gerry Cross

Yes. To answer the first question, as I mentioned in response to Deputy Doherty's question earlier, it is very important in this context that the financial services industry does not think that the Central Bank will take it by the hand and check its work every step of the way and lead it step by step along the way. This proposed Bill is about bringing the culture, governance and approach of the financial sector and its firms up a level. Crucial to that is that it takes responsibility, that it takes the view that it is for firms to get matters right in the first instance. Having said that, of course it is the job of the Central Bank, as the regulator and supervisor, to ensure that firms are doing so and to supervise them in a way that we are comfortable with and that makes us confident that they are meeting their obligations and what is expected of them as they should. In terms of the maps and the statements of responsibility, they will come to us and we will have regard to them and they will be part of our supervision of a firm. They will be very helpful part, frankly, because they will give us a very clear basis upon which to engage, consider and involve ourselves with a particular firm. I hope that answers the Deputy's question. They will come to us, we will use them and have regard to them, and make sure that they are doing it properly. However, it is not the case that the firms will submit and expect us to advise as to whether they are right. It is about the firms taking responsibility for themselves.

On the issue of a directory, that is not something that at this stage forms part of the proposed Bill. It is something that could be considered. I do not have a strong, clear view on it.

Ms Seána Cunningham

In this context, another key element to focus on is the enhancement of a firm's obligations under fitness and probity. That is the reason for the introduction of the certification proposal. While we already have an ongoing obligation to assess the fitness and probity of people involved in key functions, the general scheme envisages enhancing that further in the context of a firm's own role in that assessment. That would be a certification process which we think would be helpful as we move forward. Mr. Cross talked about the Central Bank's assessment of the statements and maps of responsibility. These will be enormously beneficial, particularly in a supervisory context. It is being approached in two different ways because there are also enhancements of how the firms will be required to look at and assess on an ongoing basis the fitness and probity of people in their employ.

I certainly believe that an element of transparency or at least public access to the details of people in those roles would be an important element in the context of the goal of improving the culture or forcing firms to improve their culture and behaviour.

My next question relates to an issue Mr. Cross touched on in terms of the primary focus - I am paraphrasing him here - being improve the culture across firms. We have seen that from the UK experience. One of the other dimensions of the UK experience, which we are looking at along with the US and other countries, is that there has been only one prosecution since the legislation was brought in there in 2016. To gain an understanding of this, as the regulators who will be enforcing the standards and bringing more contraventions to light by means of this proposed Bill and ensuring that more wrongdoing is exposed, how busy do the witnesses expect to be? It is not just about a general improvement in the culture, rather, that we are actually going to see more prosecutions, if that is the right word, or more enforcement actions being taken. Do the witnesses have an expectations in that regard?

Ms Seána Cunningham

Upfront, we do not see the measure of success here as being more enforcement. What this framework is designed to do is improve governance and the management of risk and outcomes for consumers. Of course, built in to this framework is an enhancement of enforcement in circumstances where things go seriously wrong. As Mr. Cross stated, what we are being very clear on is that is the intention behind the framework, but we remain committed to assertive risk based supervision underpinned by a credible threat of enforcement. Where serious issues arise and enforcement is appropriate, that is what we will certainly do and what this framework allows us is an enhancement of our process in terms of individual accountability, and we very much welcome that.

Gabhaim míle buíochas leis na h-aíonna as teacht isteach anseo agus as an gcur i láthair a chur os ár gcomhair. I thank the witnesses for their presentation. We welcome this proposed legislation and hope it achieves a change of culture as outlined in the objectives relating to it.

I wish to take the focus back a little, if I may. At the heart of this is the threat of white collar crime and the effect it has on corporate governance and society, as well as the significant costs it has on society. The State takes a fractured approach to white collar crime. There are several locations of investigation, of which the Central Bank of Ireland is one. Legislation is currently going through the Oireachtas to establish the corporate enforcement authority. Obviously, the Garda has an involvement in this area. There are also probably half a dozen commissions of investigation currently going through the system and those commissions of investigation are anything but satisfactory. They have been going on for years and are costing massive amounts of money. I am thinking of the commissions of investigation relating to NAMA and the IBRC. Would it not be better for the State to have a department or an office of investigations that could actually build the critical skill sets needed to be able to enforce and investigate? It could ensure there are efficient investigations that are timely and do not cost a bomb. That is not a matter specific to this legislation; it is relevant to it and to other legislation. I would like to hear the views of our guests on that issue.

Ms Seána Cunningham

It is a very interesting question. As the Deputy stated, it certainly steps back a level. The Law Reform Commission has looked at this issue. On one aspect, we have had the Hamilton review that was conducted. The report by Mr. Hamilton was very interesting and made several recommendations, including the creation of an advisory council on economic crime and corruption. There is always the idea of different functional mandates. Certainly we in the Central Bank find that supervision and enforcement in financial services sitting together is useful, but it is very important that we are part of and co-ordinated into the broader framework because, as the Deputy stated, there are several actors in play and the issue of which of them is appropriate to take the lead on a particular investigation, which of them offers supports, etc., and where the right skill sets are is really important. Arising from the Hamilton report, there has been the creation of an economic crime and corruption forum that brings together the sort of lead agencies with a view to better co-ordination with each other, which we would all welcome. The Central Bank is a constituent part of that.

A key area of focus for us in recent years has been how we have worked very effectively with the Garda National Economic Crime Bureau. There are cases in which we identify suspicions of serious criminality and report that to the Garda, which will be the lead investigator but with the Central Bank providing support. That sort of modelling is very important - obviously within the context of our respective mandates and frameworks - and we have seen it be successful.

For me, the key area of focus needs to be on using the framework effectively. I refer to the idea of joint training programmes which is being considered in the context of the forum in terms of rolling out training to investigators across several regulatory functions and the Garda so that we have consistency. However, we all operate with different frameworks and powers. The consideration of better co-ordination, working effectively together in relevant cases and seeking to ensure that things are addressed by the right agency in the right way is very much to be welcomed.

I strongly believe that we suffered from light-touch regulation throughout the past 20 years, especially in the run-up to the banking crisis, and that cost us severely as a country. However, sometimes regulation can become cyclical and there can nearly be a pro-cyclical regulatory experience. After a major crash or difficulty, regulation becomes very tight. One can see that is almost the case in the banking system currently in terms of the capital ratios that are in force in this State and the effect that is having on the banking industry.

In reply to earlier questions, our guests talked about adverse effects the Bill could have. I am not suggesting for a second that the Bill goes too far; it does not. What research have the witnesses done in respect of potential adverse effects? I am thinking of potential vexatious behaviours that could happen within an organisation. If the responsibility of an individual at a certain level is to bring an issue up to higher levels within a firm and that person exhausts every opportunity in that regard, he or she potentially reduces his or her own liability for an act or wrongdoing and that pushes the liability onto somebody else up the food chain in that firm. Is there any understanding of what could happen in firms in that regard? Mr. Cross mentioned that this regulation differs from the British regulation in that non-executive directors are made responsible under the Bill. Will that have potential competition effects in the context of Irish firms?

Mr. Gerry Cross

There are several very important and interrelated issues in that question. The Deputy started by considering cyclicality of regulation. That is a really important point. It is our job as regulators to look through that cycle because it is well shown. If one looks back, one can see a pattern of post-crisis tightening, then times get good again, and just when there is a need for regulation in good times to be firm, it can be weakened because people think we are in the good times and it is bit different now to how it was before and that we can relax a little. We have a responsibility as regulators and, if I may say so, as legislators, to look through that cycle and to remember what happened in the past. That said, it is really important that we keep proportionality and predictability and the overall purpose we are trying to achieve, which is a well functioning economy and the economic well-being of those whom the financial sector is there to support, that is, consumers and users. It is about getting this right; it is not about making it so rigorous that things cannot happen or so weak that bad things arise. It is about getting it right and it is really important that we do so. I refer to the marketplace and competition within the marketplace. I was asked by Deputy Doherty about Stripe as an example of a tech firm. It is really important that the financial system is able to benefit from technological development and competition from tech firms. It is important that we get these things right and that we do not regulate in a way that unduly dampens that kind of innovation activity while looking through the cycle and seeing what are the risks that we need to guard against. It is very important to consider that in the context of this particular regulation. For example, the regulatory impact statement that accompanies the general scheme is very helpful in calling out some of the aspects that need to be balanced and have been balanced in arriving at the general scheme.

On the issue of vexatious behaviours, it is right to say that we need to be aware of that risk. The UK has also called out the risk of juniorfication of roles that I was asked about earlier by Deputy Jim O'Callaghan. However, the system is designed in such a way that it is about substance and what are reasonable actions and us ultimately standing back and asking what is the culture of the firm in question and what is happening in it. The type of behaviour described by Deputy Tóibín is the exact type of behaviour that would set off alarm bells for us and cause us to say that what is happening in the firm is not good governance or good culture but, rather, box ticking and formalisation of things, which is precisely what this regime is designed to avoid. Although there are aspects on which we must keep a very close eye, the framework is designed to avoid that.

We have closely considered the issue of non-executive directors. I come back to the very important issue of the proportionality of the regime.

It is designed not to impose new obligations on people per se but to set out for those in a given role the obligations attached to it. With a non-executive director, those obligations are really important, but they are not executive functions. Non-executive directors are not responsible for the running of the firm at executive level. It is a matter of determining whether, within the constraints concerning the responsibility of a non-executive director, she or he takes reasonable steps necessary regarding implementation. On the matter of whether she or he should be accountable for that, these are really important roles.

It is absolutely right to say we have to be very alive to the question of whether we are getting this right but, in our engagement with the Department and on the scheme, we believe we have struck a good balance in respect of the differing aspects.

My understanding is that the legislation does not specify which regulated financial service providers it will apply to, and that this will be confirmed by Central Bank regulations. I also understand the Central Bank regulations will deal with the new fitness and probity obligations concerning controlled function and other roles. Is is not unusual that the legislation seeks to outsource such important elements of its implementation?

Mr. Gerry Cross

The Deputy's description of how it is designed to work is right. The conduct standards, whether they be common or advanced, apply to all firms. That is in the proposed legislation. On the legislative measures on senior executives – covering the mapping and prescribed responsibilities – it is correct to say it is to be a matter of regulation by the Central Bank. We have said from early on that we propose that, in the first instance, the arrangements apply to banks, most insurers and investment firms that deal on own account or hold client assets, and branches of third country firms operating in Ireland. We have been very clear all along that this is what we believe the right first tranche should include. It is probably right. It captures a very large component of the financial services sector, and, going back to the idea of proportionality, it is probably the right cohort in that regard. It is envisaged that in the future, as in the UK, the arrangement will be rolled out more widely.

Deputy Doherty asked me about the new types of firms. As time goes on, they will be material players in this field. That is a matter we will have to keep a very close eye on.

Mr. Gerry Cross

Since the conduct standards are important, it is important that we provide what guidance we can on what they mean and how the obligations can be fulfilled. We will come forward with that guidance.

The legislation refers to the expansion of investigative powers. My question is on resources. While it is fantastic to have all the legislation in the world, it is not worth the paper it is written on if it is not enforced. I appreciate that Mr. Cross’s colleague has said the objective is to change the culture. Ideally, enforcement might not need to expand if the culture changes. I hope that will be the case but my instinct is that, in the real world, enforcement will need to happen before the culture changes. What new resources will be needed to increase the investigative and enforcement powers of the Central Bank?

My last question is on timescales. How long will it take to come up with the additional investigative and enforcement capabilities? How long will it take for the new regulations to be put in place?

Ms Seána Cunningham

I will deal with the question on enforcement and capacity. We have been very focused on, and have built, enforcement capacity over recent years. We have multidisciplinary teams, constituting investigators, lawyers and data analysts, that we bring into play in our enforcement investigations. We have conducted enforcement investigations at scale, with forensic retrieval and analysis of data. We are well set up as an investigative function. We have demonstrated that in the context of some very significant investigations we have conducted.

What we see coming to bear here are proposals that we believe will enhance our enforcement process and perhaps, critically, our inquiry process. We have run Central Bank inquiries. As is typical when running inquiries, ways of bringing enhancements to bear are identified. We very much look forward to some of these enhancements as they are brought to bear. We have been really focusing on and building our capacity for conducting enforcement investigations over recent years. Considering the complexity and scale of investigations undertaken to date, we believe we can continue as we have been doing as the new regime is introduced and our process is enhanced.

Mr. Gerry Cross

I wish to answer the Deputy’s question on timelines. Obviously, the legislation needs to pass through these Houses, and we await that, but we are keen to have it in place without further delay, not only because of the value of having the regime in place but also because of the momentum that now exists. We propose to have our draft regulations and guidance ready for consultation. We need to consult because this is important stuff. It is important that we engage as we should with stakeholders on what we propose to introduce. We will have the drafts ready to go shortly after the legislation is ready. We will then move quickly to get the consultation done, take on board any responses we get and begin implementation. We are moving fast.

I have one more question. How would this legislation have changed the investigation carried out by the Central Bank into Davy, for example?

Ms Seána Cunningham

The Deputy will appreciate that I do not want to speak about the facts of a particular case. Regarding what the framework does in terms of key enhancements, we have a clear statement on what senior people are responsible for. We have a mapping exercise that allows a key feature of overlaid governance so we can see who is responsible for what, and where. We have the application, for the first time, of conduct standards that are directly applicable to individuals in key positions in financial services, and enforceable. We really believe this enhances the framework we work under. It is informed by the experience we have had over several years in conducting multiple investigations and in the context of the work we have done on supervision and enforcement, whereby we see the potential for better outcomes and, where things go seriously wrong, the potential to have a clear eye to where accountability and responsibility lie in a particular firm. I would come at the question that way.

I thank the witnesses.

Some of the issues I wished to raise have already been raised so I might just drill into some of the specific aspects of the proposed legislation that I am a little concerned about.

Specifically, I am concerned that the available sanctions are very moderate. There is a focus on monetary sanctions and administrative sanctions under Part IIIC of the consolidated Central Bank Act. I know these include monetary penalties and disqualification but these are still administrative sanctions in that context. I note the only new criminal offence being introduced under legislation relates to the confidentiality of the documents used in an inquiry, so again it is a witness that is potentially facing a new sanction relating to the confidentiality of an inquiry if he or she is seen as having breached the confidentiality of a seen document. I am little concerned that obstruction of an inquiry is being downgraded whereby there was a criminal sanction but it is now proposed a civil remedy would be used instead of the criminal offence.

The witnesses have mentioned co-operation with the Garda National Economic Crime Bureau. It would be very useful to know and be clearer on where those connections move and at what point they move. What are the formal mechanisms in an inquiry if matters arise that are of concern? Has consideration been given to perhaps strengthening criminal offences under this Bill? As I have said, currently the only new criminal offence I have seen - I may have missed some in the heads - relates to the confidentiality of documentation. I am also concerned that in terms of obstruction of an inquiry, in the heads of the Bill the case is put that a civil remedy would be quicker to use because it would be impracticable to use a criminal offence. From a deterrent perspective, and if the case being put by the bank it is that it is keen to deter obstruction, I worry that a civil remedy would certainly be seen as a less serious deterrent than a criminal offence when it comes to the obstruction of an inquiry. I worry that we might even be giving a signal that people can obstruct an inquiry and although civil action may be taken, they are not taking a risk associated with a criminal offence, as they may have done before.

There are two or three other matters. The witnesses mentioned where they see the first tranche of application and I would like their perspective on investment limited partnerships. I have significant concerns about the investment limited partnership legislation that recently went through the Oireachtas in general in that it seemed to move accountability away from a number of people who may sit on the boards of organisations making key decisions on those organisations and on investment partnership policies but fall under the new thresholds for responsibility. What is the perspective of the witnesses on the investment limited partnerships and are they seen as something they want to look to?

I have another one or two queries but perhaps the witnesses might answer those questions first. The proposed amendment to section 33BC of the principal Act relates to settlements. I am quite concerned about settlements as an option. I note that within settlements, there may be a decision as to whether to publish information and the reputation of the relevant executive person is a consideration in that regard. Again, I am concerned that there may be a scenario where we see many settlements but not actual accountability for individuals. Individuals who settle may reappear with other roles or continue to hold multiple roles, as Deputy Farrell outlined, as people could hold 100 or more roles. The questions relate to section 33BC of the principal Act and the proposed head 25 on obstruction, as well as the wider question of criminal sanctions. There is also the issue of investment limited partnerships.

Ms Seána Cunningham

I thank the Senator. I will start with the criminal sanction aspect. This proposal is around a civil or regulatory framework being enhanced. The Senator asked a specific question about how it works more broadly. Pursuant to the legislation, the Central Bank has obligations where we form a suspicion of a criminal offence to make reports to An Garda Síochána and, in some cases, other agencies. There are occasions where we make reports like that and where the Garda takes ownership of the matter and there is a criminal investigation. There are other cases where the Central Bank deals with the matter under an administrative or regulatory process.

It is interesting to look at the UK and Australia, where similar regimes were introduced, and they were also civil rather than criminal in nature. We are very clear in our view that there are areas where criminal sanctions are appropriate and others where civil or regulatory remedies are very important and have an enormous deterrence value.

The Senator made a point about the public statement aspect and what is there is essentially a codification of an "as is" position. We have been very clear on, and conscious of, how we see enforcement so that there is transparency and it is of a public nature. Looking at regulatory authorities in other jurisdictions, they do not bring the level of transparency that the Central Bank brings in enforcement. There may be a kind of one-line statement such as "Firm A sanctioned €30,000" but we have an entirely different approach that we propose to continue under this enhanced framework. This would see the Central Bank publishing the name of a firm or individual, along with details of sanctions imposed so the market is clearly aware of them.

For example, this year we published an enforcement statement relating to an individual concerned with the management of Irish Nationwide Building Society. The individual is set out therein and it is set out that he is disqualified for 15 years and that he has been sanctioned €200,000. What he did exactly is also set out. We have an approach of transparency under settlement. That will not change and it will continue.

There may be specific concerns about an appropriate consequence and sometimes this is more about trying to bring somebody into compliance rather than punishing people. That is something we think about when considering the most effective tool to bring about compliance in certain cases. For example, in an inquiry context we want co-operation and participation of individuals before that inquiry.

I mentioned earlier that it is important that both regulatory and criminal regimes operate effectively and in a way that is informed by each other so the system deals with matters in the right and appropriate way. Much of this is down to how different agencies interact and co-operate with each other. We will continue to have excellent engagement and co-operation, particularly with colleagues in An Garda Síochána, in appropriate cases.

Mr. Gerry Cross

I thank the Senator for her question on investment limited partnerships. As she said, the legislation on these was recently amended by these Houses. We have been comfortable with the legislation and what it introduced. As I said earlier, the framework in the first instance is to give quite a wide scope. Of course we will look in future where it could be further applied and further benefit could be applied. I do not want to prejudge that sort of sequencing. We have not yet got to that stage but I note the Senator's comments.

There has been a push for a senior executive accountability regime because we have seen cases in the past and the responsible individuals, or those who played a role, were effectively able to move pretty unscathed through the process and go on to other very lucrative opportunities.

I have a small concern that through this legislation, we may again be tying it back to the role but that the individuals may, effectively, not be held ultimately accountable. Previous legislation referred to a person concerned in management but, in the new legislation, that would become a person performing a controlled function or pre-approved to perform a controlled function. I would like comment, clarity or assurances in that regard. If an individual, a Mr. Smith or a Ms Lynch, is performing a controlled function, I would like it confirmed that the individual would be held accountable for any wrongdoing so we do not have a situation whereby a person can move out of a role and the problem stays with that role but does not concern the individual. The old legislation referred to a person concerned in the management. While I accept that was quite wide and needed clarity, I am worried that narrowing the wording to a controlled function or a pre-approved controlled function may give rise to a situation whereby senior executives who are not directly in those controlled functions but who have a key role in terms of management and who drive or allow for poor, unethical or dangerous decisions might not get captured in this regime. I am a little concerned about that. There are different ways in which I am worried we could end up narrowing the scope so much that people are not captured by it.

I would push back on some of the comment around encouraging compliance. I am always amazed by the amount of second, third and fourth chances we distribute in the white-collar, financial services sector, compared to any other sector, where misdemeanours are very seriously consequential for individuals. My concern is that if the goal is simply to say we have made senior executives in this country adopt different practices or improve their current practices, an issue may have been addressed within that company but the senior executive may not have been held accountable. Does it trigger an investigation of their roles within other companies? How does the inquiry follow the individual, as opposed to following the individual's controlled function in a company?

Head 5, section 2 mentions all the factors which need to be considered when assessing whether somebody should be investigated or held accountable. It strikes me that a number of the reasons somebody might be able to say they should not be held accountable are in the control of companies. Complexity is offered as a potential reason. The nature, scale, complexity and timeframe are offered as reasons someone can avoid accountability. Who do we hold accountable for the creation of circumstances which an individual can use, under head 5, section 2, to evade accountability under this regime? Is it the company or is it the individual?

Mr. Gerry Cross

I will have the first go at answering the Senator's questions and Ms Cunningham may want to come in on some specific aspects. The Senator asked about the role of individuals and the possibility they could wriggle out, empty out the senior function and get their people out of the picture. It is an important question and comes back to an answer I gave earlier. In our discussions with the Department of Finance on this issue, we have tried to design this legislation in a way that learns from the experience of others and whereby it is really about substance. People should not be able to say they are not on the hook because allegations of wrongdoing do not apply to the title of the role they carry out. It should be the case that the substance of the role goes with the responsibility for the role. There is also the other context of the allocation of responsibility. As I said earlier, the way the Bill is designed means it should not be possible for someone to decide they will make the decisions but will not assign themselves the relevant role and, therefore, get around the legislation. Ms Cunningham can speak to this better than me.

The issue goes back to some of our earlier discussions about the participation link. The essence of it is that individuals understand their responsibilities and know what is expected of them, and that we hold them to account, as individuals. That is the heart of the matter. If the regime was not hitting that target, it would be a big miss. It is about individuals. It should not allow a company to claim an investigation did not show that the firm broke a regulation and it is therefore off the hook, nor should it allow a company to assert that because it has now left the business or the financial services sector, it is off the hook. It is about trying to close those escape routes.

I agree with the Senator that this should not be about nice language with references to improving standards. This is about improving the way financial services are done in firms and how they think about their roles and responsibilities as firms and individuals. That is at least partly driven by being on the hook for what they do and what they fail to do. That has not been the case at all times and that is what this legislation has been designed to address. It is about driving up standards, culture and behaviour. It is about the financial sector fulfilling the role it should have, which is to support the economic well-being of citizens and the economy. That can be done by introducing clarity and expectations, while underpinning the regime with clear accountability.

The Senator also asked about reasonable standards. It comes back again to some of the things we were saying earlier. We need to give sufficient clarity to people so they know what is expected of them but we cannot and should not be telling people they are okay if they tick certain boxes. That is not what this is about. This is about people taking responsibility for their jobs. One could suggest that a firm may be able to create complexity but we will look straight through that. We will ask what is the substance of what is happening here. This is about asking an individual whether reasonable steps were taken to do his or her job and fulfil his or her responsibilities. If we are seeing add-on complexity and obfuscation, how we see the situation will move the other way. It will make us say we do not think an individual was taking reasonable steps. We would suspect that something was going on if individuals should have said that in order for them to do their jobs, unreasonable complexity should be removed. Of course, there are situations where things are complex. It is a complex world and we need to take that into account. The questions raised by the Senator are very important and legitimate. I hope and think this scheme will allow us to deal with those issues because if it did not, it would not be hitting the mark.

Ms Seána Cunningham

I will reiterate Mr. Cross's point. This legislation has been designed not to narrow the scope of application but to widen it, and to address issues over what moving on therefore means.

What it allows in terms of enhancements is a reach into a broader population. It also allows us to deal with the idea of somebody leaving a position. Under the administrative sanctions procedure and fitness and probity, the consequences subsequent to an investigation and fair procedures are the possibility of disqualification or prohibition. These can go beyond the firm the person worked in. It can include all financial services firms. It is quite a breadth of consequence ultimately.

We have to bring the discussion to a conclusion fairly shortly because we have a long private session that we need to get through. I also want to say a few words on this.

I will be very brief. Where are the knock-on effects? Very quickly, will the witnesses speak about where there is an inquiry into somebody who has a particular function in an organisation and is a senior executive? For those who hold multiple roles, will this trigger an inquiry into the other roles they hold? We heard about this from Deputy Farrell. This is something that has caused frustration. We seem to have siloed investigations. It is welcome that it was mentioned in the presentation that there is not a need for a finding of wrongdoing against a firm before there is an inquiry into an individual senior executive. Will the witnesses confirm that if there is an inquiry into wrongdoing in a firm that it will not preclude a parallel investigation into the behaviour of a senior executive? Does this trigger a wider investigation of the individual? If a pattern is emerging of a similar practice in a sector will it trigger a sectoral investigation? Will the witnesses confirm that the investigation of either an individual or a company does not preclude them happening in parallel?

Ms Seána Cunningham

It will not preclude it. It does allow that there could be an investigation into a firm and an investigation into an individual. We have prohibited individuals under the fitness and probity regime with consequences. When we look at the conduct of a particular individual in a particular firm the consequence at the end could well be, and has been, that the person is not allowed to hold positions in any regulated financial services provider. This is provided for. There is a similar consequence in the context of an administrative sanctions procedure investigation, whereby a person is disqualified from being a person concerned in the management of any regulated financial services provider. It not only deals with the conduct investigated, it also prohibits somebody holding any other position in financial services, which is a very important consequence. When we identify an issue with an individual we look at it in total, as we would from a sectoral perspective in our supervisory work, to see whether something has broader application. I hope this answers the question.

I thank Ms Cunningham.

I thank the members for their very pointed questions, which are very important, and I thank our witnesses for the replies. A theme that came up again and again was addressing issues after they had happened. The theory would be that we try to prevent them. This was the theme of the replies. I was a member of the DIRT inquiry more than 20 years ago. Banking practices in the country at the time ended up in an sworn inquiry. We felt they would tend to undermine credibility and the integrity of the banking system if they were allowed to continue. When we had concluded the inquiry, we were told that in future this would not happen. There was a promise of good fiduciary practices, good governance and alternate accountancy in terms of visiting accountants to ensure the books had not been deliberately swayed or skewed in a particular direction. There were promises on transparency, accountability and reliability, which were all issues that were sworn into at the particular time. We felt we were on the right path and that this would not happen again. However, it did, and that is the problem that I see. This is the theme of the questions raised by most members. We had the awful experience during that period and then we had the financial crash where some of the same practices we had identified previously were carried on, almost as soon as we had gone around the corner. With the best will in the world we go through the performance again and again.

Incidentally, the members of that committee, who were public representatives, were not very popular because of the inquiry we carried out. Some of us almost lost our seats in the subsequent election and others did so, unfortunately. We felt it was necessary to do our duty because of what happened. Unfortunately, what happened ultimately was that each and every member of the public was severely punished by virtue of non-adherence to the promises made. Some of those members of the public are still suffering ten or 12 years later and will continue to suffer for some time. I am not laying the blame for this on the witnesses. I am merely suggesting that it happened and everything possible must be done to ensure it does not happen again.

I know we have provisions for fines, criminal responsibility and accountability. I know we went through in great detail at that time the concepts of malfeasance and misfeasance. These are all issues that are very pertinent to the context of this debate. We have not learned our lessons from then. By "we" I mean all of us involved, including the institutions and public representatives. We were blamed for allowing it to happen but we did the job that had to be done, unpopular though it made us. Nobody else took it seriously. In fact, that report was ultimately treated with contempt. Approximately €1.2 billion was recovered for the taxpayer and that was fine. I still worry.

The banking system in this country seems to have become depersonalised. We have had the closure of branches all over the country and less contact with the customer. Who suffers at the end of the day? It is the customer, the economy, the general public and national and international confidence in the banking system, which is hugely important in this country. I am not attributing any blame to the witnesses. I am merely saying these things have happened before and the remedies have been introduced before and the questions raised by committee members this evening are along the same lines. There needs to be a dedication to the application of the principles contained in the Bill, and maybe more, to ensure we do not find ourselves at this juncture at some stage in the future.

My next point is not necessarily relevant to this debate but I should warn the witnesses about it. Some banks are leaving the jurisdiction at present. I have noticed that some are retaining an interest thereafter for one or other purpose. They have sold off their bad debts but they have retained some particular interests or have indicated they will do so. I hope this is not for cherry picking purposes. It would be seriously detrimental to the whole question we have been discussing here if any lending institutions were to be able to maintain a cherry picking interest in our finances thereafter.

Mr. Gerry Cross

Two points are at the heart of this arising from the comments of the Vice Chairman there. First of all, ultimately, the financial system is about people and the service of them. If we look at how we, as a regulator and supervisor, seek to achieve our objectives, that is at the core of it. Therefore, what the Vice Chairman said about prevention being better than cure is completely right and goes back to some of the questions asked earlier. This framework is designed where if one does wrong, one will be held accountable, but more than that, it has the basis for getting the banks, the insurers and investment firms, etc., to do what they do better to prevent the things we have seen in the past. I thank the Vice Chairman.

I thank all of our witnesses for attending today and for answering the questions put to them. We will suspend the meeting for a few moments to allow our witnesses to leave the room and we will continue then in private session.

The joint committee went into private session at 3.31 p.m. and adjourned at 4 p.m. until 1.30 p.m. on Wednesday, 10 November 2021.