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.