UNVEILED LAST TUESDAY by Minister for Finance Paschal Donohoe, the draft legislation for a new Individual Accountability Framework is a case of ‘better late than never’.
It’s over three years since the Central Bank of Ireland, in the wake of the tracker mortgage scandal, initially made the case for expanding its arsenal of weapons to investigate and sanction individuals for wrongdoing at regulated firms like banks, insurance companies and investment firms.
Although Donohoe said at the time that he was committed to introducing a new framework, modelled on a similar framework introduced in the UK in 2016, the legislation was held up.
That led to accusations of political foot-dragging from the opposition benches.
But while the Davy Stockbrokers scandal in March did seem to light a fire under the Government, one corporate law expert told The Journal that the complex nature of the changes required to implement the regime is at least partially to blame for the delay.
So what exactly is an Individual Accountability Framework, you might be asking?
How will it work and will it make it actually it harder for rogue bankers to get away with financial murder?
Individual accountability
Accountability might be the central motif of the draft Bill.
But improving culture and trust within the financial services sector is the ultimate goal, says Professor Blanaid Clarke, McCann Fitzgerald Chair of Corporate Law at Trinity College Dublin.
“Yes, accountability and punishment are important,” she says.
But the accountability is there in order to improve the culture and to improve behaviour to prevent any issues, rather than to cure them.
Perhaps the most well-publicised aspect of the new framework is the Senior Executive Accountability Regime (SEAR).
The centrepiece of the Central Bank’s initial proposals back in 2018, media and political interest in the SEAR was revived in the aftermath of the Davy debacle in March.
After handing the firm a record €4.1 million fine without making any findings of wrongdoing against any of the senior individuals involved in the scandal, the regulator made it clear in a very public fashion that its toolkit needed to be expanded.
Before the Oireachtas Finance Committee in March, Derville Rowland, Director General of Financial Conduct at the Central Bank, said the legal framework “requires further strengthening with regard to individual accountability”.
That’s where SEAR comes in.
The new regime will require regulated firms — specifically banks, most insurance companies and investment firms — to produce a “map of responsibilities”, explains Professor Clarke.
That means each senior employee will have to sign a statement outlining the precise responsibilities of their job.
“Now, that doesn’t mean because my name is on the statement, I will necessarily be liable” when a problem arises, she explains.
But in the event of a Central Bank investigation, this map of responsibilities should remove a lot of the guesswork around who was in charge when the issue cropped up.
If a senior employee does fail to take reasonable steps to stop their firm from breaking laws or regulations, the Central Bank can then take enforcement action against the individual and impose administrative sanctions.
Sanctions currently range from disqualification to fines of up to €1 million.
“So it moves you along that step in a much more efficient way,” Professor Clarke says.
The participation link
One of the central aims of the legislation is to break something called the “participation link”, described this week by Donohoe as a “known deficiency” in the current administrative sanctions regime.
It refers to the fact that currently, the Central Bank has to prove the wrongdoing of the firm before it can target individuals for sanctions.
Following on from that, the regulator then has to prove that the individual actually participated in their company’s regulatory breach.
“This may not be appropriate or possible in every single case as it may not accurately reflect an individual’s conduct in respect of the wrongdoing under investigation,” the general scheme of the draft Bill states.
“It can also result in delays in finalising individual investigations and/or inquiries.”
Clarke says that combined with the responsibility map, this will “make it easier” for the regulator to conduct its business and make their investigations “more accurate”.
Relatedly, the new rules will also allow the Central Bank to investigate and sanction individuals even if they have stepped down from their role.
“I think that’s really important,” Clarke says.
You don’t want somebody who realises they’ve been caught doing something and then resigns.
The general scheme of the Bill makes specific reference to a Court of Appeal case involving former Irish Nationwide Building Society chief executive Michael Fingleton.
He unsuccessfully argued in court that he could not face a Central Bank inquiry because he had retired before the probe was formally initiated in 2015.
Fingleton argued that the law does not allow for inquiry into his past conduct at the firm.
But his case was dismissed in 2018, although the inquiry into his conduct was ultimately terminated in 2019 due to Fingleton’s ill health.
So while Court of Appeal judgment clarifies that the past conduct of a former executive can be investigated, the new framework further shores up this potential loophole.
“It’s making it absolutely clear, and beyond doubt, that the rules will apply to somebody who performed this function,” Professor Clarke says.
“It’s something that’s been clarified in the case law but [the legislation] is putting it beyond doubt.”
Getting it in writing
The new framework will also bolster the Central Bank’s fitness and probity regime.
All regulated financial services firms will now have to certify in writing that a person is fit and proper to perform sensitive or ‘controlled’ functions within the firm.
This will have to be done annually.
The Bill also provides for a new set of conduct standards that apply to individuals in controlled functions and a new set of business conduct standards for general employees of financial firms.
Overall, Clarke welcomes the proposed legislation but “the devil will be in the details”, she says.
Donohoe said this week that he expects the proposals to be fully implemented within 12 to 18 months.
“So what we’re seeing is examples of the provisions but there is scope for the Central Bank to introduce regulations and guidance,” Clarke says
“That will all be necessary. So we’re seeing part of it, if you like.”
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