Ireland’s increased governance of financial services firms
Ireland has introduced extra accountability rules for senior staff that are similar but not identical to those under the UK Senior Managers and Certification Regime, says Ian Duffy of Societe Generale Securities Services.
On March 9, 2023, the Central Bank (Individual Accountability Framework) Act 2023 was enacted. It sets out the basis for the Senior Executive Accountability Regime (SEAR), and following the March 13 enactment, the Central Bank of Ireland (CBI) launched a three-month public consultation paper, including draft regulations and guidance on the key aspects of the implementation.
SEAR imposes additional responsibilities and accountability on senior executives in financial services companies. Under the SEAR, senior executives are required to identify and manage the key risks associated with their roles and to ensure that appropriate systems and controls are in place to mitigate those risks. In essence, the legislation will ensure greater transparency and clearer accountability within financial service providers.
It does this by requiring firms to:
• clearly describe where responsibility lies through statements of responsibility and management responsibility maps
• confirm through an annual certificate of compliance that those performing controlled functions (CFs) are “fit and proper”
• introduce new common conduct standards for Control Functions, additional conduct standards for Pre-approved Controlled Functions (PCFs) and any other individuals exercising significant influence on the firm and business standards applicable to the firm; and
• imposes on Senior Executive Function holders (SEFs) a duty of responsibility to take steps that are reasonable in the circumstances in relation to the business areas they are responsible for to avoid infringement of the firm’s financial services obligations.
The SEAR is similar to the Senior Managers and Certification Regime (SMCR) that was introduced in the United Kingdom in 2016. Like the SEAR, the SMCR imposes significant responsibilities on senior executives in financial services companies. However, there are differences.
Under the SMCR, there is a distinction between senior managers, who are subject to greater regulatory scrutiny, and certification staff, who are subject to less rigorous requirements. In Ireland, the scope seems narrower, where Common Conduct Standards will only apply to CFs and Additional Conduct Standards will apply to PCFs and CF1s.
Another difference is that the SMCR, at this stage, applies to a wider range of financial services companies than the SEAR. There were two phases of implementation in the UK. In 2016, credit institutions and systemically important firms were in scope, then all other institutions were included later in 2019. There will be a phased rollout in Ireland, with SEAR initially applying to a defined range of firms, namely:
• credit institutions (excluding credit unions);
• insurance undertakings (excluding reinsurance undertakings, captive reinsurance undertakings and insurance special purpose vehicles);
• investment firms which underwrite on a firm commitment basis and/or deal on their own account and/or are permitted to hold client assets; and
• incoming third-country branches of the above are also within scope.
The scope will initially cover 150 firms. However, all regulated firms will be subject to the Conduct Standards, enhancements to the Fitness and Probity Regime and strengthening of the Administrative Sanctions Procedure by the end of this year.
Given the broad similarities in the legislation, it is worthwhile examining how the actual implementation has worked in the UK. Although introduced in 2016, there has been limited action taken against individuals. Only in recent months has the number of senior managers and other certified staff under investigation increased.
It is also worth noting that there are reviews taking place on the effectiveness of the SMCR. The Edinburgh Reforms, announced in December 2022, have politicised matters and have clearly identified the need for an impact analysis of the SMCR regime. There is a post-Brexit desire to make the UK more competitive, but most companies have welcomed the changes brought about by SMCR, and the FCA has clearly stated how successful it has been in improving culture and increasing standards of conduct across the industry.
Ultimately, that’s what the Irish regulator is looking for too. They want Ireland to be a robust and mature location for financial services. The SEAR is creating the formal framework to address matters that many financial services firms have already been dealing with for several years. There will be costs to design and manage the new frameworks, but there should be benefits to the domicile in the long run. There will be advantages for some firms who already have the experience of implementing SMCR in the UK, and so are able to pass on the key lessons learnt to their Irish colleagues.