On March 9, the much-awaited new individual accountability regime in financial services was enacted into law, with most of the key aspects of the new regime to apply from December.
The core aim of the new regime is behaviour and culture change in the financial services industry. But those who are expecting that this new regime in Ireland is all about the imposition of heavy financial sanctions on high-profile individuals might be disappointed.
Initial indications from equivalent individual accountability regimes in the UK and Australia are positive.
A key element of the regimes involves requiring in-scope firms to ensure that each senior individual has in place a documented statement of responsibilities, setting out those activities of the firm for which they are responsible.
Senior individuals are required to take reasonable steps to ensure that breaches of regulatory requirements do not occur in their area of individual responsibility.
The senior individuals can be held individually to account by the regulator if they fail to take such reasonable steps.
This is intended directly to address one of the key concerns identified in a 2013 UK parliamentary report into banking misconduct, which led to the adoption of the individual accountability regime in the UK – namely, wilful blindness to misconduct at senior levels.
Recent industry surveys in the UK and Australia indicate that the clarification of individual roles and responsibilities at a senior level in firms has focused the minds of senior managers on improving behaviours and has empowered individuals to get issues resolved. The new regime sets out individual conduct standards, including additional standards that apply only to more senior individuals.
A failure by an individual to take “any steps that it is reasonable in the circumstances to take” to comply with these individual conduct standards will render the individual liable to sanctions, regardless of whether this conduct also gave rise to a breach by the individual’s firm.
The sanctions that could be imposed on an individual include a fine of up to €1m and disqualification. But as stated by the Central Bank, “we do not expect the main benefits of the new framework to be enforcement-driven”.
Taking sanctions cases against individuals is always likely to be complex and time-consuming. This is borne out by our experience at Eversheds Sutherland of the equivalent regime in the UK, where a fine has been imposed in only one case since the UK regime started in 2016.
Under the new regime, however, high-profile sanctions from the Central Bank are not the only risk for individuals in the industry who may engage in (or tolerate) misconduct.
In particular, individuals whose actions (or failures to act) might give rise to ethical concerns can find themselves in difficult conversations with the Central Bank when seeking its required prior approval for a senior-level appointment in the industry.
When individuals are faced with material concerns raised by the Central Bank, they typically choose to withdraw their application for approval, rather than have a formal refusal on their record.
The clarity of the conduct standards set out in the new regime may give the Central Bank further impetus to make use of this tool to achieve its aim of behaviour and culture change in the industry.
This tool is low-key, relatively quick and easy for the Central Bank to use and does not attract much publicity.
More generally, firms will be required to review the fitness and probity of most of their staff, their senior management and board members on an annual basis. This new requirement will force firms to carry out more stringent and effective due diligence on standards of conduct.
Behavioural science research suggests that while sanctions are a key element of a regulator’s arsenal, the regulator should be focused on speaking softly while carrying a big stick. Indeed, the research suggests that a heavy-handed approach may be counter-productive.
Ultimately, the success of the new individual accountability regime will depend on the use of a complex array of tools and initiatives by the regulator to compel and encourage regulated firms to normalise improved standards of behaviour in the industry. This will likely involve greater cooperation with the industry as a whole to achieve this because, as the Central Bank itself recognised in a recent speech, “the law alone cannot compel cultural change”.
Ciaran Walker is a consultant in financial services regulation with global law firm Eversheds Sutherland and co-author of ‘New Accountability in Financial Services: Changing Individual Behaviour and Culture’