Update on bank executive accountability – October 2020

Friday, October 2, 2020

We have previously looked at the Central Bank of Ireland’s (CBI) report on “Behaviours and Culture of the Irish Retail Banks” and the proposals for a Senior Executive Accountability Regime (SEAR). These proposals are currently with the Department of Finance where the legislation underpinning SEAR is being drafted and considered.

In the meantime, the ECB signalled in an opinion piece by Vice-Chair of the supervisory board of the ECB on 1 October 2020 that the ECB intends to implement “stricter and more intrusive” fit and proper assessments. The ECB intends to revise the existing Guide to Fit and Proper Assessment to ensure a more harmonised approach across the EU and will examine more closely the individual accountability of board members guilty of misconduct and those who turn a blind eye to misconduct by their peers. In addition there is to be increased scrutiny on reputation, such as previous criminal convictions or other ongoing proceedings and, of relevance to existing bank directors, how new material facts will trigger a reassessment of suitability for existing bank directors.

As noted in our previous updates on SEAR, the CBI individual accountability proposals consist of:

1. Individual Conduct Standards: Applying to all of those who work in financial services. The behaviour the CBI expects of regulated financial services providers and the people working there. These include honesty, integrity, acting with due skill, care and diligence.
2. Additional Conduct Standards: Applicable to individuals in senior roles. These will include a requirement to take all reasonable steps to ensure the area of business for which they are responsible is controlled effectively and complies with regulatory requirements.
3. SEAR: Clear allocation of responsibility and accountability within the firm and between individuals, with documents responsibility maps setting out key management and governance arrangements, terms of reference for key board committees and so on
4. Enhanced Fit and Proper Regime: The intention is to strengthen the onus on firms to proactively assess individuals in a controlled function role on an ongoing basis and to provide for the ability to investigate people who performed controlled functions in the past.
5. Unified Enforcement Process: A revised process to apply to all breaches by firms or individuals of financial services legislation and to remove the requirement for a participation link to be proven in respect of an individual in a firm’s wrongdoing before the CBI can pursue and individual.

Stricter and more intrusive is a phrase that we have become more accustomed to hearing in statements from regulators both in the ECB and the CBI in terms of the approach to be adopted to regulation. It is a recurring theme as they continuously look at the integrity and competence of bank directors as the most important line of defence against mismanagement and fraud, and the fit and proper assessment and banking culture are increasingly seen as the ultimate quality control by regulators. With the legislation establishing the SEAR regime being drafted by the Department of Finance and the ECB proposals likely to come through as a directly applicable EU Regulation this will remain an area of intense focus for regulated firms.

For further information on the above article, please contact our banking team led by Simon O Neill.