ICQ Log - Consumer Protection

Positive Behavioural and Cultural Change: The implementation of an IAF

Last Updated: 10 September 2021

Kian Caulwell, Head of Conduct Risk and Compliance Advisory at KBC Bank Ireland and member of the ACOI Consumer Protection Working Group, looks at the implementation of an IAF and the impact it will have on firms. 

The initial structure of an Irish Accountability Framework (IAF), was introduced by the Central Bank of Ireland (CBI) in its July 2018 report, Behaviour and Culture of the Irish Retail Banks. A recurring theme within the CBI’s report and other publications is the need for cultural change to occur within the financial services industry to regain consumer and investor trust and ensure business models are sustainable.

But, can a piece of legislation focused on accountability and making it easier to hold individuals to account (privately and publicly), be an enabler to deliver demonstrable behavioural and cultural change, that benefits our customers, our people, our firms and our industry? Yes, it can.

27 July 2021 marked a significant milestone for the Irish financial services industry in its journey to implement an IAF. The Department of Finance (DoF) released the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021. It outlines the draft Heads of Bill to address the CBI’s proposals for an IAF and a Senior Executive Accountability Regime (SEAR) as outlined in their July 2018 report. When enacted, the Bill will create the IAF. The IAF will empower the CBI to hold those in management roles at Regulated Financial Service Providers (RFSP/firm) accountable for wrongdoing that occurs under their supervision.

The Proposals

The Bill contains few surprises and includes the core elements as expected, specifically:

SEAR - The introduction of a SEAR, which places obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lies.

Conduct Standards - The introduction of three distinct sets of conduct standards:

1. 1. Common conduct standards to apply to all individuals in controlled functions;
   2. Additional conduct standards for individuals in senior positions; and
   3. Business conduct standards for all firms .

Fitness and Probity(F&P)

Enhancements to the F&P regime to support the effective operation of the IAF.

Participation Link

The Bill proposes to break the current “participation link”. This link currently requires the CBI to prove a contravention of financial services legislation against a RFSP before it can take action against an individual.

RFSPs In-Scope

Banks, investment firms and insurance firms all fall within the scope of the legislation. However, specifically with respect to the SEAR requirements the following firms will be in-scope initially:

1. 1. Credit institutions, excluding credit unions;
   2. Insurance undertakings, excluding reinsurance undertakings, captive (re)insurance undertakings and insurance special purpose vehicles;
   3. Investment firms which underwrite on a firm commitment basis and/or deal on own account and /or are authorised to hold client monies/assets; and
   4. Third country branches of the above.

What Impacts can we Expect?

The implementation of the IAF will create a number of impacts for firms, some of which will be short-term in nature (e.g. the initial administrative burden of implementation) and others will have a medium to long-term impact (e.g. the positive impact it will have on the behaviours and culture within firms). Outlined below are a number of impacts, we can expect to experience, including observations from the implementation of a comparable regime (Senior Managers and Certification Regime (SMCR)) in the United Kingdom (UK).

The Challenges of Implementation

The key challenges of the initial implementation of the IAF will be ensuring;

Your Firm has the buy-in and engagement of senior management, that set the right tone from the top; and

Your Firm designs and implements fit for purpose documents, systems and controls. Some of the key considerations and enhancements that will be required are:

A Management Responsibilities Map (SEAR specific) – Which must outline the firm’s governance structure, responsibilities and reporting lines of committees and senior management.

Prescribed Responsibilities and Statements of Responsibilities (SoR) (SEAR specific) – Each firm will be obliged to allocate prescribed responsibilities to Pre-Approved Control Function (PCF), to be documented within each PCF’s SoR.

Certification of CFs and PCFs – Firms will need to review their existing F&P frameworks to assess if enhancements are required to facilitate the completion of periodic due diligence of staff, to confirm staff remain fit and proper to continue in their role.

Enhanced Corporate and employee documentation – Firms will need to enhance and/or develop specific policies and procedures relating to their IAF, employee contracts, job descriptions and performance management process (including the incorporation of conduct standards).

Training – Each firm will need to ensure all impacted staff receive relevant appropriate training on the firm’s IAF.

IAF as an Enabler of Behavioural and Cultural Change

 n recent years, other jurisdictions have implemented their own accountability framework including, the UK, Australia, Hong Kong and Singapore (as of September 2021). Of these, the UK framework is the most closely aligned to the proposed Irish framework and has been effective since 2016.

As a consequence, there have been many industry studies focusing on assessing the impact of the SMCR on UK firms and the industry, which provide useful insights into an IAF. A significant and recurring finding from each of the individual studies performed by the Financial Conduct Authority (FCA) ¹  , Prudential Regulation Authority(PRA) and UK Finance is that the implementation of SMCR has had a positive impact on the behaviours of individuals and/or the culture of firms surveyed. Specifically, the PRA ²  noted that of the 140 firms surveyed, 96% noted that SMCR “had brought about positive and meaningful changes to behaviour in industry”. Whilst, UK Finance ³  noted that based on their survey of 25 credit institutions:

“Industry respondents regard the introduction of the SMCR regime as a positive development which has led to improvements in behaviours and processes within firms”; and

There was a general consensus across those surveyed that changed the culture at their firm.

Notwithstanding the positives noted above from these studies there are also further lessons to be learned on avoiding some of the potential negatives of implementing an IAF, for example; the perception of innovation being stifled or increased complexity surrounding decision making within committees.

It would appear from the UK experience of SMCR that overall it has had and continues to have a demonstrable positive impact on the behaviours and culture within firms. Which given the similarities between the UK and Irish jurisdictions including past issues of misconduct and the actions taken by regulators to ensure there is greater accountability, the IAF in Ireland should have a positive impact locally and act as an enabler for positive behavioural and cultural change.

Author: Kian Caulwell

Head of Conduct Risk and Compliance Advisory at KBC Bank Ireland

REFRENCES:

1. Senior Managers and Certification Regime Banking Stocktake Report | FCA

2. Evaluation of the Senior Managers and Certification Regime (bankofengland.co.uk)

3. https://www.ukfinance.org.uk/system/files/SMCR - Evolution and Reform.pdf

< Back to all Log Posts

ICQ Autumn Edition 2021

This article was taken from the ACOI's ICQ Autumn Edition 2021