CBI updated regulations leave core IAF requirements intact

In this article for Finance Dublin, Kian Caulwell, partner and head of financial services consulting, analyses the changes contained in the Central Bank’s latest guidance.

The financial services sector is making significant strides in preparing for the Individual Accountability Framework (IAF), with 89% of firms reporting improved readiness, according to a November 2023 study by Mazars and the Compliance Institute. Furthermore, 82% of respondents said their board and/or executive committee had considered the impact of Senior Executive Accountability Framework (SEAR)/IAF in the past 12 months, a significant increase from the 73% who said so in the 2022 survey.

It is noteworthy that the research was carried out prior to the Central Bank of Ireland’s (CBI’s) Feedback Statement in relation to the IAF issued on 16 November 2023. The statement followed a three-month consultation process which took place between March and June 2023.

The Feedback Statement issued updated regulations and further guidance to Regulated Financial Service Providers (RFSPs) in a number of important areas including Independent Non-Executive Directors (INEDs), Certification, and Disciplinary Procedures.

While the recent updates were generally welcomed, it is crucial to note that the core expectations for board and executive behaviour remain unchanged. The IAF and SEAR, upon enforcement, won't bring about any radical shifts in the responsibilities expected from boards and executives.

The stated purpose of the Individual Accountability Framework Bill was to “confer powers on the Central Bank of Ireland to strengthen and enhance individual accountability in the financial services industry.”

There was general agreement during the consultation period that the implementation of IAF would likely clarify the responsibilities of regulated firms and individuals in terms of expected standards of conduct and would help promote sound governance practices and enhance the culture of accountability within financial services. In other words, it wasn’t introducing any new standards of conduct or governance practices.

The changes announced in the Feedback Statement are significant nevertheless, however.

Concern was expressed during the consultation in relation to the proposed timeline for the applicability of IAF to all INEDs. In response, the CBI has decided to defer the introduction of SEAR for INEDs until 1 July 2025, specifically the application of prescribed responsibilities.

The rationale is to allow the CBI and Regulated Financial Service Providers (RFSPs) to learn from the introduction of the framework as it applies to executive directors first. However, all other aspects of the IAF including the Conduct Standards apply to INEDs from 29 December 2023.

The deferral is certainly welcome but will not have any practical implications for how board members conduct themselves and discharge their responsibilities. Existing CBI codes already outline corporate governance requirements for financial services providers and their boards. All that has changed is that INEDs will not have prescribed responsibilities assigned to them until 1 July 2025. But chairs of committees such as internal audit will de facto have these responsibilities in any event. The role of INED inherently carries responsibilities that must be fulfilled irrespective of the new framework in place.

From a practical standpoint, the CBI has limited the scope of enhanced due diligence for certification requirements to PCFs, CF1s, and CF2s. Up until 16 November, it had been proposed that it would apply to all CF3-CF11 role holders.

This will allow firms to implement a self-certification process in respect of CF3 to CF11 role holders. This will significantly reduce the administrative burden on firms as there are thousands of such role holders in the industry in Ireland at present. It will also place a greater obligation on forms to ensure their CF role holders are fit and proper to hold the office.

Another notable change relates to disciplinary actions against PCF and CF role holders. It had been proposed that all such disciplinary actions would need to be notified to the CBI. On the face of it, there was little wrong with that, but it would not have been confined to disciplinary processes relating to regulatory breaches. Moreover, the gravity of the offence or penalty would not have been taken into account.

This has now been amended to notification only when the person is not being retained in the role as a result of the disciplinary action, as is the current requirement.

Despite no introduction of new conduct standards, there are concerns about difficulties in recruiting people to PCF roles. 90% of respondents to the Mazars survey believe this would be the case.

The UK experience, where a similar framework has been in place since 2015, provides some reassurance, with only 8% of respondents reporting recruitment challenges in a 2019 survey carried out by industry body UK Finance.

On a positive note, 83% of respondents believe that implementing IAF requirements will lead to better outcomes for financial services customers. Drawing parallels with the UK experience, it is anticipated that the IAF will not pose significant barriers to recruitment.

In conclusion, while the CBI's Feedback Statement introduces significant changes, the fundamental expectations for board and executive conduct remain consistent. The amendments aim to enhance the effectiveness of the framework without imposing undue burdens on financial service providers. The industry's positive outlook suggests that the IAF, when fully implemented, will contribute to improved governance practices and better outcomes for customers.