- RFSPs will be obliged under SEAR to set out clearly where decision making/responsibility lies. This will be done by preparing “statements of responsibility” for each senior executive, identifying key risks within their area of responsibility, as well as a “management responsibility map” setting out where each senior executive role sits within the management and governance structure of the organisation. SEAR also creates a new “Duty of Responsibility” on senior executives to take reasonable steps to prevent the organisation committing regulatory breaches in the area for which they are responsible. Breaches of this Duty of Responsibility will be enforceable directly against senior executives by means of the CBI’s Administrative Sanctions Procedure (ASP).
- The introduction of Common Conduct Standards for all individuals in controlled function (CF) roles, as well as Additional Conduct Standards for individuals in senior positions (including those who hold a pre-approved controlled function or PCF) and Business Conduct Standards applicable to all regulated firms in the financial sector. These standards will set out the requirements expected of relevant individuals who hold management roles in RFSPs. Failure to comply with these new standards will be enforced against the executives or the RFSP by means of the CBI’s ASP.
- The current Fitness and Probity Regime will be enhanced to include an obligation on RFSP’s to certify that individual senior executives meet fitness and probity standards. Breaches of this requirement will be enforceable against the RFSP by the CBI’s ASP. The Regime will also be expanded to enable the CBI to investigate persons who formerly performed a CF or PCF role.
- The CBI’s enforcement framework will be enhanced by the removal of the “participation link”. This rule required the CBI to prove that the RFSP had committed a regulatory breach which the individual had “participated” in, before proceeding against the individual. In essence, the CBI had to proceed against the entity first. The removal of this rule means that the CBI will be able to proceed against the individual in tandem with the entity, or indeed proceed against the individual directly.
The Senior Executive Accountability Regime – Key points for directors' and officers' (D&O) insurers
Ireland is set to increase regulatory oversight of persons with decision making power in regulated financial entities. The changes being proposed are likely to lead to an increase in both the number of claims made under the directors' & officers' (D&O) insurance policies of those regulated entities and the costs incurred in respect of those claims.
In 2018, the Irish financial regulator, the Central Bank of Ireland (the CBI), proposed the introduction of a Senior Executive Accountability Regime (SEAR). This followed its report on the behaviour and culture of the Irish retail banking sector, which highlighted that failings within the banking sector were a significant contributing factor to the financial crisis of 2007/2008. SEAR is expected to commence during the latter half of 2022 and its scope has been touched upon in the General Scheme of Central Bank (Individual Accountability Framework) Bill 2021 (the Bill), published on 28 July 2021.
The Bill proposes the introduction of an Individual Accountability Framework (IAF), granting the CBI enforcement powers in respect of mismanagement by individuals in senior management positions in regulated financial service providers (RFSPs). The Minister of Finance has claimed that the proposals “will put individual accountability at the centre of decision making in financial services organisations” and will “ensure that there is clarity around the roles and functions of senior executives”.
The IAF will be similar to the United Kingdom’s Senior Managers and Certification Regime which was extended to the insurance sector in 2018.
The four main proposals in the Bill:
We understand that the IAF will be introduced on a phased basis, beginning with banks, insurance companies and other sectors which have a high degree of interaction with retail customers (excluding credit unions, reinsurance undertakings, captive (re) insurance undertakings and Insurance Special Purpose Vehicles). The IAF will also apply to third country branches of these institutions.
Key points for D&O insurers
SEAR, and related proposals contained in the Bill, represent an important development in the regulation of those who hold executive functions within the financial sector in Ireland, and will impact their insurers.
Greater regulation widens the scope for conduct investigations, the costs of which may fall to be considered under the entity’s D&O policy.
Of perhaps most significance to underwriters will be the removal of the “participation link” in regulatory investigations conducted by the CBI. To date, the regulated entity’s professional liability/financial institutions insurers have often been exposed to the costs of the entity cooperating with a conduct investigation by the CBI. D&O insurers have sometimes escaped exposure unless the CBI proceeds to investigate an individual’s conduct after the entity has been sanctioned. Some commentators believe that the subsequent sanction procedure against the individual is underutilised, given the impression that sanctions against the entity often indicate the end of CBI’s interest in a matter.
The ability of the CBI to proceed immediately against the individuals responsible for potential regulatory breaches, without having to establish first a regulatory breach on behalf of the entity, is likely to expose D&O insurers to significant investigation costs much earlier than under the current regime. This is potentially to the benefit of the entity and/or its financial institutions insurer, who would otherwise have incurred significant costs cooperating with the CBI’s investigation and ASP.
In practice, we anticipate that the CBI will commonly investigate both the RFSPs and the individual at the same time. This may raise questions over how costs are to be allocated between the RFSP (and its insurer) and the D&O insurer, should the RFSP and the individual be represented by the same firm, although the potential for conflict of interest between the RFSP and the individual may avoid such allocation issues arising. Either way, SEAR and the related proposals contained in the Bill are likely to increase the exposure of individuals and, in turn, D&O Insurers to CBI investigations. In response, the D&O market may “harden”, with insurers charging increased premia and/or introducing sub-limits of indemnity to reflect the increased risk of such investigations and the significant costs that accompany them.