Address to the IBEC Fraud Prevention Forum
Good Morning
I would like to thank IBEC and the International Fraud Prevention Conference for the invitation to address you on the Central Bank’s proposals to strengthen individual accountability in financial services in Ireland.
All around the world conduct regulators in leading global financial centres are focusing on individual accountability in an effort to drive improvements in the behaviour and culture of financial services firms and to rebuild trust in the financial system following a spate of scandals.
In my remarks this morning, I will remind you why the Central Bank has advocated for more individual accountability at senior level; recap what our proposals were; and demonstrate how they will play an important part in helping firms drive a positive and customer focused culture in the future.
I will also argue that financial services firms should view the proposed regime as a tool that will help ensure that senior leaders are crystal clear about their responsibilities and can therefore better manage their businesses. And I will touch on the responsibilities of professional advisors to play their part in driving the cultural transformation.
Global Conduct Regulators Focus on Individual Accountability
It is more than six years since a UK Parliamentary Commission on Banking Standards – set up following the LIBOR interest rate manipulation and other scandals – published its report, Changing banking for good (Parliament UK, 2013).
The Commission recommended the introduction of a new individual accountability regime. The Commission’s chairman Andrew Tyrie argued that a lack of personal responsibility had been commonplace throughout the banking industry, while senior figures sheltered behind an accountability “firewall.’’
But he also stated that high standards would strengthen Britain as a global financial centre.
And so the UK pressed ahead with its Senior Managers and Certification Regime (SMCR) in 2016.
The idea behind the regime was to make clear who the senior managers are, what they are accountable for and what steps they should take to prevent regulatory breaches occurring in their area of responsibility.
In April 2018, the Financial Stability Board – an international body charged with making recommendations about the global financial system – also identified a lack of accountability as a key cultural driver of misconduct (Financial Stability Board 2018).
It recommended that national authorities identify and assign key responsibilities, hold individuals accountable and assess the suitability of people assigned key responsibilities. Such an approach could also support cultural change at firms – for instance, by dispelling notions that fines can be simply dismissed as the cost of doing business.
Why Individual Accountability
That recommendation was music to the ears of the Central Bank as we were already advocating such a regime be introduced in Ireland. This is because we had noticed that it was often very hard to identify precisely who was in charge of which decisions at the firms we regulate and supervise.
Specifically, in our 2017 submission to the Law Reform Commission, we recommended that reforms enhancing the accountability of senior people in regulated entities be adopted here.
We proposed that senior managers would submit a statement of responsibilities that makes clear the matters for which they are responsible and accountable.
This would help assign responsibility to individuals in a regulatory context and decrease their ability to claim that the culpability for wrongdoing lay outside their sphere of responsibility (Central Bank 2017).
Further, the Central Bank had only a few months previously set up a dedicated Financial Conduct Pillar to emphasise our focus on regulating conduct with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner.
Like other conduct regulators in Australia, Hong Kong and Singapore, we see the introduction of an individual accountability regime as a key plank of our strategy to drive firms to embed high standards of conduct and culture that in turn deliver fair outcomes for consumers and investors (KPMG 2018).
We are not alone in our focus on behaviour and culture.
The Minister for Finance in 2017 requested that the Central Bank examine the Behaviour and Culture of the five Irish retail banks amid mounting public concern that banks were dragging their heels when it came to redressing and compensating consumers they had wrongly overcharged in the context of the Tracker Mortgage Examination.
The Minister also asked the Central Bank to suggest any actions that may be taken to ensure that banks prioritised customer interests in the future.
It came as little surprise that we found the five main Irish retail banks all had a distance to travel when it came to building a consumer focused culture.
The burning question for us was what further actions should be taken to drive firms to change their behaviour for the better.
What we recommended
Building on our earlier submission to the Law Reform Commission, the Behaviour and Culture Report set out detailed proposals for reform aimed at driving effective and sustained cultural change within the Irish financial services sector (Central Bank 2018).
First, we proposed five clear and enforceable conduct standards to apply to all staff in all regulated firms. These set out the behaviour the Central Bank expects of regulated financial services providers and the people working in them – standards like behaving with honesty and integrity, acting with due skill, care and diligence in the conduct of their business and co-operating with the relevant regulatory authorities.
There should be nothing surprising in these standards. Staff in firms should already be complying with them, and most already are. We also proposed some additional standards for senior management and firms. The Central Bank is actively engaged with the Department of Finance as to the scope and development of the provisions.
From an enforcement perspective, our hope is that enforcement action following a breach of one of the standards would send a strong public message about the kind of behaviour we expect and the kind of behaviour we refuse to tolerate and for which individuals will be held accountable. We reckon people can readily understand what is meant by a lack of integrity compared to, say, a breach of Solvency II (or some other relatively obscure piece of sectoral legislation).
Second, we proposed a Senior Executive Accountability Regime (SEAR) to ensure clearer responsibility and accountability by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lie for their business.
Third, we proposed further enhancements to the current Fitness & Probity (F&P) regime, to strengthen the onus on firms to proactively assess individuals’ taking up certain senior positions. We also proposed enhancements to overcome some current limitations of the Central Bank’s F&P oversight function; for example, the ability to investigate people who performed controlled function roles in the past.
Finally, we proposed a unified enforcement process, which would apply to all breaches by firms or individuals of financial services legislation. We also recommended that the hurdle of participation be removed such that the Central Bank could pursue individuals directly, rather than only where they are proven to have participated in a firm’s wrongdoing. At present, we can only impose sanctions on individuals where they have participated in a firm’s breach. In our view, this is unduly restrictive and it is not compatible with delivering the necessary reforms and enhanced accountability
How the proposed reforms will drive cultural change [SLIDE 4]
Driving a positive consumer focused culture is the responsibility of firms in the first instance and we expect boards to ensure they have fully embedded risk frameworks to manage conduct risk and drive positive behaviour at the firms they lead.
The Central Bank considers these proposed reforms to be necessary enhancements to its supervisory and enforcement toolkit which supports an effective and ethical culture in regulated firms.
What we would like to see, as I am sure you would too, is that the tone for such a positive culture is set from the top at the firms, cascaded throughout the entire organisation – and echoed from the bottom up. We believe that these proposals to strengthen individual accountability are an important step in that direction.
We believe that senior roles in regulated firms come with serious responsibilities and that it is important these responsibilities are understood and are clearly delineated within a firm and that appropriate consequences follow where senior people abdicate their responsibilities.
Combined, the SEAR, the Conduct Standards, an enhanced enforcement process and the F&P Regime should help achieve the aims of individual accountability and embed a positive culture in regulated firms.
In the Central Bank’s Behaviour and Culture Report, we proposed that the SEAR would initially apply to credit institutions, certain insurance and investment firms and third country branches of all of these. In that report, we also proposed that the senior executive functions covered by the regime would include board members, executives reporting directly to the board and heads of critical business areas.
Firms would be required to produce statements of responsibilities and responsibility maps documenting key management and governance arrangements in a comprehensive, accessible and clear single source of reference.
That’s because we think it important that those people, the firms that employ them and we as regulators are clear on who is responsible for what and that no aspect of a firm’s business is unaccounted for.
The Role of the Professional Advisor
But it isn’t just about the firms.
All participants in the financial services industry, including key legal and accountancy advisors, must play their part in the cultural transformation.
Given that the purpose of regulation is to safeguard stability and protect consumers, the Central Bank expects the conscientious professional to advise firms to comply not only with the letter of the rules, but also with the spirit.
The great philosopher Edmund Burke put it very eloquently when he said: “It is not what a lawyer tells me I may do; but what humanity reason and justice tell me I ought to do.’’
The Existing Regime: Fitness & Probity
Of course, it is important to highlight that under our existing framework, we can and do consider the behaviour and actions of individuals.
We do so under our two principal enforcement procedures: the fitness and probity regime and the administrative sanctions procedure. I shall say a little about each.
We already have powers to prevent senior people from holding pre-approval controlled functions (PCFs) – such as the roles of chairman, chief executive or board member – where we have concerns about their fitness and probity.
We take this gatekeeping role very seriously and we are determined to keep people out of these senior roles where we have concerns about their fitness and probity. To date, over 80 applications for senior positions have been withdrawn where the Central Bank has challenged the applicant. This is in addition to four outright refusals.
We can also remove people from PCFs or other controlled functions (CFs) following investigation, including, for example, from roles that have a significant influence on the conduct of a firm or roles that involve, say, giving advice to customers or determining the outcome of an insurance claim. We do this by issuing a prohibition notice.
Under the existing regime we have also issued eight prohibition notices.
Recently, we prohibited an individual from performing any controlled function in all regulated financial services providers for a period of two years. We did this after he failed to disclose to us the circumstances under which his former employment had ceased when he made an application for a PCF position (Central Bank 2019).
Let me be clear: we expect absolute candour and honesty from applicants for senior roles. The provision of false or misleading information to the Central Bank may lead to the most serious of consequences – either denial of approval, or if approval has previously been granted, as it was in this case, prohibition from financial services.
Earlier this year, we published full details of the prohibition of a former partner in a financial brokerage firm from performing any controlled function for an indefinite period.
If you have not done so already, I encourage you to read these notices as they contain important messages about the Central Bank’s understanding of what constitutes ‘serious misconduct’, and the relevance of factors such as cooperation and the payment of redress. They also serve to highlight the importance of protected disclosures to the Central Bank in fulfilling our mandate.
Most firms comply with their responsibilities under the Fitness & Probity Regime – but not all. For this reason we wrote to all regulated firms in April 2019 reminding them of their significant compliance obligations under the Regime.
We have seen instances where serious issues have arisen which should have prompted a firm to ask itself if a particular individual was still “fit and proper”, but nothing was done. We expect firms to investigate when concerns are raised, and to take action if those concerns are justified.
We also expect firms to be open and co-operative with the Central Bank where serious issues arise: we have seen instances where firms have identified serious concerns about an individual and may even have taken steps to address these, but have failed to report those concerns to the Central Bank.
In such instances, we expect firms to assess the seriousness of concerns and, where appropriate, to report those matters to us.
I would also remind you that proposed appointees to pre-approved roles must be approved by the Central Bank before they take up the role – a requirement that has not always been observed in practice.
Administrative Sanctions Procedure
Under the Administrative Sanctions Procedure, the Central Bank has now imposed almost €100 million in fines in over 130 cases.
You will also have seen us taking enforcement action against individuals under the Administrative Sanctions Procedure last year, when we imposed significant disqualification periods and fines on two individuals formerly concerned in the management of Irish Nationwide Building Society. In both cases, we issued public statements detailing the outcome.
Prevention is better than Punishment
Some in the legal profession have remarked recently on the Central Bank’s willingness “to deliver a stinging public rebuke to those responsible for sub-par regulatory compliance when it feels it is warranted’’ (Mason Hayes & Curran 2019).
I can confirm that this is the case. We do expect high standards at the firms we regulate and supervise. And we are willing to take enforcement action to deter misconduct and promote a culture of compliance.
For example, our work on the Tracker Mortgage Examination has demonstrated our commitment to put things right and to pursue suspected wrong doing.
First, we pushed banks to pay almost €700 million in redress and compensation to customers who were denied a tracker mortgage or put on the wrong rate. And in tandem we began our enforcement investigations.
The gravity with which we view such failings was demonstrated by the €21 million fine we imposed on PTSB earlier this year, while other enforcement investigations are continuing. You will doubtless be aware that this hefty fine was reduced from €30m because PTSB took advantage of our early settlement discount scheme.
But let me be very clear: while robust enforcement action will continue to underpin our powers, we would far rather that firms focus on preventing wrongdoing in the first place than on punishing them after the fact.
That’s why we plan to intensify our focus on conduct regulation over the next three years including expanding our wholesale conduct regulation.
Wholesale financial markets are key to the effective functioning of the financial system as they provide government, companies and financial firms with a facility to raise finance for both short and long-term growth; to manage financial risks; and to pursue investment opportunities.
This is all the more important as we see big firms involved in wholesale financial trade moving to Ireland in the light of Brexit.
Indeed, the Central Bank’s strategic plan (Central Bank 2018) commits us to:
- Strengthening our approach to conduct risk regulation by requiring firms to have in place high quality and fully embedded conduct risk frameworks;
- Carrying out more intrusive and targeted assessment of firms and products that pose the greatest potential harm to consumers and investors;and
- Focusing on the culture of firms and the individual accountability of the people who run them.
I should note that the experience of other countries who have implemented similar regimes has been broadly positive.
In the UK, for instance, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) applied a senior accountability regime to banks, building societies and credit unions in March 2016. It is due to be extended to all regulated firms by December 2019.
It would not have been extended had it not been considered a success, at least by the regulator.
It is perhaps of note that the feedback to the FCA consultation on extending the regime was positive with the “vast majority” of the 225 responses supportive of the regulator’s proposals.
Indeed, some senior UK executives are now telling the FCA that the new regime is actually helping them to do their jobs properly (Financial Conduct Authority).
Further there are clear indications that “strengthened accountability frameworks for senior management have led to improved governance in many banks and insurers” (KPMG 2018).
Conclusion – What Good Culture Looks Like
I am sometimes asked what good culture looks like.
Let me give you a few examples.
It is having a set of values and expected behaviours that clearly articulate the intended culture of the firm; it is ensuring accountability for consumer protection at board and committee level; and it is having promotion and remuneration policies that encourage employees to behave in a consumer focused way.
We have set out in greater detail what good culture looks like in our Consumer Protection Risk Assessment model which is available on our website (Central Bank 2017).
In crafting our proposals for an Individual Accountability Framework, we have kept abreast of international best practice and the experiences of other regulators.
While the proposed reforms are ultimately a matter for the Oireachtas, the Central Bank is actively engaged with the Department of Finance in the development of legislative provisions in the context of the proposed Central Bank (Amendment) Bill.
However, what I can say is that if the reforms are implemented, there will be a consultation process and extensive engagement with industry as the regime is rolled out.
Finally, as a conduct regulator, the Central Bank’s vision is for a trustworthy financial system supporting the wider economy, where firms and individuals adhere to a culture of fairness and high standards.
I can think of no better way for firms to demonstrate their trustworthiness than to start focusing now on making sure their people are clear about the standards expected of them and are willing to be accountable for living up to those standards – irrespective of when the proposed reforms become law.
In short, the time is always right to do the right thing.
