Navigating new corporate governance challenges in financial services sector
The individual accountability framework, which has introduced new responsibilities for individuals in certain roles, has also created significant challenges for governance professionals
The Central Bank (Individual Accountability Framework) Act 2023 (the IAF Act) has ushered in a new era of individual accountability within the financial services industry in Ireland and raised important challenges for corporate governance practitioners.
The IAF Act introduced conduct standards which came into effect on 29 December 2023, along with a responsibility for individuals performing certain roles to take reasonable steps to ensure those conduct standards are met. It also introduced a Senior Executive Accountability Regime, which will come into effect from July 1, 2024, and a duty of responsibility on individuals performing certain senior roles to take reasonable steps to ensure the firm does not breach financial services regulations.
The IAF Act defines reasonable steps as “steps that it is reasonable in the circumstances for the person to take”, and according to the Central Bank’s Guidance on the IAF, “what is reasonable is context-specific and will vary according to the facts and circumstances of each case.”
This creates an opportunity for those of us who work in the area to make an important contribution as we move through the first phase of this new era of individual accountability
According to Derek Hegarty, partner and head of financial services regulation at KPMG Law LLP, “The concept of reasonable steps is likely to already be embedded in the day-to-day activities of impacted individuals. However, to manage the risks under the IAF Act, individuals will need to apply the IAF Act and the guidance to the performance of their roles and importantly, they will also need to assemble evidence of compliance with the requirements.”
Sanctions can be imposed on an individual by the Central Bank where the individual cannot demonstrate compliance with reasonable steps requirements (with sanctions ranging from cautions to fines of up to €1 million as well as prohibitions from holding certain roles in the financial services industry). However, Hegarty says that firms should nevertheless view the IAF as an opportunity to review existing corporate governance arrangements and ensure best practice and effective implementation.
“Risk consultants are working with firms to develop tools such as reasonable steps frameworks to help individuals achieve and document compliance. Minutes of meetings of governance forums will, however, remain a crucial consideration in any assessment of an individual’s compliance with IAF Act requirements carried out by the Central Bank or as part of an inquiry established under its Administrative Sanctions Procedure.
“In these circumstances, individuals may want to use minutes of a meeting to attribute specific actions or statements to them, or to record group discussions on specific agenda items which are relevant to their responsibilities. However, it is widely accepted that effective minutes should provide a summary of the issues discussed and resulting group decisions, rather than be a transcript of the meeting. This creates a challenge given the potential need to create records of compliance for multiple individuals with a range of IAF responsibilities.”
For corporate governance professionals, this means working out a way to ensure that the vital role of minutes for effective governance and collective decision-making by boards is not compromised by focusing on documenting compliance with individuals’ requirements. “The development of an industry-wide approach is therefore anticipated,” said Hegarty, “and this creates an opportunity for those of us who work in the area to make an important contribution as we move through the first phase of this new era of individual accountability.”
