Monday December 9, 2019

Should you fear the SEAR?

Financial services firms need to prepare now for the new rules on accountability that the government is setting up, writes Donal Hamilton

24th November, 2019

Minister for Finance Paschal Donohoe recently said that there was “still some considerable distance to go” in the reform of Irish banking culture.

A key initiative in this ongoing process has the catchy title of Senior Executive Accountability Regime, or SEAR for short. The regime places new obligations on financial services firms and the people working for them.

According to the finance minister, SEAR will be “a key driver” of cultural change across the sector and even though he made the comments at Halloween, firms have nothing to fear, although they should be starting to prepare for what lies ahead.

The required changes will be neither straightforward nor easily managed. While its introduction will take some time, SEAR will no doubt require significant changes to organisational structures and HR practices. So what can firms expect:

Overview

It will apply initially to banks, insurers and certain investment firms, all of which will be required to clearly set out where responsibility and decision-making lies within their organisations.

Individual accountability already exists under current rules. Financial services firms and their executives will be aware that the Central Bank has the power to sanction individuals managing regulated entities with penalties up to €1 million.

However, the Central Bank has said that the new proposals will “go significantly beyond the current requirements for staff to be fit and proper, set conduct standards for staff, and ensure clearer lines of accountability within firms”.

Enhanced conduct standards will operate at three levels - for staff, for senior management, with additional requirements, and for businesses themselves.

A new certification regime is also expected, under which firms will be obliged to annually certify that individuals subject to the existing Fitness and Probity Regime are fit and proper persons to perform their functions.

Increased powers of enforcement are also included in the proposals. These will allow the Central Bank to pursue individuals directly, rather than having to link the misconduct to a regulatory breach by their firm.

The move represents a significant departure from current practice and will make enforcement proceedings against individuals more likely.

Responsibility maps

Financial services firms will be required to prepare responsibility maps and statements of responsibilities to ensure that individuals who are accountable for key functions can be readily identified.

It will also require a wholesale review of individual roles within the organisation, as well as the responsibilities of the board and its committees. This will be a significant undertaking that should not be underestimated.

Additionally, employment contracts, workplace policies and performance reviews may all need to be assessed in light of SEAR.

For example, individual employees’ adherence to the new obligations will need to be reviewed through internal performance management procedures.

Therefore, policies and procedures may need to be updated. Employees will need to be clearly informed that their performance will, at least in part, be judged on how well they meet the requirements set out in SEAR.

The SEAR proposals share many similarities to Britain’s Senior Managers and Certification Regime (SMCR), which was introduced in March 2016 for banks, building societies, credit unions and insurers.

Timeline

The SEAR rollout is continuing on a phased basis and will extend to all firms regulated by the Financial Conduct Authority later this year.

Levels of enforcement action have been relatively low to date. Out of ten completed FCA investigations, there has been just one successful enforcement action. The FCA has, however, indicated that it intends to increase its supervisory focus on conduct rules. This suggests that more investigations, and more enforcement actions, are inevitable.

In Ireland, the Central Bank recently stated its intention to intensify its focus on conduct regulation over the next three years.

Fitness to perform

The operation of the SMCR in Britain has also given rise to some interesting questions about how an individual’s fitness to perform a given function should be assessed. To what extent, for example, should someone’s private life be taken into account in assessing their honesty and integrity?

Can someone who is not certified as fit and proper become fit and proper with appropriate training? If someone is not certified as fit and proper, are they to be re-deployed or simply dismissed? Clarity will be required on all these issues, which are crucial to HR management and organisational preparedness.

A public consultation on SEAR is due in the coming months. Any firms potentially affected should start to examine how it could impact their organisations. They should not only begin preparations for its introduction, but engage properly in this consultation, ensuring that any potential problems are flagged early in the process.

Donal Hamilton is a senior associate at McCann FitzGerald

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