SEAR: Part of an international drive for greater individual accountability?

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SEAR: Part of an international drive for greater individual accountability?Global trend - The past decade has seen a marked and continuing shift in global focus towards greater accountability and responsibility for decision making in the financial sector - no doubt influenced by the fallout of financial crisis.

In 2018, the US Federal Reserve proposed guidance on management of business lines and independent risk management controls for large financial institutions (including individual accountability). Hong Kong, Australia and Singapore have introduced similar regimes and proposals.

Closer to home, the UK paved the way by introducing its Senior Managers and Certification Regime (SMCR) for the banking sector in 2016 and the insurance sector in 2018. It seeks to strengthen market integrity; more clearly enabling firms and regulators to hold individuals to account. Broader European trends have been to focus on ensuring professional qualifications, knowledge and experience. This is coupled with broad-based powers to sanction for failings. Most jurisdictions in Europe have not yet moved toward a regime specifically designed to allocate or action accountability at individual officer level.

Ireland’s response

Ireland is following the international trend as a front-runner in the European context. Our proposed Senior Executive Accountability Regime (SEAR) is a key catalyst. Together with other measures (e.g. enhancements to fitness and probity, administrative sanctions and conduct standards) SEAR is part of the Central Bank of Ireland’s (CBI) wider framework to boost  transparency and accountability in the financial sector by making it easier to identify individuals responsible for certain functions, decisions and failings.

What next?

The framework is to be put on a legislative footing in the Central Bank (Amendment) Bill 2019. The Department of Finance expects to produce a draft scheme of the Bill by the end of 2019 with the CBI then expected to publicly consult on it. The text of the Bill will then be prepared and must pass through both Houses of the Oireachtas (where it may be amended) before it can be signed into law. As a result, it is likely to be some time before SEAR is in place.

Who will be affected?

Firms in scope include banks, investment firms and certain insurance companies. Individuals in scope include:

  • board members (no substantive change expected for non-executives)
  • executives reporting directly to the board
  • heads of business critical areas

How can we prepare?

With very limited information available, this is difficult to predict. However, if SEAR bears any resemblance to the UK SMCR, key features may include:

  • earmarking certain functions as business critical (including possibly new pre-approval roles)
  • prescribed responsibilities to be allocated to named individuals/roles
  • statutory duty/onus on relevant individuals to take reasonable steps to prevent breaches
  • responsibility mapping/statements of responsibilities (for firm and individuals) including delegation, reporting lines, supervision process/procedures

Food for thought

How will SEAR dovetail with collective Board/management responsibility? The UK regulator’s position is that decisions may be taken collectively where:

  • this was reasonable
  • individuals informed themselves in advance; exercising reasonable care/skill/diligence in contributing to the decision

Watch this space!

Keep track of developments on the Bill www.oireachtas.ie

Monitor CBI speeches and press statements www.centralbank.ie

By Sinead Lynch of A&L Goodbody.