Anticipating SEAR: A Closer Look at Individual Accountability Regimes in Other Jurisdictions

Introduction

In designing the much-anticipated Senior Executive Accountability Regime “(SEAR”) which will be introduced under the Central Bank (Amendment) Bill, the Central Bank of Ireland (“CBI”) has looked closely at individual accountability frameworks in a number of jurisdictions, including the United Kingdom, Australia, Hong Kong, Malaysia and Singapore.

In this Insight, we take a look a look at the key elements of some of those regimes.

UK

The model that applies in the UK is of particular interest given that CBI is on-record as indicating that SEAR will most closely follow the approach that applies in the UK under its Senior Managers and Certification Regime.

In 2016 the Approved Persons Regime (“APR”) was replaced by the Senior Managers and Certificate Regime (“SMCR”). Initially, SMCR only applied to banks and its application was extended on a phased basis to eventually apply to insurers, building societies, credit unions and investment firms.

There are essentially three pillars of SMCR:

Senior Managers Regime (“SMR”)

The SMR requires that the most Senior Managers who perform key roles, described as “Senior Management Functions”, need to secure FCA approval before starting their roles. In addition to this, those at a more senior level are required to have in-place a “Statement of Responsibilities” that clearly spells out the matters for which they are responsible and accountable.

Certification Regime (“CR”)

The CR applies to individuals, other than senior managers, carrying out specific functions – referred to as a “certified function” - that have the potential to inflict significant harm on the firm, its customers or the wider market. CR requires that firms will need to check and certify that individuals in these roles are fit and proper to perform their roles at least once a year.

Conduct Rules

The Conduct Rules apply minimum standards of individual behavior across firms. There is also a set of Individual Conduct Rules which apply to all staff other than ancillary staff. In addition, there are Senior Manager Conduct Rules which impose more-demanding requirements on senior managers.

Those elements of SMCR are applied on a proportionate basis across firms depending on the type of financial services offered and the scale of their operations.

In December 2020 the PRA published a Report on an Evaluation of the Senior Managers and Certificate Regime[1]. The Report seeks to assess if the SMCR was delivering against its original objectives. The Report notes that there was strong support from firms for the PRA’s view that individual and collective accountability are complementary and this does not negate the fact that the board has the ultimate responsibility for overseeing firms. In addition to this the report indicated that 95% of firms reported that SMCR has had a positive effect on individual behavior.

Australia

Australia introduced the Banking Executive Accountability Regime (“BEAR”) in 2018 to address public anger at the absence of any consequences for senior executives who engage in egregious commercial behavior. The tide of anger stemmed from a series of banking scandals across Australia. BEAR requires banks to allocate specific responsibilities to an accountable person, meaning senior executives and directors. Similar to its UK counterpart, BEAR is designed to improve accountability and prevent executives from hiding behind group decision making processes. As occurred with SMCR, BEAR was introduced on a phased basis, and began to apply to large Australian banks from July 2018 and to all other Authorized Deposit-taking Institutions (“ADIs”) 12 months later.

According to a paper prepared by the Australian Prudential Regulatory Authority (“APRA”), the implementation of BEAR had delivered a stronger understanding of accountability obligations of accountable persons at the ADIs and had sharpened board challenge of executive accountable persons[2]. Similar findings were also put forward by Macquarie University which found that the perceived drawbacks of the regime (such as difficulties in recruiting and retaining senior executives, potential siloed approaches to management and loss of collegiality) did not materialise to a significant degree[3].

Following adoption of BEAR the Australian government also established the Hayne Royal Commission into Misconduct in Banking, Superannuation and Finance Services Industry. A key recommendation of the Commission was for the extension of BEAR across the financial sector[4]. To proceed with this recommendation Australian Treasury published a paper setting out a model to extend BEAR to all APRA regulated entities - the Financial Accountability Regime (“FAR”)[5].

FAR is centered around the following elements:

• accountability obligations will be placed on both firms and Accountable Persons who will have to establish that they took reasonable steps in carrying out their responsibilities;
• Firms must submit accountability statements and maps to the regulator;
• Firms must notify the regulator of any changes in their FAR environment;
• Firms must ensure they appoint the correct persons as Accountable Persons and that their responsibilities cover all operations of the firm;
• Provision of deferred remuneration of Accountable Persons of up to 40% of the Accountable Persons variable remuneration.

The planned regulatory timetable has been extended due to legislative delays caused by the Covid-19 pandemic and draft legislation implementing FAR is expected in June 2021.

Hong Kong

In 2016, Hong Kong’s Securities and Futures Commission (“SFC”) introduced measures to boost individual accountability, in the form of a circular to heighten the accountability of senior management of licensed corporations in 2016[6]. The elements of the regime mirror those of the UK's SMCR.

The circular entered into force in 2017 and sets out a regime applicable to "Managers in Charge" (“MIC”) usually senior management including directors and Responsible Officers across eight core functions including key business lines for each of the activities the firm is licensed, operational controls, compliance and risk management. The MIC regime requires firms to submit organisational charts and information on each senior manager's duties and responsibilities the SFC and to promote awareness of regulatory obligations and potential liabilities.

Malaysia

Bank Negara Malaysia (“BNM”) introduced responsibility mapping for financial services firms with effect from December 2020 with the aim of bolstering existing governance arrangements in collective decision-making forums[7]. It believes that responsibility mapping is an important part of individual accountability and will, by strengthening incentives for good conduct and culture, result in better decision-making by firms.

The responsibility mapping requirements in Malaysia are centred around the following 4 key principles:

• Principle 1: The board shall oversee and ensure an effective process for identifying and assigning responsibility areas to individuals, as part of internal governance arrangements that promote sound management and decision making. This includes ensuring all responsibility areas are clearly identified and mapped into the organisational structure.
• Principle 2: The CEO must ensure that all identified responsibility areas are allocated to individuals at an appropriate senior level, and who have the professional competence, authority and accountability to manage these areas.
• Principle 3: The individuals to whom responsibilities are allocated are accountable for the management and conduct of the responsibility areas, including for the staff under their remit. In discharging this responsibility, an individual must exercise sound professional judgment, diligence and due care, adhere to the code of ethics of the financial institution and act with integrity.
• Principle 4: The CEO must maintain a complete and up-to-date register of each individual’s responsibilities, covering the individuals’ responsibility areas across the institution and, where relevant, the group.

Each of these principles are considered as requirements that must be complied with and that non-compliance may result in enforcement action.

Singapore

In September 2020, the Monetary Authority of Singapore (“MAS”) published Guidelines on Individual Accountability and Conduct[8]. The Guidance, which applies from September 2021, sets out five high level outcomes that firms should achieve in order to promote the accountability of senior managers, strengthen oversight over material risk personnel, and reinforce conduct standards among all employees. The guidelines aim to assist firms by providing a framework for strengthening accountability and improving standards of conduct.

The outcomes listed in the guidelines are as follows:

1. Senior managers responsible for managing and conducting the firms core functions are clearly identified;
2. Senior managers are fit and proper for their roles and held responsible for the actions of their employees and the conduct of the business under their remit;
3. The firm's governance framework supports senior managers’ performance of their roles and responsibilities with a clear and transparent management structure and reporting relationships;
4. Material risk personnel are fit and proper for their roles and subject to effective risk governance and appropriate incentive structures and standards of conduct;
5. The FI has a framework that promotes and sustains among all employees the desired conduct.

A reasonable degree of flexibility and pragmatism has been brought to bear in determining the approach to implementation of the regime in Singapore. Implementation is not mandatory and smaller firms (with less than 50 staff) are still expected to achieve the five outcomes but are not required to adopt the specific guidance described in the Guidelines. Larger firms also have the flexibility not to adopt specific aspects of the guidance that they have assessed as being not relevant to their business once they can justify the decision and demonstrate alternative means of achieving the required outcome.

Interestingly, the outcomes-focused approach adopted in Singapore is far less prescriptive than individual accountability regimes that have been implemented in other jurisdictions.

Closing Remarks

In designing each element of SEAR, the CBI has the benefit of being able to draw upon individual accountability regimes that have been tried and tested in a number of jurisdictions; being able to build upon the approaches of other jurisdictions should help SEAR avoid any weaknesses and unintended consequences.

While it is interesting to note the parallels, but also the differences, between the individual accountability regimes that have been adopted across these jurisdictions, financial services firms wishing to take pre-emptive steps in anticipation of the implementation of SEAR in Ireland would be wise to look to the UK as the primary template for what is to be expected under SEAR.

In the RDJ SEAR Information Hub you can find in one location all of the key pieces of information regarding the Senior Executive Accountability Regime (SEAR) and the Individual Accountability Framework, including information on comparable regimes in other jurisdictions.

The first Insight in this series looked at the core elements of the Senior Executive Accountability Regime that is expected to be introduced under the Central Bank (Amendment) Bill. To access that Insight, click here.