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This time it’s personal: Government hopes banker accountability Bill will end culture of impunity

Incoming rules to make it easier for regulators to go after individual bankers are sure to revive debate on pay

In July 2018 the Central Bank published a report on behaviour and conduct in Irish banking at the behest of Minister for Finance Paschal Donohoe. It concluded that cultural failings were a “significant contributory factor” in the domestic financial crisis and a “trigger” for the State’s tracker-mortgage scandal.

Four years to the month later, Donohoe is finally on the cusp of delivering on a key request from regulators in that report.

The Minister brought a long-awaited Bill to Cabinet last week that would give the Central Bank powers it has been seeking to make it easier to hold individuals to account for wrongdoing under their watch.

The Central Bank (Individual Accountability) Bill, which would establish a so-called senior executive accountability regime, is on track to be published by the end of this month. However, with the Dáil having slid into summer recess on Thursday, it will be autumn before the Bill is first debated. And it is expected that it will be late next year, after legislation has gone through the Oireachtas and the Central Bank has put its draft regulations and guidelines out to consultation, before the new regime is up and running.


“Almost a decade and a half on from the banking industry bailout and [the start of] a tracker-mortgage scandal that left a trail of destruction, one would think that legislation to make senior decision-makers responsible in law for the actions they take would be a bigger priority than it has proven to be,” says Ged Nash, Labour TD and the party’s finance spokesman.

“The inexplicable foot-dragging on the accountability regime contributes to a sense that we don’t do accountability well in Ireland. It is beyond time that the hammer came down on the culture of impunity associated with the sector.”

The publication of the Bill will come a year after Donohoe published the general outline of the planned laws, which allowed the Oireachtas finance committee to carry out pre-legislative scrutiny.

The incoming rules — similar to those introduced in the UK in 2016 in the wake of scandals surrounding the rigging of interest-rate benchmarks and the foreign-exchange market — would force firms to document top managers’ responsibilities, making it easier for regulators to go after individuals if they take unnecessary, uncalculated risks, refuse to follow correct processes or knowingly commit wrongdoing.

A central aim of the accountability regime is to do away with a key part of the existing sanctions regime, known as the “participation link”, where regulators must first find that a financial firm committed regulatory breaches before they can take individuals to task.

The Central Bank’s current penalties tool kit, including its powers to bar executives from senior financial roles and fines of up to €1 million, will apply.

The planned framework will initially require 150 banks and lenders, insurance companies and larger investment firms to develop and maintain responsibility maps detailing what areas each of its senior executives are accountable for, as well as where oversight rests among non-executive directors at board level.

“These documents that firms are going to be submitting to the Central Bank on responsibilities are going to be held on file for a long period of time. It will provide the Central Bank with material that they will be able to leverage at a later date as part of [any] inspection or investigation — to inform them who was responsible for what, when, where and for how long,” says Kian Caulwell, a partner and head of financial services consulting with Mazars Ireland.

Severe penalties

Nick Fahy, a one-time senior Bank of Ireland executive who became chief executive of London-based special business lender Cynergy Bank in late 2015, said the UK senior managers’ regime has, “on balance, been a positive thing, because it promotes absolute accountability at a personal level — and the penalties for noncompliance are pretty severe”.

“We get all of our executives to attest on a quarterly basis that they’re compliant with all aspects of the senior management regime and conduct standards,” he says.

In addition to the declarations going to the board and being overseen by the bank’s compliance and risk functions, Fahy says Cynergy typically gets its internal audit function “to pick one executive every quarter to make sure it’s not just a ‘tick-box’ exercise, but that there is real substance to what executives are attesting”.

David Duffy, a former chief executive of AIB, also stepped right into the changing UK accountability landscape when he moved in 2015 to head what is now known as Virgin Money.

“At its core, the requirements of a senior executive accountability regime are just common sense,” he said. “You shouldn’t be delivering financial products and services — where customers are taking on debt or a product over the long term — that you are not accountable for. It is a good discipline. It provides necessary rigour to what could otherwise be a well-intentioned practice.”

He describes the administrative burden involved as “an appropriate tax for a financial firm to do business — one that requires discipline, rigour and attestation”.

The Republic is drawing lessons from the UK experience. It was originally envisaged that the UK would adopt a “guilty until proven innocent” approach, where a senior manager would be deemed to be responsible for misconduct unless they could prove they took reasonable steps to prevent it in the first place. However, this was abandoned by the time the rules were introduced.

One of the most contentious elements of the UK regime has been that finance companies must seek so-called regulatory references from previous employers covering the previous six years. If the firm is another regulated financial company, it must provide details of any disciplinary action due to a breach of conduct rules, including written warnings, suspension, clawback of variable pay or dismissal.

“At the moment the concept of regulatory references do not appear to be in the scope of the proposals in Ireland, in part due to the differing employment law landscape in Ireland compared to the UK, specifically the protections surrounding an individual’s good name enshrined in our Constitution,” says Caulwell.

There are also concerns in the banking industry about the Central Bank’s original proposal that individuals needed to take “all reasonable steps” to ensure that their business areas are controlled effectively in compliance with regulations, and that all tasks delegated to others are carried out properly. The general outline of the rules last year referred only to “reasonable steps”.

Clarity on rules

The Irish Banking Culture Board and Banking & Payments Federation Ireland (BPFI) have said it is important that the Central Bank outlines what it considers reasonable steps. Regulatory officials indicated to the Oireachtas finance committee during its scrutiny of the planned rules that they will provide guidance, but will not be leading firms “by the hand”.

In a speech late last month, Gerry Cross, director of financial regulation in the areas of policy and risk at the Central Bank, said: “This guidance will need to be finely balanced — on the one hand providing sufficient clarity to firms and individuals regarding our expectations whilst at the same time ensuring that the regime is flexible enough to accommodate different governance structures, business models and situations.”

“There are going to be elements of the requirements that, on the face of it, appear to be quite nebulous but where firms will be given enough flexibility to define and implement their own processes to address the requirements,” says Caulwell.

“Nothing that’s coming down the tracks is going to change a director’s obligations tomorrow compared to today. It’s more about making it very clear to entities and individuals that the Central Bank has some very clear expectations on key responsibilities that it wants to see allocated to senior individuals.”

Executives who will fall under the scope of the new regime are those whose roles require them to be vetted by regulators — as preapproved controlled functions — under an existing Irish fitness and probity regime. This means that managers of overseas branches of Irish-regulated firms will also be subject to the rules, which has rattled some international banks based in Dublin.

Francesco Ceccato, chief executive of Barclays Bank Ireland, the unit the British banking giant chose as its post-Brexit EU hub, raised concerns about this in an interview with The Irish Times in March.

“I have no problem with discipline and fitness and probity. If anything, I’d like to think of myself as somebody who drives discipline as opposed to [someone who] tries to sort of get derogations from discipline,” he said at the time. “But Ireland is the only country in the [EU] to introduce a regime like this. And the way that it’s currently drafted, it appears to us to incorporate an extraterritorial dimension.”

However, Cross indicated last month that the regulator was not for turning on this.

“Branches — unlike subsidiaries — are legally part of the regulated entity. If an issue arises in the branch of an Irish-authorised institution, it is important that the Central Bank as responsible authority has clear line of sight on that issue, knows who is accountable and is in a position to hold those responsible to account,” he said. “Sear [the senior executive accountability regime] will, accordingly, apply to outgoing branches as an integral part of the regulated entity.”

Tough enough?

The planned regime will also result in the introduction of common conduct standards to everyone deemed to be in a controlled function — which includes finance workers who give advice or sell product to customers. This includes requirements that people in such roles act “honestly, ethically and with integrity”, with “due skill, care and diligence”, and “in the best interests of customers”.

Caulwell says this amounts to elevating principles already in the Consumer Protection Code, governing the provision of regulated financial services, on standards that must be upheld at firm level.

Any enforcement investigations into individuals on matters that occur before the enactment of the new Bill will, of course, continue to be governed by the Central Bank’s existing regime. Last November the regulator said it was setting up an inquiry into a former Permanent TSB executive, its first known move to pursue an individual for an alleged role in the tracker-mortgage scandal. It is expected that more cases against individuals will be taken in time.

The UK authorities have initiated dozens of investigations into individuals since its new rules were introduced in 2016, but it has resulted in only one person being sanctioned publicly: former Barclays chief executive Jes Staley.

He was fined £642,430 (€758,500) in May 2018 by the Financial Conduct Authority and the Prudential Regulation Authority for breaching conduct rules by attempting to identify a whistleblower who had criticised an employee of the bank. Barclays also clawed back £500,000 of his bonus over the matter.

Staley ultimately stepped down from Barclays last November after an investigation by UK financial watchdogs into his links to the sex offender and disgraced financier Jeffrey Epstein.

This has fuelled a debate on the other side of the Irish Sea about whether the fledgling UK regime is effective enough.

Although there were concerns at the outset of the UK accountability rules that it would “create a systemic drain of talent from the banking sector”, Duffy says that hasn’t materialised, because of the pay model in the industry there, even if an element of variable remuneration is deferred over a number of years.

In the Republic, however, bonuses remain banned across the State’s only three continuing retail banks, which were bailed out during the financial crisis. BPFI used its submission to the Oireachtas finance committee late last year on the proposed laws to warn that the regime “cannot operate effectively” as long as a ban on variable pay remains in place.

“While variable remuneration is important to incentivise better decision-making and risk-taking, the use of malus [the cancelling of executive bonuses] and clawback [of bonuses] provides another tool to punish poor behaviour in addition to regulatory sanction,” the BPFI says in its submission.

“The continued restriction on the application of variable pay in Irish retail banks will set Ireland’s accountability framework apart and increase the competitive disadvantage of the retail banks.”

Cynergy’s Fahy is all too aware of the Irish political and public sensitivities around banker bonuses. However, he says: “I think if you want to have a vibrant banking sector in Ireland that’s supporting the economy, supporting SMEs and consumers, you need appropriate conduct by the leaders and the staff of those banks, appropriate accountability — but also appropriate reward [in line] with the rest of Europe and internationally.”