There is a widespread belief that individuals who should have been held accountable for their actions managed to escape sanctions under the rules in effect at the time of the latest crash.
To address these issues, the Central Bank recently introduced the Individual Accountability Framework Act (IAF), which aims to change the compliance culture and increase transparency and trust within the industry. The new framework combines the Senior Executive Accountability Regime with new standards of conduct, appropriateness and fairness and enhanced enforcement powers against both individuals and companies.
The primary aim of the regime is to clarify who is responsible for what. Under the regulations, individual roles are assigned specific responsibilities. Board members are responsible for overseeing and overseeing the strategy and management of the company, while senior executives are responsible for managing the relevant business function they lead.
Regulators have the power to impose fines or penalties on individuals who fail to meet their obligations. These range from fines to restrictions on future involvement in the financial services industry. Individuals can face criminal charges, which can lead to imprisonment.
Similarly, responsible persons may also be subject to civil liability if their actions or decisions result in harm or financial loss to stakeholders. This can lead to lawsuits for damages and other legal remedies. All of this also entails enormous reputational damage for individuals, which can affect their professional position and future career prospects.
In such an enforcement case, the challenge will be how to prove that a person has properly overseen or managed a function. In the UK, the Senior Managers and Certification Regime (SMCR) requires a ‘Statement of Responsibilities’ detailing the senior manager’s responsibilities and prescribed accountabilities.
This statement specifies what the senior manager is responsible and accountable for, rather than how he does it. In contrast, the IAF requires individuals to take “reasonable steps,” which is open to interpretation and creates uncertainty and hesitation for those involved. Further guidance from the Central Bank would undoubtedly be welcome.
There are also concerns from affected individuals that the level of responsibility they now bear is disproportionate to the level of control, power and decision-making they exercise over the wider company. Others seek advice on how to mitigate or compensate for some of the risk.
For example, companies may consider enhanced driver and officer (D&O) insurance policies that provide greater wind-down coverage. This coverage can protect individuals for the duration of the statute of limitations, which is generally six years. It provides financial support for legal costs incurred during investigations or legal proceedings related to their duties.
The policy may require higher limits and scope to account for expanded coverage, which now includes a larger number of staff.
However, it is crucial to remember that insurance should not be seen as a substitute for good governance, responsible behavior and effective risk management. The primary focus should be on implementing robust frameworks, processes and controls to mitigate risk and ensure compliance with IAF requirements.
While the threat of enforcement may seem serious, it is important to recognize that many of these requirements have been around for a long time, including in the Companies Act 2014. The IAF reinforces and clarifies these pre-existing obligations and emphasizes the importance of good business, strong governance , robust controls and clearly defined roles and responsibilities.
The new regime will also improve existing business standards and introduce new standards of conduct for individuals with the aim of improving corporate culture.
These new standards will apply to all control functions at all levels, including most customer-facing employees and back-office functions. Companies must also notify the Central Bank when an individual has been penalized for violating the new standards.
What we see is a clear and consistent trend towards more individual responsibility. Not only by the Central Bank, but also by the judiciary.
The recent cases leading to the lifting of the corporate veil, a previously impenetrable legal principle that separates a company’s actions and liabilities from its directors and senior managers, have received much attention.
This shift represents a fundamental change in the perception of accountability, emphasizing that individuals must be held accountable for their actions and decisions within the organizations they serve and the impact of their actions on their communities.
Colm O’Flaherty is director of financial crime at Deloitte Ireland.