Nothing to fear from new accountability rules – Mazars

The advent of a new regulatory regime governing individual accountability and responsibilities in the financial services sector is more to be welcomed than feared, according to Kian Caulwell, partner and head of financial services consulting at Mazars.

The new rules are part of the individual accountability framework (IAF) and the senior executive accountability regime (SEAR) which are currently winding their way through the legislative process, he explains.

The aim of the IAF is to create a framework to facilitate individual accountability and responsibility, particularly senior individuals, in regulated financial services providers. Within that overall framework, the SEAR will require firms to clarify the roles of those senior people.

Caulwell points out that other jurisdictions, most notably the UK, have had similar regimes for some time.

“The UK introduced theirs in 2016 and it initially covered banks and insurance companies,” he says. “ They broadened it out to include other regulated firms, including investment and retail credit firms and so on during 2018 and 2019. Hong Kong, Australia and Singapore have also introduced their own regimes in the last few years. In Ireland, they are looking to go broader more quickly, and a wider range of financial firms will be covered when it comes into force, which we expect will be in late 2023.”

There have been some concerns expressed in the industry in relation to the impact it may have on the operation of individual firms.

“There are fears that it will stifle the decision-making process,” Caulwell notes. “That was also the case in the UK, but those fears turned out to be unfounded. What we have seen from our lived client experience and surveys carried out by the Prudential Regulatory Authority [PRA] and UK Finance is that the industry there believes the regime has led to positive culture change. In the UK Finance survey 93 per cent said it brought about a meaningful change in culture and behaviours. In the PRA survey the corresponding figure was 94 per cent.”

Positive

Mazars has worked with the Compliance Institute on similar research in Ireland, he adds. “Our study in Ireland shows that 79 per cent believe it will be positive, and that’s even before it comes in. In the UK they are looking at what’s happened since it came in.”

He explains that there is not much that’s new in the proposed regime. “What is new is the additional information and documentation that firms will have to provide to the Central Bank. In terms of how they should act, there is nothing new. It will bring additional transparency. Firms will need to prepare a management responsibility map indicating who is responsible for what. When something does go wrong it will be a record of who was responsible. And individuals will sign up to a statement of responsibilities confirming that they understand the role and responsibilities that they are taking on.”

That does sound like a lot but, as Caulwell points out, Ireland already has rules governing what are known as pre-approved control functions (PCFs) in the industry. These rules are aimed at ensuring that people are fit and proper to hold these senior roles and that they act in the interests of customers and other stakeholders. The roles covered are being expanded all the time, so it should come as no surprise when the chief technology officer of a bank or investment manager finds themselves covered by SEAR.

The IAF will extend beyond senior positions and will include five conduct standards which will apply to everyone in the firm. Senior individuals will have an additional four. Breaches of any of these standards by any individual to whom they apply will have to be recorded and reported to the Central Bank.

Risk aversion

One of the key concerns being expressed by the industry here relates to risk aversion. That was also the case in the UK, says Caulwell. “There was a fear in the UK that it could stifle innovation, but firms don’t believe that has been the case. Greater risk awareness has been the result.”

At the same time, that focus on personal responsibility and accountability for when things go wrong is causing some nervousness. “People are asking how they can prove that they took reasonable steps in the event of something going wrong,” he notes. “But when the Central Bank talks about reasonable steps and contravention of regulatory responsibilities they are not just talking about before the event happened but what the firm and individuals did afterwards. It’s about taking proactive steps after an event and what you do when a difficult topic comes up.”

Fundamentally, it’s about being trusted to do the right thing. “Firms are seeing the upside,” says Caulwell. “It will help build trust amongst all stakeholders. When something does go wrong customers know they will be told about it and won’t have to wait for the Central Bank to tell them after an inspection. That has to be a good thing for everyone.”