Individual accountability – our approach - Seana Cunningham, Director of Enforcement and Anti-Money Laundering

Speaking at Deloitte Ireland event

Good morning. I am here this morning to talk to you about individual accountability, an area where we have seen considerable evolution, and to emphasise its importance in seeking to establish and maintain trust and public confidence in financial services in Ireland.

What we want firms to do, and in particular the senior management team, is to embed a culture whereby there is a real and demonstrable commitment to meeting high standards.

In this regard, the Central Bank is a strong advocate for individual accountability – our regulatory focus in this area reflects our concern that a lack of individual accountability is a key cultural driver of misconduct. The Central Bank is not alone in this focus. In April 2018, the Financial Stability Board recommended that national authorities identify and assign key responsibilities, hold individuals accountable and assess the suitability of individuals assigned key responsibilities.

I will speak firstly about what we have done and what we are currently doing in this area and the key tools we employ to hold individuals accountable: the Fitness and Probity Regime and the Administrative Sanctions Procedure. I will then give a high-level overview of the reform proposals set out in our response to the Law Reform Commission’s Issues Paper on Regulatory Enforcement and Corporate Offences  which was published in January 2018, and in our recent report to the Minister for Finance on Behaviour and Culture of the Irish Retail Banks, which was published in July. These proposed reforms will create an individual accountability framework to facilitate the embedding of cultural change and ensure greater individual accountability. In short, if these reforms are introduced, the scope for individuals to escape liability will be significantly reduced.

Before turning to the detail of our processes, I would like to share something of my previous experience, which gives context to my approach as Director of Enforcement and Anti-Money Laundering. Although I have worked in a number of senior roles in the Central Bank since 2011, my background is as an insolvency and commercial litigation lawyer and I spent a number of years specialising in these areas in law firms in the UK and Dublin. There are parallels and themes from this experience that I can draw on in my current role. For example, when a company fails and becomes insolvent, the consideration of a director’s liability for restriction or disqualification follows as a matter of course. While some may argue the terms of directors’ restrictions are not sufficient, there are always consequences for responsible individuals. I want to ensure that same focus on individuals applies in financial services.

We are increasing our focus on individuals across our suite of enforcement powers. The appropriate regulatory response for responsible individuals is always considered. That response will not always necessarily be a monetary penalty. It may be a prohibition for a defined or indefinite period of time. Alternatively, the appropriate response may be robust challenge, and potential refusal, under the Gatekeeper function of our Fitness and Probity regime, if an individual seeks Central Bank approval for a senior role.

Fitness and Probity Regime

The key objective of the Central Bank’s cross-sectoral Fitness and Probity Regime is to ensure that regulated firms and individuals who work in these firms are committed to high standards of competence, integrity and honesty, and are held to account when they fall below these standards. This helps to build trust and confidence in the industry. Of course, the vast majority of individuals in the industry are committed to upholding high standards of behaviour and, in turn, ensuring we have a sustainable industry supporting growth, employment and future prosperity.

Regulated firms and management have first line responsibility

Firms, and their management, have the first line of responsibility under the Fitness and Probity Regime. They have a statutory duty to ensure that the regime operates effectively. Firms, and their management, must act as a gatekeeper to the industry; they must ensure people subject to the regime are fit and proper. In essence, what does this mean? Well, it means that on appointment they are competent and capable, honest, ethical and of integrity. This responsibility does not end following the hiring of staff. Firms, and their management, must ensure their staff are fit and proper on an on-going basis. Where firms, and their management, fail in this regard, we will take appropriate action.

A recent example is our enforcement action against Merrion Stockbrokers in December 2017. The Central Bank’s enforcement investigation identified that Merrion failed to introduce adequate systems or controls to ensure that individuals holding senior and influential positions complied with the Fitness and Probity Standards. The enforcement action was concluded by the imposition of a reprimand and a monetary penalty of €200,000.

Central Bank Gatekeeper Function
For the most senior roles in the industry the Central Bank acts as gatekeeper, and must approve proposed appointments. By way of example, we may refuse to approve appointments where an individual’s criminal convictions or other misconduct cast doubt on his/her probity. The gatekeeper function is critical to the protection of the public interest and to ensuring that there is public trust and confidence in the financial system. In our experience, it has proven to be robust and effective. It is an area, though, where we do not have public outcomes in terms of published refusals. Rest assured however; we adopt a robust and assertive approach in our exercise of this function. As part of the approval process, where such concerns arise, individuals can expect robust challenge by way of interview in particular. We frequently conduct a number of interviews in such scenarios.

It has been our experience to date, which is consistent with international regulators, that where the prospect of refusal is raised, proposed appointments are in most cases withdrawn. To date, since the commencement of the regime, 56 applications for senior positions have been withdrawn where the prospect of refusal by the Central Bank was raised; in this year to date 13 senior individuals have withdrawn their applications following challenge interviews with the Central Bank.

This is an area where we are quietly effective.

Given the importance of the gatekeeper function, we routinely proactively seek information that may assist in fulfilling our mandate. For instance, in July, the Central Bank obtained a court order allowing us access to the transcripts and exhibits from the recent criminal trial of former Anglo-Irish Bank CEO David Drumm. The trial related to conspiracy to defraud and false accounting, in relation to the €7.2 billion back-to-back transactions between Anglo and Irish Life & Permanent. A significant amount of evidence was admitted in the trial that related to those transactions and the individuals involved in them. Such evidence may be relevant to future assessments of fitness and probity as part of the Central Bank’s gatekeeper function.

Again, once individuals have been approved by the Central Bank, first line responsibility lies with firms and their management to ensure all people subject to the regime are fit and proper on an ongoing basis.

Central Bank’s oversight function
Furthermore, the Central Bank may investigate individuals if there are fitness and probity concerns. Such an investigation can give rise to a suspension, or to a prohibition. We regularly investigate those subject to the regime and have issued a number of prohibition notices following such investigations. We published a statement about our most recent prohibition notice only yesterday. It was issued against the former Director of Citybus Employees Credit Union, and prohibits him from carrying out any controlled functions in any regulated firm for an indefinite period. The prohibition follows an investigation which revealed that the Director was responsible for the misappropriation of a significant sum of money from the credit union between 2010 and 2015. It is typical of the notices we have issued so far, in that it arose from concerns over misappropriation of funds.

However, our focus in this area is not limited to this type of misconduct. We are currently investigating a number of cases where there are broader fitness and probity concerns such as providing misleading information to the Central Bank or where a person has been reckless in the performance of their professional responsibilities.

After seven years of the fitness and probity regime, my message is that it is an effective and robust framework, which we shall continue to use as appropriate. At the conclusion of my remarks this morning, I shall speak briefly on proposed reforms to make the regime, and our ability to hold individuals accountable, even more robust and effective.

Participation under the Administrative Sanctions Procedure

Let me turn to the Administrative Sanctions Procedure (or ASP), which is the primary means by which the Central Bank investigates and sanctions breaches of financial services legislation by firms and individuals. And that last point is important: while the vast majority of our concluded enforcement actions under the ASP are with firms, we can and do also take action against individuals under the ASP. In our enforcement actions, we consider all possible angles, including individual culpability.

Since 2006, 122 enforcement actions have been concluded, resulting in a total of over €64 million imposed by way of monetary sanctions. While the vast majority of these outcomes are in respect of firms, there have been notable outcomes under the ASP in respect of individuals, such as the settlement earlier this year with the former non-executive chairman of Irish Nationwide Building Society. Overall, to date, we have imposed 12 disqualifications of individuals at the conclusion of enforcement actions, and have imposed monetary penalties alongside those sanctions in a number of cases.

Enforcement actions against individuals are challenging and complex. There are issues unique to actions against individuals. Management in regulated entities may insulate themselves, or be at a remove, from apparent misconduct. As such, it can be a painstaking, complex exercise for investigators to review documents and conduct interviews to determine the precise narrative and evidence trail to assign responsibility. Additionally, unique to our regime, the Central Bank must establish that an individual ‘participated’ in the relevant breach by the firm.

Notwithstanding such challenges, the Central Bank does not shy away from difficult cases. The Central Bank has taken, and continues to pursue, a number of complex financial crisis related enforcement actions against individuals. Following detailed forensic investigations, we have referred a number of cases to Inquiry concerning individuals formerly concerned in the management of Irish Nationwide and Quinn Insurance. The Inquiry hearings are in public and you can attend the ongoing Inquiry into persons concerned in the management of Irish Nationwide. That Inquiry has already been running for many months. We will continue to pursue individuals and take difficult cases.

We have had to defend our Administrative Sanctions process itself in the last few years, and have done so with vigour and determination. Following the referral of the Irish Nationwide Building Society and Quinn Insurance cases to Inquiry in 2015, a number of legal challenges were brought, including a challenge to the constitutionality of our legislation. The High Court has found for the Central Bank and confirmed the constitutionality of the legislation. The Court of Appeal also found in favour of the Central Bank in April of this year. These judgments recognised the importance of the regime. Mr Justice Hedigan referenced the expert evidence provided, which “demonstrated very clearly the overwhelming public interest in maintaining the integrity of the financial sector of society … It is something that requires… effective forms of regulation and enforcement. The Oireachtas has provided that those functions should be carried out by the Central Bank … and have established complex and sophisticated administrative machinery for doing so.” (Purcell v. The Central Bank of Ireland & Others [2016] IEHC 514) Alongside seeking reforms to enhance our ability to pursue individuals, it is our intention to continue to use the statutory enforcement machinery granted to the Central Bank to the fullest effect, including against individuals. I shall now turn to proposed reforms.

Suggestions for reform – the Individual Accountability Framework

Notwithstanding the increased focus on individual accountability, we think that more can and should be done. As GK Chesterton noted “An almost unnatural vigilance is really required of the citizen because of the horrible rapidity with which human institutions grow old.” Our enforcement toolkit needs to keep pace with change. That is why we recommended changes in our response to the Law Reform Commission, and followed that by suggesting a comprehensive suite of reforms in our report to the Minister for Finance, published in July. The primary purpose of our proposal for an Individual Accountability Framework is to act as a driver for positive behaviours and the recognition of responsibilities by individuals. These reforms will constrain the ability of senior executives to escape liability for wrongdoing; the days of individuals hiding behind the collective will be numbered.

There were four elements to the proposals in our report to the Minister:

First, we proposed enforceable Conduct Standards which set out the behaviour the Central Bank expects of regulated firms and the individuals working within them. Examples of such standards include the binding obligations on firms and individuals to conduct themselves with honesty and integrity, act with due skill, care and diligence in relation to the conduct of their business and co-operate with relevant regulatory authorities.

Second, we proposed a Senior Executive Accountability Regime, or “SEAR”, to ensure clearer responsibility and accountability by placing obligations on firms and senior individuals within them to set out clearly where responsibility and decision-making lie for their business. Taking a risk-based approach, it was proposed in the Report to the Minister that the initial introduction of a Senior Executive Accountability Regime would focus on a sub-set of the financial services industry.

Third, we proposed further enhancements to the current F&P Regime, to strengthen the onus on firms to proactively assess individuals in controlled functions on an ongoing basis. We also proposed enhancements to overcome some current limitations of the Central Bank’s F&P oversight function (for example giving us the ability to investigate people who performed controlled function roles in the past).

Finally, we proposed a unified enforcement process, which would apply to all breaches by firms or individuals of financial services legislation. We also recommended that the hurdle of participation be removed such that the Central Bank could pursue individuals directly for their misconduct under the Administrative Sanctions Procedure, rather than only where they are proven to have participated in a firm’s wrongdoing.

Differences between the proposals and the existing Fitness and Probity Regime
A natural question is what the proposals, if introduced, add over and above the existing Fitness and Probity Regime. While the Fitness and Probity Regime and SEAR will greatly complement each other and to a large degree operate in unison, they will not be one and the same thing. Most fundamentally, what SEAR brings that is different to “Fitness and Probity-as-we-know-it”, is a requirement for clarity regarding the responsibilities of key individuals in firms. The Fitness and Probity Regime does not require firms or individuals to set out the responsibilities of their roles or to map responsibilities at an organisational level. SEAR will do just that, and we believe that this will benefit firms and those who work in them.

In terms of the Central Bank’s Gatekeeper function and a firm’s ongoing duty to ensure individuals are fit and proper, any assessment of fitness and probity is easier where the responsibilities of the role in question are clearly documented. Essentially, under SEAR all senior executive roles would be defined by comprehensive statements of their primary responsibilities. Firms, and the Central Bank, would therefore be able to assess more readily whether a person has the necessary fitness and probity to perform the specific role.

In addition to—and again in harmony with— SEAR and the Fitness and Probity Regime, “Conduct Standards” would be imposed on all staff in all regulated firms and not just those covered by the Fitness and Probity regime. These high level obligations will contain no surprises: they will simply require that staff and firms act with integrity, honesty, skill, care and diligence, and so on. No doubt the majority of staff in regulated firms already hold themselves to such standards.

All of this – the four elements of the Individual Accountability Framework set out in our report to the Minister for Finance – would support our aims of greater individual accountability and embedding a culture of ethical compliance in regulated firms.

Conclusion

These proposals set out what are reasonable and expected standards of behaviour of staff in regulated firms and clearly delineate responsibilities. In addition, they will increase the Central Bank’s ability to hold individuals to account and deter misconduct.

The message to the industry that lies behind these proposals to increase the accountability of individuals is this: senior roles in regulated firms come with serious responsibilities. These responsibilities must be clearly delineated and appropriate consequences will follow for an abdication of such responsibilities. Where there is regulatory wrongdoing, an appropriate regulatory response for individuals will follow - there are consequences for responsible individuals acting irresponsibly. Because ultimately, what I believe we can all agree is wanted and needed, is a trusted financial system, where firms and the individuals working in them believe in and adhere to a culture of fairness and high standards.