"The Central Bank’s evolution of enforcement" - Speech by Derville Rowland at the A&L Goodbody Corporate Crime and Regulation Summit

“The Central Bank’s evolution of enforcement: building on a decade of credible deterrence and promoting effective culture and good governance”

Introduction

Good afternoon,

I am delighted to speak to you this afternoon about the evolution of enforcement at the Central Bank of Ireland. It is a timely moment to do so, as it is just over a decade since we established a dedicated Enforcement Division in the Central Bank – a natural point to reflect on the work done so far, and the next steps. I will share some reflections from the past decade about the development and embedding of the credible threat of enforcement by the Central Bank to raise standards in the financial services sector. And I will look to the future: to how we see our enforcement strategy evolving further, ensuring targeted deployment of our enforcement powers, with transparent outcomes, to build on the established foundation of credible deterrence.

Now that the General Scheme for the Central Bank (Individual Accountability Framework) Bill has been published, paving the way for the introduction of the Individual Accountability Framework, I will also cover the proposed elements of the framework and its role in improving governance and driving consumer-focused cultures within firms.

Central Bank mission and the role of enforcement

The Central Bank of Ireland serves the public interest by safeguarding monetary and financial stability and by working to ensure that the financial system operates in the best interests of consumers and the wider economy.

Ours is a broad and deep mandate, covering a broad and numerous range of entities and obligations, and our responsibilities are heavily intertwined. As per statute, the consistent theme through all of them is “the welfare of the people as a whole”.¹

Within that, the objective of financial regulation is a resilient and trustworthy financial system, which sustainably serves the needs of the economy and its customers, in which firms and individuals adhere to a culture of fairness and high standards. We regulate more than 10,000 firms and entities providing financial services in Ireland and overseas.

We discharge our duties through a high-quality regulatory framework, delivering effective gatekeeping and intrusive supervision underpinned by robust enforcement powers. The careful selection of an appropriate regulatory tool, such as enforcement, from our broad supervisory toolkit is central to our strategy.

Of course, that toolkit needs to evolve as the financial system evolves, both anticipating change and responding to it.

As the Central Bank looks ahead, we seek to be proactive in preparing for future innovation in financial services; we aim to mature our regulatory, supervisory and oversight frameworks to promote the resilience of the financial sector; we want to support financial system resilience to climate risks; and we intend to further develop and implement our consumer and investor protection framework and ensure that the highest standards of accountability and conduct are maintained.

And we want to do so in a way that fosters trust in ourselves as regulator and in the wider financial services system that is so important to every person, household, and business in our community.

There are many component parts to delivery of those objectives – and clear standards of conduct, accountability, and enforcement mechanisms are all necessary components.

We know this from very recent history.

Establishing and Maintaining the Credible Threat of Enforcement

Here, and globally, deficiencies in financial regulation were a contributory factor to the financial crisis. In the immediate aftermath of the crisis, it was imperative that financial regulation improve and demonstrate its effectiveness. To embed the post-crisis enhanced regulatory rulebooks, the Central Bank stated its ambition to implement a framework of assertive risk-based supervision underpinned by the credible threat of enforcement. Just over a decade ago now, we set up a dedicated Enforcement Division, starting with a small team, to establish that credible threat.

We were in the ‘build’ phase in that early period, recruiting a multi-disciplinary team, developing, in tandem, the legal frameworks for our Administrative Sanctions and Fitness and Probity Regimes, while also progressing large complex investigations. Meaningful enforcement responses were required to address serious breaches of key regulatory requirements by firms and individuals to embed that credible deterrent across our regulatory mandate.

To offer examples, we commenced significant and complex financial crisis investigations in relation to Irish Nationwide Building Society and Quinn Insurance Limited, and individuals concerned in the management of those entities. Following the commencement of the Fitness and Probity regime, in 2012 the Central Bank undertook a fitness and probity review of individual incumbent executive and non-executive directors at the Irish State-supported banks and specifically their role in the period leading up to the financial crisis. We also provided assistance to An Garda Síochána, the Office of the Director of Public Prosecutions and the Office of the Director of Corporate Enforcement for criminal investigations and prosecutions against individuals in connection with Anglo Irish Bank.

By the end of 2013, in furtherance of our mandate to ensure that the financial system operates in the best interests of consumers and the wider economy, we had concluded 76 enforcement cases imposing fines of over €29.5m and disqualified 10 individuals from senior roles in firms.

Over time, our investigative practices have become increasingly intrusive and our statutory powers have been enhanced. As an example, in 2013, we sought and received enhanced consolidated enforceable information-gathering powers as well as significant increases to our fining powers. We quickly started using those powers, in response to serious wrongdoing.

A further significant milestone for our enforcement approach were the tracker mortgage-related issues, which caused significant detriment for in excess of 41,000 affected customers. Due to actions taken by the Central Bank, lenders have now paid over €730 million in redress and compensation to affected customers. The identification of affected customers and their redress and compensation was our first priority and we commenced significant investigations into suspected breaches of key consumer protection requirements by the six main lenders. The gravity of the findings in our investigations completed to date is evidenced by the level of the fines at the completion of a number of investigations, which include the largest fines we have ever imposed on firms. To date, we have fined KBC in excess of €18m, PTSB €21m and Ulster Bank in excess of €37m for tracker mortgage related failings. Further tracker mortgage related investigations are ongoing and we are continuing to look at individual accountability.

We are conducting thorough enforcement investigations in respect of firms and individuals using the breadth of powers conferred upon us in recent years. We have bolstered our skill sets, bringing in specialists in digital forensics and data analytics to enable us to leverage artificial intelligence and data analytics to advance our investigations. We are continuing to focus on interviews with relevant persons to supplement or test gathered evidence. The progression of an investigation and establishment of liability necessitates a forensic review and interrogation of evidence and analysis against regulatory requirements. Our investigations are, and will continue to be thorough, to establish responsibility for serious wrongdoing. Where appropriate, we are now imposing sanctions based on the increased powers, including significantly higher fining thresholds, conferred upon us in 2013 and are applying the detailed Sanctions Guidance² we published in 2019.

There is no doubt in my mind that over the past decade, the Central Bank has embedded the credible threat of enforcement to support its assertive risk-based approach to supervision. Enforcement is firmly a key element of the Central Bank’s regulatory toolkit, which comprises effective interaction between a series of interlocking components, namely regulation (the rules), ongoing supervision and enforcement.

In terms of overall outcomes, as at the end of September 2021, we have concluded 144 enforcement actions, imposing fines amounting to over €166.5 million. We have disqualified 26 individuals from senior roles in firms. These figures speak beyond the credible threat of enforcement to the effective use of enforcement powers to address serious wrongdoing.

We see change ahead for our use of the Administrative Sanctions Procedure. Over the past decade, the majority of our Administrative Sanctions cases have been concluded by way of settlement agreement. By “settlement”, we mean the statutory mechanism available to the Central Bank to conclude investigations where the firm or individual has admitted the breach (described as prescribed contravention) in question and accepted the sanctions the Central Bank believe to be fair and appropriate in the circumstances.  “Settlement” does not mean individuals or firms have a menu of options to choose from as to what they will or won’t accept. It simply means the case has been concluded and won’t need to go to Inquiry. While our power to conclude these cases, and impose sanctions, by way of an agreed settlement has proven effective, looking forward, we expect more cases to be determined by way of Inquiry. Not all cases against firms or individuals can be or are suitable to be resolved by way of settlement. A Central Bank Inquiry is the key statutory mechanism in the Administrative Sanctions Procedure by which the Central Bank, through one or more appointed impartial decision makers, can assess suspected breaches, make relevant determinations and impose sanctions. By year end, we expect to conclude a process to appoint a new panel of regulatory decision makers who may be appointed to hear and determine Inquiries as well as other regulatory decision making processes. It is anticipated that the panel members will comprise national and international industry/regulatory/legal experts. We plan to publish details of the new panel following conclusion of the process.

The Central Bank began referring cases to Inquiry in 2015, commencing with Inquiries in respect of individuals concerned in the management of Quinn Insurance Limited and Irish Nationwide Building Society. While we are now almost at the conclusion of these financial crisis-related cases, with the remaining case in respect of one individual formerly concerned in the management of Irish Nationwide Building Society expected to conclude next year, following referral of the cases in 2015, the Inquiry process was repeatedly subject to legal challenge. We successfully defended these legal challenges and the Courts have recognised the value and necessity of the Inquiry and Administrative Sanctions Procedure, with the High Court noting: “[there is an] 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 […]” [emphasis added].³

As we move forward, we expect to use our Inquiry process more routinely. If a case goes to Inquiry, it indicates that an individual or firm has not made the admissions or agreed the sanctions that the Central Bank considers necessary to form the basis of settlement. Inquiries can therefore take more time, and are not without cost. But they are, as the High Court has accepted, a critical component of an effective regulatory enforcement system. And as a public body, we are always conscious of the need to deliver effective enforcement outcomes in a cost-effective way. More generally, and based on our experience of the Inquiry process to date, we proposed a number of enhancements to streamline the Inquiry process, which have been included in the General Scheme for the Central Bank (Individual Accountability Framework) Bill. As an example, we expect that the Central Bank will be able to pursue individuals directly for their misconduct rather than only where they have participated in a firm’s wrongdoing. The anticipated enhancements will provide for greater process efficiency, clarity, and administrative consistency to all involved, including those who may be the subject of enforcement action.

I noted our enforcement outcomes to date against individuals. We will continue to carefully select cases against firms and individuals that support our mission to safeguard financial stability and ensure that the financial system operates in the best interests of consumers and the wider economy. In cases of serious wrongdoing, it can be just as important that an individual’s actions are investigated, to reflect the reality of activity within a firm. Naturally, individuals are more likely to contest cases and are thus more likely to go to Inquiry. Firms may also not want to settle a case on the terms we consider appropriate in the relevant case and such cases will also go to Inquiry.

In 2019, we published detailed guidance on sanctions, to help both the financial services industry and the wider public to understand our approach to sanctioning under the Administrative Sanctions Procedure. In further commitment to transparency, we purposefully issue detailed public statements for our enforcement outcomes. We believe such transparency is vital to promote public confidence and trust and deter misconduct within the financial sector by outlining to the market unacceptable practices or behaviours and the consequences of breaches. The Central Bank’s ability to publish such information, which is ordinarily subject to onerous legal professional secrecy obligations, is only possible by way of agreement with a firm or individual as part of a settlement or by order of an Inquiry under the Administrative Sanctions Procedure. We remain committed to such transparency and expect, in all but the rarest of cases, to publish detailed public statements upon conclusion of enforcement outcomes.

I spoke earlier about our cooperation with An Garda Síochána. In addition to our statutory obligations to report suspected offences to An Garda Síochána and other enforcement agencies, we are committed to continued cooperation with other agencies across the national enforcement landscape to ensure that wrongdoing is addressed in the most effective way. We are also part of a multi-agency review group on anti-corruption and anti-fraud structures set up as part of the implementation plan for the ‘Hamilton Report’⁴. We will continue to play our part to ensure that Ireland has an effective overall enforcement system to combat white collar and economic crime.

We know the vast majority of firms share our desire for a trusted and trustworthy sector that consumers and investors can rely upon for the services they need. Accordingly, our enforcement toolkit is deployed with precision.

There will, however, always be bad actors and serious regulatory breaches. Where we need to exercise our enforcement powers, we aim to do so effectively, to ensure that the financial system operates in the best interests of consumers and the wider economy. We will take action, and purposefully deploy the appropriate enforcement tool, to address serious breaches of regulatory requirements and misconduct by firms or individuals. We take on such cases knowing they may be hard-fought, forensic, and take time to conclude. We see this commitment to take on difficult cases as a necessary component of an effective system of regulation. And we aim for our enforcement actions to deliver a wider message, including through detailed public statements, about the importance of compliance.

As such, enforcement is one of our tools but one which we use in a targeted, proportionate way.

Individual Accountability Framework

There are, of course, root causes as to why enforcement action becomes necessary. In our Behaviour and Culture Report⁵, we pointed to some of these causes - poor governance, lack of consumer-focused cultures, and weak structures of accountability within firms.

Most firms aspire to high standards. We see the Individual Accountability Framework as a positive in this regard – not simply a tool for regulators, but one to help firms strengthen their internal processes and to ensure that all firms and all staff know what is expected of them. A tool to ensure that senior leaders in particular are crystal-clear about their responsibilities and can therefore better manage their businesses. A tool that drives an uplift in governance across the board.

We believe it will assist us in our mission but also assist you in yours. It is notable in that context that when the UK Parliamentary Commission on Banking Standards proposed a new individual accountability regime in that jurisdiction, it said that high standards would strengthen Britain as a global financial centre.⁶  “High standards in banking should not be a substitute for global success,” the Commission noted. “On the contrary, they can be a stimulus to it.”

The UK experience is instructive. A December 2020 report on Evaluation of the Senior Manager and Certification Regime⁷ noted that the Regime is seen as offering a sound framework for enhancing governance with a high number of industry respondents noting that integrating the Regime into their business went beyond the simple requirement to demonstrate regulatory compliance.

Experience has shown that in order for a regulatory framework to work well, it should stimulate strong and effective governance within firms. To achieve this:

• the allocation of responsibilities within firms needs to be transparent, clear, and comprehensive; and
• individuals need to know what they are responsible and accountable for, be clear what standards of behaviour are expected of them, and recognise that where their actions fall short of expected standards, they will be held accountable.

In July, Minister Donohoe published the General Scheme of the Central Bank (Individual Accountability Framework) Bill 2021 containing the four central components aimed at achieving these behavioural, cultural and regulatory objectives as proposed in our Culture Report:

• The Senior Executive Accountability Regime will require firms to set out clearly and comprehensively where responsibility and decision-making lie in order to achieve transparency as to who is accountable for what within firms.
• The enforceable Conduct Standards set out the behaviour expected of firms and their staff, including obligations to conduct themselves with honesty and integrity, to act with due skill, care, and diligence, and in the best interest of consumers.
• The Central Bank’s Fitness and Probity Regime will be enhanced and will place a greater onus on firms to proactively certify that certain staff are fit and proper and capable of performing their roles with integrity and competence.
• The Central Bank’s Administrative Sanctions Procedure will be strengthened to ensure that individuals can be pursued directly for their misconduct rather than only where they have participated in a firm’s wrongdoing. The reforms will also provide for greater process efficiency, clarity, and administrative consistency to all involved, including those who may be the subject of enforcement action. A continued focus by the Central Bank on proportionality and fair procedures is a key theme of its Framework proposals.

The various separate aspects of the Framework complement each other to achieve the ultimate goals of better outcomes for consumers and a more sustainable financial system by driving higher standards of behaviour for individuals in financial services firms.

The Framework is ultimately about incentivising positive behaviours and promoting improved governance and culture within firms while strengthening the Central Bank’s enforcement toolkit, particularly with respect to individuals, to allow the Central Bank to more effectively hold to account those that fall below the expected standards.

Put more simply, we want to encourage the good, not focus solely on stopping and punishing the bad.

Therefore, I stress that the overwhelming majority of firms and employees within the financial sector who already approach their roles responsibly will have nothing to fear from this new regime.

We have been actively engaged with the Department of Finance on the development of the Framework and will continue to work with the Department throughout subsequent stages as the legislation progresses through the Oireachtas to enactment.

Once the Bill has been enacted, which we are hopeful will be in the first half of 2022, we intend to publicly consult and engage with the key stakeholders on the implementation of the Framework.

As an open and engaged regulator, this consultation will be essential to ensure the proposed policy measures and guidance are clear, consistent, and pragmatic and to ensure effective and consistent implementation of what is a significant step forward.

I would encourage firms to use this time to actively prepare to implement the Framework by understanding their obligations, assessing their current governance structures, and identifying and implementing any necessary changes to their existing business model in order to ensure the requirements are properly embedded.

The Bill must now make its way through the necessary legislative phases before the public consultation process. When implemented, the initial focus will be on embedding the Framework into our processes and watching to ensure firms embed it into theirs. As such, and rightly so, our task will be a supervisory one to begin with, not an enforcement one.

Of course, we won’t hesitate to take enforcement actions where warranted. But this is where firms taking real ownership of the Framework will make a major difference. If firms do the work to embed the Framework properly - if they embrace its spirit rather than doing the least amount possible to comply - it should ideally result in fewer serious issues in the sector, meaning fewer enforcement actions, not more of them.

The objective of the Framework therefore is long-term, not short-term - to drive a permanent uplift in governance standards. The end-result would be a more trusted financial services sector, which is in everybody’s interest.

Conclusion

In conclusion, then, as already stated, the Framework is about encouraging the good, not just focusing solely on stopping the bad.

This is consistent with our overall approach to our regulatory powers comprising effective interaction between regulation, supervision and enforcement.

The escalation pyramid is a useful representation of the hierarchy of a regulator’s powers.

At the base of the pyramid are the most frequently used measures – the so-called “soft powers” of education, persuasion, and other ways of seeking voluntary compliance.

Further up are less frequently used “hard” powers. These involve increasing degrees of intrusion into firms’ business and coercion of their actions.

At the middle level are powers typically used to correct errors and to bring defaulters back into compliance.

At the peak are the most coercive measures, such as administrative sanctions, criminal punishment including fines, and licence revocations.

When set in this context, the Central Bank’s approach to enforcement – significantly enhanced over the last decade - forms part of a set of adaptive and proportionate responses to suspected breaches of regulatory requirements. Whilst enforcement sits near the top of this escalation pyramid of measures available, there are other measures that the Central Bank can and does use in addressing issues that arise.

So, while robust enforcement action will continue to underpin our powers, we would far rather that firms focus on preventing, identifying, and acting upon misconduct in the first place than on us punishing them after the fact.

Given its critical importance to everyday life, we share with the firms we regulate a desire for trust in the financial services system. Effective regulation is one part of this – but so too is effective culture, governance, and accountability within firms.

Thank you.

¹Central Bank Act, 1942

²See ASP Sanctions Guidance (PDF 632KB) (November 2019), Central Bank of Ireland

³Mr Justice Hedigan in Purcell v Central Bank and Others [2016] IEHC 514

⁴Report of the Review Group (December 2020), Review of Structures and Strategies to Prevent, Investigate and Penalise Economic Crime and Corruption

⁵See Behaviour and Culture of the Irish Retail Banks (PDF 756.85KB) (July 2018), Central Bank of Ireland

⁶See Changing banking for good (2013), Parliament UK

⁷Prudential Regulation Authority, Bank of England (December 2020), Evaluation of the Senior Managers and Certification Regime