The Central Bank (Individual Accountability Framework) Bill published in July is aimed at bringing about fundamental changes in the way banks and other financial services institutions deal with their customers. The introduction of a Senior Executive Accountability Regime (SEAR) will bolster the Central Bank’s ability to hold individuals to account for regulatory contraventions in the business, including in their treatment of customers.
“When I look at the Bill published in July, it is clear that the real winner is the customer,” says Mazars partner and head of financial services consulting Kian Caulwell. “The legislation will require firms to act appropriately and in their customers’ interest. It is very prescriptive in how firms should treat customers.”
If a firm has a framework in place to manage conduct risk it will deliver good outcomes for the organisation
— Kian Caulwell, Mazars
He believes the legislation, which will probably become law in 2024, will bring about a renewed focus on conduct risk in the financial services sector. Conduct risk relates to potential misconduct on the part of a regulated firm or individuals associated with it, or any action by the firm or its employees that has an adverse effect on market stability. Examples of conduct risk include mis-selling of products or collusion to manipulate markets as seen in the Libor scandal of 2012.
“Conduct risk can be viewed as a rather nebulous concept,” says Caulwell. “It’s not like liquidity risk or credit risk where there are clearly defined requirements. The Central Bank of Ireland, the Financial Stability Board, the European Insurance and Occupational Pensions Authority, and others have issued separate conduct risk definitions over the years, but three key constituent elements emerge from them all.”
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These are the impact the institution has on its customers and clients; its impact on the relationship of trust with stakeholders, and the impact it has on the integrity of the markets.
That relationship of trust has particular relevance in the Irish context. Caulwell points out that the 2022 Eist survey, conducted on behalf of the Irish Banking Culture Board, noted “trust among the Irish public in banks remains low”.
“That relationship of trust also extends to employees knowing they are working in a safe environment for them to make their voices heard and that the Central Bank can trust a firm to act in a fair and reasonable way,” he adds.
Good conduct risk management is good for business, he adds. “If a firm has a framework in place to manage conduct risk it will deliver good outcomes for the organisation. Excessive lending does not produce good customer outcomes. A good lending outcome is where the customer receives a loan that’s reflective of their means and circumstances and acquires an asset which is affordable for them. The customer can service the loan and the bank doesn’t have to take actions to recover its capital. If they have to take action, that reduces the overall profitability of the loan.”
And the costs of poor conduct can be very high. “From 2006 to the recent AIB EBS tracker sanction there were 149 sanctions issued by the Central Bank with a value of €298 million,” he notes. “In the last three years alone the value of sanctions was €228 million. When you strip out the tracker sanctions, there were 16 sanctions with a value of €68 million. That’s just about equal to the total for the previous 13 years.”
The new Bill includes some subtle changes in language from earlier drafts which are quite important, according to Caulwell. “It now says institutions should provide relevant information to customers instead of material information. This is a shift to getting them to follow the spirit of a rule rather than the letter of what’s in the legislation. It places an obligation on institutions to assess the needs and circumstances of customers for all products. It requires them to act in the best interests of customers and treat them fairly. It is very positive from the customers’ point of view.”
Where cases of misconduct or breaches of the regulations occur, a powerful mitigating factor is if the firm concerned has a good conduct risk framework in place. “The Central Bank’s expectations around conduct risk management have been well aired over the years and many firms have already been working on meeting them. For most firms it shouldn’t require a paradigm shift to comply with the new rules. However, for firms that haven’t been implementing conduct risk frameworks, it’s going to be a challenge to demonstrate internally and externally that the firm is acting in customer interests.”
Ultimately, it boils down to culture. “You need a positive culture and buy-in from the board and senior management,” he says. “Where an organisation has good values, good behaviours will follow. If the tone from the top is right, it will be ingrained in the corporate fibre of the firm and the behaviour of the individuals working in it.”