Individual Accountability Framework Series: Part 2

Over the coming weeks, we will continue to delve into the detail of the Individual Accountability Framework (IAF), address some of the trickier aspects of the regime and provide practical guidance for regulated financial services providers as part of our IAF Series. 

In this Part 2, we set out eight practical steps that firms who are in-scope of the Senior Executive Accountability Regime (SEAR) should action. 

When working through these key steps, in-scope firms must continue to bear in mind that the purpose of SEAR is to improve governance, performance and accountability by placing obligations on in-scope firms and their senior individuals to clearly set out where responsibility and decision-making lie. 

1. Identify who is in-scope for SEAR 

The first action is to identify the relevant pool of in-scope individuals from the workforce. All Pre-Approved Controlled Function (PCF) holders within in-scope firms are captured by the SEAR requirements. 

2. Map current responsibilities for each PCF holder 

The next step is to map out the current responsibilities for each PCF holder and categorise their current responsibilities as "inherent", "prescribed" or "other". 

This step will require careful diligence by in-scope firms but is the necessary preparatory work and, indeed, the first draft of what will become the requisite Statement of Responsibility (SoR) for each PCF. 

3. In parallel with Step 2, map the in-scope firm's current management responsibility structure 

Each in-scope firm will be required to produce and maintain an up-to-date Management Responsibility Map (MRM) charting, in a composite document, its key management and governance arrangements, which clearly demonstrate that there are no gaps in material responsibilities or governance across the firm. Mapping the firm's current management responsibility structure will be the preparatory work for drafting and producing the MRM. 

The initial step here is to identify the current activities, current business areas and current management functions of the in-scope firm and consider how each of these three components currently operate. Each in-scope firm should also consider their internal reporting and responsibility lines, including how decision-making and governance operate. It is important to understand which decisions are reserved for the board and how its subcommittees / senior level committees contribute to decision making. It is also important to consider the impact of decision-making at individual firm level and at group level, in particular where group entities are not in scope of SEAR. 

4. Compliance Assessment: Review the current PCF responsibility allocation (step 2) and the current management responsibility structure (step 3) against the requirements of the draft SEAR Regulations and the Central Bank Consultation Paper 153 

The purpose of this step is for in-scope firms to consider their current allocation of PCF responsibilities (step 2) and the current management responsibility structure (step 3) as against the requirements of the draft SEAR Regulations and the Central Bank Consultation Paper 153 and determine:

(i) what steps are necessary to ensure full compliance with the draft Regulations, and

(ii) how the identified steps to compliance can be achieved.  

For example, this compliance assessment may reveal a potential mis-match or overlap in the responsibilities currently assigned to one PCF holder which should, in fact, be within the remit of another to ensure compliance with Schedules 1 and / or 2 of the draft SEAR Regulations (Schedules 1 and 2 set out what constitutes the "inherent" and "prescribed" responsibilities of PCF holders). This step will inform the firm if actions need to be taken to reallocate responsibilities to ensure compliance with the draft SEAR Regulations.  If so, such reallocation of responsibilities will need to be effected in a manner that mitigates exposure for potential employment law claims.  

5. Design optimum "go-live" SoRs and MRM

Following the completion of the compliance assessment at step 4, the firm should next consider what its optimum "go live" MRM and SoR for each individual would look like from an operational and compliance perspective. Once this has been done, the firm will need to:

(i) determine what steps are required to achieve its optimum MRM and each PCF's SoR, and 

(ii) how such can be achieved in practice. 

6. PCF engagement to agree SoRs 

The next step is for the firm to engage with each PCF to agree its SoR. This is likely to be the most time-consuming and contentious step in the process, particularly where discrepancies lie between PCF holders' current responsibilities and those that are required to be within their remit to ensure compliance with the SEAR requirements. We recommend that in-scope firms start this process as early as possible, ideally by May or June of this year and obtain legal advice on the process.  

7. Finalise MRM and SoRs and prepare to provide the Central Bank with such documentation, on request

The next step is to finalise the MRM and the SoR.

Annex 2 to the Consultation Paper 153 provides a template SoR at Appendix 3 which, although could be amended following the consultation process, should be used by firms to assist them at this stage. The Central Bank has not shared a template MRM on the basis that the detail of each firm's MRM will be dictated by its size, structure, governance and, indeed, the complexity of its internal arrangements. However, it has provided a diagram at Appendix 4 of Annex 2 to the Consultation Paper 153 which is a very useful aid (also subject to change as the consultation progresses) and illustrates what the Central Bank expects each firm's MRM to include.  

The draft SEAR Regulations provides that the Central Bank may require an in-scope firm to submit its MRM and SoR within a timeframe specified by it. This means that firms must be ready to furnish the requested documents within the timeframe provided and be ready to engage with the CBI on any questions or comments it may have.

8. Embedding the new structure within the organisation and ensuring ongoing compliance

The key step to ensuring ongoing compliance with the SEAR requirements requires in-scope firms to embed the new structure within the organisation. This means that all contracts, policies and procedures, reporting lines, decision-making processes, corporate governance structures, etc. reflect the finalised MRM and SoRs. It also requires employee engagement and training to ensure that the new structures are embedded into the fabric of the organisation. In addition, firms need to consider how they will manage the process of updating the MRM and the SoRs when material changes occur. 

IAF Series publications to date: 

Part 1: Industry Insights – As part of Matheson's recent webinar "The Individual Accountability Framework: What Actions Must Employers Take Now?", we conducted a survey of the 470 plus attendees to understand their key concerns and priorities in respect of their IAF compliance. In Part 1, we considered the results of that poll and shared our insights and guidance in respect of the survey responses.