# Financial Regulator wants your views on Corporate Governance.



## Brendan Burgess (27 Apr 2010)

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*New Corporate Governance Standards Proposed for Banks and Insurers                                                                            *

*Consultation Seeks to Introduce new Rules and Limits on  Directorships *



The Central Bank and Financial Regulator today announced the  commencement of a public consultation on new corporate governance  standards for banks and insurance companies. Consultation Paper CP41 on  Corporate Governance Requirements for Credit Institutions and Insurance  Undertakings sets out minimum requirements as to how banks and insurance  companies should organise the governance of their institutions  including membership of the Board of Directors, the role of the Chairman  and the operation of various board committees. 



 It is proposed that the requirements will apply to all credit  institutions and insurers licensed or authorised by the Financial  Regulator including Irish licensed and authorised subsidiaries of  international financial services groups. 



 The consultation paper sets out the minimum standards and  expectations that will apply to the boards of directors of banks and  insurers. These include: 



A minimum of five directors on the Board;
Requirements regarding the role and number of the independent  non-executive directors;
Limits on the number of directorships which directors may hold  to ensure they can comply with the expected demands of Board membership  of a credit institution or insurance company;
Clear separation of the roles of Chairman and CEO;
A prohibition on an individual who has been a CEO, director or  senior manager during the previous five years from becoming Chairman of  that institution;
Criteria for director independence and consideration of  conflicts of interest;
A requirement that Board membership is reviewed at a minimum  every three years;
A requirement that Boards set the risk appetite for the  institution and monitor adherence to this on an ongoing basis;
Minimum requirements for Board committees;
The establishment of a remuneration committee comprising a  majority of independent non executive directors;
A requirement for an annual confirmation of compliance to be  submitted to the Central Bank.
 
This consultation paper is part of a wider strategy to update the  domestic regulatory framework applying to banks and insurers. Corporate  governance frameworks for other industry sectors are also planned. The  Financial Regulator has invited funds industry representatives to work  on an appropriate corporate governance code for the funds industry and  corporate governance for credit unions will be dealt with as part of the  forthcoming Strategic Review of the Credit Union Sector. In addition,  the consultation paper specifically seeks views on the extension of  these proposals to investment firms. 



 Failure to comply with the requirements may be subject to sanction  under the Administrative Sanctions Framework. The enhancement of  corporate governance together with more intrusive supervision and a  credible threat of enforcement will contribute to the improvement of the  resilience of the Irish financial sector. 



 Interested parties are asked to comment on the proposals by 30 June  2010. All submissions will be published on [broken link removed].  Industry comments and queries in relation to this consultation paper  should be directed to the Prudential Policy Unit, International Credit  Institutions at e-mail corpgov@centralbank.ie. It is expected that the  new corporate governance standards will be published in Autumn 2010. 
  [broken link removed]


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## OakesP (28 Apr 2010)

Some comments from a briefing note we wrote on this issue yesterday looking at certain parts of the proposed Requirements:

A. In-scope firms are Credit Institutions and Insurers, licensed or authorised by the Financial Regulator but not subsidiaries of international groups where the subsidiary is a credit institution or insurer licensed or authorised by the Financial Regulator _(e.g. an Irish bank / insurer - authorised or licensed by the regulator - which is the subsidiary of a South African parent company)_. 

But does not apply to foreign incorporated subsidiaries of a financial institution (_e.g. the South African subsidiary of an Irish bank / insurer authorised or licensed by the regulator_). 

_Others: _Funds - funds industry representatives have been invited to work on a corporate governance code for the funds industry. Credit Unions - corporate governance for credit unions to be dealt with as part of the forthcoming Strategic Review of the Credit Union Sector. Investment Firms - the views of investment firms are sought on the extension of the proposals to those firms.

B. The Financial Regulator, in conformance with its ‘credible threat of enforcement’ ethos, states that the requirements may be subject to sanction under the Administrative Sanctions Framework. Together with a more intrusive approach to supervision the availably of powers to enforce the corporate governance proposals shall contribute to ‘the improvement of the resilience of the Irish financial sector’. Quid pro quo, the Financial Regulator will be watched closely and will be judged by many stakeholders (including financial intuitions, their boards, their senior management, their employees, professionals in governance, risk, internal audit and actuarial functions (GRC professionals), the external auditors, politicians, international funding markets, the European Commission and of course shareholders) if the regulator does not produce evidence of material compliance with the proposals or swift - but proportionate - enforcement against those failing to meet the requirements.

C. Further requirements regarding remuneration will follow the release of the CP41. The recently published Central Bank Reform Bill 2010 also seeks to put the Fit & Proper regime on a statutory basis for the first time. This follows the spectacular failure of the previous architecture to guard against unethical (and in some cases alleged illegal) behaviour by directors and senior personnel at financial institutions.

D. Obligation to submit an annual statement of compliance with the requirements imposed. In-scope institutions are required to submit to the Financial Regulator a ‘compliance statement’ specifying whether the firm has complied with the Requirements during the relevant period (will this period be (a) the calendar year-end or (b) the financial year of the relevant firm?). This may seem a strange point to note at this stage of the comment process, but the boards of many firms have structured the operations of their companies to receive compliance representations from their management at financial year-end. This might prove problematic if the regulator imposes a calendar year-end requirement. Furthermore the ‘compliance statement’ might be required annually or at other frequencies determined by the regulator. A key question that firms should focus upon is whether the Financial Regulator will require a simple ‘Yes or No’ from in-scope firms as to whether they have complied with each and every requirement, whether it will permit a firm to state that it has materially complied or that it has systems and procedures designed to secure compliance with the Requirements. No doubt these questions and more will be addressed in subsequent guidelines issued by the Financial Regulator. This is an important issue noting that the regulator may make non-compliance ‘sanctionable’ – see section 2 of the Requirements for the specific legal basis for the Requirements.

E. Whistle-blowing obligation imposed on any director with concerns about corporate governance. Although one can appreciate the genuine sincerity of such a requirement, what protection will the Financial Regulator offer to a reporting director? Stories in the media (and before one particular Oireachtas Committee) about the treatment of whistle-blowers may not enthuse directors (or indeed GRC personnel) to come forward. No doubt this is an area that Messrs Elderfield and McMahon are considering as they draw up their Central Bank Reform Bills wish list.

F. Directors to be limited as to number of directorships they can hold – prior approval required for more than five directorships, not more than three of which can be credit institutions or insurers_. _Section 4.6 of the Requirements states:_ “__Where directorships are held outside of credit institutions and insurance undertakings, the Financial Regulator considers that an individual holding more than 5 directorships creates a rebuttable presumption that the director has insufficient time available to fulfil his role and functions as a director of a financial institution. However, the nature of the directorships and the time commitments required is also a factor, hence fewer than five directorships may also indicate a possible constraint on the ability of a director to comply.”_ We should expect many directors – especially the army of retired bank and funds directors offering themselves in the market as a way to top-up their pensions – starting to make out their cases of ‘rebuttable presumptions’ so as not to lose a reliable and material source of income!. 



Compliance Ireland has written a short briefing paper available at _http://www.complianceireland.com/documents/BN032010-Financial-Regulator-Governance-Code-20100427.pdf [Disclosure: I am the author of this document]_


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