Regulatory Briefing. Effective Corporate Governance (Significant Influence Controlled Functions and the Walker Review)

Transcription

1 CPA Audit LLP, Talbot House, 8-9 Talbot Court, London EC3V 0BP Telephone: Facsimile: web: Regulatory Briefing Effective Corporate Governance (Significant Influence Controlled Functions and the Walker Review) Introduction The events of the financial crisis exposed immense weaknesses in the governance and risk management of some regulated firms. This has led the FSA to form a supervisory enhancement programme in order to regulate activity in relation to governance further. In this Consultation Paper, CP10/3, Effective Corporate Governance (CP), the FSA emphasises the importance of the role of senior management at firms, extending the scope of the SIF regime and introducing a new, more detailed framework of controlled. The FSA is also extending the regime to capture more individuals from parent companies who exert significant influence upon a UK regulated firm. This CP has an impact on large firms, for example banks. However, there will also be a significant impact on smaller firms, so close attention to the proposals is necessary. New Framework of Classification of Significant Influence Controlled The FSA considers that the structure of the significant influence controlled is currently lacking details and does not allow them to fully identify and capture specific key roles within a firm s governance structure. The controlled are generally, too broad a range of individual roles for the FSA to be able to track and investigate individuals who may change their roles within those. The FSA proposes to introduce nine new specific controlled capturing key roles in organisations, within the scope of the present governing controlled. An individual approved for one of the governing function is also required to apply for further approval, even though they may already be performing that controlled function within the responsibilities of their governing function role. The following table gives detail of the new Controlled Functions: CPA Audit is a trading name of CPA Audit LLP, a Limited Liability Partnership registered in England and Wales. Partnership number: OC Registered office: Talbot House, 8-9 Talbot Court, London EC3V 0BP

2 Significant Influence Function Current Function New/Changed /Unchanged Proposed new function Section of this CP (paragraphs) Governing Required New CF00 (Parent entity SIF) 2.12 to 2.13 and 3.2 to 3.14 CF1 (Director) Changed Decreased Scope 2.12 CF2 (NED) Changed Decreased Scope 2.12 CF3 (Chief Executive) CF4 (Partner) CF5 (Director of unincorporated association) CF6 (Small friendly society) CF8 (Apportionment and oversight) CF10 (Compliance oversight) CF11 (Money Laundering Reporting) CF12 (Actuarial) New CF2a (Chairman) CF2b (Senior independent director) CF2c (Chairman of risk committee) CF2d (Chairman of audit committee) CF2e (Chairman of remuneration committee) Unchanged n/a n/a Unchanged n/a n/a 2.3 to 2.10 Systems and controls Significant management function CF12A (Withprofits actuary) CF12B (Lloyd s actuary) CF28 (Systems and controls) CF29 (Significant management) New Changed CF13 (Finance function) CF14 (Risk function) CF15 (Internal audit function) Deleted 2.7 to 2.11 and 2.14 to 2.16 Changed Increased scope 3.19 to 3.23

3 Significant influence controlled Extending the scope and application of the proposed parent entity SIF controlled function The FSA considers it useful for individuals based in a parent entity who are likely to exert a significant influence downwards, to be identified and assessed separately from CF1 and CF2, even if these are already held for another firm. The new controlled function CF00 (Parent entity SIF), are for those whose significant influence on the UK-regulated firm is comparable to that of a director or Non Executive Director (NED) and whose decisions or actions are regularly taken into account by the governing body of the firm irrespective of the corporate status of the UK subsidiary or whether the parent entity is FSA-authorised. Significant influence controlled Extending controlled function 29 to UK Branches of EEA Banks The FSA proposes to extend CF29 (significant management function) to UK Branches of incoming EEA firms accepting retail deposits. The application of CF29 will vary from branch to branch depending on how responsibilities are allocated. Firms responsibilities in recruiting and sponsoring candidates for controlled function roles Firms have the responsibility to provide sufficient information in the application process to satisfy the FSA that they have fully assessed the candidate and can confirm that they are fit and proper. The type of information expected includes: responsibilities that the role involves, recruitment processes, due diligence undertaken by the firm, etc. These requirements will be implemented into Section 6 of the application form. If firms do not keep the FSA informed from an early stage of the recruitment process, it may mean the firm s public announcement of an appointment has to include a caveat that the appointment is subject to regulatory approval. Far greater responsibility will be placed upon firms to assess and satisfy themselves of a candidate s core competences. The following table gives some guidance in this regard. Core competences for SIFs Market knowledge awareness and understanding of the wider business, economic and market environment in which the firm operates. Business strategy and model awareness and understanding of the firm s business strategy and model appropriate to the role. Risk management and control the ability to identify, assess, monitor, control and mitigate risks to the firm. An awareness and understanding of the main risks facing the firm and the role the individual plays in managing them. Financial analysis and controls the ability to interpret the firm s financial information, identify key issues based on this information and put in place appropriate controls and measures. Governance, oversight and controls the ability to assess the effectiveness of the firm s arrangements to deliver effective governance, oversight and controls in the business and, if necessary, oversee changes in these areas.

4 Regulatory framework and requirements awareness and understanding of the regulatory framework in which the firm operates, and the regulatory requirements and expectations relevant to the SIF role. Risk governance guidance and plans in support of Sir David Walker s recommendations The FSA considers that implementing parts of Sir David Walker s recommendations through its regulatory activity will enable it to:: evaluate and include more intensive work in the governance and risk management of the ARROW framework; increase focus on non-executive directors, ensuring that they are capable of meeting the level of time commitment required by their firms; amend existing references to the Combined Code in the Handbook to ensure that the current provisions will apply to the Corporate Governance Code when it comes into effect; give guidance in the Systems and Controls Sourcebook (SYSC) on the need for some firms to appoint a Chief Risk Officer (CRO) for advice on the subject of risk; monitor and contribute to the consultation on the Stewardship Code and disclosure rule, to highlight the importance of communication between companies and their shareholders. What Happens Next The consultation period finishes on the 28th April 2010 with a Policy Statement and final rules being published in Quarter 3 of At this point, the transitional periods will begin. Action Points Determine whether the proposed new controlled apply to your firm Will any individual within your firm perform one of the three new proposed systems and controls (CF13, CF14, CF15). If so, they will need to seek specific approval for that function irrespective of whether they are also approved or seeking approval to perform any of the governing controlled (3 months if subject to the Remuneration Code, 12 months if a smaller firm). Individuals already approved for a governing controlled function in an FSA-authorised parent entity that also require CF00 in a subsidiary of that firm need to tell the FSA which part of their parent entity s approved persons need to be approved for the new controlled for the subsidiary.

5 Any individual in an FSA-authorised parent entity who is not currently approved for a governing function for the parent entity will need to be approved for the CF00 controlled function. The subsidiary will need to submit a Long Form A application in the usual manner. The transitional period is six months from the date the rules are published. Further detail can be found at: Effective corporate governance (Significant influence controlled and the Walker review) CPA Audit LLP. First edition, February 2010