CPA Audit LLP, Talbot House, 8-9 Talbot Court, London EC3V 0BP Telephone: 020 7621 9010 Facsimile: 020 7621 9011 email: info@cpaaudit.co.uk web: www.cpaaudit.co.uk Regulatory Briefing Effective corporate governance - Significant influence controlled and the Walker Review Introduction This Policy Statement (PS) sets out a summary of the responses the FSA received to Consultation Paper (CP) 10/3: Effective corporate governance (Significant influence controlled and the Walker Review) published in January 2010. Developments The focus on the role of good governance continues internationally and domestically. Since the CP in January, the Basel Committee on Banking Supervision issued a set of principles for enhancing sound corporate governance practices. The European Commission also published its Green paper on Corporate Governance. Domestically, the Financial Reporting Council (FRC) has now published a new edition of the UK Corporate Governance Code and UK Stewardship Code. Consultation Feedback on the new framework of significant influence controlled 80% of respondents agreed that there should be more role-specific controlled for Governance and Systems and Control roles. The minority have concerns that the changes to separately identify certain key roles will increase administrative burden and costs. All respondents have requested greater clarity and detail about the roles and responsibilities specific to each of the new significant influence controlled. The FSA created the new internal audit function (CF15), which ensures the effective governance of organisations. Further guidance will be added to Supervision Sourcebook SUP 10 to clarify that a person responsible for CF15 should not be carrying out any other governing. The FSA stresses that the decision about whether or not a firm should create these roles will depend on the nature, scale and complexity of the firm. The FSA does not prohibit the outsourcing of certain controlled to a suitable thirdparty provider as long as such an arrangement complies with the outsourcing provisions. However, CF13-15 can only be allocated to a person or persons at a firm CPA Audit is a trading name of CPA Audit LLP, a Limited Liability Partnership registered in England and Wales. Partnership number: OC314819. Registered office: Talbot House, 8-9 Talbot Court, London EC3V 0BP
The new Significant Influence Function (SIF) controlled apply to Appointed Representatives (AR) because the new controlled are classed as governing and governing apply to ARs. However, the new controlled will not be introduced to ARs when they are first introduced in 2011. The questions on the FSA s proposals of creating the Parent entity SIF (CF00) will be answered by means of Frequently Asked Questions, which will be inserted as guidance into the Handbook in Statements of Principle and Code of Practice for Approved Persons Sourcebook APER and Supervision Sourcebook SUP 10. Firms will have seven months from the publication of this PS until the rules and guidance come into force on 1 st May 2011 to consider these issues. The FSA intends to implement the proposal to extend CF29 (significant management function) to UK branches of incoming EEA banks accepting retail deposits. Firms are allowed to have as many CF29s as it requires, consistent with its internal structure. The FSA will consider issues relating to Non-Executive Directors (NED) responsibilities, liabilities and the candidate s existing commitments when assessing their suitability for the role. The FSA expects NEDs to take the initiative in challenging the governing body and its committees, and will identify poor decision-making by executives through their supervision process. The positions are that, if NEDs have adequately discharged their responsibilities, they will not be held liable for the failings of the firm or others within it. It is for each individual firm to determine, based on its nature, scale and complexity, as well as its attitude and exposure to risk, whether or not to establish a risk committee of the governing body. Where no risk committee has been established, the FSA would expect the firm to keep this situation under regular review and to create such a committee should circumstances change and/or, for relationship managed firms, on the advice of their supervisor. The appointment of the Chief Risk Officer (CRO) is also a matter for the firm, in consultation with their supervisor. Where a CRO is appointed they will have to be granted approval as a CF14. Approving and supervising Significant Influence Functions Firms need to ensure that it has the right balance of individuals, in terms of their experience and skills, and that board members are properly equipped to deal with the full range of issues they are likely to face. The FSA s intention is to focus more on the competence and capability of candidates for SIFs. Where applicants are requested to attend an interview to assess their suitability for a SIF role, the FSA would like to ensure that they have the correct balance of individuals on the interview panel, including in seniority. The FSA are mindful of the need to avoid any conflicts of interest when selecting the interview panel members. They select from a range of advisers and senior advisers appropriate to the candidate and nature of the rule being applied for. The decision about whether or not to call an applicant to interview is a risk-based one, dependent on the assessment of their competencies, the role sought and the existing/proposed composition of the governing body of the firm. For candidates seeking approval to carry out a SIF function, the FSA s
primary purpose is to establish their competence and suitability for the role they are seeking to fulfil. For those candidates who are called for interview, this is potentially a two-stage process. The first interview is an unrecorded, minuted interview with the candidate, followed, if necessary, by a second, recorded interview. The FSA expects all firms to undertake their own due diligence checks on candidates. The Controlled Functions The following table gives detail of the new Controlled Functions: Significant Influence Function Governing Required Current Function /Changed/Unchanged Proposed new function CF00 (Parent entity SIF) CF1 (Director) Changed Decreased Scope CF2 (NED) Changed Decreased Scope 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) Unchanged Unchanged CF2a (Chairman) CF2b (Senior independent director) CF2c (Chairman of risk committee) CF2d (Chairman of audit committee) CF2e (Chairman of remuneration committee) n/a n/a CF12A (With-profits actuary) CF12B (Lloyd s actuary)
Systems and controls Significant management function CF28 (Systems and controls) CF29 (Significant management) Changed Changed CF13 (Finance function) CF14 (Risk function) CF15 (Internal audit function) Deleted Increased scope Implementation controlled role is already approved to perform a relevant controlled function for firm role is already approved to perform a relevant controlled function for the UK parent firm role is not an approved person (only applicable where applications are required as a result of the extension of scope of the approved person regime, as confirmed in this Policy Statement.) holds a governing function but now requires separate approval for a systems and control function CF00 May 2011and 31 July 2011. May 2011and 31 July 2011. Must apply for approval between 1 May 2011 and 31 October 2011, Though transitional period will extend beyond 31 October if necessary for all applications submitted before 31 July 2011. N/A CF2 a-e May 2011 and 31 July 2011 As above. As above. N/A
CF13-15 Firm must notify 2011 and 31 July 2011 N/A N/A Firms subject to Remuneration Code must notify 2011 and 31 July 2011. Firms not subject to Remuneration Code must notify 2011 and 30 April 2012 CF29 N/A N/A Must apply for approval between 1 May 2011 and 31 October 2011, though transitional period will extend beyond 31 October if necessary for all applications submitted before 31 July 2011. N/A All notifications and applications must be submitted through the Online Notifications and Applications System (ONA). Action Points The following institutions and relevant persons should pay attention on any upcoming issues: regulated firms, the parents of regulated firms and those applying for authorisation; individuals who hold significant influence and individuals who exert significant influence over regulated firms; and those involved in recruiting SIFs and in overseeing, developing and administering processes for complying with the FSA s approved persons regime. To read the full PS visit: http://www.fsa.gov.uk/pubs/policy/ps10_15.pdf CPA Audit LLP. Second edition, October 2010