FSA Consultation on Effective Corporate Governance (Significant Influence Controlled Functions and the Walker Review) (FSA CP10/03)

Transcription

1 FSA Consultation on Effective Corporate Governance (Significant Influence Controlled Functions and the Walker Review) (FSA CP10/03) Introduction A response by The British Bankers Association The British Bankers Association is the leading association for UK banking and financial services sector, speaking for 220 banking members from 60 countries on a full range of UK and international banking issues. All the major institutions in the UK are members of our Association as are the large international EU banks, the US banks operating in the UK, as well as financial entities from around the world. The integrated nature of banking means that our members engage in activities ranging widely across the financial spectrum encompassing services and products as diverse as primary and secondary securities trading, insurance, investment bank and wealth management as well as conventional forms of banking. Chapter 1: overview It is worth recounting that the banking industry responded positively to the Walker Review and was supportive of the analysis of the shortcomings of corporate governance in the British-Owned Financial Institutions, as evidenced by those institutions caught up in the financial crisis, and the 38 recommendations for change clustered around five key themes: board size, composition and qualification; the functioning of the board and evaluation of performance; the role of institutional shareholders; the governance of risk; and remuneration. Recommendations included placing more rigour around the recruitment of Non-Executive Directors, their support and the identification of a minimum time commitment in respect of major bank boards. The review also questioned whether the right balance between independence and experience had been achieved. A more disciplined approach was recommended in respect of the functioning and evaluation of the board, its committees and its members. Institutional investors were encouraged to become more engaged. Greater emphasis was encouraged on board oversight of risk management, with the establishment of a board risk committee to sit alongside the audit committee and the appointment of a Chief Risk Officer, reporting to the CEO or CFO. The review also embraced the Pittsburgh principles on remuneration in making the case for the deferral of a proportion of performance-related pay and enhanced transparency. The review gained wide acceptance within the banking industry early in the process. Concerns were expressed, however, about scope and emphasis. Most agreed with the image provided of what constituted good practice; questions related more to whether specific proposals necessarily applied across the community of banks irrespective of size

2 2 and whether or not improvements in practice deemed appropriate for large financial institutions were necessarily relevant to smaller or non-listed institutions. Similar considerations were relevant when it came to revising the UK Corporate Governance Code in light of the Walker review. As the consultation paper explains, the FSA has already embarked on its programme for contributing to the delivery of effective governance in regulated firms. This includes placing greater emphasis on its oversight of governance arrangements in firms as part of the existing ARROW framework and completion of the Supervisory Enhancement Programme. Similar changes have been made to the way in which the FSA operates its approved persons regime in recognition that an increased intensity in the regulation of approved persons can drive improvements in the effectiveness of the governance of a firm. Steps have already been taken to include competence-based interviews in the assessment process for key roles in certain firms and to establish that fitness and propriety should be viewed as an ongoing test and not restricted to the point of approval. The consultation paper is intended to ensure that the FSA has the right regulatory foundations in place to support its efforts to deliver effective governance and to address gaps in this regard. In broad terms, we have little difficulty with the proposals as they apply to the parent entity of British Owned Financial Institutions. But it remains the case that we must ensure that the right judgement calls are made in respect of other institutions and entities. By definition, the demands to be placed upon the main board of a FTSE 100-listed bank or life assurance company must be very different to those in respect of a smaller or nonlisted entity, such as private banks or asset management companies, or UK subsidiaries, including subsidiaries of foreign-owned entities. Sir David Walker recognised this and we trust that this will continue to be a consideration for the FSA in the completion of these changes to its rulebook and their ongoing application. We are also aware that the European Commission is expected to publish corporate governance proposals in the near future and would underline the need to ensure that the FSA s requirements fit coherently with any new European requirements, particularly if they are statutory in nature. Chapter 2: a new framework of classification of significant influence control functions We are broadly supportive of the way in which the FSA is proposing to update the framework for the classification of significant control functions. We are also supportive of the proposed phased introduction of the new arrangements under which firms subject to the Remuneration Code will be required to demonstrate adherence over a shorter time period than other, often smaller, firms. But we see grounds for the adoption of a longer transitional period for the first set of firms and would argue that 6 months would be a more appropriate period. Q1: Do you agree with our proposal to separately identify certain key roles that are performed within the CF1 (director) CF2 (NED) or CF 28 (systems and controls) controlled functions? We support FSA s proposals to split down the governing functions. This will undoubtedly give FSA additional granularity on how the firm is operating and who is taking key decisions to commit the firm.

3 3 In relation to CF00, it appears that the new CF00 designation will be wider in its application to parent level individuals than the current CF1 & CF 2 designations. However it appears that, in the first instance, there will be no accompanying guidance on the standards of conduct expected of CF00 approved persons. In reality a CF00 individual is likely to be somewhat distanced from the granular decisions made at the subsidiary firm. Such an individual should be judged differently from an active serving Director of the subsidiary. We would support FSA provision of additional guidance on the role, function and responsibilities of CF00s. Not least so that firms and those who will end up with this approval fully understand what is required of them in a regulatory sense. Q2: Are there any other key roles we should be identifying? We cannot see any additional key roles that should be added to FSA s proposed new SIF framework going forwards. Q3: Do you agree that we should separately approve all candidates for a systems and controls function, even if they have, or are seeking, approval to perform a governing function? We agree with FSA s proposals, in that not all Governing Functions competencies, always and everywhere, outweigh the Systems and Controls Functions competencies. However we would encourage FSA to run these processes in parallel rather than concurrently. FSA should seek to make the approvals process run as efficiently as possible. As such, the same approval team should work on the same individual for each of their required approvals. This will avoid the unnecessary duplication of questions / exchange of information etc. FSA should consider identifying which governing Function roles could potentially encompass some of the underlying Systems and Controls Functions. This would remove the need for unnecessary duplicative approval processes to take place for candidates. In addition it is our view that FSA should ensure that there is sufficient resources available to deal with the higher level of intensity and breadth of the systems and controls requirements and concomitant work that will fall on to the FSA. It would be unfortunate if this new system creates a bottleneck in the appointment of staff in the City. In Appendix 1 to the CP on page 28 of 48 FSA states the following rule: G - A firm may have more than one employee performing one of the systems and controls functions. Where this is the case, the FSA would only expect an employee to be approved for the relevant controlled function where that employee is responsible for the whole function, whether individually or jointly with others. We are not clear exactly what the FSA intend by this statement and would be grateful if the guidance could be expanded or further information on the intention behind the guidance be provided. Q4: Do you agree that we should automatically grant the new controlled functions to individuals already performing the relevant role within their existing approvals? Yes we support FSA s helpful proposal to grandfather existing post holders into the new regime. Clearly without such a smoothing proposal there would be a huge bulge in people requiring approval in a very short time frame. Over time, with movement of staff, people will be bought into the new SIF regime.

4 4 Q5: Do you agree that a phased approach of between 3 and 12 months is sufficient for the notification process, and that the Remuneration Code provides an appropriate basis for this phasing? Our members consider that 3 months is unlikely to be sufficient time to provide notification to FSA of the apportionment of the new controlled functions for large global banking institutions. FSA must bear in mind that this is not simply a case of restating existing permissions. But rather this may drive a reorganisation of the senior management structure - potentially on a global scale, as is FSA s intent, to reflect the new prima facie role of the corporate governance structure in supervision. We would suggest 12 months as an appropriate timeline, (as has been suggested for small firms) but with the rider that firms will endeavour to provide information as quickly as possible. Chapter 3: Significant influence controlled functions other proposals Q6: Do you agree that we should extend the proposed CF00 (parent entity SIF) to apply irrespective of the corporate status of the UK subsidiary? We agree with FSA s proposal to extend the CF00 regime in this manner. Q7: Do you agree that we should extend the proposed CF00 (parent entity SIF) regime to apply to regulated firms whose parent entity is also FSA-authorised? Our members consider this to be excessive. Given the involved ownership structure of many financial firms authorised by FSA, there is a distinct possibility for a maze of cross cutting approvals, that don t add very much to FSA s understanding. In addition, it is unclear how the FSA handbook rules on Statements of Principle and Code of Practice for Approved Persons (APER) would interact with the CF00 function. Q8: Do you agree that these transitional periods are sufficient? Given the step change in policy here, in relation to the CF00 designation, we would suggest an across the board transitional period of at least 6 months rather than just 3 months to identify those individuals in the parent who will require SIF approval for the subsidiary. Q9: Do you agree that it is appropriate for us to extend CF29 to UK branches of incoming EEA banks accepting retail deposits? Our members support FSA s extension of this provision. Given that these branches are, servicing UK retail customers, it is important both from a consumer protection and systems & controls perspective that they are brought into this aspect of the FSA regime. Q10: Do you agree that our proposed guidance on compromise agreements is useful in clarifying the current position? We support FSA s proposals. Our members support the clarification provided by the FSA on this area, and note the restriction on firms entering into agreements in conflict with this obligation. However, given that this clarification is only now being issued, we would welcome FSA confirming that it will not take retrospective action, in relation to agreements containing such provisions.

5 5 Chapter 4: Approving and supervising Significant Influence Functions (SIFs) our more intrusive approach The chapter provides a useful outline of the approved person and SIF interview process that now applies and is helpful in assisting firms to understand the FSA s processes and the expectations upon them. Chapter 5: Non-executive directors (NEDs) As outlined above, the banking industry was supportive of the Walker Review and the read across to the Corporate Governance Code and is therefore supportive of their provisions being reflected appropriately in the FSA s rules. There are, however, issues of proportionality and relevance which need to be taken into account in determining how this then translates into requirements for entities outside of the BOFI grouping which was the principal focus of the Walker review. This relates to some of the expectations on chairmen and NEDs set out in this chapter and also in respect of some of the provisions of chapter 6. Q11: Do you agree with our proposed guidance on the time commitment required for chairmen and NEDs? We can see the justification for the FSA s rules indicating explicitly that it will have regard to whether an individual has adequate time to perform a controlled function when considering an application and that it may take into account the process undertaken by the firm to determine the time required. We would underline, however, that the time commitment of a chairman or NED on the main board of a FTSE 100-listed bank or life assurance company is likely to be very different to that of a chairman or NED of a smaller or non-listed entity, such as private banks or asset management companies, or UK subsidiaries, including subsidiaries of foreign-owned entities. The FSA are following the Walker recommendations by imposing time commitments, however, allowing the employer in the first instance to specify how many days they believe the employee should commit to is a fair approach, reflecting the varying size and scope of different companies. Q12: Do you agree that we should delete the guidance in SYSC 2 and 4 on NEDs responsibilities? It is of concern that FSA intends to delete the existing guidance in SYSC 2 and 4 on NED s responsibilities. In particular the removal of text that places limits on the liability of NEDs in the event of a firm contravening their regulatory obligations. Whilst we acknowledge that FSA s desire for an increase in the level of responsibilities if NEDs. The removal of this guidance creates a significant uncertainty for NEDs on the extent of their liability and responsibilities. As such it appears there will be both increased responsibility for NEDs but less granularity on what that responsibility could entail. This will no doubt impact on firms ability to recruit NEDs to their boards. Certainly in the initial stages of this new regime where inter alia the market is unsure of the extent of this liability, it may be helpful to extend the transition period. This will enable firms to meet their regulatory obligations / replace those NEDs who no longer wish to stay in post etc.

6 6 Chapter 6: The Walker Review Chapter 6 deals with recommendations made by the Walker review in respect of risk governance and shareholder engagement. Q13: Do you agree that we should amend our rules to reflect the introduction of the new Corporate Governance Code? Yes. We support the introduction of the updated Corporate Governance Code and understand that our members are already implementing systems and control changes to achieve implementation. Q14: Do you agree with the content of our proposed guidance on board risk committees? As the consultation document recognises, it may be necessary for boards, particularly those of larger and more complex firms, to delegate the active oversight of risk to a subcommittee established for that purpose. In other instances, however, this may not be necessary. We therefore support the proposal to change in the FSA s rules on a need for firms to consider the value of establishing such a committee. As the paper implies, this is more likely to be necessary in the case of the main board of a FTSE 100-listed bank or insurer. A Board Risk Committee provides a specific forum to deal with the expansive area of risk and strategy which, given the economic crisis, is an increasingly important and regulated area of corporate governance. Q15: Do you agree with the content of our proposed guidance on CROs? Yes We are pleased to see that the FSA concurs with the conclusion of the Walker review that while it will be appropriate for many firms, according to their nature, size and complexity, to appoint a CRO, there will be others for whom it would clearly be unnecessary. It is helpful that the FSA is not mandating the appointment of a CRO, which for our smaller members would be a disproportionate burden. The FRC's proposed guidance highlights the key issues; which are that the risk officer should be able to challenge the Board on risk issues from a position of independence, having first had sufficient opportunity to assess where risk issues may arise.