At the end of January the FSA in the UK published Consultation Paper 10/3: Effective corporate governance (Significant influence controlled functions and the Walker review) (CP10/3).
In CP10/3 the FSA discusses developments in governance and regulatory policy and sets out a wide range of proposals for consultation:
- A new framework of classification of controlled functions (chapter 2). The FSA proposes to introduce nine new significant influence controlled functions (comprising six new governing functions and three new systems and controls functions) to capture key roles that currently fall within an existing significant influence controlled function. The functions are chairman, chairman of risk committee, chairman of audit committee, chairman of remuneration committee, senior independent director, parent entity SIF, finance function, risk function and internal audit function.
- Changes to the approved persons regime (chapter 3). The FSA sets out further proposals on the approved persons regime that build on the changes set out in Policy Statement 09/14: The approved persons regime - significant influence function review. The FSA’s proposals include extending the regime to capture more individuals who are based outside a UK-regulated firm but who exert a significant influence upon that UK-regulated firm. The FSA proposes to extend the regime by removing: (1) the exclusion that applies to individuals who are likely to exert a significant influence from within a non-EEA authorised parent undertaking or holding company of a UK-regulated firm that is a Limited Liability Partnership or a non-body corporate; and (2) the exclusion that allows individuals already approved for a significant influence controlled function within an FSA authorised parent entity or holding company to exercise significant influence over a UK-regulated subsidiary. Under the proposals such individuals will need to seek approval for the UK-regulated subsidiary as well. The FSA also proposes to amend controlled function 29 so that it applies to senior managers responsible for retail banking activities carried out by UK branches of EEA-authorised firms.
- Guidance on the FSA’s expectations in relation to non-executive directors (NEDs) (chapter 5). The FSA’s key message remains that NEDs have a pivotal role to play in the active governance of firms. Where it appears that executives have persistently made poor decisions, the FSA will look closely at NEDs’ performance if it feels they have not intervened in a timely and sufficient way. The FSA proposes to delete current guidance in the FSA Handbook that discusses the limits of NED liability. Whilst it is not the intention of the FSA to take disciplinary action against a NED (or any other approved person) for matters that clearly fall outside the scope of their responsibilities, it believes that those responsibilities are broad. The FSA is concerned that the existing guidance in the FSA Handbook could be misinterpreted and taken to mean that the FSA would not hold NEDs responsible for, for example, failing to intervene and challenge the executive. The FSA sees challenge and intervention as a key part of any NED’s responsibilities.
- Risk governance guidance and the FSA’s plans for other implementing measures in support of Sir David Walker’s recommendations (chapter 6). The FSA proposals include amending existing references to the Combined Code in the FSA Handbook to ensure that the current provisions will apply to the Corporate Governance Code when it comes into effect. The FSA also intends to implement Sir David’s recommendations 23 to 26 regarding Chief Risk Officers and board risk committees through guidance in the Systems and Controls sourcebook. The FSA also indicates its intentions in relation to Sir David’s recommendations 19 to 20B on shareholder engagement.
The FSA also uses CP10/3 to provide more information on its Significant Influence Function (SIF) process. This can be found in chapter 4.
The deadline for comments on CP10/3 is 28 April 2010.