On 28 January 2010, the FSA published Consultation Paper 10/3: Effective corporate governance (Significant influence controlled functions and the Walker review) (CP10/3).
In CP10/3 the FSA discussed developments in governance and regulatory policy and set out a 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 set 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 included 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 also proposed amendments to 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 remained 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 proposed the deletion of 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 it 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's proposals included 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 indicated its intentions in relation to Sir David’s recommendations 19 to 20B on shareholder engagement.
The FSA also provided more information on its Significant Influence Function (SIF) process. This was set out in chapter 4 of CP10/3.
The deadline for comments on CP10/3 is 28 April 2010.