Overview of the introduction of the Central Bank s Corporate Governance Code for Credit Institutions and Insurance Undertakings (the Code).

Transcription

1 Overview of the introduction of the Central Bank s Corporate Governance Code for Credit Institutions and Insurance Undertakings (the Code). Geraldine McAlinden Senior Solicitor Policy Governance, Accounting and Auditing Policy Division Central Bank of Ireland

2 Overview of the introduction of the Central Bank s Corporate Governance Code for Credit Institutions and Insurance Undertakings (the Code). Expression of Views This presentation is given in a personal capacity. I would emphasise that the views expressed are my views and do not necessarily reflect those of the Central Bank of Ireland

3 Overview of the introduction to the Central Bank s Corporate Governance Code for Credit Institutions and Insurance Undertakings (the Code) 1. Background 2. Consultation Paper CP41 3. Published Feedback 4. Top Ten Issues 5. Final Code 6. Useful Guidance 7. Annual Compliance Statement 8. Other Relevant Developments 8. Questions

4 1. Background Lessons Learned Internationally recognised that regulation on corporate governance needed strengthening (e.g. EU Green Papers (Corporate governance in financial institutions and remuneration policies and the EU corporate governance framework) and the Walker Review of Corporate Governance of UK Banking Industry) Nationally highlighted in the Regling & Watson Report, Governor Honohan s Report and Report of the Nyberg Commission Central Bank Response Issued Consultation Paper CP41 in April 2010

5 2. Consultation Paper CP41 Published April 2010 Sought the views of industry, their advisors, the Financial Services Consultative Industry and Consumer Panels and all interested parties. Concentrated on the approach to be taken to the application and implementation of new corporate governance requirements Sought views on proposed policies which the Central Bank was considering applying. Proposed requirements were included in the consultation for comment.

6 2. Consultation Paper CP41 (cont d) Key Proposals Impose requirements in terms of the minimum number of directors on the Board; Limit the number of directorships which directors may hold to ensure they can comply with the expected demands of Board membership of an institution; Require that Board membership is reviewed at a minimum every 3 years; Require clear separation of the roles of Chairman and CEO and preclude an individual who has been CEO, executive director or senior manager during the previous five years from becoming Chairman of that institution; Set out clearly the role of the independent non-executive directors; Require the Board to set the risk appetite for the institution and to monitor adherence to this on an ongoing basis; Set out the minimum requirements for Board committees; and Require annual confirmation of compliance to the Central Bank.

7 2. Consultation Paper CP41 (cont d) Main policy questions Should the Code be extended to investment firms? Which elements should be dis-applied to Captives? Proposed adopting a proportionate approach with scope to apply for derogations.

8 2. Consultation Paper CP41 (cont d) Unprecedented level of interest written submissions received including from 16 Individuals, 14 Banks, 30 Insurance Companies,18 Reinsurance Companies 6 Pension Firms, 3 Investment Firms 2 Fund Managers,1 Stockbroker, 1 Mortgage Firm 19 Associations, 6 Management Consultancy Firms, 3 Solicitors firms, 3 Accountancy firms 7 Academics 2 Semi-State Bodies The Financial Services Consultative Industry and Consumer Panels. Meetings Externally Internally Published 8 November 2010 Effective date 1 January 2011 and Transitional provisions

9 3. Published Feedback Schedule published on the Central Bank s website which captures the proposals in CP41, key recurring themes; and the position ultimately adopted in the Code. Having considered the submissions received, the Central Bank: Noted the issues which were generally agreed: and Clarified the requirements and definitions used where respondents sought more clarity and where the Central Bank thought further clarity was needed; and Revised the requirements where the Central Bank was persuaded by rationale put forward by respondents; and Retained core requirements which the Central Bank was satisfied will enhance effective governance and contribute to the improvement of the resilience of the Irish financial sector to any future stresses in the long term.

10 4. Top Ten Issues 1. Over-arching issue - clarity on how the Central Bank shall apply the Code proportionately on different types of entities. 2. Board composition (and in particular the proposed requirement to have a majority of independent non executive directors INEDs). (65) 3. The limit of directorships which could be held in financial institutions (55) 4. The limit of directorships which could be held in non-financial institutions (44). 5. The restrictions on the Chairman, particularly in the context of a whollyowned subsidiary of a parent 38 responded that by requiring a chairman to seek consent before allowing other directorships the Central Bank was acting outside its remit 24 responded to the proposal that a chairman or CEO could not be Chairman or CEO of more than one credit institution or insurance undertaking.

11 4. Top Ten Issues (cont d) 6. The requirement for a minimum of one meeting per calendar month (37). 7. The requirement for an Annual Compliance Statement (31). 8. The requirement to establish separate Audit and Risk Committees (31). 9. The proposed obligation on directors to report concerns to the Central Bank and the lack of protection for Whistleblowers (30). 10. The requirement for a balance between executive and non-executive directors to be present at meetings (29).

12 5. Final Code So what changed? The Central Bank adopted a dual approach of imposing : minimum core requirements on all institutions covered by the Code; and additional requirements upon those institutions which the Central Bank deemed to be major institutions. The Central Bank expanded on the type of criteria which shall be taken into account when assessing whether or not an institution is major. The Central Bank encouraged institutions to consider implementing the additional requirements. The Central Bank adopted a carve-out for captive insurers and captive reinsurers and subsequently developed a bespoke Code for Captives; The Central Bank has allowed the Chairman to be either an INED or, in the case of subsidiaries, to be a Group non-executive director;

13 5. Final Code (cont d) The Central Bank reduced the minimum number of meetings per year to 11 (1 per month for 11 months) for major institutions and quarterly for other institutions; The Central Bank has allowed some leeway for institutions to use group committees, for example audit and risk, but subject always to boards satisfying themselves that the institution s relevant functions are adequately discharged. The Central Bank has increased the limits for directors of (non major) institutions to five financial directorships and eight non-financial directorships generally. When calculating the number of directorships held, the Central Bank has agreed to exclude directorships held in the public interest on a voluntary and pro bono basis but provided that they do not interfere with the director s ability to fulfill properly his or her role and functions as a director.

14 5. Final Code (cont d) What did the Central Bank retain? An enforceable code, breach of which may result in the Central Bank using any of its regulatory powers, including, but not limited to, any or all of the following: The imposition of an administrative sanction under Part IIIC of the Central Bank Act 1942; The prosecution of an offence; The refusal to appoint a proposed director to any pre-approval controlled function where prescribed by the CBI pursuant to Part 3 of the Central Bank Reform Act 2010; and/or The suspension, removal or prohibition of an individual from carrying out a controlled function where prescribed by the CBI pursuant to Part 3 of the Central Bank Reform Act 2010.

15 5. Final Code (cont d) The limits on directorships which could be held in major institutions (3 financial institution directorships and 5 non-financial); The requirement to submit Annual Compliance Statements; The prohibition against a Chairman or CEO from holding such a position for more than one institution at any one time (NB PPI companies); The requirement for directors and boards to report concerns to the CBI regarding the overall corporate governance framework or any deviations from the Code. However the Central Bank modified it to: Allow directors to report concerns to the board in the first instance (without prejudice to their ability to make a report to the CBI) so as to give the board an opportunity to address such concerns; Allow that reports should be made where there are material deviations from the Code; In the absence of relevant legislation, the Central Bank has not provided protection for Whistleblowers but are prepared to revisit the position in the event of any relevant legislation being introduced in this area. Central Bank Supervision and Enforcement Bill 2011.

16 5. Final Code (cont d) Overview Covers corporate governance requirements on credit institutions and insurance undertakings (excluding captives) relating to Composition and role of the board Criteria for appointment and ongoing obligations on members of the board (Chairman, CEO, INEDs, NEDs and EDs) Conduct of board (Meetings, Reserved powers, Consolidated Supervision) Risk Control and Management Committees (Audit, Risk, Remuneration and Nomination) Reporting obligations to the CBI annually and on an ad hoc basis Effective from 1 January 2011 Transitional periods given to industry to achieve compliance 30 June 2011 changes to systems and structures 31 December Appointments to the board.

17 5. Final Code (cont d) In Conclusion the Code Recognises industry concerns (e.g. a tiered system for major institutions and non major institutions, facilitates group structures) Strengthens board composition and contribution Imposes conditions on appointments of key officers (the Chairman and the CEO) recognising time required to fulfill these obligations. End result a balanced and proportionate strengthening of the Corporate Governance regime for banks and insurance companies in Ireland Behaviour in following the spirit of Code is crucial to its success.

18 6. Useful Guidance Published on the CBI Website In the Consultation Papers Section (closed consultation papers) Consultation Paper CP41 Feedback Code In Codes Section Code FAQs: How limits on numbers of Directorships operate? Attendance at meetings What does attendance mean? What about existing corporate governance obligations? Guidelines on the Annual Compliance Statement in accordance with Section 25.

19 7. Annual Compliance Statement The Guidelines on the Annual Compliance Statement (ACS) required under Section 25 were produced at industry s request and confirm: The ACS covers obligations in sections 4.3 and 25 of the Code to make an ACS in relation to the Code to CBI. The first ACS required is for the period from 1 January to 31 December 2011 and must be submitted no later than 30 June The scope of the ACS relates to reporting on compliance with the obligations set out in the Code. The ACS should include details of: any ad hoc reports of material deviations which an institution has already made to the Central Bank (under section 4.2) and which its directors have made (under section 6.7) during that period. details of the background to that deviation; and the remedial action taken or proposed to be taken by the institution.

20 7. Annual Compliance Statement (cont d) The CBI has produced a template (Appendix 1) which institutions must, at a minimum, complete in order to comply with their obligation under Section 25 comprising: Statement of Compliance; and An overview of the board and sub-committees. In the event of material non-compliance institutions must also attach a Report of material non-compliance. Guidance gives examples of types of supporting documentation which institutions could use to demonstrate compliance with the Code and which should be retained.

21 8. Other Relevant Developments 1. For Captive Insurance and Captive Reinsurance Undertakings CP53 - Consultation ended 10 June 2011 Code and Feedback document - Published August 2011 FAQs and Guidance on completing the Annual Compliance Statement - Published October For Funds Industry Voluntary Industry Code to issue shortly. 3. Remuneration Policy and Practices in Financial Sectors 4. Fitness and Probity Regime from 1 December 2011 Staggered implementation dates.

22 . Questions?

23 . Thank you