Monday, February 08, 2010

UK FSA Proposes Enhanced Corporate Governance Regime

The UK Financial Services Authority has proposed significant enhancements to its corporate governance rules centering on an enhance role of non-executive directors and board risk committees. Under the Financial Services and Markets Act, the FSA is empowered to regulate persons who have a significant influence on a firm’s affairs. The FSA created the significant influence controlled functions to capture these individuals. The proposals partially implement the FSA-specific recommendations in Sir David Walker’s review of corporate governance published late last year. The consultation period closes on 28 April 2010. The FSA hopes to have final rules in place during the third quarter of 2010.

The proposed approach would extend the scope of the regime and introduces a new, more detailed framework of controlled functions. These would make clearer the exact role an individual is performing within a firm and increases the FSA’s ability to vet and track individuals.

The FSA also proposes to extend the regime to capture more individuals from parent companies who exert significant influence upon a UK regulated firm. The FSA proposes to designate a number of significant influence controlled functions, including chairs of the risk, audit and compensation committees, the senior independent director, risk functions and internal audit functions. Firms must ensure that they conduct due diligence to ensure that persons performing significant control functions are fit and proper to perform that role.

The FSA has long stressed the importance to regulated firms of an effective and independent risk oversight function. The Walker Report placed particular emphasis, as does the FSA, on the central role of the board of directors in ensuring that risk is properly managed within a firm. Boards must take appropriate steps to ensure that, in addition to the necessary review of the quality and effectiveness of internal controls, the overall risk appetite of the firm is clearly articulated and its future strategy appropriately aligned with that risk appetite.

The Walker Report described how the scale of work required to deliver the necessary level of active oversight of risk in larger and more complex firms, means that some boards will need to delegate the detail of this work to a sub-committee established for that purpose. This committee would be charged with advising the board on high-level issues about current risk exposures and future risk strategy. The FSA considers the role of chair of this committee to be of such significance to the quality of risk governance in the firm that it merits identification as a specific controlled function

The FSA also agrees with the Walker Report that boards should ensure that one individual is appointed within the executive to be accountable to them on risk issues. The board should be able to look to this person for advice on the subject of risk, so the FSA proposes appointment of a chief risk officer, who will play a pivotal role in ensuring that the board receives balanced and accessible information and advice on high-level risk issues.


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