The FSA has published a consultation on effective corporate governance in banks and financial institutions, along with the text of draft changes to the FSA Handbook. This sets out the “more intrusive approach” that the FSA is taking to the approval and supervision of senior managers in authorised firms, and a new framework for classifying controlled functions. Of particular interest from a broader corporate governance perspective are its proposals to implement Sir David Walker's recommendations in relation to non-executive directors and risk committees of banks and financial institutions. The FSA proposes to:
- include additional guidance on its expectations in relation to the role of chairmen and non-executive directors of FSA-authorised firms. When considering the application for any approved person, the FSA will have regard to whether the individual has adequate time to perform the role proposed;
- include new guidance that authorised firms - in particular large or more complex firms, for example banks and insurers in the FTSE 100 index - should consider whether to appoint a chief risk officer and establish a board risk committee;
- remove guidance in the FSA Handbook which states that a non-executive director of an authorised firm would not be held responsible for the failings of the firm, provided the NED carried out its role with due care. Whilst the FSA does not intend to take disciplinary action against NEDs for matters falling clearly outside the scope of their responsibilities, the FSA is removing this text as it is concerned that it undermines the message that the FSA will take action against NEDs who do not perform their role in intervening in poor management decisions.
The FSA confirms that it will implement the Walker recommendation to require investment firms to disclose publicly the extent to which they comply with the FRC's proposed Stewardship Code (which will set out good practice for institutional investors when engaging with UK listed companies in which they invest) and explain, where relevant, their reasons for not doing. In view of its wish to encourage collective engagement by investors, the FSA also states that it will consult in the second quarter of 2010 on guidance on its interpretation of "acting in concert". This should enable investors to have greater clarity on the extent to which they may cooperate without being deemed to be acting together for the purposes of disclosure, change of control and market abuse provisions.
Lastly, the FSA proposes to make consequential changes to the FSA Handbook to reflect the FRC's proposal to change the name of the Combined Code to the "UK Corporate Governance Code" from 29 June 2010.
The consultation paper can be found here. Comments are invited by 28 April 2010. The FSA will publish final rules in the third quarter of 2010. See here for background on the Walker Review and here for background on the FRC’s Stewardship Code.
