A robust plan will be required if directors of investment firms are to meet increased governance requirements under the Central Bank of Ireland’s Consultation Paper 94, write Sarah Lane and Mark Kennedy.
A consultation paper entitled ‘CP 94’ was published by the Central Bank of Ireland (CBI) in May 2015 focusing on the deveopment of sound corporate governance standards for investment firms.
As the paper’s requirements will be supplementary to those of Financial Instruments Directive (MiFID) II and CRD IV, directors of investment firms must therefore consider how to achieve compliance once the proposals are implemented while using the opportunity to enhance governance frameworks.
It is vital that investment firms plan for implementation with particular emphasis on the compliance statement that is submitted annually to the CBI, which directors must sign; changes to documentation including specific requirements for board minutes; and stipulations around the membership, size and composition of the board.
Scope
MiFID II and CRD IV introduced new corporate governance requirements for investment firms. The CBI requirements are intended to supplement these and will be introduced on a statutory basis subject to the transposition and imposition of Markets in MiFID II. All member states are required to transpose MiFID II by 3rd July 2016 with implementation on 3rd January 2017.
CP 94 proposes that the requirements will apply to investment firms including all MiFID firms and non-retail investment intermediaries licenced or authorised by the CBI that are designated as high, medium-high or medium-low impact under the Central Bank’s Probability Risk Impact System (PRISM). There will be additional requirements for high or medium firms, as outlined below.
It is proposed that the requirements will not apply to firms designated as low impact or foreign incorporated subsidiaries of an Irish firm. Firms are nevertheless reminded that the requirements would be considered best industry practice and are encouraged to adopt them.
Trustees and administrators covered by the Corporate Governance Code for Fund Service Providers, which was published by the Irish Funds Industry Association (IFIA), and retail investment intermediaries are excluded.
Compliance statement
When reporting to the CBI, a compliance statement will be submitted by each firm on an annual basis, or with such other frequency as the Central Bank may notify from time-to-time. This statement should confirm compliance with the requirements.
Deviations from the requirements will be reported within five working days to the CBI, including the background to the deviation and the proposed remedial action.
Board meetings
The Board must meet as often as is appropriate to fulfil its responsibilities effectively and prudently, reflective of the nature, scale and complexity of the firm. The minimum number of meetings is four per calendar year and at least one should be held in each six-month period.
Board size and composition
A board must have a minimum of three directors with the majority comprising independent non-executive directors (NEDs) – five in the case of PRISM high and medium-high impact firms. Where the firm is a subsidiary of a group, the majority of the board may be composed of a combination of group directors and independent NEDs provided there is at least one independent NED (or two in the case of PRISM high and medium-high firms). The firm will need to satisfy itself as to a director’s independence prior to appointing a director, and all directors must attend each board meeting – in person if possible, or through the use of video link or teleconferencing. At least two of the directors should be available to meet with the CBI at short notice if so required. Also, there is no limit on the number of investment firm directorships an individual may hold. This is in contrast to other corporate governance codes, for example with credit institutions.
Board membership
Investment firms are required to review their board membership on a formal basis at least every three years in line with the documented board membership review policy. If the firm in question is a PRISM medium or high risk firm, however, a documented internal annual review is required with an external review every three years. Where an independent NED has been a director on the board for nine years at any time following the imposition of the requirements, the firm is required to perform a formal review of the individual’s membership of the board. This includes advising the CBI in writing as to the rationale for continuance of membership.
Chairman and the CEO roles must be split. Both must be independent NEDs and re-elected on an annual basis. A firm that is a subsidiary is exempt from this particular rule, where the chairman may be a group director. Furthermore, no individual who has been the CEO, an executive director or a member of senior management during the previous five years may act as chairman. The chairman must be proposed for election or re-appointment on an annual basis and if the chairman wishes to take on other directorships, prior approval of the Central Bank must be obtained to ensure the required time commitment does not conflict.
There is no requirement for the CEO to be a member of the board, as there is with other corporate governance codes. The CEO’s contract must be reviewed by the board on renewal and at least once every five years.
Board committees
The board must establish, at a minimum, both an audit and risk committee. In the current proposals, a chief risk officer is not required as it is with other corporate governance codes such as Credit Institutions and Insurance Undertakings. Clear, written terms of reference for each committee should be documented and each firm must ensure the committees have at least one shared member.
Where a firm is part of a wider group, which has a group audit committee and/or a group risk committee, it may rely on these committees provided the board is satisfied that they are appropriate to the specific circumstances of the firm and the board has documented its assessment.
The audit committee must include at least one independent NED, and the chairman of the audit committee should be an independent NED. The risk committee, on the other hand, must be composed of a majority of non-executive directors, independent non-executive directors, or a combination of both. The chairman should also be an independent NED. Meanwhile, PRISM high and medium-high impact firms must establish remuneration and nomination committees. An exemption from this requirement occurs where the firm in question is part of a wider group where remuneration and nomination committees already exist.
Documentation
Throughout the consultation paper, documentation forms a key element of the proposals on corporate governance. Directors should take note of the minimum requirements in this regard. CP 94 outlines specific documentation requirements including documentation of the role and responsibilities of the board; policy of board membership renewal (as outlined above); conflicts of interest policy; risk appetite and deviation from it; schedule of matters for board decision and terms of reference (including annual review thereof); and specific requirements around board minutes and what should be included in them. Examples include the requirement for their timely circulation prior to board meetings; and the requirement for sufficient detail in relation to matters discussed at the meetings to evidence an appropriate level of attention and discussion by the board.
Detail of the substance of discussions and their outcome is also required, as is details of document dissensions or negative votes, documentation of directors’ attendance and eligibility to vote.
Conclusion
While MiFID II and CRD IV outline broad principals in terms of corporate governance requirements for investment firms, CP 94 is the first prescriptive set of requirements
investment firms will be required to comply with.
To tailor compliance, a robust plan will need to be developed and executed to meet the governance requirements, most notably the establishment of up to four committees and meeting the specific board membership, composition and size requirements.
In doing so, the board is provided with an opportunity to make sure it is well organised and able to provide ongoing ‘steady state’ leadership with the skills, expertise and experience necessary to cope as the business develops.
Sarah Lane is Director of Regulatory Assurance at Mazars Ireland. Mark Kennedy is Managing Partner at Mazars Ireland.