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SIR DAVID WALKER PUBLISHES HIS REVIEW ON CORPORATE GOVERNANCE AND REMUNERATION

Last week the much awaited Review by Sir David Walker was published. It focuses on five main areas:

Board size, composition and qualification
Functioning of the Board and evaluation of performance
The role of Institutional shareholders
Governance of risk
Remuneration

BOARD SIZE, COMPOSITION AND QUALIFICATION

This concentrates on the role of the Non Exective Director and strengthens the FSA’s role in vetting proposed NEDs as part of the Approved Person regime.

• Non-executive directors at banks or other financial institutions will need to go on training programmes and Boards should provide non-execs with extra support on appropriate issues as and when needed.

• Non-execs at a FTSE 100-listed bank or life assurance company should give more time to their roles. Several non-execs will be required to commit between 30 and 36 days a year, and this commitment should be indicated in letters of appointment.

• Non-execs should be ready and able to challenge the executive management on strategy.

• The FSA’s vetting process should give closer attention to the balance of the board, taking into account the experience of its members and when the FSA interviews a proposed non-exec, the candidate should be assessed by a senior adviser with relevant industry experience. Note that the FSA have in the last week announced the appointment of five senior advisers to assist in this regard.

For help with vetting proposed NEDs as part of the Approved Person regime, CLICK HERE or call 020 7645 8808 for how we can assist you.

FUNCTIONING OF THE BOARD AND EVALUATION OF PERFORMANCE

This principally is concerned with the role of the Chairman and evaluation of performance of the Board both internally and externally. Chairmen expectations are as follows:

• The chairman of a major bank should be expected to commit a substantial proportion of time – probably around two thirds – and should prioritise the role over all others.

• The chairman should have a combination of financial industry experience and a proven track record of leading a board.

• Chairmen must lead their boards and foster an environment where there is constant discussion of a bank’s strategy.

• The chairman should be put up for re-election on an annual basis. Boards should consider annually electing all members.

• Senior independent directors should provide a sounding board for the chairman. They should act as an intermediary between the chair and shareholders if communication breaks down.

In terms of evaluating Board performance:

• Board performance should be evaluated externally every second or third year, and the findings should be included in the annual report. The evaluation statement should explain what techniques have been used to assess the skills and experience of the board.

THE ROLE OF INSTITUTIONAL SHAREHOLDERS

This introduces a new Stewardship Code for institutional investors and fund managers.

• The Financial Reporting Council (FRC) should oversee stewardship of institutional investors and fund managers.

• The existing Combined Code should be split into a Corporate Governance Code and a Stewardship Code.

• Institutional investors should observe the Stewardship Code on a “comply or explain” basis.

• All fund managers that comply with the code should participate in a survey to monitor their adherence.

• Fund managers and other institutions authorised to undertake investment business should indicate on their website whether they commit to the Stewardship Code. If they do not, they should explain why.

• The FSA should require institutions that are authorised to manage the assets of others to disclose whether they commit to the code.

• Institutional investors and fund managers should club together and become more active to improve results for their clients.

• Fund managers and institutional investors should vote regularly, and disclose their record.

• Boards should be made aware of any meaningful changes in the share register as soon as possible, and inform the FSA if appropriate.

GOVERNANCE OF RISK

• FTSE-100 banks and life insurance firms should establish a board risk committee that is separate from the audit committee.

• A board should be served by a chief risk officer (CRO) that is involved in risk management and oversight at the highest level. The CRO should report to the risk committee and have direct access to its chair. The board must agree to the CRO’s removal.

• The risk committee
o should seek external input
o should advise on acquisitions and disposals
o the risk committee report should be included in the annual report and accounts.

Ensure that your systems and controls are to the regulator’s requirements with TCC’s RISK FRAMEWORKER

REMUNERATION

The remuneration committee

• should ensure that the firm’s approach to pay and conditions is coherent in respect of all employees

• should oversee the pay of all “high end” employees

• the remuneration committee report should confirm it is satisfied with the way that performance objectives and risk adjustments are reflected in compensation structures.

• From fiscal 2010, FTSE 100 banks and comparable institutions should disclose in bands their numbers of “high end” employees. The bands will range from £1m to £2.5m, £2.5m to £5m, and will go up in £5m bands thereafter. They will include salary, cash bonus, deferred shares, performance-related long-term awards and pension contribution.

• FSA-authorised banks that are UK-domiciled subsidiaries of non-resident companies should do the same.

• Incentive payments should be deferred, in line with the FSA Remuneration Code. At least one half of a year’s variable remuneration should be in the form of a long-term incentive scheme. One half of the scheme should only vest after three years, the other after five. Short term bonuses should be paid over a three year period, with no more than one-third paid in the first year. Clawback should be used to reclaim pay in the event of misconduct.

• “High end” employees should maintain a shareholding, to be built up at the discretion of the remuneration committee. This stock should not be vested on cessation of employment.

• The remuneration committee should seek advice from the board risk committee on risk adjustments to remuneration.

• If the non-binding resolution of a remuneration committee attracts less than 75 per cent of total votes cast, the chairman of the committee should stand for re-election in the following year.

• The remuneration committee should state whether any “high end” employee has the right to enhanced benefits beyond those already disclosed.

• There should be a Remuneration Consultants Code that is used for determining contractual terms and pay.

FSA – STATEMENT RE THE WALKER REVIEW

The Financial Services Authority has welcomed publication of Sir David Walker’s final review of corporate governance in UK banks and other financial institutions.

Many of the recommendations complement work the FSA is already carrying out, such as the increased focus on the quality of governance and risk management at FSA-regulated firms. The FSA has already strengthened its approach to the approval of individuals who manage and influence firms at a senior level and will publish a further consultation paper on governance and approved persons early next year.

The FSA introduced a remuneration code in August 2009. It comes into effect on 1 January 2010. Sir David Walker has expressed strong support for, and his recommendations are broadly consistent with, the FSA’s existing remuneration code.

The FSA reiterates its commitment to reviewing its remuneration code next year in order to take any international developments into account. This review will also consider whether, and how, to implement Sir David’s wider recommendations on remuneration.

In relation to shareholder engagement, on conclusion of the Financial Reporting Council’s consultation on the ‘Stewardship Code’ the FSA will consult upon a rule introducing a ‘comply or explain’ disclosure requirement for relevant investment management firms.


Source: Financial Services Authority

FSA Website

FSA – APPOINTS SENIOR ADVISERS ON GOVERNANCE AND AUTHORISATION

The FSA has announced the appointment of five new senior advisors who will assist the FSA in its work on governance issues.

These advisors will provide input into developing the FSA’s regulatory framework for ensuring effective governance in financial institutions, and will also contribute to the panel interview process for individuals wishing to take up major board positions in the UK’s largest financial institutions.

The new advisors are: Sir Dominic Cadbury, Baroness Hogg, Lord Marshall, Sir Brian Pitman and Sir David Scholey.

As part of its new intensive approach to supervision the FSA has made clear that it is now seeking to judge competence as well as probity with regard to individuals holding significant influence functions (SIFs).

In October the FSA wrote to firms to reinforce how its intensive regulatory approach applied to the FSA’s vetting of individuals applying for roles classed as SIFs. This included details about the SIF interview process conducted by a senior panel drawn from the FSA executive and its existing advisory group. These interviews are used to judge the competence and capability of those applying for influential positions within regulated firms.

In future, for key roles in the largest firms, the FSA panel will be joined by one of the new appointees, who will act in an advisory capacity. This is likely to apply to candidates for chair, chief executive, senior independent director and the chair of audit, remuneration and risk committees, particularly in the banking and insurance sector.

The new advisors, whose primary focus is on governance and competency, will work with the existing senior advisors who provide specialist input on specific technical areas.


Source: Financial Services Authority

FSA Website

FSA – BANK CHARGES COMPLAINTS

In light of the Supreme Court’s judgment in the bank charges test case the FSA can confirm that its waiver has now lapsed.

The waiver was granted during the test case so that firms did not have to deal with complaints about unauthorised overdraft charges in the eight-week-period required under FSA rules while the outcome of the court case remained unclear.

Firms can now resume processing consumers’ complaints in accordance with the FSA’s complaint handling rules.


Source: Financial Services Authority

FSA Website

FSA – SPEECH TO CBI ANNUAL CONFERENCE

The Chairman of the FSA addressed the CBI Annual Conference. The speech concentrated on economic stability.


Source: Financial Services Authority

FSA Website

ABI – POSITIVE STEPS IN WALKER REVIEW SHOULD LEAD TO BETTER GOVERNANCE

Responding to the Walker Review into Corporate Governance in UK banks and other financial industry entities, Peter Montagnon, the ABI’s Director of Investment Affairs, said:

“This is a well-balanced and useful report, in which Sir David has paid close attention to practical points made by respondents to his consultation. The result is a useful indicator of the way forward, though there are, of course, some areas where further thought is needed. It is very important that the overall conclusion is on the side of comply-or-explain, and against statutory regulation, on the way boards behave and how shareholders engage. We will do our best to deliver as investors.”

The Press release then went on to comment on the following aspects:

• The role of shareholders
• The role of directors
• Remuneration
• Risk management
• Scope


Source: Association of British Insurers

ABI Website

ABI – HEDGE FUND PROPOSAL COULD HARM SAVERS

Jean-Paul Gauzes MEP, the rapporteur in the European Parliament for the EU's proposed Alternative Investment Fund Managers (AIFM) Directive, has today published a draft report on the Directive. It supports plans to limit the ability of European pension funds to invest in third country funds, and proposes other restrictions.

In response Peter Montagnon, the ABI’s Director of Investment Affairs, said:

“There is a real danger of throwing the baby out with the bath-water with this Directive. Those who invest in financial markets on behalf of European savers need to be able to make sensible decisions within a well-regulated global market and not, as proposed, be excluded from key markets.

We will be suggesting amendments to the Directive in this and other key areas, and would urge MEPs to consider the needs of savers. Pensioners in Europe will be worse off if pension funds cannot diversify their asset allocation because their choices are unnecessarily restricted.”


Source: Association of British Insurers

ABI Website

CML – EXTENDING MORTGAGE REGULATION

The Council of Mortgage Lenders has a mixed response to the Treasury's proposals today to extend the scope of FSA mortgage regulation to cover second-charge mortgages, buy-to-let mortgages, and the sale of mortgage books to third parties.

The CML supports an extension of FSA regulatory scope to second-charge lending - indeed, the CML argued before FSA mortgage regulation was introduced in 2004 that it should cover all secured lending, not just first-charge mortgages.

The CML also understands and broadly supports the rationale for extending FSA regulatory scope to the acquirers of mortgage portfolios when they are sold on by the originator. Although there are bound to be technical issues to be ironed out in this area, and it is vital that such regulation avoids creating other knock-on negative effects, the principle is correct and plugs an existing regulatory gap.

On buy-to-let, the CML is more agnostic. It is unclear whether the Treasury's main rationale for the proposed extension to scope relates to market risk or consumer protection.

If the aim is to protect amateur property investors from poor property investment decisions, then regulating the mortgage process - as opposed to the sale process - will not necessarily address this. And there is little evidence of consumer detriment to buy-to-let mortgage borrowers arising out of their mortgage borrowing, so the case for extending regulatory scope here is not clear cut.

CML director general Michael Coogan commented:

"We will now study the Treasury consultation paper in detail, in parallel with the FSA's consultation on potential changes arising from the Mortgage Market Review. 2010 is clearly going to be a year of regulatory change for mortgage lenders - but it's important that change should have a clear rationale and a clear set of outcomes, and not be implemented simply for its own sake as a reaction to past events that conduct of business regulation would not have prevented."


Source: Council of Mortgage Lenders

CML Website