UK: FSA approved persons regime consultation - the duties of non-executive directors

The UK's Financial Services Authority has published a consultation paper in which it sets out proposed changes to the approved persons regime with regard to directors. These changes form part of the FSA's response to its failings in the supervision of Northern Rock. Of interest are the proposals concerning non-executive directors and in this regard the FSA states (at para. 2.4):

Although their role is different to that of an executive director we expect them to ask challenging questions in order to understand (and if necessary, positively influence) the business model and inherent risks within the regulated firm. In order to do this effectively firms must have high quality non-executive directors committed to ensuring that their firms are run effectively. In this consultation we are proposing some changes to the APER Code of Practice to better reflect the duties of non-executive directors. We also want to make it clear that in the future we will be more likely to hold non-executive directors accountable, as well as the firm and its executives, if there is evidence to suggest that they have failed to fulfil their duties with competence and/or integrity". 

The FSA proposes the insertion of the following new principle within the Code of Practice for Approved Persons:

(1) An approved person performing the role of a non-executive director should seek to establish and continually maintain his confidence in the:

(a) conduct of the firm;
(b) performance of senior management;
(c) development of the firm’s business strategy;
(d) adequacy of financial controls;
(e) risk management;
(f) appropriateness of remuneration;
(g) appointment and replacement of key personnel; and
(h) plans for management development and succession.

(2) An approved person performing the role of a non-executive director should provide an independent perspective, and should constructively challenge and help develop proposals on strategy.

(3) An approved person performing the role of a non-executive director should scrutinise the performance and approach of senior managers in meeting agreed goals, objectives, and standards of conduct".

It is interesting to compare these responsibilities with directors' duties under the Companies Act (2006). Several points can be made.  First, the 2006 Act imposes duties on directors and does not distinguish between executive and non-executive directors (indeed, the Act does not provide a definition of non-executive director). Second, the duty imposed by company law with regard to directors'  skill, care and diligence (Section 174) is phrased in very general terms. The FSA's proposed principle is, in contrast, more detailed and identifies specific factors that the non-executive director should consider. Third, directors' company law duties are subject to enforcement by the board of directors and, in certain circumstances, a shareholder or shareholders. In contrast, a breach of the FSA's Code of Practice for Approved Persons can result in action (e.g., the imposition of a penalty) by the FSA under Section 66 of the Financial Services and Markets Act (2000).  This said, conduct giving rise to a breach of Section 174 may also breach the Code of Practice. 

For further information see:

Consultation paper | newsletter | press release | online response form | FSA internal audit report: Northern Rock | Northern Rock board trading statement (October 2008): no action to be taken against former directors |