UK: Commons Treasury Committee begins inquiry into the governance of systemically important financial institutions

The House of Commons Treasury Committee has begun an inquiry exploring corporate governance in systemically important financial institutions. The inquiry's terms of reference are wide-ranging and the following questions are amongst those identified for consideration:

• What outcomes should corporate governance in the financial services sector seek to achieve?
• Are Board structures effective? For example, should UK financial institutions consider adopting alternatives to the unitary Board structure?
• Does the UK approach to regulation and supervision of financial services incentivise Boards to perform their role effectively?
• Is more intrusive regulation a substitute or complement to effective corporate governance?
• Is a 'comply or explain' approach an effective framework for governance?
• What type of corporate culture should financial services firms seek to foster? In what way can this be encouraged? How effective are Boards at shaping corporate culture within their institutions?
• What impact has the Walker Review (2009) had on corporate governance and corporate behaviour in financial services? 
• Should non-executive directors bear greater liabilities than under current law? 
• Is the existing FSA approval process for significant influence functions (SIF), including non-executive directors, effective?
• Should shareholders be required to exercise a stronger role in systemically important financial institutions?
• What are the key barriers to greater shareholder activism by institutional investors in financial institutions? 
• What role should institutional investors, remuneration consultants, employees and others play with respect to remuneration in the financial services sector?
• The Chairman of the Financial Services Authority has argued that there may be a case for changing the personal risk return trade-off for bank executives. He has suggested either a 'strict liability legal sanctions or an automatic incentives based approach. What are the merits and drawbacks of these proposals? Are there other ways to achieve the same objective? 
• What is the relationship, if any, between Board diversity and company performance in the financial service sector?

UK: first fine for breach of Listing Principle 2 imposed by FSA

The Financial Services Authority has, for the first time, fined a company for its failure to establish and maintain the systems and controls necessary to comply with the Listing Rules, as set out in Listing Principle 2. The fine was imposed on Exillon Energy plc, which had failed to identify around £930,000 of payments as related party transactions. For further information see the FSA's press release and the final notice available here (pdf).

UK: supervision by approved persons - FSA loses Tribunal appeal

Earlier this week the Financial Services Authority announced the outcome of Mr John Pottage's appeal in respect of the FSA's decision to impose a fine on him in respect of alleged supervisory failings as the CEO at UBS Wealth Management (UK) Ltd and UBS AG in breach of Statement of Principle 7 of the Statements of Principle and Code of Practice for Approved Persons: see here. The Tribunal found that Mr Pottage had not committed the alleged misconduct (failing to take reasonable steps to ensure the firm's business complied with the requirements and standards of the regulatory system) and directed the FSA not to take action against him. The Tribunal's decision has now been published: see here (pdf).

UK: England and Wales: parent company owed duty of care to subsidiary company employee

The Court of Appeal gave judgment today in Chandler v Cape plc [2012] EWCA Civ 525 and upheld the decision of the trial judge ([2011] EWHC 951 (QB), see here, Word), that a parent company owed a duty of care towards an employee of a subsidiary company. The leading judgment was delivered by Lady Justice Arden (Moses and Macfarlane LJJ concurring); her Ladyship observed:

[69] I would emphatically reject any suggestion that this court is in any way concerned with what is usually referred to as piercing the corporate veil. A subsidiary and its company are separate entities. There is no imposition or assumption of responsibility by reason only that a company is the parent company of another company.

[70] The question is simply whether what the parent company did amounted to taking on a direct duty to the subsidiary's employees.

[80] In summary, this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary's employees. Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues".

UK: England and Wales: Court of Appeal judgment in Chandler v Cape plc due tomorrow

Last year, in Chandler v Cape plc [2011] EWHC 951 (QB), the trial judge held that a parent company owed a duty of care towards one of its subsidiary company's employees: see here (Word). An appeal was made and tomorrow, according to the Court of Appeal Civil Division daily cause list, judgment will be given.

Update (24 April 2012): the Court of Appeal's judgment is available here.

UK: effective corporate governance and the role of financial regulators - speech by the FSA's chief executive

The chief executive of the Financial Services Authority, Hector Sants, delivered a speech today titled Delivering effective corporate governance: the financial regulators role: see here. There is a great deal of interest in the speech, which will be Mr Sants last as he will be leaving the FSA in June. An indication of its wide-ranging content can be gained by quoting four points Mr Sants chose to highlight in his conclusions:

The role of a regulator is to create boundaries within which firms take responsibility for their own decisions. In the past the capital and liquidity boundaries for banks were nearly non-existent and thus management were not sufficiently constrained in their judgements. The new capital and liquidity standards will address these shortcomings but will not remove the necessity for management to make good judgements and the need for regulators and shareholders to hold those firms to account. 

Central to a regulator’s role in promoting effective boards is the utilisation of the authorisations process to encourage firms to make the right appointments. History clearly demonstrates the importance of a regulator having a proactive approach to judging the suitability of directors, in particular their competence. This proactive approach must be focused only on those key roles and has to be a judgement not just about the effectiveness of individuals, but about the board as a whole. 

Good governance and a strong culture are a necessity for maximising the likelihood of the right judgements being made by management. Regulators have a role to play in ensuring that firms have the right governance and culture. But I should stress that it is not for the regulator to determine the culture. Ultimately, however, even a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, firms need to have an appropriate culture and one which is focused on the firm delivering the right long-term obligations to society. The right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles rather than just short-term commercial considerations. In particular, this means that when a regulator expresses a clear instruction then firms should not continue to resist for reasons of expediency and short-term gain. 

Nevertheless, history tells us that we cannot rely on the motivation of individuals alone and that we need credible enforcement to require individuals to be driven by principles rather than just commercial expediency. Commercial success should not place an individual above the law".

UK: The Financial Services Bill 2011-12 and Bank of England accountability

The Financial Services Bill 2010-12 was debated for first time yesterday at Report stage in the House of Commons yesterday. Hansard, the record of debate, is available here. Andrew Tyrie MP, the chairman of the House of Commons Treasury Select Committee, spoke at some length with regard to the accountability of the institutions within the new framework, in particular the Bank of England and also the new Financial Conduct Authority. It would appear that the Government has accepted some of Mr Tyrie's arguments and that amendments to the Bill will be made when it reaches the House of Lords.

UK: Financial Services Bill 2010-12 - Report stage reached in Commons

The Financial Services Bill 2010-12, the purpose of which is to introduce a new financial regulatory framework in the UK, has reached the Report stage in the House of Commons. A copy of the Bill as introduced at this stage (including the amendments tabled for consideration), is available here.

A couple of amendments specifically related to corporate governance have been proposed by three MPs (Chris Leslie, Cathy Jamieson and Mark Durkan) who were on the Committee that considered the Bill before it reached Report stage. The first would require the new Financial Conduct Authority, in consultation with the Financial Reporting Council, to publish rules to improve the quality of stewardship by UK institutional investors. The second would require the making of Regulations under section 1277 of the Companies Act 2006 not later than 30 April 2013 in order to require institutions to publish information about the exercise of their voting rights in respect of listed company shares.

UK: FRC consults on revisions to the UK Corporate Governance Code and UK Stewardship Code

The Financial Reporting Council has published for consultation proposed changes to the UK's Corporate Governance Code: see here (pdf). The consultation paper also included proposed changes to the FRC's guidance for audit committees. A draft copy of the amended Code, highlighting the revisions, is available here (pdf). A draft copy of the revised audit committee guidance is available here (pdf). Amongst the amendments made to the Code is the inclusion of a new provision, subject to the comply or explain principle, that FTSE350 companies should put the external audit out for tender at least every ten years (recommendations are made for when this should first take place, taking into account the date when the audit engagement partner is due to rotate and when the audit was last put out to tender). Some further detail is also provided concerning the explanations explanations provided by companies where they choose not to comply with a provision in the Code.

The FRC is also consulting on proposed changes to the UK's Stewardship Code: see here (pdf). A draft copy of the revised Stewardship Code, highlighting the proposed changes, is available here (pdf). The changes are intended, amongst other things, to provide greater clarity with regard to the meaning of stewardship and to explain how comply or explain operates should operate.

UK: Treasury Committee to examine the FPC's macroprudential tools

The House of Commons Treasury Select Committee published its Budget 2012 report yesterday: see here (html) or here (pdf). Amongst other things, the Committee stated (at paragraph 46) that it would be undertaking an inquiry into the macroprudential tools available to the Financial Policy Committee under the new financial regulatory framework.

Netherlands: Lost Credit II - Taking Stock, report published

The Committee of Parliamentary Inquiry into the Financial System has presented its final report titled Lost Credit II - Taking Stock. The Committee concluded that the Dutch authorities made serious mistakes during the financial crisis. A summary, in English, is available here.

The CPSS and IOSCO Principles for Financial Market Infrastructures

The Committee on Payment and Settlement Systems and the International Organization of Securities Commissions have published a report titled Principles for Financial Market Infrastructures: see here (pdf). The Principles, which include a section on governance, replace three existing sets of international standards as set out in the Core Principles for Systemically Important Payment Systems (CPSS, 2001), the Recommendations for Securities Settlement Systems (CPSS-IOSCO, 2001) and the Recommendations for Central Counterparties (CPSS-IOSCO, 2004).

Europe: what is a 'regulated market'?

The meaning of 'regulated market' for the purposes of Article 4(1)(14) of Directive 2004/39/EC on markets in financial instruments was considered last month by the Court of Justice of the European Union in Case C-248/11, Nilaş and others. The Court of Justice held, to quote from its decision:

Article 4(1)(14) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments ... must be interpreted as meaning that a market in financial instruments which does not satisfy the requirements in Title III of that directive does not fall within the concept of ‘regulated market’, as defined in that provision, notwithstanding the fact that its operator merged with the operator of such a regulated market". 

Pakistan: SEC code now available

Following its launch last week, a copy of the SEC's corporate governance code is now available: see here (pdf).

Europe: implementation of the CEBS Guidelines on Remuneration Policies and Practices

The European Banking Authority has published the results of its survey of the implementation of the CEBS Guidelines on Remuneration Policies and Practices: see here (pdf). Whilst noting good progress with regard to the governance of remuneration, the report highlights areas of concern including, for example, the application of the proportionality principle and risk alignment practices.

G30: Toward Effective Governance of Financial Institutions - report and recommendations published

The Steering Committee and Working Group formed by the Group of Thirty to consider the governance of major financial institutions has published its report: see here (pdf). The report argues that boards, managers, supervisors and long-term shareholders need to reassess their approach to governance and, in this regard, provides recommendations regarding what each of these parties needs to do in order to bring about more effective governance. The press release accompanying publication of the report is available here (pdf) and an executive summary is available here (pdf).

UK: England and Wales: break fee was unlawful financial assistance

A copy of the transcript for Paros Plc v Worldlink Group Plc [2012] EWHC 394 (Comm) was published on BAILII yesterday: see here. The trial judge held, amongst other things, that a break fee in an agreement constituted unlawful financial assistance under section 151 of the Companies Act 1985.

OECD: Related Party Transactions and Minority Shareholder Rights

The OECD has published a report titled Related Party Transactions and Minority Shareholder Rights: see here (pdf). The report presents the results of a review of 30 jurisdictions, with particular attention given to Belgium, France, India, Israel, Italy and India.

Pakistan: SECP publishes revised corporate governance code

The Securities and Exchange Commission launched a revised edition of its corporate governance code yesterday. A copy of the revised code has not yet been published but a summary of some of the changes made in the revision edition is available here (pdf).

Update (16 April 2012) - a copy of the Code is now available: see here (pdf).

Europe: insider trading - what is precise information?

Advocate General Mengozzi delivered his opinion in Markus Geltl v Daimler AG (Case C-19/11) last month and provided advice on the meaning of precise information for the purposes of Directive 2003/6/EC (the Market Abuse Directive) and Directive 2003/124/EC (implementing Directive 2003/6/EC): see here.

USA: auditor independence - further discussion of the PCAOB's concept paper

Last year the Public Company Accounting Oversight Board published a concept release considering how to enhance auditor independence, objectivity and professional scepticism: see here (pdf). The concept release returned to a question that had been asked before in the USA and in other jurisdictions: should there be mandatory audit firm rotation? The deadline for responding to the concept release is April 22 and so far over 600 responses have been submitted: see here. Last month the PCAOB organised a public meeting to consider its concept paper. The contributions of panelists at this meeting have been published - see here - and video recordings are available here.

Europe: ecoDA conference materials available

The European Confederation of Directors' Associations (ecoDa) held its annual conference at the end of last month. The theme of the conference was "Comply or explain - preserving governance flexibility with quality explanations". Materials presented at the conference, including reviews of governance practices in some of the European Union Member States, are now available: see here.

Canada: boards and risk governance - speech by OSFI superintendent

Superintendent Julie Dickson of the Office of the Superintendent of Financial Institutions (OSFI), delivered a speech yesterday titled "Boards of Directors and Risk Governance" in which she outlined some of the changes that are likely to be made to OSFI's Corporate Governance Guideline: see here (pdf). The current Guideline is available here (pdf); a revised Guideline will be published for consultation in the summer. The revisions will focus on, amongst other things, board composition and expertise; the separation of audit and risk committees; and external review of the board's effectiveness.

Basel III implementation progress report

The Basel Committee on Banking Supervision has published its second progress report regarding the implementation of Basel III: see here (pdf). Further supporting materials are available here.

UK: Sir David Tweedie on auditor independence

Professor Sir David Tweedie, the former chairman of the International Accounting Standards Board and ICAS president designate, has recently been interviewed by the Financial Times newspaper: see here. In the interview, Sir David questions whether rules requiring the changing of lead audit partners are sufficient to protect the independence of auditors, particularly given the average tenure length (48 years) for auditors of FTSE100 companies.

Australia: equity market structure reform - update

The Australian Securities and Investments Commission has published an update on its equity market structure reform proposals, including an implementation timetable: see here.

UK: Nottingham Law School's insolvency law bulletin

The Centre for Business and Insolvency Law, at Nottingham Law School, has published the first edition of its insolvency bulletin, which contains summaries of recent insolvency and corporate rescue cases: see here (pdf).

Guernsey: the Limited Liability Partnerships (Guernsey) Law, 2012

In April 2009 the States of Guernsey approved the introduction of limited liability partnerships in Guernsey (see Billet D'Etat XI April 2009 and Resolutions, pdf). A draft of the Limited Liability Partnerships (Guernsey) Law 2012 has now been published for consultation: see here (pdf). The draft contains a couple of important changes compared with the originally published proposals: [a] all LLPs will have separate legal personality and [b] the members' agreement will no longer need to be filed with the Companies Registry.

Jersey: Codes of Practice for Certified Funds

The Jersey Financial Services Commission has published a revised edition of its Codes of Practice for Certified Funds (which include corporate governance principles): see here (pdf).

UK: the Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012

The Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012 were made on 27 March and come into force on 6 April: see here or here (pdf). The Regulations amend the rules regarding distributions by investment companies. An explanatory memorandum is available here (pdf) and an impact assessment is available here (pdf).

UK: membership of FTSE100 company remuneration committees - High Pay Centre report published

The High Pay Centre has published a report titled The New Closed Shop: Who's Deciding on Pay? in which it examines the membership of FTSE100 company remuneration committees: see here (pdf). The report notes that 9% of FTSE100 companies have a current FTSE100 chief executive on their remuneration committee and that 46% of those sitting on remuneration committees are current or former chief executives.

UK: financial crime, a guide for firms - FSA consults on changes

The Financial Services Authority is consulting on changes to its regulatory guide Financial Crime: A Guide for Firms following a recent review of anti-bribery and corruption systems and controls in investment banks: see here (pdf). The FSA's Guide sets out the regulator's expectations of firms' financial crime systems and controls and contains examples of the steps that firms can take to reduce the risk of being used to further financial crime, including what role should be performed by the board of directors and the information it should receive.

Europe: ESMA's technical standards for short-selling and credit default swaps

The European Securities and Markets Authority - one of the supervisory authorities within the European System of Financial Supervision - has published a final draft of the technical standards relating to Regulation (EU) No 236/2012 of the European Parliament and of the Council on short selling and certain aspects of credit default swaps: see here (pdf).