On 23 December 2013, the Central Bank of Ireland
("CBI") published a revised Corporate
Governance Code for Credit Institutions and Insurance Undertakings
(the "Code"). The Code applies to banks,
and insurance and reinsurance undertakings licensed by the CBI
("Institutions"). The Code does not
apply to captive insurance or reinsurance undertakings, nor to
special purpose reinsurance vehicles. It sets out minimum statutory
requirements on how the Institutions should organise their
governance and imposes minimum core standards on their boards of
directors with additional requirements imposed for certain
designated institutions.
The Code comes into effect on 1 January 2015. In the meantime,
Institutions continue to be governed by the existing CBI corporate
governance code in effect since 1 January 2011 (the
"Existing Code"). As
with the Existing Code, the Code does not apply to foreign
subsidiaries of an Institution (albeit that the CBI encourages
those subsidiaries to adopt equivalent practices). The Code
provides for continuity of legal or enforcement proceedings in
being under the Existing Code where a provision of the Existing
Code has been amended or deleted by the Code.
Principal Changes
The Code introduces a number of changes which significantly add to
the compliance obligations on credit institutions, insurance and
re-insurance undertakings. The principal changes are:
(a) The role of the board of directors has been significantly
expanded to cover (in addition to prudential and ethical oversight,
business strategy and management of risk and compliance) monitoring
capital adequacy, ensuring an effective organisational structure
for the institution and setting a remuneration framework in line
with the institution's risk strategies.
(b) The Code reflects the risk-based approach of CBI regulation.
There will be enhanced requirements imposed on "High
Impact" Institutions (as opposed to "Major
Institutions" under the Existing Code). High Impact
Institutions are those which are perceived to be of systemic
importance to the financial system. The Institution will have to
disclose in its annual report that it is subject to the High Impact
regime.
(c) The Code introduces a new officeholder entitled a "Chief
Risk Officer".
(d) Specific criteria are introduced to assess whether a director
is independent. These include obvious matters such as professional
or personal connections with the Institution and its managers and
also less obvious matters such as additional fees received by the
director from the Institution. Many of the features of the Existing
Code remain unchanged. Therefore the requirement to have
independent non-executive directors, to have audit and risk
committees, documenting compliance with the Code and the imposition
of limits on directorships all continue to apply. The prohibition
on the concentration on one individual of unfettered powers of
discretion also continues to apply.
Further detailed changes include the following:
(a) The Chairman of Institutions, which are not High Impact
Institutions and are subsidiaries of groups, may hold the role of
Chairman in other Institutions within the group, subject to prior
approval by the CBI.
(b) The CEO of Institutions, which are Medium-Low or Low Impact
Institutions, may hold up to two additional posts as CEO of
Institutions that are Medium-Low or Low Impact Institutions,
subject to prior approval by the CBI.
(c) Institutions are to introduce a diversity policy for board
membership.
(d) The audit committee and the risk committee are required to have
at least one shared member. In addition, High Impact Institutions
are also to have at least one shared member between the risk and
remuneration committees.
(e) The risk and audit committees must have at least three
members.
(f) The board of High Impact Institutions must review the
performance of individual directors, when carrying out its annual
review of the performance of the board itself. This review is to be
documented.
(g) The board of High Impact Institutions must put in place a
formal skills matrix.
(h) The minimum number of board meetings of High Impact
institutions has been reduced from 11 to six per calendar year.
Instead of meeting at least once per calendar month for 11 months
of the year as per the Existing Code, the board must meet at least
three times in every six months.
The Code as a Legislative Trigger
Part 3 of the Code seeks to provide a basis for the
furnishing of information to the CBI. Its drafting is not
altogether clear in some respects and at times seems incomplete.
The Code provides that to the extent that it requires an
Institution to furnish to the CBI information, and to submit to the
CBI an annual compliance statement, these are to be taken as
obligations also under the applicable legislation which requires
Institutions to provide that information to the CBI. The
"compliance statement" obligation includes reporting on
the Institution's own breaches of the Code (if applicable).
"Self-reporting" of breaches is a feature of the current
regulatory landscape in this area.
The Code purports to be a notice for information respectively under
Section 18 of the Central Bank Act 1971
("CBA"), Section 41A of the Building
Societies Act 1989 ("BSA") and Section
16 of the Insurance Act 1989 ("IA"). The
CBA, BSA and IA envisage a statutory notice being used by the CBI
to obtain specific information with regard to a particular
institution. It is not altogether clear that the information
referred to in the Code meets this requirement of specificity.
Further, the BSA envisages the CBI obtaining information "by
notice in writing served" on the building society.
Given that the BSA (at section 7) specifies precise modes of
service or delivery of a notice under that Act none of which
include general publication, it is difficult to see how the Code
could be a valid notice under BSA. In addition it is a precondition
to the service of a notice under the IA that the CBI
"considers it necessary in order to satisfy [itself]"
whether a particular undertaking is compliant with the Insurance
Acts. It is not clear how that precondition is satisfied in the
case of a generic publication such as the Code.
The obligation to furnish information and to submit to the CBI a
"compliance statement" are each a distinct statutory
obligation under the applicable legislation. That legislation sets
out the statutory context in which an Institution is obliged to
furnish information to the CBI and to submit a "compliance
statement." The Code (like the Existing Code) purports to be a
statutory basis for triggering those obligations. Given the very
significant sanctions that could be imposed for breach of the Code,
it is questionable whether the Code is a proper basis for the
imposition of those statutory obligations. Those statutory
obligations arise in the precise statutory context set out in the
applicable legislation. One could question whether the Code –
which is of general application – provides a sufficient
statutory context for imposing these obligations.
Sanctions for Breach
A contravention of the Code may attract the administrative
sanctions regime and other applicable statutory remedies (e.g.
prosecution). Insofar as an Institution is required by the Code to
report its own breaches, it may be that such reports would be
inadmissible in any criminal proceedings against the Institution
because they were provided under compulsion of statute. It should
also be noted that section 44 of the Central Bank (Supervision and
Enforcement) Act 2013 (the "2013 Act") provides that a
breach by a financial service provider of financial services
legislation is actionable by any customer who suffers loss as a
result.
As with the Existing Code, the CBI has indicated that it considers
that compliance with it is necessary to ensure compliance with
particular statutory requirements that an Institution manages its
business on a sound administrative basis. It is likely that a court
would approach the CBI's conclusion with considerable
deference. It follows, therefore, that a court may well conclude
that a breach of the Code automatically constitutes a breach of
those statutory provisions. If so, then the breach would appear to
attract civil liability on the part of the Institution to any of
its customers which suffered loss or damage as a result. However,
proof that the breach caused loss or damage may well be difficult
to establish in practice.
Conclusions
The Code represents a significant re-focus by the CBI on
corporate governance. It seems intended to complement the existing
"fit and proper" regime for those who run Institutions.
The "fit and proper" requirement applies to individual
officers and certain employees of an Institution.
The Code seeks to bolster that regime with provisions which ensure
collective responsibility by executive and non-executive directors,
and those in charge of audit, risk and compliance. The Code
explicitly provides that where it is breached the CBI may refuse to
allow an individual to be appointed to a "control"
function or the removal of such a person from office.
Compliance with the Code is enforceable by reference to existing
regulatory powers of the CBI where applicable (e.g. the
administrative sanctions regime, criminal prosecution) and
(potentially) under the new private right of action under the 2013
Act.
For further information please speak with your usual Maples and
Calder contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.