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CP120: CBI Consults on Corporate Governance Requirements for Investment Firms

10 July 2018

CP120: CBI Consults on Corporate Governance Requirements for Investment Firms

On 10 May 2018 the Central Bank of Ireland (the "Central Bank") published CP120:  Second Consultation Paper on the Corporate Governance Requirements for Investment Firms and Market Operators. This contains proposals to finalise the corporate governance requirements for Irish regulated investment firms previously set out in CP94 [1].  

The CP94 requirements have been updated (the "revised Requirements") to reflect the European Union (Markets in Financial Instruments) Regulations 2017 ( "MiFID II Regulations"); the delegated acts issued under MiFID II (the "Delegated Acts"); and in light of the joint EBA and ESMA Guidelines on the assessment of the suitability of members of the management body and key function holders of 26 September 2017 (including the additional ESMA Guidelines on the management body of market operators and data reporting service providers of 28 September 2017) ("EBA Guidelines").

In-Scope Firms

The proportionality approach from CP94 has remained and the revised Requirements will apply to the following firms ("Firms"):

  • An investment firm authorised under MiFID II and the Delegated Acts;
  • A market operator authorised under MiFID II and the Delegated Acts; and
  • A non-retail investment intermediary authorised under the Investment Intermediaries Act 1995; classified as with High, Medium High or Medium Low Impact by the Central Bank Probability Risk Impact System ("PRISM").  Low Impact Firms will not be bound by the revised Requirements but are encouraged to adopt them. Similarly, the revised Requirements will not apply to foreign incorporated subsidiaries of an Irish Firm but adoption of equivalent good corporate governance practices is encouraged.

The revised Requirements address:

  • Board composition;
  • The chairman's role; and
  • Board committees.

Board Composition

A Board of Directors (the "Board") shall be required to be of sufficient size and expertise to adequately oversee the Firm's operations and to be composed of a majority of independent non-executive directors ("INEDs"). 

However, for Firms that are subsidiaries of groups, the majority of the Board may, depending on their PRISM rating, comprise the following:

 
High Impact  Firms Group directors and INEDs provided that the Firm has at least three INEDs.
Medium High Impact  Firms Group directors and INEDs provided that the Firm has at least two  INEDs.
Medium Low Impact  Firms Group directors and INEDs provided that the Firm has at least one  INED.

The Central Bank will also retain discretion to require a Firm to have more INEDs than those specified above.

For INEDs, the revised Requirements set out criteria to be considered in assessing independence. 

Group directors shall be required to act critically and independently so as they exercise objective and independent judgement.

Chairman

Each Board's Chairman (the "Chairman") must be an INED. However, a Firm that is a subsidiary, may appoint a group director as Chairman. The Chairman will be required to have the relevant financial services expertise, qualifications and experience or undertake comprehensive training so that he/she understands: (i) the nature of the Firm's business, activities and related risks; (ii) his or her individual direct and indirect responsibilities and the Board's responsibilities; and (iii) the Firm's financial information.

Board Committees

Requirements for High Impact Firms only

  • These Firms will be required to have an audit committee and a risk committee;
  • The same person cannot chair both committees simultaneously;
  • A remuneration committee will be mandatory and the Board must ensure that the Chairman of the Board is not also the Chairman of the remuneration committee;
  • Where possible, all members (or if not all, a majority) of the remuneration committee should be INEDs; and 
  • If the Firm is part of a wider group which has a group remuneration committee, the Firm may rely on that committee if the Board is satisfied that it is appropriate and there is evidence of this assessment. Such a decision should be notified promptly and the Central Bank can require the Firm to establish its own remuneration committee.

Requirements for Medium High and Medium Low Impact Firms only

  • These firms will be required to have an audit committee and a risk committee;
  • Where the Board comprises five or less members, the full Board, including the Chairman and chief executive officer ("CEO"), may act as the audit committee and / or risk committee subject to the Central Bank's prior written approval; and 
  • Minutes of such meetings must reflect that the Board was sitting as the audit or risk committee.

Requirements for all in-scope Firms

  • The Board shall be responsible for the oversight of each of its committees;
  • INEDs should play a leading role in the committees or where the functions are carried out at group level, they should play a leading role in satisfying the Board that the Firm's audit and risk functions are adequately carried out;
  • The audit committee and risk committee shall have at least one shared member;
  • When appointing committee members, the Board shall satisfy itself as to the relevant expertise and skills of members and their ability to commit appropriate time to the committee;
  • Committee membership shall be reviewed by the Firm and subject to renewal by the Firm frequently; and
  • Clear written terms of reference must be adopted for the Board and each committee outlining the authority, functions, membership and reporting lines of the Board and each committee as well as meeting frequency, voting rights and quorums. Such terms must be reviewed at least annually.

Audit Committee requirements

  • The Chairman must be an INED;
  • The committee shall be composed of non-executive directors, including at least one INED;
  • The audit committee as whole must have relevant financial experience and at least one member with an appropriate qualification;
  • Neither the CEO nor Chairman shall be a member of the audit committee;
  • Attendance by the CEO or Chairman at audit committee meetings will be by invitation only and managed to ensure the independence of the committee and the maintenance of appropriate relationships with other parties, particularly external auditors; and
  • Committee activities and decisions must be reported to the Board.

Risk Committee requirements

  • The Chairman must be a non-executive director or an INED; and
  • The committee must comprise a majority of non-executive directors or INEDs or a combination of both.

A summary of the revised Requirements is set out in tabular form in the attachment at Appendix 1.

EBA Guidelines

The EBA Guidelines apply as of 30 June 2018, and competent authorities were required to notify the EBA and ESMA about whether they comply, or intend to comply, with them, or otherwise with reasons for non-compliance, by May 21 2018.

In the recently updated fitness and probity guidance which the Central Bank issued in June 2018, the Central Bank clarified that the EBA Guidelines apply, in addition to the Central Bank's fitness and probity standards, to all applications to perform pre-approval control functions in credit institutions and certain investment firms. CP120 also sets out that the revised Requirements should be read in conjunction with the EBA Guidelines. In addition, the current Central Bank fitness and probity regime and CP120 cover certain aspects of the EBA Guidelines. 

The fitness and probity regime already covers some elements contained in the EBA Guidelines such as (i) adequate knowledge, skill and experience of directors; (ii) time commitment and other directorships; and (iii) reputation, honesty and integrity of directors and key function holders.

CP120 has captured certain elements from the EBA Guidelines including the independent director requirement and requirement for committees.

Other aspects of the EBA Guidelines, such as (i) the 'independence of mind' concept, (ii) the management of conflicts so as not to impede the ability to perform duties independently and objectively and (iii) ongoing assessment of Board and director performance are not explicitly addressed in CP120.

Consultation Period

The Central Bank welcomes feedback on CP120 from all stakeholders. Responses should be submitted by 31 July 2018.

Effective Date

The revised Requirements (once finalised) will apply from 1 July 2019 and there are no transitional arrangements.

Further Information

Should you have any questions or would like to discuss the above, please contact your usual Maples and Calder contact.


[1] Consultation on Corporate Governance Requirements for Investment Firms, Consultation Paper 94.


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