The Central Bank of Ireland (the "Central Bank") is currently carrying out a review of its Corporate Governance Code for Credit Institutions and Insurance Undertakings (the "Code"), which sets out minimum statutory requirements on how credit institutions and insurance undertakings (including reinsurers but excluding captives) should organise the governance of their institutions. The Code has been effective since 1 January 2011.

Consultation Paper CP 69, which was published on 1 August 2013, contains the proposed amendments to the Code as well as an invitation to comment on certain topics. The key amendments and topics for comments are outlined below.

Scope and Definitions

It has been proposed to introduce the Central Bank's PRISM (Probability Risk Impact SysteM) impact categories (High, Medium- High, Medium-Low and Low Impact institutions) into the Code, so as to bring it in line with the Central Bank's supervisory regime. This means that the current Code's references to the term 'Major Institution' would be replaced with PRISM's 'High Impact institution'.

The Board

It is proposed to:

  • Remove the requirement on boards of subsidiaries to be made up of a majority of group non-executive directors and require instead that the majority of directors on those boards must be group executive or non-executive directors;
  • Introduce a provision requiring directors to attend each board meeting in person wherever possible but provide that where physical attendance is not possible, video or teleconferencing is permissible; and
  • Restrict the requirement for credit institutions/insurance undertakings to conduct a formal review of the board membership of any person who is a member for nine years or more to independent non-executive directors.

Throughout the proposed revised Code where credit institutions and insurance undertakings are listed in the context of the limit on the number of directorships and on holding the position of Chairman/CEO in more than one institution, reinsurance undertakings are added to the list. This does not amount to a practical change to the Code however, as the scope of the Code as currently drafted includes reinsurers.

The Central Bank is seeking comments on how the directorship limits have operated and whether the limits are appropriate. Currently the Central Bank requires (for non-High Impact institutions) that the number of directorships of credit institutions and insurance undertakings (including reinsurers) held by a director does not exceed five and that the number of directorships of other entities does not exceed eight, while for High Impact institutions the number of directorships of credit institutions and insurance undertakings does not exceed three and the number of directorships of other entities does not exceed five.

The Central Bank is also seeking feedback as to whether a provision in relation to board diversity should be introduced into the Code and, if so, the nature of any such requirement. Consultation Paper CP 69 refers to the international discussion on gender diversity, including the recent Capital Requirements Directive IV which requires that credit institutions, which are 'significant in terms of size, internal organisation and the nature, scope and complexity of their activities', establish a target for the representation of the under-represented gender on the board and devise a policy to achieve the target. The Consultation Paper points out that quotas, disclosure requirements for listed companies and voluntary codes have all been used by countries in Europe to facilitate board gender diversity.

Chairman and CEO

Currently, the Code prohibits the Chairman of a credit institution/insurance undertaking from holding the position of Chairman or that of CEO in another credit institution/insurance undertaking. Acknowledging the benefits of appointing a group Chairman to the board of a subsidiary, the Central Bank has proposed a change to the Code whereby the Chairman of subsidiaries of groups which are designated as Medium-High, Medium-Low or Low Impact institutions can hold more than one Chairman position in another credit institution/insurance undertaking within the same group, subject to the Central Bank's prior approval. The Consultation Paper also proposes that derogation requests for High Impact institutions would be considered by the Central Bank on a case-by-case basis.

Similarly, the Central Bank has suggested that the strict rule that the CEO of a credit institution/insurance undertaking may only act as CEO in one credit institution/insurance undertaking at a time be relaxed, but only for Medium-Low or Low Impact institutions. The Consultation Paper proposes that CEOs in those credit institutions/insurance undertakings could occupy the position of CEO in two other Medium-Low or Low Impact institutions, provided the CEO has sufficient time to be able to fulfil his or her roles and subject to the Central Bank's prior approval.

It is proposed to clarify in the revised Code that the term CEO encompasses other titles such as General Manager, Managing Director and President. It is also proposed to introduce into the Code an obligation for a credit institution/insurance undertaking to appoint a CEO.

Chief Risk Officer

A new Section is proposed to be introduced to the Code requiring credit institutions/insurance undertakings to appoint a Chief Risk Officer ("CRO") who would "have sufficient seniority and independence to challenge or influence decisions which affect the institution's exposure to risk". The new Section 12 of the proposed revised Code lists the responsibilities of this proposed new position which include maintaining effective processes to identify, manage, monitor and report the risks to which the credit institution/insurance undertaking is or might be exposed, and being responsible for the facilitation of setting the board's risk appetite.

Credit institutions/insurance undertakings not designated as High Impact institutions are proposed to be allowed to have another pre-approval controlled function1 fulfil the CRO role, provided there is no conflict of interest.

Enforcement Action/Investigation

It is proposed to amend Section 3 to provide that enforcement action or investigation by the Central Bank may still be instituted, continued or enforced in respect of a Code provision that was in force at the time of the contravention, but later amended or deleted.

Reporting to the Central Bank and General Requirements

The Central Bank proposes to provide that in terms of the requirement to report material deviations from the Code to the Central Bank, the board is responsible for determining in the first instance whether a breach is material.

Furthermore, under the revisions proposed to the General Requirements Section of the Code, a credit institution/insurance undertaking's system of governance would 'promote an appropriate risk culture at all levels of the institution'.

Role of the Board and Appointments

The Central Bank proposes to provide more detail as to its expectations in terms of the responsibilities of credit institution/insurance undertakings' boards of directors. The Code, if revised as proposed, would provide that the board is responsible for, among other things, setting and overseeing:

  • the business strategy for the credit institution/insurance undertaking;
  • the amounts, types and distribution of both internal capital and own funds adequate to cover the risks of the credit institution/insurance undertaking;
  • a robust and transparent organisational structure with effective communication and reporting channels;
  • a remuneration framework that is in line with the risk strategies of the credit institution/insurance undertaking; and
  • an adequate and effective internal control framework, that includes well-functioning risk control, compliance and internal audit functions as well as an appropriate financial reporting and accounting framework.

The Code's provisions in relation to the training provided to non-executive directors are also proposed to be expanded upon. Section 14, if revised as proposed, would require new non-executive directors to be provided with adequate induction training, and the board would be required to ensure that adequate on-going training is provided to board members.

Risk Appetite and Meetings

Section 15 on 'Risk Appetite' is proposed to be revised by adding a requirement for the board to ensure that it identifies risks to be addressed by contingency plans based on the areas where it considers the credit institution/insurance undertaking to be especially vulnerable and that these are reviewed, updated and tested on a regular basis.

The Central Bank has invited comment on the current Code requirement that High Impact institutions hold a minimum of eleven board meetings per year. It is noted in the Consultation Paper how evidence suggests that the majority of High Impact institutions are already holding that amount of board meetings.

In terms of non-High Impact institutions, it has been proposed that instead of requiring them to hold four board meetings, each in a separate calendar quarter, they should be permitted to tailor the timing of their meetings to better fit their business cycle. In that regard, the Central Bank suggests that the Code be amended to provide that the boards of non-High Impact institutions meet at least four times per calendar year and at least once per half year.

Committees of the Board

The Central Bank proposes to revise the Code to include a requirement that the Chairman of the Audit Committee be a member of the Risk Committee and that the Chairman of the Risk Committee be a member of the Audit committee. In addition, it is proposed that Section 19 be amended to include that 'cross memberships between key sub-committees of the board should be encouraged'. This is intended to enhance board consideration of risk-related issues.

It is proposed in the Consultation Paper that Section 20 – General Requirements of Committees be revised to add a sub-section providing that 'directors should attend each sub-committee meeting in person wherever possible' but that video- and teleconferencing are permissible where physical attendance is not possible due to the location of some directors.

Audit Committee and Risk Committee

The Central Bank proposes to revise the Code to include a new requirement whereby the Audit Committee and the Risk Committee shall each be composed of at least three members.

In respect of the Risk Committee, the Central Bank is proposing to require that the majority of the committee be composed of non-executive directors (i.e. group directors and independent non executive directors). The Central Bank indicates that this would be subject to proportionality considerations which would take into account the nature, scale and complexity of a credit institution/insurance undertaking's operations and it is inviting comments from respondents on whether this amendment would be proportionate in the context of a credit institution/insurance undertakings' operations and current practise. It is also proposed to require the Chairman of the Risk Committee to be a non-executive director.

Compliance Statement

In light of the fact that some credit institutions/insurance undertakings have a financial reporting period which differs from the calendar year and the Code requires the annual compliance statement to be submitted on the basis of a twelve month calendar year, the Central Bank proposes to allow for any 'misalignment of reporting timelines' to be corrected. They have therefore suggested to amend this section so that it provides that where a credit institution/insurance undertaking does not have a financial reporting period coinciding with the calendar year it may submit a compliance statement for the period of its financial year.

Additional Obligations on High Impact (Major) Institutions (Appendix 1)

Currently the Central Bank requires that the number of directorships of High Impact institutions held by a director does not exceed three and that the number of directorships of other entities does not exceed five. It is seeking comments from respondents on how this limit has operated and whether it is appropriate.

It is proposed to require the boards of High Impact institutions to put in place a formal skills matrix in order 'to ensure that there is an appropriate skills mix across members of the board' and so that potential new board members could be assessed against the skills matrix during their appointment process.

Finally, it is proposed to require the Chairman of the Remuneration Committee to be a member of the Risk Committee and for the Chairman of the Risk Committee to be a member of the Remuneration committee. The Central Bank also wants to prevent the same person from being Chairman of the audit and the Risk Committee simultaneously in a High Impact institution.

Invitation to Comment

Interested parties are invited to comment on these amendments and topics by 1 October, 2013. Submissions should be made to codereview@centralbank.ie. The Central Bank proposes to publish its revised Code in December 2013.

Footnotes

1 Pre-approval controlled functions are 41 senior positions where the prior approval of the Central Bank is required before an individual can be appointed to that role.

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