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.
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.y 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.
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.
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