Operational and Reporting Policy Team
Permissions, Decisions and Reporting Division
Financial Services Authority
25 The North Colonnade
14 April 2010
AFM Response to CP10/3- Effective Corporate Governance
1. I am writing in response to this consultation paper, on behalf of the Association of
Financial Mutuals. The objectives we seek from our response are to:
Comment on the proposals in the consultation paper, and highlight areas
where we believe the paper has not sufficiently articulated how the proposed
rules will apply in firms of different form and size.
2. The Association of Financial Mutuals (AFM) was established on 1 January 2010,
as a result of a merger between the Association of Mutual Insurers and the
Association of Friendly Societies. Financial Mutuals are member-owned
organisations, and the nature of their ownership, and the consequently lower
prices, higher returns or better service that typically result, make mutuals
accessible and attractive to consumers.
3. AFM currently has 56 members and represents mutual insurers and friendly
societies in the UK. Between them, these organisations manage the savings,
protection and healthcare needs of 19 million people, and have total funds under
management of over £80 billion.
4. We agree with the general approach and direction taken in the consultation
paper. It is vital that NEDs and Controlled Function holders have the
competence to deliver their responsibilities effectively. We therefore support
work from FSA and other regulators, to better articulate their expectations of what
those responsibilities are, and what firms need to do to evidence that governance
is appropriate within their organisation.
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5. The effectiveness of governance in any given Board is the result of a series of
complex and competing issues including:
a. the skills and engagement of Board members,
b. executive leadership,
c. the culture within the organisation,
d. the processes that support Board recruitment and development,
e. the nature, size and complexity of the organisation, and
f. the relationship between managers, owners and customers of the
All of these issues have an important effect, though in our assessment the final of
these has perhaps the most profound impact on the way a Board behaves.
6. Governance in mutual organisations is we suggest likely to be enhanced by the
avoidance of a conflict of interest between owners and customers, because they
are one and the same. This means that Board members in mutuals can readily
make decisions for the good of customers, because by so doing they are not
acting in a way that produces a contrary outcome for shareholders. This is even
more the case where Board members are also members.
7. This lays a firm foundation for effective governance in mutual organisation. AFM
and its members have worked hard to reinforce this foundation by embracing
good practice in corporate governance, as evidenced through their compliance
with the Annotated Combined Code for Mutual Insurers- which translates the
requirements of the UK Corporate Governance Code into terms appropriate for
8. As a result we think that it is vital that FSA takes a proportionate approach to
governance, and recognises the need for supervisors to be pragmatic. In our
view the consultation implies a one size fits all regime and does not adequately
consider how the proposals translate from complex, shareholder owned
organisations such as multinational banks, to other forms of corporate entity. To
a. A member-owned mutual has a different set of requirements and capacity
than does a large bank, and a one-size-fits-all approach would be
inappropriate and extremely damaging. It is disappointing that the
consultation does not seek to properly address this, but instead assumes
the judgment of supervisors alone will result in good outcomes. We are
not convinced that supervisors will exercise proper discretion in relation to
the size, nature or complexity of the firm, because there is no guidance
available to them or to the firm on which to base those judgments.
b. Similarly we are surprised the consultation does not take proper account
of the need and indeed value, of individuals in small firms holding a
number of Controlled Functions. Where small firms are faced with the
prospect of demonstrating that every Controlled Function is held by an
individual with the full range of skills and experience implied within the
consultation, this would present a significant problem. Again we consider
there is a need for a proportionate and pragmatic approach- for example
AFM Response to CP10/3 2 of 6
to consider how skilled external resource actively supports the
c. The length of the approval process will be a problem for organisations of
any scale, but particularly smaller ones, who are recruiting new Board
members. We would like to see FSA set and report on effective service
standards for processing approvals, as we suggested in response to an
d. The proportionality statement in the cost benefit analysis (paragraph 32 of
Annex 1) completely overlooks the implications and applicability of the
proposals to different forms and sizes of organisations, and appears to
consider the issue of proportionality almost entirely from the perspective
of efficient use of FSA resource, not from the perspective of impact on a
9. In a similar vein, paragraph 4.27 suggests FSA will take an active role in
assessing whether a firm’s has met its statutory obligations relating to equal pay
and non-discrimination. We accept firms must carefully consider these
responsibilities, but we considered their monitoring is the responsibility of other
agencies. It is not clear to us that these issues legitimately challenge FSA’s
10. More broadly, the general tone of the consultation raises a concern to the extent
that it presents the FSA as moving from ‘supervisor’ to ‘manager’ of firms. Whilst
the consultation seeks to reassure that this is not the case, the implications
suggest otherwise, particular in respect of the pre approval process and the
lengths to which the FSA are extending its remit. Not only in principle is this
approach concerning, but we do not feel that the FSA necessarily has the
resource or expertise to carry out this role effectively.
11. We would be pleased to discuss further any of the items raised by our response.
Association of Financial Mutuals
AFM Response to CP10/3 3 of 6
Responses to selected questions
Q1: Do you agree with our proposal to separately identify certain key roles that are
performed within the CF1 (director) CF2 (NED) or CF 28 (systems and controls)
The Approved persons’ regime has undergone regular and some contradictory changes.
Further change is not to be welcomed where it adds extra potential for confusion, and
the consultation wording is not wholly clear; however we consider the changes proposed
in this paper, presented clearly in a policy statement are not unreasonable and may help
to provide greater clarity on roles and responsibilities.
One of the issues which could be construed from the current wording is that all controlled
functions of risk, internal audit and finance that will replace CF28 should be employees
of the organisation. Clearly in small organisations this is unrealistic, as these functions
are often outsourced, both from a cost perspective but also to ensure the firm benefits
from higher levels of competency.
Q2: Are there any other key roles we should be identifying?
We cannot think of any additional roles that ought to fall under the AP regime and in any
event the SIF function appears to provide a "catch all" for important positions of
influence that are not otherwise specified.
Q3: Do you agree that we should separately approve all candidates for a systems and
controls function, even if they have, or are seeking, approval to perform a governing
No. We recognise there will be some attraction to FSA in taking this approach, and that
for large firms the proposal is desirable and achievable. However the proposed
approach is not appropriate for medium and smaller firms where by necessity many
Board appointments will be for multi Approved Person functions. It is disappointing that
the scalability of the proposal to different types and sizes of firm is not explored, so that
even where supervisors are encouraged to use some discretion in relation to the size,
nature or complexity of the firm, there is no guidance available for the supervisor or the
Q4: Do you agree that we should automatically grant the new controlled functions to
individuals already performing the relevant role within their existing approvals?
Yes, we believe that to do otherwise would incur significant cost which is unlikely to be
outweighed by the benefits. We have heard reports that the FSA approval process is
running to over three months already, which has serious consequences for recruitment
and which would be exacerbated by retrospective reviews of individuals already carrying
out controlled functions.
We note that in any event FSA would expect to interview such incumbents in relation to
their “new” Controlled Function as part of the next Arrow visit.
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Q5: Do you agree that a phased approach of between 3 and 12 months is sufficient for
the notification process, and that the Remuneration Code provides an appropriate basis
for this phasing?
Q6: Do you agree that we should extend the proposed CF00 (parent entity SIF) to apply
irrespective of the corporate status of the UK subsidiary?
Q7: Do you agree that we should extend the proposed CF00 (parent entity SIF) regime
to apply to regulated firms whose parent entity is also FSA-authorised?
Yes to both; arguably such individuals should already be CF29 of any company/
subsidiary over which they exert influence.
Q8: Do you agree that these transitional periods are sufficient?
Q9: Do you agree that it is appropriate for us to extend CF29 to UK branches of
incoming EEA banks accepting retail deposits?
Q10: Do you agree that our proposed guidance on compromise agreements is useful in
clarifying the current position?
We agree. In practice, in many cases, we would expect to notify FSA of the reason for
an Approved Person leaving a firm's employment in advance of concluding the terms of
a compromise agreement. So by the time the leaver might attempt to negotiate the
compromise agreement, the firm may have already made disclosure to FSA.
Q11: Do you agree with our proposed guidance on the time commitment required for
chairmen and NEDs?
We agree with the principle but believe that FSA should not be specific on the minimum
time that NEDs should devote to their duties. Amongst other things, the demands on
their time will depend on the size, nature and complexity of each firm and the issues that
they have to deal with.
It is appropriate that firms should negotiate and agree this with NED candidates, and
specify the expected time commitment in the letter of appointment. But smaller firms in
particular need to be very conscious of the cost of extending NED contracts, and for
those that pay little or nothing to NEDs it is inevitable that a greater time commitment will
reduce the willingness of some people to seek to join a Board.
Q12: Do you agree that we should delete the guidance in SYSC 2 and 4 on NEDs’
We understand the root of FSA's concerns that have led to the need to give greater
clarity to NED responsibilities. We believe however that it would be more appropriate
and helpful if the current guidance in SYSC2 is retained, but clarified by adding to it the
AFM Response to CP10/3 5 of 6
language that FSA uses in paragraph 5.3 of CP10/3. By preserving current guidance it
would help to distinguish the critical but distinct role that NEDs perform whilst (by
adding new FSA text) achieving FSA's objective of ensuring NEDs are aware of their
We consider that FSA’s emphasis is mostly on challenge and responsibility, and does
not fully reflect that in any effective Board this needs to be properly balanced with the
need for firms and their NEDs to continue to develop innovative and entrepreneurial
strategies, and to take calculated risks having properly assessed them.
Q13: Do you agree that we should amend our rules to reflect the introduction of the new
Corporate Governance Code?
We agree, provided that any proposal to extend the Combined Code to regulated firms
generally recognises in particular that mutual firms are different and that there is
currently ongoing consultation on a revised Code for mutual companies. We consider
FSA can do more to demonstrate that it is aware of the diversity of business models in
UK financial services, and avoids the presumption that all firms conform to the
shareholder owned model.
Q14: Do you agree with the content of our proposed guidance on board risk
We agree but would welcome clarification as to whether FSA intends to extend the
scope of this beyond FTSE 100 listed banks and insurers. New SYSC Chapter 21
indicates that all firms should consider forming a risk committee but little guidance is
given to help firms decide whether, on grounds of proportionality, it is necessary to do
Q15: Do you agree with the content of our proposed guidance on CROs?
We do not think the guidance goes far enough in helping firms to determine whether
they are of the size, nature and complexity that would require a CRO. Similar to Q14
above, whilst it is for firms to decide, we understand that FSA is indicating via Arrow
visits that firms should be considering this issue, but they give little if any guidance on
the question of proportionality.
FSA suggests that if firms are in doubt as to whether they should create a CRO position
then they should discuss with their Supervisor. We consider it would be more useful for
FSA to issue guidance, to help both supervisors and firms, to consider what issues they
should take into account, and what mitigating risk systems would mean a dedicated
CRO would be unwarranted. For example, where a firm has developed a risk framework
to accord with Solvency II, the creation of a CRO might be unnecessary, and risk gold-
plating the Directive.
Without such guidance we would expect supervisors to take a conservative approach
and avoid using any discretion.
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