Central Bank of Ireland - Corporate Governance Code refresh

The Irish approach to corporate governance in financial services, at least up until the onset of the financial crisis in 2006/07, resembled something of an all-you-can-grasp buffet for a select number of executive golf club pals and octogenarian ex-politico Non-Executive Directors (NEDs), having their voting arms operated a la Weekend at Bernies.

Ireland pre-2007 - Waking NED?

The new FSA-flavoured approach brought in by Matthew Elderfield in 2009 (elaborated on here) fortified by the findings of a devastating 2011 report summarising the truly horrid governance practices in the Irish banking industry, has led to a change of regulatory tack at the Central Bank of Ireland that represents the biggest volte-face in Europe since the Macarena.

Alongside PRISM, a piece of revolutionary work in the assessment of financial institutions by supervisory bodies, the CBoI also made substantial changes in areas such as Annual Compliance Statements, Fitness and Probity of directors, Risk Appetite Statements.

All of this ran off the back of Mr Elderfield's first major gig in 2010, a full revamp of the Corporate Governance Code, which could hitch a ride off the back of the work of the FSA and CEIOPS (at the time!) and deliver a more substantial suite of obligations to a cabal of directors who, after feasting on carrots for years, desperately needed the stick.

This makes the release of yesterday's consultation on the Corporate Governance code a touch baffling, as the ink is barely dry on 2010's effort - it perhaps reflects that the regulator has reached optimum staffing levels if they can review it so regularly! Having said that, the level of divergence from accepted CG practices in the UK was flagged by Grant Thornton back in 2011 as being substantial, so a point-in-time revamp should not be so unwelcome, regardless of the proximity to the last one, and of course, all of this activity was too late to prevent Quinn Insurance from going down.

They emphasise that this review takes into account developments in the Solvency II space, as well as on-the-ground experience and publications from other parties of interest. Of particular note was their emphasis that, where national regulations are not as stringent as relevant EU or international one (or indeed vice versa?), the most onerous one should be complied with. In a number of instances around corporate governance, this will mean the CBoI outranking Solvency II as the more onerous of the two!

While these are proposals rather than stitched-on changes at this point, the CBoI doesn't have a great track record for backtracking these days. Highlights for me were;

Risk Committees

• Require a majority of NEDs on Risk Committees, and must be chaired by a NED

Committees in general

• Require the Risk Committee and Audit Committee chairs to sit on each other's committees
• Require the Remuneration Committee chair to sit on the Risk Committee
• In High Impact firms, the Risk Committee and Audit Committee Chair may not be the same person
• Must be at least 3 members of Risk Committees and Audit Committees

Chief Risk Officers

• They note that it is "Generally accepted best practice" to have a CRO who, amongst other tasks, is charged with "...facilitating risk appetite setting by the Board". In addition;
• All "High Impact" firms will be required to appoint a specialist CRO
• Firms with a lower PRISM rating may have a CRO who is shared with another control function, "...provided that there is no conflict of interest between the two roles". Can't help but feel that this might rule out CRO/Chief Actuary dual roles, but allows for CRO/Head of Compliance and CRO/Head of Internal Audit, which would be to the chagrin of the Society of Actuaries in Ireland!
• CRO to have direct access to the Chairman of the Board

Board Meeting frequency

• Seem to acknowledge that the compulsory 11 meetings per year for High Impact firms may be a touch much, so are looking for comments
• Also acknowledge that compulsory 1 meeting per calendar quarter is a bit constrictive for the smaller firms, so may relieve this to be pragmatic

Chairman and CEO

• Some of the restrictions around number of roles held at any one time to be relieved for smaller firms, but seemingly only to populate inter-Group roles.

Board Diversity

• Acknowledges that, while the debate in the EU is gender-centric, that diversity of all types is a worthy target for Boards, but falls short of compelling firms to do anything at national level, choosing to seek comments and wait for the supra-national activity to drive any compulsion. This seems to fit with the thinking of Irish directors published back in 2011 i.e. no "Golden Skirt" quotas.

Random

• "...appropriate Risk Culture" makes its way in (6.3), perhaps cognisant of the FSB's proposals
• Built in a piece which allows for video-conferencing rather than physical attendance at meetings (7.5)
• Board responsibilities updated (13.1)
• Compulsory Board skills matrix (14.9)

USA and ORSA - Let's do it baby!

Promising sounds from across the pond, as the NAIC make some definitive movements (detail here and here) towards the inclusion of Own Risk and Solvency Assessments as part of their regulatory reporting package - difficult to find the exact paperwork, but the summary of what was tabled by the ORSA subgroup at their August jamboree is here, while a statement to cover their adoption of the Risk Management and Own Risk and Solvency Assessment model act is available here.

I have touched on the movement of the US towards production of ORSAs in earlier blog posts, including recently on the preparedness of firms to meet ORSA reporting requirements,

From another earlier post, I can see the 15 volunteer company pilot which was mooted at the start of the year ultimately became 13 companies by the conclusion of the pilot (no word on who started, but couldn't be bothered finishing!). According to the Clearwater information, only 8 participants ORSA Reports were considered "complete", this despite the NAIC providing an ORSA Manual from which to work from.

Is this ratio of incompleteness indicative of what the 27 EU national regulators are likely to encounter in 2014, or is the lack of prescriptive guidance at Level 1 and Level 2 handy in this regard (i.e. ORSA Supervisory Reports will be "passed" regardless of quality, and regulatory arbitrage is back on the agenda).

Either way, Clearwater also note that 2015 is looking like the most likely time for imposition of ORSA reporting, so the guys will still have time to borrow from our experiences, as we can from theirs - suggested improvements  from the NAIC's sub-group to the participants (none of which would hurt anyone in the ORSA space over here!) include;

• Include a summary of “significant changes” from prior year
• Provide additional detail regarding risk managers and compensation
• Include additional stress testing, specifically for liquidity

 Looking forward to the sub-group's next report, the approach over there appears to be relatively easy to follow and well led, which I guess it can afford to be if it isn't masquerading as something other than a filing requirement... 

Society of Actuaries in Ireland - response on Market Consistent ESGs discussion paper

In the interests of being prepared to scrutinise internal models to the letter of the existing text, I have spent more examining the hot topics on Pillar 1, and the SOA have provided an excellent response paper to the Central Bank of Ireland's ongoing discussion on market consistent black boxes.

I have tried to pick out the key themes in the absence of having detailed knowledge!

• Difficulty is calibrating market-consistent ESGs where deep and liquid markets don't exist
• Risk margin consideration appears and reappears throughout - the SOA advocate clarity and methodology disclosure wherever a risk margin is allowed for (which in my head would be an area the risk function could then scrutinise when validating the Internal Model)
• Process of converging insurance pricing with market-based pricing will involve considerable expert judgement (problematic for pure Risk functions to validate I suspect).
• Easier to use the ESG for interpolation as opposed to extrapolation - organisations need to be able to "show its work" when extrapolating beyond the region of the data (another good area for would-be validators to focus on)
• Also need to be careful when accounting for margins (implicit, explicit, illiquidity premia) that they are also appropriately extrapolated.

I suspect I will be referring back to this as the Level 2s and 3s make there way into their final form, as I found it a reasonably accessible pointer for potential Internal Model weaknesses (and I make no apologies for misinterpretations as a non-mathematician!).

Ireland - Some random Solvency II/ERM bits

Couple of topical pieces from the Emerald Isle - A whopping, yet apparently generously applied fine for incorrect submissions to the Central Bank. The generosity was applied due to their being forthright upon discovering the error, as well as their rectification efforts. Rack this one up in your Op Risk tail events log.

Secondly, the Society of Actuaries newsletter for June. Great piece on risk aggregation on page 8 (as I blogged earlier, Mr Elderfield has indicated this is a neglected area so grab everything you can on the topic!), a more actuarially slanted breakdown of Ireland's QIS 5 exercise on p16-17, and notification of some pipeline work on ERM, which I look forward to checking out in the near future.

Third, and somewhat bizarrely, a thinly-veiled attack in the Irish press on the FSA's recent efforts in instigating a fistful of white collar arrests - the implication being they were sleeping on the job when the real crime took place. 2011 seems a odd time to point the finger of shame at narcoleptic regulators, particularly when, once their rather 'toppy' staff turnover levels are accounted for, there can't be many of the class of 2007-08 left!