Risk Coalition: Consultation on principles and guidance for board risk committees and risk functions in the UK financial services sector
The Risk Coalition is a network of not-for-profit professional bodies and membership organisations committed to raising standards of risk governance and risk management in the UK. On July 12, 2019 the Risk Coalition published a consultation on its draft principles and guidance for board risk committees and risk functions in the UK financial services sector (Draft Guidance). The Draft Guidance aims to provide coherent, principles-based good practice guidance for board risk committees and risk functions and is intended to:
- Develop a common understanding of the purpose and remit of board risk committees and risk functions.
- Raise expectations and promote good practice of risk oversight in UK financial services.
- Provide a benchmark against which board risk committees and risk functions can be objectively assessed.
The first part of the Draft Guidance identifies eight principles relating to what can reasonably be expected of a mature board risk committee and provides accompanying guidance on how each of the principles can be met. The eight principles identified by the Draft Guidance are set out below.
Board accountability - The board risk committee is an advisory committee to the board. Its aim is to facilitate focused and informed board discussions on risk-related matters. The board retains ultimate accountability for the adequacy and effectiveness of the organisation’s risk management arrangements.
Composition and membership - The board risk committee should be formed of independent non-executive directors and apply chair, membership, competence, performance evaluation and succession planning criteria as outlined in the UK Corporate Governance Code for board committees.
Risk strategy and risk appetite - The board risk committee should provide the board with advice on the continued appropriateness of the board-set risk strategy and risk appetite in light of the organisation’s purpose, values, corporate strategy and strategic objectives.
Principal risks and continued viability - The board risk committee should assess and advise the board on the organisation’s principal current and emerging risks and how these may impact the organisation’s corporate strategy and strategic objectives, and the continued viability of its business model.
Risk culture and remuneration - The board risk committee should consider and periodically report to the board whether the organisation’s purpose, values and board-approved risk culture expectations are appropriately embedded in the organisation’s risk strategy and risk appetite, and are reflected in observed behaviours and decisions.
Risk information and reporting - The board risk committee should assess and advise the board on the quality and appropriateness of the organisation’s risk information and reporting.
Risk management and internal control systems - In conjunction with the audit committee (where relevant), the board risk committee should monitor and periodically advise the board on the overall effectiveness of the organisation’s risk arrangements.
Chief risk officer and risk function independence - The board risk committee should safeguard the independence and oversee the performance of the chief risk officer and the second line risk function.
The second part of Draft Guidance focuses on the role and responsibilities of the chief risk officer and second line risk function. It sets out principles (and supporting guidance) in relation to the areas of: independent risk oversight; independent perspective; risk governance; risk reporting; corporate strategy and objectives; risk function independence and effectiveness; risk culture; innovation and change; and group risk functions.
While the scope of the Draft Guidance is limited to financial services, the Risk Coalition hopes the principles it establishes will also be seen as relevant to other sectors, and it welcomes consultation responses from those outside financial services.
The consultation asks respondents to consider a number of questions arising from the development of the Draft Guidance, including (amongst other things) in relation to: whether the responsibilities of the board risk committee are set out with sufficient clarity in Draft Guidance; the composition of the board risk committee; and how the board risk committee should be interacting with other board committees generally to ensure risk oversight at board level is conducted in the most effective way.
The consultation closes on September 20, 2019 and the Risk Coalition anticipates publishing a final version of the guidance in December 2019, along with a companion narrative piece discussing relevant key risk topics and themes which have emerged from the consultation.
(Risk Coalition: draft principles and guidance for board risk committees in the financial services sector, 12.07.19)
FRC: Consultation on enhanced Ethical and Auditing Standards
On July 15, 2019 the Financial Reporting Council (FRC) published a consultation (Consultation) on proposed changes to the UK’s Ethical and Auditing Standards. The revisions are the result of the FRC’s post implementation review of the efficacy of the standards, a process which included a call for feedback in November 2018, and a position paper in March 2019.
Key changes proposed include:
- Simplifying and restructuring the Ethical Standard in order to achieve higher levels of understanding and compliance.
- Re-defining the ‘objective, reasonable and informed third party’ test which is a core element of the Ethical Standard.
- The introduction of a list of permitted services that auditors of Public Interest Entities (PIEs) can provide, limiting these to those which are closely related to the audit and/or required by law and regulation.
- Expanding the scope of certain ethical requirements to cover entities which may not be formally designated as PIEs, but are clearly of significant public interest.
- Strengthening certain ethical prohibitions and requirements which relate to auditor independence, including the provision of non-audit services, for the auditors of all listed entities.
- Clarifying and enhancing requirements in the Auditing Standards including: group audit procedures; auditor reporting; enhanced work effort in respect of irregularities in law and regulation, including fraud; and greater clarity over the auditor’s work effort on ‘other information’ included within annual financial reports.
The FRC recognises that there are a number of concurrent reviews of the UK audit market, including an independent review by Sir Donald Brydon looking at the quality and effectiveness of audit, and notes that its proposals are not intended to pre-empt the outcome of those reviews, or the direction of future government policy. Instead they are focused on improving current Ethical and Auditing Standards in light of experience since the last major revision in 2016, driving up the quality of audits being carried out in the UK, and continuing to promote public confidence in audit.
The consultation closes on September 27, 2019 and the revised standards are intended to apply to the audit of financial periods commencing on or after December 15, 2019.
(FRC: Enhanced Ethical and Auditing Standards – Feedback statement and Impact assessment, 15.07.2019)
(FRC: Enhanced Ethical and Auditing Standards - Exposure Drafts , 15.07.2019)
(FRC: Consultation on enhanced Ethical and Auditing Standards – press release, 15.07.2019)
ESMA: Prospectus Regulation - consultation on draft guidelines on disclosure requirements
On July 12, 2019 the European Securities and Markets Authority (ESMA) published a consultation on its draft guidelines on disclosure requirements under the Prospectus Regulation (Draft Guidelines).
The Draft Guidelines update the recommendations adopted by ESMA’s predecessor, the Committee of European Securities Regulators (CESR), in order to make them consistent with the contents of the Prospectus Regulation, while at the same time converting them into guidelines (which will mean that the “comply or explain” approach will apply to them). The content of the Draft Guidelines and the explanatory text generally follows the content of the CESR recommendations, although drafting changes have been introduced to simplify the context and improve readability, and ESMA has also introduced some new guidelines and some additional content in the explanatory text.
The purpose of the Draft Guidelines is to ensure that market participants have a uniform understanding of the relevant disclosure requirements and aim to assist national competent authorities when they assess the completeness, comprehensibility and consistency of information in prospectuses. The Draft Guidelines further aim to help market participants comply with the disclosure requirements set out in the Commission Delegated Regulation supplementing the Prospectus Regulation regarding the format, content, scrutiny and approval of prospectuses. The Draft Guidelines cover topics such as:
- Historical financial information.
- Interim financial information.
- Profit forecasts and estimates.
- Working capital statements.
- Capitalisation and indebtedness
ESMA notes in the consultation that the CESR recommendations relating to specialist issuers (including mineral companies, scientific research-based companies and property companies) are not being converted into guidelines at this time.
Consultation responses are requested by October 4, 2019 and ESMA expects to publish a final report containing a summary of all consultation responses and a final version of the guidelines in Q2 2020.
(ESMA: Prospectus Regulation - consultation on draft guidelines on disclosure requirements, 12.07.19)
(ESMA: Prospectus Regulation - consultation on draft guidelines on disclosure requirements – press release, 12.07.19)
ESMA: Prospectus Regulation – updated Q&A
On July 12, 2019 the European Securities and Markets Authority (ESMA) published updated questions and answers on the Prospectus Regulation (Q&As). The purpose of the Q&As is to promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Prospectus Regulation. It does this by providing responses to questions asked by the public, financial market participants, competent authorities and other stakeholders. The updated Q&A document includes twenty-five Q&As.
There are three new Q&As which provide clarification on the following issues in relation to the Prospectus Regulation:
- The application of Article 23(3) of the Prospectus Regulation in relation to issuers that qualify as financial intermediaries.
- Continuing an offer which has initially been made using a base prospectus approved under the Prospectus Directive after the entry into application of the Prospectus Regulation.
The other twenty-two Q&As were originally published in relation to the Prospectus Directive, and have now been updated in relation to the Prospectus Regulation. These include questions relating to public offers, incorporation by reference, Home Member States, financial information, supplements, passporting, and responsibility for a prospectus.
ESMA has also decided not to update twenty-eight Q&As that were published in relation to the Prospectus Directive and these Q&As will not be carried over in relation to the Prospectus Regulation. In addition, ESMA will continue to analyse the existing Q&As published in relation to the Prospectus Directive and will determine whether to update and carry them forward or not. ESMA also states that it will continue to publish Q&As relating to the Prospectus Directive during the period in which prospectuses that have been approved under it may continue to be valid, until July 21, 2020. After that, those Q&As will no longer apply. ESMA states in the Q&As that it intends to update the Q&As on a regular basis going forwards.
(ESMA: Prospectus Regulation – updated Q&A, 12.07.19)
(ESMA: Prospectus Regulation – updated Q&A – press release, 12.07.19)
FCA: Prospectus Regulation Rules Instrument 2019 published
On July 15, 2019 the Financial Conduct Authority (FCA) published its final Prospectus Regulation Rules Instrument 2019 (Instrument). The purpose of the Instrument is to revoke the existing PR sourcebook and replace it with the Prospectus Regulation Rules sourcebook (PRR Sourcebook), aligning the FCA Handbook with the new Prospectus Regulation.
The Instrument is in the same form as the near-final version that was published in May 2019 (PS 19/12) and the PRR sourcebook is attached as Annex A to the Instrument.
The Instrument will come into force on July 21, 2019.
(FCA: Prospectus Regulation Rules Instrument 2019, 15.07.19)
CIIA: Consultation on new Internal Audit Code of Practice
On July 15, 2019 the Chartered Institute of Internal Auditors (CIIA) launched a consultation on a draft of its new Internal Audit Code of Practice (Code). The Code is intended to provide an industry benchmark for best practice and a gauge for boards, audit committees and where appropriate UK regulatory authorities to assess the role, function and effectiveness of internal audit functions.
The Code makes 30 recommendations to strengthen internal audit covering the following areas:
- Role and mandate of internal audit.
- Scope and priorities of internal audit.
- Reporting results.
- Interaction with risk management, compliance and finance.
- Independence and authority of internal audit.
- Quality assurance and improvement programme.
Specific recommendations include (amongst others):
- Unrestricted access for internal audit - internal audit should not be stopped from looking at any part of the organisation it serves.
- Full access for internal audit to senior meetings - internal audit must have the right to attend board and executive committee meetings.
- Full access for internal audit to key management information - internal audit must have timely access to key management information.
The consultation is open until October 11, 2019.
(CIIA: Draft Internal Audit Code of Practice, 15.07.19)
(CIIA: Consultation on new Internal Audit Code of Practice – press release, 15.07.19)
HM Treasury: Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 3) Regulations 2019
On July 16, 2019, HM Treasury published the Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 3) Regulations 2019 (Draft Regulations), along with a draft explanatory memorandum. The Draft Regulations have also been laid before Parliament. The purpose of the Draft Regulations is to ensure a coherent and functioning financial services regulatory regime once the UK leaves the EU by addressing deficiencies in UK domestic law and retained EU law arising from the UK’s withdrawal from the EU.
The Draft Regulations amend primary and secondary legislation, including certain provisions of the Criminal Justice Act 1993 and the Insider Dealing (Securities and Regulated Markets) Order 1994, to address deficiencies in UK domestic law and retained EU law arising from the UK’s withdrawal from the EU, in line with the approach taken in other financial services EU exit instruments under the EU (Withdrawal) Act 2018 (EUWA). In addition, the Draft Regulations make minor amendments to financial services statutory instruments made under the EUWA to correct minor errors identified in legislation after it was laid before Parliament and update certain references to account for the Article 50 process extension.
Some of the Regulations will come into force immediately, some on the day which the Regulations are made, with others coming into force the day after. The remaining Regulations will come into force on exit day.
(Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 3) Regulations 2019)
(Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 3) Regulations 2019 – explanatory memorandum)
BEIS: Draft Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019
On July 16, 2019 the Department for Business, Energy and Industrial Strategy published the draft Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 (Draft Regulations). The purpose of the Draft Regulations is to address deficiencies of retained EU law arising from the UK’s exit from the EU in relation to the application of international accounting standards under UK law, and the regulatory oversight and professional recognition of statutory auditors and third country auditors.
The Draft Regulations make amendments to the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019, including:
- Bringing forward the commencement of the new powers inserted as sections 1240A and 1240B of the Companies Act 2006, which is the power to approve third countries as equivalent or transitional third countries and the power to approve third country competent authorities, so that these powers will be available before exit day for the purposes of making regulations only. These sections will now be inserted 21 days after the day on which the Draft Regulations are made, rather than on exit day. (Regulation 3)
- Removing an exemption from audit for a subsidiary which is a company or a limited liability partnership and which has an EEA parent where the subsidiary is included in the parent’s consolidated accounts and the accounts are drawn up in accordance with the EU’s Accounting Directive or in accordance with UK-adopted international accounting standards. The subsidiaries audit exemption will continue to be available for those companies and LLPs that are subsidiaries of UK parent undertakings. However, it will not be available to subsidiaries of parent undertakings in the EEA after exit day. (Regulation 4)
In addition, the Draft Regulations replace references to "UK-traded non-EEA companies" with references to "UK-traded third country companies" in certain areas of the Companies Act 2006, as well as amending Schedule 2 to the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 so as to repeal additional directly applicable Commission Regulations adopting IFRS or amending EU adopted IFRS for application in the EU, and making minor amendments to the Accounts and Reports (Amendment) (EU Exit) Regulations 2019.
(Draft Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019)
(Draft Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019 - explanatory memorandum)
Council of the EU: Digital tools and processes in company law
On July 11, 2019 Directive (EU) 2019/1151 amending Directive (EU) 2017/1132 regarding the use of digital tools and processes in company law was published in the Official Journal (Directive). The Directive remains substantially unchanged from the text adopted by the Council of the EU on June 13, 2019.
The Directive will enter into force on the twentieth day following its publication in the Official Journal (i.e. July 31, 2019) and Member States will have until August 1, 2021 to transpose its provisions into national law (save for a small number of provisions which must be transposed by August 1, 2023).
(Council of the EU: Digital tools and processes in company law, 11.07.19)
ESMA: Transparency directive - updated ESEF Reporting Manual
On July 12, 2019 the European Securities and Markets Authority (ESMA) published an updated version of its European Single Electronic Format (ESEF) Reporting manual (Manual).
The Transparency Directive (2004/109/EC), as supplemented by Commission Delegated Regulation (EU) 2019/815 (ESEF Regulation), requires annual financial reports containing financial statements to be prepared in a single electronic format for financial years beginning on or after January 1, 2020.
The Manual is intended to assist issuers and software vendors in creating Inline XBRL documents in compliance with the ESEF Regulation, to provide guidance on common issues that may be encountered when creating Inline XBRL documents and how to resolve them, and to promote a harmonised and consistent approach for the preparation of annual financial reports in the format specified in the ESEF Regulation.
Following feedback from market participants, ESMA has updated the Manual to expand and update the guidance included in the original version of the Manual published in 2017. A summary table of the updates is set out in Part II of the Manual.
ESMA notes that it will continue to monitor relevant market developments and gather feedback on issues frequently encountered, and will provide further guidance where relevant or necessary.
(ESMA: Transparency directive - updated ESEF Reporting Manual, 12.07.19)
(ESMA: Transparency directive - updated ESEF Reporting Manual – press release, 12.07.19)