Risk Coalition: Principles-based guidance for board risk committees and risk functions in the UK financial services sector
On December 4, 2019, the Risk Coalition published its final principles-based guidance for board risk committees and risk functions in the UK financial services sector (Guidance). The Risk Coalition expects this Guidance to lead to substantive improvements in the overall quality and effectiveness of risk management across the UK financial services sector. The Guidance provides a commonly agreed benchmark for ‘what good looks like’ and in developing this publication, the Risk Coalition has drawn on industry, academic and regulatory best practice and consulted widely, including with the key UK financial regulators who are supportive of all work that raises risk standards across the industry.
The Guidance remains mainly unchanged from the previously published draft in July 2019, and is intended to be used by organisations on an ‘apply or explain’ basis, and the Risk Coalition encourages firms to publicly disclose the extent of their application of the Guidance, including details of any implementation period where relevant. The Guidance also clarifies that while it assumes that organisations operate a “three lines of defence” model for risk management, it does not require this.
The Guidance is split into two parts:
Part A - Board Risk Committee Principles And Guidance focuses on what can reasonably be expected of a mature board risk committee through defining a number of key principles and supporting guidance. The Guidance contains eight principles, and accompanying guidance for each, and emphasises that board accountability sits at the centre of the related principles. The eight principles are set out below:
- Board accountability
- Composition and membership
- Risk strategy and risk appetite
- Principal risks and continued viability
- Risk management and internal control systems
- Risk information and reporting
- Risk culture and remuneration
- Chief risk officer and risk function independence and objectivity
Changes to Part A from the draft Guidance include additional recommendations that the board committee should seek regular board engagement and direction on the organisation's principal and emerging risks and other key board risk committee topics, confirm that delegated risk-related responsibilities are clearly defined between board committees and consider the benefits of, and support the committee chair in, engaging with investors and other key stakeholders on risk-related topics.
Part B - Risk Function Principles And Guidance follows a similar format, but focuses on the role and responsibilities of the chief risk officer and second line risk function. The Guidance contains nine principles, and accompanying guidance for each, but emphasises that independent risk oversight and challenge sits at the centre of the risk function principles. The principles are set out below:
- Independent risk oversight and challenge
- Independent and objective perspective
- Risk governance
- Risk reporting
- Corporate strategy and objectives
- Risk function independence and effectiveness
- Risk culture
- Innovation and change
- Group risk functions
There have also been changes and additions to the guidance underlying the risk function principles. These changes include additional guidance on the role of the chief risk officer and members of the risk function in relation to first line management.
(Risk Coalition: Principles-based guidance for board risk committees and risk functions in the UK Financial Services sector, 04.12.19)
ESMA: Prospectus Regulation questions and answers updated
On December 4, 2019 the European Securities and Markets Authority (ESMA) published an updated version of its Prospectus Regulation question and answers (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 includes two additional questions from the previous version published in July 2019. These questions provide clarification on the following issues in relation to the Prospectus Regulation:
- Pro-forma summaries in base prospectuses (question 13.2) - ESMA clarifies that it is not possible to include a pro-forma summary in a base prospectus. The intention of Article 8(8) of the new Prospectus Regulation is to clarify that it is not possible to include a summary in a base prospectus, unless the final terms are included in the base prospectus or supplement and the issue specific summary is annexed thereto.
- The application of prospectus disclosure annexes where securities do not fall neatly within a specific disclosure regime (question 14.6) - ESMA is of the view that, generally, the annexes which apply to existing securities should be applied to the prospectus for comparable securities. However, issuers and competent authorities should consider whether it is necessary to include additional information in the prospectus to satisfy the "necessary information test" in Articles 6(1) and 14(2) of the new Prospectus Regulation.
ESMA further clarifies that its ongoing prospectus Q&A work consists of a dual initiative of developing Q&As which address issues that have emerged solely since the introduction of the Prospectus Regulation and of revising Q&As previously issued in respect of the Prospectus Directive that are still of added value under the Prospectus Regulation.
All Q&As currently being prepared are for inclusion in the new prospectus Q&A document, as this is the document which will serve both regulators and the market going forward under the Prospectus Regulation regime. ESMA will continue to publish the existing Q&As relating to the Prospectus Directive during the period in which prospectuses that have been approved under the Prospectus Directive may continue to be valid, which is until July 21, 2020. After this period, those Q&As will no longer apply.
(ESMA: Prospectus Regulation Questions and Answers updated, 04.12.19)
ESMA: Final report on draft RTS amending Prospectus RTS Regulation
On December 4, 2019, the European Securities and Markets Authority (ESMA) published its final report on the draft regulatory technical standards (RTS) amending Delegated Regulation (EU) 2019/979 (Prospectus RTS Regulation) containing regulatory technical standards under the new Prospectus Regulation (Report).
The Prospectus RTS Regulation sets out key financial information to be included in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal. The draft RTS contained in the Report aims to make some minor amendments to the Prospectus RTS Regulation in respect of certain errors identified.
Proposed amendments to the Prospectus RTS Regulation include:
- In relation to Article 18 of the Prospectus RTS Regulation, issuers of securities convertible or exchangeable into third party shares are required to publish a supplement to their prospectus. By contrast, Commission Delegated Regulation (EU) No 382/2014, which was replaced by the Prospectus RTS Regulation, did not require the publication of a supplement in those situations. As the Prospectus RTS Regulation was not intended to increase the legal requirements for issuers of securities convertible or exchangeable into third party shares by asking them to publish a supplement and as those rules have proven to work well and have not affected the level of investor protection, all references to issuers of securities convertible or exchangeable into third party shares should be removed from the list in Article 18(1) of the Prospectus RTS Regulation.
- In Annex I of the Prospectus RTS Regulation, Table 3 (Cash flow statement for non-financial entities (equity securities)) is proposed to be replaced because the third year of cash flow information was omitted from the key financial information in the summaries of the prospectuses. In the draft RTS, ESMA has added an additional column to Table 3 to the cash flow information for the two years before the year of the prospectus, ensuring that cash flow information is included for each year covered by the historical financial information included in the prospectus.
The draft RTS also make clerical and typographical corrections to the Prospectus RTS Regulation.
ESMA will submit the Report containing the draft RTS to the European Commission at a later date.
(ESMA: Final report on draft RTS amending Prospectus RTS Regulation, 04.12.19)