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Financial Regulator clarifies that it will not request "compliance statements"

We welcome the clarification provided by the Financial Regulator that it will not (save in extremely exceptional circumstances) exercise its power to require regulated firms to provide compliance statements, writes Joe Beashel.

These statements are similar to the controversial Compliance Policy Statements contained in Section 45 of the Companies (Auditing and Accounting) Act 2003 which were the subject of intense lobbying and debate in 2005. The proposed section 45 statements would have required directors of a broad range of Irish companies, to prepare a Compliance Policy Statement and an Annual Compliance Statement in respect of company law, tax law and all other relevant obligations, the breach of which could have a material impact on the company's financial statements. In addition, it was intended that the Compliance Policy Statement and Annual Compliance Statement be signed off by the company's auditors as being fair and reasonable and included in the annual accounts of the company. It was intended that the statement in the company's annual accounts would acknowledge the Director's responsibility for securing the company's compliance with all relevant obligations, confirm internal procedures are in place designed to secure such compliance and specify whether, based on such procedures and their review of same, they are of the opinion that they used "all reasonable endeavours" to secure the company's compliance with such relevant obligations.

Joe Beashel

These extensive, onerous and controversial proposals were ultimately referred by the Minister for Enterprise Trade and Employment to the Company Law Review Group ("CLRG"), a statutory body established to review, on an ongoing basis, Irish Company Law and with broad representation from industry, government departments, the Revenue Commissioners (tax authorities), the Financial Regulator, lawyers, accountants, the Director of Corporate Enforcement, the Congress of Trade Unions and others.

The CLRG identified that the main concerns for industry were the creation of a complex and highly prescriptive compliance regime that would result in significant additional costs to industry. The definition of 'relevant obligations' was seen to be excessive and there was an absence of a sufficiently prominent materiality requirement. If implemented, Ireland would have a corporate governance standard above and beyond that required by any other jurisdiction and therefore the regime might act as a deterrent to investment in Ireland and an incentive for, effectively, Irish companies to incorporate in other jurisdictions.

A compromise replacement section was suggested by the CLRG and this has been accepted by the Minister. The proposed amendment will, when enacted, apply to fewer companies and have a considerably narrower focus, relating to material breaches of company and tax law only.

The Financial Regulator also has, under Section 26 of the Central Bank and Financial Services Authority of Ireland Act 2004 ("CBFSIA"), a power to request compliance statements of entities regulated by it. A compliance statement requested by the Financial Regulator is similar but not identical to the Section 45 statements discussed above. Below are the key features of the Financial Regulator's Compliance Statements:

All regulated financial service providers irrespective of size may be requested to prepare one. There are no turnover or balance sheet thresholds.

There is no automatic requirement to prepare them each year, rather they are triggered by a formal request from the Financial Regulator.

Section 45 statements require directors to comment on the effectiveness of internal review procedures. In contrast the Financial Regulator's requirement is much more direct and onerous, details of each breach must (in accordance with any guideline issued) be reported.

Compliance statements may be targeted to a particular issue only. This would allow the Financial Regulator to focus on specific issues or themes within the industry or to ask for a compliance statement in advance of one of their periodic inspections.

The definition of relevant obligations focuses on specific pieces of financial legislation and codes as well as a catch-all category of "all other enactments and statutory instruments with which it must comply".

There is a specific statutory recognition of the fact that Section 45 statements may have been prepared. The Financial Regulator may reply upon such Statements but only if "…it is satisfied that the statement contains the information that would be required to be included in a compliance statement under this section".

Like Section 45 statements, the auditor must add its opinion that the statement produced is fair and reasonable or if not, the reasons why not. Unlike Section 45 statements, the Financial Regulator's compliance statement is not included in the service provider's annual accounts though the auditor's opinion is.

Following the resolution issues surrounding Section 45, the Financial Regulator conducted an informal consultation during October and November 2006 of its own powers. As in the case of Section 45 itself, industry pointed out the potential negative impact on Ireland's competitiveness as a result of implementing the requirement, the costs of implementation, the absence of a materiality threshold and the extent of the confirmation required. It was also pointed out that the Compliance Statement provision is not principles-based and therefore inconsistent with the Financial Regulator's approach to regulation. Finally it was noted that the CLRG recommendations on Section 45 of the Companies (Auditing and Accounting) Act 2003 are not reflected in the CBFSAI legislation.

On the basis of the above, the Financial Regulator has recently indicated that, save in very exceptional circumstances it will not exercise its power to require regulated firms to prepare compliance statements pending its review as part of the Government's Consolidation and Modernisation of Financial Services Legislation Project.

This is a sensible and pragmatic decision which provides clarification and comfort to all firms regulated by the Financial Regulator.

Author Details: Joe Beashel is a Partner in the Banking and Financial Services Department and Head of the Regulatory Risk Management and Compliance Group at Matheson Ormsby Prentice. He can be contacted by phone: +353 1 232 2000 or by email: joe.beashel@mop.ie.