Catherine Woods
Financial Reporting Council

Fifth Floor
Aldwych House
71-91 Aldwych
London WC2B 4HN

June 2014

AFM Response to Consultation on changes to the UK Corporate Governance Code

  1. I am writing in response to this discussion paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Comment on the proposals in your paper; and
  • Explain how we intend to translate into our Annotated Code once the final revisions are published.
  1. The Association of Financial Mutuals (AFM) represents 53 member companies; they all support the principles of mutuality, and are mostly owned by their customers. Between them, AFM members manage the savings, pensions, protection and healthcare needs of over 20 million people, and have total funds under management of £120 billion. 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, and have been recognised by Parliament as worthy of continued support and promotion.
  1. The AFM maintains a version of the UK Corporate Governance Code annotated for mutual insurers. We recognise that the listed companies for whom the Code is primarily aimed are many times bigger than most of our members, and also that the focus on shareholder-owned businesses does not entirely adapt to other business models.
  1. In 2012 we undertook a review of our Annotated Corporate Governance Code, and as a result the AFM Board renewed its commitment to keep our Code in step with FRC’s, and that the FRC code expresses generally acknowledged good practice. We will though continue to review this approach in light of the practicality of the Code, including the degree to which it is readily adaptable to our members’ business plans, in view of other governance initiatives in the mutual sector, and with reference to changes in legislative and regulatory approaches to governance in our sector.
  1. We also note that in 2010 FRC chaired a working group created by government to consider a new governance code for mutuals. Whilst this work appears to no longer be progressing (albeit Treasury has not formally confirmed this), we continue to believe there is merit, particularly given problems in governance within the Cooperative Group, of a properly defined code for mutuals: our annotated version of the FRC Code does much to establish this, but it continues to be framed from a PLC perspective and does not wholly translate to our business model.
  1. The proposals in this consultation broadly cover those FRC consulted on in 2013, albeit with welcome recognition of the caution of copying across legislation (too early). We are broadly content with the amendments, subject to the comments below.
  1. Once FRC has completed its review, and published the amended Code, we will add any appropriate annotations and consult with our members with a view to publishing our Annotated UK Corporate Governance Code for Mutual Insurers before the end of 2014, to take affect for financial years beginning after the date of publication. We would be happy to explain this process in more detail.
  1. We would be pleased to discuss further any of the issues raised by our response.

Yours sincerely,

Chief Executive

Association of Financial Mutuals

Answers to specific questions

Question 1: Do you agree with the proposed changes in Section D of the Code?

We agree with the proposed changes.

However, as some of our members are much smaller than the main target audience for the Code, and as a number have little or no form of performance-related pay, it is not always the case that they will have a Remuneration Committee. Where the duties of the committee are performed by the Board we are content that the revised supporting principle applies.

Question 2: Do you agree with the proposed changes relating to clawback arrangements?

We agree with the proposed changes, though also highlight that many of our members are outside the scope of the underlying Regulations, as they are not governed by the Companies Act (and Treasury has not amended their underlying legislation).

Question 3: Do you agree with the proposed change relating to AGM results? Is the intention of the proposed wording sufficiently clear?

We agree with the broad intent of the changes.

Whilst we accept that Boards will need to consider for themselves the degree of dissent, we think that the use of the word ‘significant’ is very vague.

Votes on remuneration traditionally receive lower approval for financial companies. Where owners (shareholders) are largely institutional, a small number of owners carry significant weight, and their views might be at odds with owners that are consumers (as is entirely the case with our members). Equally, the form of post-AGM engagement will vary: again it is easy to engage with a small number of large institutional investors, but this is not practical for members of the public. Engagement via a message of the website, or in a newsletter or ahead of the next AGM might be the most practical solution where there are a very large number of low value holdings, as is the case in most mutuals.

Equally for organisations with a significant vote during the AGM it might not be practical to “explain when announcing the results of voting what actions it intends to take”: it may be that the nature of the concern only becomes apparent during the AGM, and the company may therefore need time to assess the best course of action. In such cases we would expect the company to announce that it will engage, though not necessarily how.

Question 4: Do you agree with the proposed amendments to the Schedule?

We agree.

Question 5: Do you agree with the changes to the Code relating to principal risks and monitoring the risk management system?

We agree.

Question 6: Do you agree that companies should make two separate statements? If so, does the proposed wording make the distinction between the two statements sufficiently clear?

We accept the merit in having two statements to address this.

Question 7: Do you agree with the way proposed Provision C.2.2 addresses the issues of the basis of the assessment, the time period it covers and the degree of certainty attached?

We agree.

The term ‘reasonable expectation (that the company will remain viable)’ provides a more realistic position than ‘high degree of confidence’, though it will depend on whether the Board sees this as something that investors should take for granted, or else attempts to quantify the degree of confidence, or what in their assessment is reasonable, in having that expectation.

It may also be difficult, where a company is in the early stages of confidential discussion with regard to a merger, or where it is negotiating with its regulators the terms of its winding up, to avoid making a misleading statement at this point, based on the information the Board can provide publicly.

Question 8: Do you have any comments on the draft guidance in Appendix B on the going concern basis of accounting and / or the viability statement?

We consider that the guidance provided in Appendix B would be helpful to companies in preparing their accounts. As insurers, our members are very accustomed to identifying and reporting on risk.

Question 9: Should the FRC provide further guidance on the location of the viability statement?

We think this would be helpful.

Question 10: Should the recommendation that companies report on actions being taken to address significant failings or weaknesses be retained? If so, would further guidance be helpful?

We think the recommendation should be retained. As per out answer to Question 7, further guidance might be helpful where it helps companies determine what is significant, and when a company should adopt management discretion on what to report, taking account of the specific situation of the company.

Question 11: Should the option of giving companies the possibility of putting the full corporate governance statement on their website be considered further? If so, are there any elements of the corporate governance statement that should always be included in the annual report?

We think that the question of how to make the report and accounts more readable, and to make it easier for owners of a business to access and understand important information is worth considering further.

We would point out that in undertaking this work, consideration is given to the legislation affecting different entities, to avoid placing unfair hurdles in the way of compliance due to corporate form. To illustrate from a mutual perspective, s78 of the Friendly Societies Act requires friendly societies to lay their report and accounts before the AGM and to send copies to every member who asks for them. Where a member asks for friendly society accounts under s78, they must be sent the full accounts as there is no equivalent to the exception provided by companies' law (which now states a company can replace the full report and accounts with the strategic report and certain prescribed supplementary material).

Question 12: Are there any disclosure requirements in the Code that could be dropped entirely?

We are not aware of any.

AFM response to consultation on UK Corporate Governance Code / 1