Irish Bankers’ Federation/ Institute of Bankers’ Conference

1. Irish Bankers’ Federation/ Institute of Bankers’ Conference IoB Conference and Learning Centre, IFSC 18 November 2004

2. Directors’ Compliance Statements: Feedback and Implementation Paul Appleby Director of Corporate Enforcement

3. Introduction • ODCE Role/Financial Services Industry Contacts • Overview of Compliance Statement Obligations • Issues raised in ODCE Consultation Process • Some Concluding Thoughts

4. ODCE’s Company Law Role • Encouraging Improved Compliance • Uncovering Suspected Breaches • Prosecuting Detected Offences • Sanctioning Improper Conduct in Insolvent Situations • Quality Customer Services

5. ODCE Contacts with the Financial Service Industry • Consultation Exercises on ODCE Guidance • Information-Sharing with IFSRA, ISE, Revenue • Company Investigations • Collection/Presentation of Evidence to Court

6. ODCE Contacts with the Financial Service Industry • Successful Enforcement Activity • Merrion Reinsurance Company Ltd. (Conviction) • Directors of Financial Service Companies (Restriction) • Accountants/Liquidators (Convictions/Remedial Orders)

7. Compliance Duties in 2003 Act • Involves the making by the Directors of certain companies in their Annual Report of: • a Compliance Policy Statement and • an Annual Compliance Statement • Also involves the relevant Auditors expressing: • an opinion as to whether each of these Statements is ‘fair and reasonable’

8. Compliance - by Whom? • The Directors and Auditors of: • all public limited companies (listed or not) and • all private companies limited by shares- • whose turnover exceeds €15.2 million or • whose balance sheet total exceeds €7.6 million in the year in question

9. Compliance - with What? • The company’s ‘relevant obligations’ are: • the Companies Acts • tax law and • any other enactments: • that provide a legal framework within which the company operates and • that may materially affect the company’s financial statements

10. Compliance – from When? • Date/form of commencement not yet known • Mr Michael Ahern, T.D., the Minister for Trade and Commerce will decide • He also has the power to exempt certain types and classes of companies from the obligation

11. Compliance Policy Statement - Content • The company’s policies respecting compliance with its ‘relevant obligations’ • Its internal financial and other procedures for securing compliance with its relevant obligations • Its arrangements for implementing and reviewing the effectiveness of the above policies and procedures

12. Annual Compliance Statement - Content • Directors’ acknowledgement that they are responsible for securing company compliance • Confirmation that the company has internal financial and other procedures in place to secure compliance and if not, specifying the reasons • Confirmation that the directors have reviewed the effectiveness of the company’s procedures during the year and if not, specifying the reasons and

13. Annual Compliance Statement – Content(continued) • Statement whether, based on the procedures in place and their review of them, the directors are of the opinion that they have used all reasonable endeavours to secure compliance during the year and if not, specifying the reasons

14. Role of Audit Committee (if any) • Must review the Annual Compliance Statementbefore its approval by the board • Must state whether, in its opinion, the Statement • complies with the legal requirements and • is fair and reasonable and is based on due and careful enquiry

15. Compliance Duties in 2004 Act • Applies to regulated financial service providers since 1 August 2004 • CBFSAI may require Compliance Statement • It may also require an Auditor to report on whether the Statement is ‘fair and reasonable’ • Where a company is involved, it may also rely on Compliance Statements made under the 2003 Act

16. Compliance Duties in 2004 Act • Statement must indicate the extent of compliance with specified relevant obligations including: • all applicable and designated legislation • all codes, guidelines and notices and • all other legislation with which it must comply • Statement must comply with any Bank guidelines (none available yet)

17. Preparation of Draft Guidance • Initial Guidance developed in conjunction with the Institute of Directors, IBEC, CCAB-I and Revenue • ODCE Consultation Paper and Draft Guidance remain available from www. odce. ie • Revised Guidance will be available in a few weeks • Related Draft Bulletin on Auditor Compliance Reporting is also available from the Auditing Practices Board at www. frc. org. uk/apb • This will also be finalised as soon as possible

18. Overview of Submissions • 36 Submissions received of which: • 16 emanated from professional firms/bodies • 9 sourced from financial service interests • Many expressed appreciation of the Guidance • Many also identified issues of concern that required clarification

19. Issues Raised in Submissions • Affected Companies • some uncertainty as to qualifying criteria • issue of exemptions • clarity on effect of the obligation on groups • clarity on application to newly qualifying companies

20. Issues Raised in Submissions • Meaning of ‘Relevant Obligations’ in 2003 Act • includes relevant Irish primary and secondary legislation • includes relevant and directly applicable EU legislation • excludes foreign law and non-statutory rules • Some sought schedules of legislative obligations • a list of company law offences is in development. This will not be a complete list of obligations, because non-compliance often does not attract a penal sanction • other lists of obligations are also in development

21. Issues Raised in Submissions • No Compliance Statements in Draft Guidance • some sought templates in the Guidance • Statementtemplates arein development, but Statements will be tailored to the individual company, its area of business and the choices which directors make as to the necessary procedures and arrangements to secure compliance

22. Issues Raised in Submissions • Implications for Directors’ reporting of their detection/rectification of non-compliance • selection of scenarios being developed with comment on what might be the appropriate Statement by directors in each case • again, directors will decide the Statement content

23. Issues Raised in Submissions • Some queried IFSRA’s absence from the group who helped to develop the Draft Guidance • process of preparing the Guidance started before the 2004 Act was enacted • I have invited IFSRA to participate in our working group developing the final Guidance • they are attending our meetings

24. Issues Raised in Submissions • Terminology • Guidance did cover issues like ‘fair and reasonable’ and ‘all reasonable endeavours’ • work is underway to try to better explain these and other terms • however, directors will have to make their own judgements after receipt of any professional advice

25. Issues Raised in Submissions • Commencement Date • most suggested dates in 2005 or from 1/1/2006 • some proposed a phased commencement • three main options for commencement (in my view): • financial year starting on or after 1 July 2005 • financial year starting on or after 1 January 2006 • phased approach over two year period (July 2005-June 2007)

26. Issues Raised in Submissions • Illustrative commencement with effect from, say, the financial year starting on or after 1/7/2005 would mean: • identification of ‘relevant obligations’ and implementation of proper compliance controls by the start of that financial year • preparation of the Compliance Policy Statement by that date • review of the effectiveness of controls throughout the year • preparation of the Annual Compliance Statement at year-end • publication of both Statements in the Directors’ Report and the Auditors’ Opinion of those Statements after year-end

27. Concluding Thoughts • Imperatives for Positive Confirmation include • ‘relevant obligations’ have been identified • compliance policy has been decided • financial/other procedures have been put in place • procedures address the risk of non-compliance • procedures have operated effectively

28. Concluding Thoughts • Documentary Support is critical for: • identification of company’s ‘relevant obligations’ • design of appropriate control processes • outputs of the control process • review by directors of compliance environment

29. Concluding Thoughts • Company law affects the financial services sector • ‘Culture of non-compliance’ which was said to prevail is being turned around and hopefully eradicated: • State had failed to regulate effectively • professional conduct was not supported • little prospect of sanction for misconduct • flawed accountability framework in practice

30. Concluding Thoughts • New Situation • Directors, etc. now more accountable • Auditor’s independent role reinforced • errant and unscrupulous Directors face inquiry/Court action by ODCE, IFSRA, Revenue, etc. • creditors’ situation has improved • better information disclosures to market • reinforcing good practice in other areas

31. Concluding Thoughts • Effective and Balanced Regulation protects: • the public from fraud • employees, traders and suppliers from irresponsible conduct • State revenue and the taxpayer’s interest • investors and credit institutions from bad debts • legitimate business from fraud-based competition • personal and corporate reputation

32. Concluding Thoughts • Compliance may be regarded a business cost, but it has a valuable market role and public interest purpose as well • Quality Regulatory Environment is the aim • progress has been achieved • conditions for enterprise development are positive • risks of unscrupulous conduct being minimised • continuing support of all parties is necessary • outlook is favourable for further improvements

33. Thank You for Your Attention www. odce.ie