How a Governance Committee adds value to your business
What should a company board understand about the value that a Governance Committee can add?
Introduction
Boards, Responsible Managers and Compliance Managers of Australian Financial Services Licence (‘AFSL’) and Australian Credit Licence (‘ACL’) holders should be proactive in overseeing the organisation’s regulatory obligations and corporate governance.
A critical component of this oversight can be the establishment and operation of a Compliance or Governance Committee (‘Governance Committee’). The formation of a Governance Committee positively reflects the board’s commitment to good governance and actively shows to regulators and clients, a culture of compliance ‘from the top’.
Background
As covered in a recent post, there are subtle differences between a formal Compliance Committee and a Governance Committee. A Compliance Committee is defined under s601JB of the Corporations Act and is required under the Corporations Act to provide additional oversight to registered managed investment schemes.
A managed investment scheme is an Australian term for what is known in other jurisdictions as a pooled investment. Registered schemes usually provide investment opportunities to retail investors, so the formal compliance committee adds an additional layer of protection for ‘mum and dad’ type investors.
Unlike the oversight of registered schemes, AFSL and ACL holders are not legally required to have a Governance Committee. However, ASIC expects licensees to have documented compliance measures in place and to regularly review their effectiveness, and a Governance Committee is an effective method for documenting the compliance steps taken by the board of an AFSL and ACL holder.
In this post, the focus will be on how a Governance Committee can add value to the board of an AFSL or ACL holder that does require a formally constituted compliance committee.
AFSL and ACL Holders: Why establish a Governance Committee?
Committees that oversee AFSL or ACL holders, such as a well-structured Governance Committee, are broadly expected by regulators such as the Australian Securities and Investments Commission (‘ASIC’) to form part of a licensee’s documented governance and risk management framework.
From experience, one of the key roles a Governance Committee can play is to proactively identify governance, compliance, risk or commercial issues early, and before the issue becomes more serious for the board of the licensee to manage. The Governance Committee can act as an ‘early warning system’.
Where established, the Governance Committee can play an essential role in reviewing, monitoring and supporting compliance with regulatory obligations, licence conditions, and updating internal policies and procedures as laws invariably change.
For example, AFSL and ACL holders must:
Provide financial or credit services efficiently, honestly, and fairly;
Comply with their licence conditions; and
Meet obligations under financial services or credit legislation.
A Governance Committee can support these types of obligations by:
Meeting regularly and reporting to the board on ongoing compliance status, recording what is working well and to identify any potential areas for improvement;
Monitoring changes in the regulatory environment, as changes to laws, policies and regulations is constantly evolving;
Overseeing implementation and effectiveness of internal compliance measures and regular review and updating of the suite of policy documents where required – best practice would suggest annual reviews of compliance measures and policy documents; and
Reviewing risk, breach, complaint, training and conflict registers.
So, in summary, while not legally required, a Governance Committee can give a board comfort that the licence holder is a taking a proactive approach to have documented compliance measures in place, as ASIC expects.
So, what does ASIC expect?
ASIC expects that licensees document, implement, and monitor their ongoing compliance measures. In particular, licensees should:
Foster a culture of compliance across the business – led by the board of the AFSL or ACL holder;
Regularly review the effectiveness of the licensee’s compliance processes; and
Always take prompt and effective action on any recorded breaches and/or incidents.
Governance Committees are a practical mechanism to meet ASIC’s expectations. If operating effectively, the Governance Committee can provide a forum for oversight, feedback, reporting, and escalation of issues to the board when required. The Governance Committee can also help demonstrate to ASIC that the board is taking active responsibility for compliance obligations as required, for example under ASIC Regulatory Guide 104.
How is a Governance Committee structured?
There are various ways a Governance Committee can be structured, and it is usually formed based on the preferences of the company founder(s), the board, internal legal counsel, external legal advisors or a combination of these key company stakeholders. A Governance Committee is typically a standing committee of the board, or a sub-committee of the company’s compliance and risk function.
Where a Governance Committee exists as part of the company’s documented compliance function, the Governance Committee should have a Committee Charter outlining its objectives, scope, membership, and quorum requirements.
The composition of a Governance Committee can also vary depending on the licensee’s size and complexity. Commonly, it includes:
An external independent chair who may also serve as an independent external compliance advisor;
A Responsible Manager;
A Director (particularly if the Governance Committee is a board-level subcommittee); or
An internal representatives from the legal, audit or risk teams.
The Compliance Officer or Manager (‘CO’) will generally attend Governance Committee meetings to present compliance reports and updates however, the CO is not generally a member of the committee.
Minutes of the Governance Meeting should always be prepared and retained, with copies provided to the board for board review and deliberation, regardless of whether the committee is a formal board subcommittee. Ultimately, the board of the AFSL or ACL is responsible to the regulator for ongoing compliance with the law.
Often, the meeting minutes will also be required by the auditor of the AFSL holder to aid in the annual AFSL audit. The annual audit report, which is prepared by an external auditor, provides an opinion on both the financial statements and the meeting of relevant AFSL compliance documentation.
Conclusion
Effective Governance Committees can form a vital part of a licensee’s governance and regulatory risk management function. For AFSL and ACL holders, they can be an effective governance tool to monitor compliance with general licence obligations, act as an early warning system for emerging issues, raising awareness of constantly evolving laws, and providing support to internal risk management and controls.
A well run Governance Committee enhances transparency, identifies commercial issues in the business before they become critical, promotes accountability to the operating business and its managers, and supports the board and Responsible Managers in maintaining the integrity of the financial services and/or credit licence and the products issued under the relevant licence.
If your board has not yet implemented a Governance Committee, or if your existing committee lacks clear structure, independence or defined scope, now could be a great time for your board to review its future governance requirements. Establishing or strengthening a Governance Committee is not just about ‘Compliance for compliance’s’ sake. An effective and well led Governance Committee should help protect your licence, clients, reputation and business.
If you would like support in designing, reviewing or enhancing your Governance Committee framework, please contact me to discuss how I can help you align with ASIC’s expectations and foster a culture of institution grade compliance and governance in your business.