By Natasha Gunaratne
Finance companies are a bit concerned about proposed provisions in a Central Bank (CB) draft regulation on corporate governance for registered finance companies which is based on the governance code for banks. Chairman of the Finance Houses Association of Sri Lanka Shirley Perera told The Sunday Times FT that they are in the process of studying the draft and submitting their comments.

The CB this week released what it calls an ‘exposure’ draft on corporate governance for registered finance companies to solicit comments, views and suggestions from the stakeholders of registered finance companies and the interested public.

The 2007 Committee on Public Enterprises (COPE) Report highlighted a string of failed finance companies that have systematically put the CB into massive debt. According to the COPE Report, the CB has failed to recover a staggering Rs.7 billion, which includes the principal amount and the accumulated interest, granted to various bankrupt financial companies.

The CB has given the directors of finance companies until August 15 to respond to the proposed draft. Mr Perera said some directors are concerned with certain provisions the CB has included, primarily having to do with the rule that directors will not be able to continue serving on the board after the age of 70 and that the CB has restricted a director to serving on the board for no more than 9 years. He also said finance companies are concerned that the CB has restricted the number of companies that directors can serve on the board to 20. "These are the types of issues they (directors) are concerned with and I am awaiting their response," he said.

Mr Perera said companies were happy with the interim provision that three years will be given to comply with the corporate governance rules once they come into effect from January 1, 2009. He added that the CB and directors of the finance companies will be meeting for discussions some time over the coming week.

The CB said the draft regulation is organized under 10 subheadings dealing with the responsibilities of the board of directors, meetings of the board, composition of the board, criteria to assess the fitness and propriety of directors, management functions delegated by the board, the chairman and the chief executive officer, board appointed committees, related party transactions, disclosures and transitional provisions.

Provisions
Some of the responsibilities of the Board in the draft states that the board shall strengthen the safety and soundness of the finance company through various measures such as approving the overall business strategy of the finance company including the overall risk policy and risk management procedures and mechanisms with measurable goals for at least the next three years in addition to identifying risk and ensuring implementation of appropriate systems to manage the risk prudently.

There are also provisions included in the draft to deal with conflicts of interest on the part of directors.
It lays out the criteria to assess the fitness and propriety of directors. It proposes that a person over the age of 70 years shall not serve as a director of a finance company. Furthermore, a director shall not hold office as a director or any other equivalent position in more than 20 companies/societies/bodies corporate, inclusive of subsidies or associate companies of the finance company.

The roles of chairman and chief executive officer shall be separated and shall not be performed by one and the same person. The draft stipulates that the board shall disclose in its corporate governance report, which shall be an integral part of its Annual Report, the name of the chairman and the chief executive officer and the nature of any relationship [including financial, business, family or other material/relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the board.

The draft states that an integrated risk management committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the finance company on a monthly basis through appropriate risk indicators and management informatio. Further, the committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset-liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the committee.

The draft stipulates that the risk management committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the finance company's policies and regulatory and supervisory requirements.
The committee is expected to meet at least quarterly to assess all aspects of risk management including updated business continuity plans. Further, the committee shall take appropriate actions against the officers responsible for failure to identify specific risk and take prompt correction actions as recommended by the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.

In the interest of disclosure, the draft states that the board shall ensure that annual audited financial statements and periodical financial statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards and that such statements are published in the newspapers in an abridged form in Sinhala, Tamil and English.

Some of the dsclosures to be made in the Annual Report include a statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements; a statement of the regulatory and supervisory concerns on lapses in the finance company's risk management or non compliance with the Finance Companies Act No. 78 of 1988, and rules and directions that have been communicated by the Director of the Department of Supervision of Non-Bank Financial Institutions as well as measures taken by the company to address such concerns.