Issues

1
Issues Options 2009

• Robert Wharton
• Corporate Financial Services
• 4 March 2009

Bristol ? Bath ? Swindon ? London
2
Corporate Governance

• We were dazzled by supposedly brilliant
  bankers.
• Lord Turner of FSA BBC1 15 February 2009
• The risk was quantified as very small. It
  turned out to be very big
• Sir Fred Goodwin RBS 10 February 2009
• We failed to consider some of the extreme
  scenarios that have happened
• Lord Stevenson HBOS 10 February 2009
• _________________________________________________
• We look for poorly managed businesses with some
  form of challenge for example lack of finance,
  tax or legal problems or changes in the market
  place
• Jon Moulton Alchemy Partners
• In todays regulatory environment its virtually
  
• impossible to violate rules. But its impossible
  for
• a violation to go undetected
• Bernard Mardoff from The Independent 1 January
  2009

3
Corporate Collapses
Can you spot 3 common denominators in these
corporate collapses?
4
Where Are We?
Feb 2008 AMI/AFS Corporate Governance for
Mutual Insurers Jun 2008 FSA report good and
poor practice 9 Feb 2009 Treasury announce David
Walker to chair review into corporate
governance in banking sector (Autumn
2009) 18 Mar 2009 FSA to report on Review of
Regulation
5
Where Are We?
Announcing the review, the Chancellor said it was
clear that corporate governance should have
been far more effective in holding bank
executives to account while Lord Mandelson
promised that the review would ensure that UK
banks had competent, well-run and transparent
boards which are engaged with their shareholders
and capable of understanding and managing risk
effectively
6
Where Are We?

• Terms of Reference of Review
• Effectiveness of risk management
• Balance of skills, experience, independence on
  board
• Performance of audit, risk, remuneration and
  nomination committees
• Role of institutional shareholders in engaging
  with and monitoring boards

7
What About Friendly Societies' Governance?
All in the Annotated Code and Guide Comply or
explain The reality at end of 2008 77 have a
separate CG report, 18 amalgamated 65 state
compliance with code 57 not have the words set
out in Code 8.2 61 feel they do not comply
8
Practical Things To Do
Applies to all directors/committees of management

• Is a committee of management still correct
  structure for you?
• Are all directors approved for fixed periods of
  time (in particular NEDs)?
• Assess suitability for the job/evaluation
• Pay/reward/commitment
• Training on the job

9
Practical Things To Do

• NEDs
• Responsibility of Chairman (9 years to annual
  re-election)
• Degree of challenge to Board
• Understanding of controls/Societys business
• Able to review infrastructure/understand business
  model
• Member relations strategy

10
Practical Things To Do

• How?
• Professional independent assessors
• Qualifications (check/test)
• In house training
• Use outside advisers added value/arms length
• Review annually effectiveness of internal controls

11
Practical Things To Do

• Is there a real issue if yes explain
• Embedded governance effective not part
  compliance
• Audit committee effectiveness
• Limit the Board size large 9 small 5
• Regular meetings/committees
• Review the people

12
Practical Things To Do

• those firms which have the best corporate
  governance systems, overseen by those who are not
  afraid to ask the awkward questions, are those
  most likely to ride out difficult markets
  successfully.
• Sheila Nicoll
• Director of the FSA Retail Firms Division

13
FSA Review of ACC Compliance

• Non-compliance areas
• None/limited number of Executives on Board
• Non-Execs done longer than 9 years
• No Senior Independent Directors
• Annual performance evaluation not done
• Non Execs have not met without Chairman

14
Board Meetings Demonstrating Governance
No direct duties out of Friendly Societies Act
Companies Act 2006
1 Oct 2007 Duty to act within powers
(171) Duty to promote success of the company
(172) Duty to exercise independent judgement
(173) Duty to exercise reasonable skill and
care (174) 1 Oct 2008 Duty to avoid conflicts of
interest (175) Duty not to accept benefits from
third parties (176) Duty to disclose an
interest in proposed transaction (177) Declare
interest in existing transaction (182)
15
Board Meetings Demonstrating Compliance
A director must act in the way he considers, in
good faith, would be most likely to promote the
success of the company for the benefit of its
members as a whole, and in doing so have regard
(amongst other matters) to-

• the likely consequences of any decision in the
  long term
• the interests of the companys employees
• the need to foster the companys business
  relationships with suppliers, customers and
  others
• the impact of the companys operations on the
  community and the environment
• the desirability of the company maintaining a
  reputation for high standards of business
  conduct and
• the need to act fairly as between members of the
  company

16
Risk Management

• Strategic/Financial/Operational/Compliance
• How managed/measured against risk appetite
• Balance of top down to bottom up
• Culture/training
• Board demonstrate commitment to risk management
• Think the unthinkable
• Think the impossible

17

• Governments worst national fear

18
Exercise

• Only 60 of staff available
• Systems for isolation of parts of office/cross
  infection/hygiene
• Disaster recovery site not available
• One of your servers is on the blink no repair
  for 3 weeks
• Postal service reduced to 2 days per week
• CEO has died
• Mobile phone system closed down
• ARROW visit due in 3 weeks
• Bank has limited withdrawal of funds

19
What Are The Options For The Future?

• Acquire and expand
• Continue as is
• Close to new business and run off
• Amalgamate with another society
• Transfer all or part of the book of business
• Convert to an insurance company
• FSA compulsory transfer of engagements Sec 90
  Friendly Societies Act 1992

20
Amalgamation under Friendly Societies Act 1992
Sec 85

• Steps needed
• Form a new incorporated society as successor
• Need new rules to be agreed by each society
• Provide info to all members
• financial position of each society
• Details of consideration payments
• Interests of members of committee of
  management/offices
• Any other FSA required document (SUP 18.4.3
  18.4.6)
• All preapproved by FSA
• Special resolution of all members of both to
  approve
• On transfer date all property transfers under Act
• Old societies are dissolved

21
Transfer of Engagementsunder Friendly Societies
Act 1992 Sec 86

• May transfer to
• Industrial and provident society
• A company
• An insurance company
• A person or body of persons
• How?
• Info to members (as previous slide)
• Special resolution of members
• Special resolution of affected members (if a part
  transfer only)
• Transfer documentation
• FSA approval (SUP 18.4.6)
• Transferee society
• Actuarys report (on assets over liabilities and
  solvency
• margin)
• Independent actuarys report (on long term
  business)
• Transferee society is dissolved

22
Conversion into a Company

• Info to members as per amalgamation slide
• Draft memorandum and articles of newco
• Obtain FSA approval
• Conversion terms
• Transfer document
• Special resolution of members

Allows for distribution of funds to
members Allows for different shareholder rights
23
Other Points To Note

• FSA discretion
• To allow a transfer by Board vote alone by
  transferee (Sec 86.3)
• Modify a transfer on application from 10 of
  members (Sec 89)
• Direct a transfer where society unable to manage
  affairs (Sec 90)
• Check
• Permissions
• Rules
• Status of transferor

24
Part VII of FiSMA

• Applies to banking and insurance transfers
• Specifically not to transfers of engagements by
  (not to) F.S.
• No need for customer/member contents
• But tax issues
• Scheme of Transfer
• Actuarial and independent actuarial reports
• Member information
• 2 court hearings
• FSA significant role

25
The Anatomy of a Transfer (Part VII Scheme
Method) Table 1
Actuarial Reports
Confidentiality Agree
Preliminary discussions negotiations
General Financial Info
Personality Issues
Timing
Exclusivity
Agreement of the Heads of Terms
Commercial Terms
Subject to Contract
Tax Issues
Regulatory Issues
Due Diligence Investigations Data Room
Financial/Accounts Responsibility
Actuaries x 2 Responsibility
Legal Regulatory
Warranties Indemnities
Commercial Terms
Negotiation of Scheme
Regulatory issues
Property issues
TUPE/Employee consultation
Transfer of contracts
FSA/Board approval leads to Preliminary Court
Hearing
Approvals Announcements
Data protection
See Table 2 for detailed timetable
Notices to members Press announcements
Main Court hearing
Registration/transfer of assets
26
The Anatomy of a Transfer (Part VII Scheme
Method)Table 2

• Agree terms of transfer of business, any novation
  agreements
• Finalise wording of scheme, orders, explanatory
  statement, witness statements, notices and obtain
  any letters of support
• Complete Financial Services Authority (FSA)
  unofficial review
• Reserve court time for hearings
• FSA approval of notice
• Execute all agreements to be effective on
  effective date
• File claim form and first witness statements with
  court
• Serve copy of all documents on FSA
• Reserve space in proposed publications for
  notices
• File second witness statement with court
• Send copy to FSA
• Preliminary hearing
• Preliminary order made
• Inform FSA of order being made
• Send notices for publication

Process can start when completed
T-36
T-35
Before or at Prelim hearing
T-28 (Monday or Tuesday)
T-25 (Friday)
Before circa T-5
T (Monday or Tuesday)
Before T10
Typically within 6 months of order, but often
very soon after order
27
Mutual Societies Act 2007

• Building Societies (Funding) and Mutual Societies
  (Transfers) Act 2007
• Sec 3 Treasury may modify a transfer of mutual
  (whether or not of same type)
• Sep 2008 Consultation by HM Treasury
• Jan 2009 Response by HM Treasury
• 16 Jan 2009 Sec 3 brought into force for
  building societies only
• 23 Jan 2009 Treasury to publish later order for
  Industrial Provident Societies

But no intention to publish (ever?) for
Friendly Societies
28
Payment Services Directive

• What are payment services?
• Processing, clearing or settling payment
  transactions (electronically and in course of a
  business)
• Why?
• European integration
• Maximum times for money transfers
• Capitalisation and regulation of Payment
  Institutions

29
Payment Services Directive

• Who are Payment Institutions?
• banks/building societies
• emoney issuers/money transfer operators
• non bank credit card issuers/ATM operators
• mobile phone operators/bill payment services
• When?
• 1 May 2009 applications to FSA
• 1 Nov 2009 commencement

30
Payment Services Directive

• Why You?
• Affinity group schemes with Payment Institutions
• Flexible savings accounts?
• Review client facing documentation for money
  transfer provisions
• Next
• Final guidance end February 2009

31
Data Protection

• Losses of information
• Password protect/encrypt information and
  equipment
• Electronic communication with customers/members
• Fraudulent claims/money laundering procedures
• Theft by employees

32
Contact

• Robert Wharton
• Tel [phone] or 020 7766 5600
• Email rwharton_at_ttuk.com

This presentation does not constitute legal
advice.