A summary of recent global regulatory developments, including what to expect from the forthcoming white paper for the reform of UK corporate governance and audit oversight, the Climate Biennial Exploratory Scenario (CBES) stress test to be launched in June 2021 and the Danish corporate governance recommendations introduced on 1 January 2021.
Directors and officers and their insurers await detail of UK audit reforms
The government is set to publish a white paper with proposals for the reform of UK corporate governance and audit oversight. If press reports are correct, the proposed changes (including a new regulator, the Audit Reporting and Governance Authority, to replace the Financial Reporting Council) will have the potential to dramatically impact the exposure of D&Os and their insurers to new risks relating to the accuracy of a company’s financial statements.
In terms of the impact on D&O insurance, the devil will be in the detail. If spurious claims or investigations are brought on the basis of legislative changes in this area, the cost of defending such actions could be very significant, especially where a D&O is seeking to avoid a personal exposure for a fine falling outside the scope of cover.
Climate-related stress testing, disclosure obligations and the promotion of sustainability
The CBES stress test was announced by the PRA in its “Dear CEO letter of 1 July 2020” requesting that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021.
As opposed to the usual financial stress testing, the CBES will focus on the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient, identify gaps in firms’ data and risk management processes rather than assessing their capital requirements.
Better disclosure by companies will allow insurers to calculate their risk exposure more accurately and in turn, insurers will be able to price the more risky assets differently. This will support the increase of net zero investors and the direction of travel for impact investing, and lead overall to more sustainability in the economy.
Good corporate governance
On 1 January 2021, new Danish corporate governance recommendations came into force. The recommendations only apply to Danish listed companies, but Danish owner-managed companies can also benefit from the recommendations.
The recommendations are about predictability, transparency and propriety. The recommendations regulate issues not already regulated by law and thus supplement the Companies Act and the Danish Financial Services Act. This is especially true in areas such as management, recruitment of board members and the company’s social responsibility.
Good corporate governance is ultimately about risk management. If the listed company does not live up to the expectations of customers, shareholders and civil society, it can lead to significant losses. It therefore comes as a surprise that the recommendations do not mention one of the greatest contemporary threats to any modern company – the risk of an IT security breach. This may, of course, be due to the fact that recommendations on cyber security for boards exist already.
Contact: Medea Plesner Petersen
Related item: Good Corporate Governance