Weeks after the panic surrounding the Sakvithi scandal, new directions have been given by the Monetary Board of the Central Bank (CB) to finance companies on corporate governance with effect from January 1, 2009 where the Chairman and CEO posts must be held by two separate individuals.
Direction No. 3 will apply to every finance company registered in terms of Section 2 of the Finance Companies Act No. 78 of 1988. The new rules refers to the responsibilities of the Board of Directors having to strengthen the safety and soundness of finance companies through several measures such as identifying risks and ensuring implementation of appropriate systems to manage the risks prudently, approving a policy of communication with all stakeholders including depositors, creditors, shareholders and borrowers and reviewing the adequacy and integrity of the company's internal control systems and management of information systems. The Board must also ensure that there is appropriate oversight of the affairs of the finance company by key management personnel that is consistent with the company's policy as well as exercising due diligence in the hiring and oversight of external auditors.
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| After the panic surrounding the Sakvithi scandal, new directions have been given by the Monetary Board of the Central Bank (CB) to finance companies on corporate governance. |
According to the Direction, the roles of the Chairman and CEO's shall be separated and shall not be performed by the one and the same person after three years commencing from 1 January 2009. The directions further state that the Chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board. The CEO shall function as the apex executive-in-charge of the day to day management of the company's operations and business.
Every finance company shall have at least two Board committees. The committees shall report directly to the Board and the Board shall present a report on the performance, duties and function of each committee at the annual general meeting of the company.
The Direction states that the Chairman of the Audit Committee shall be a non-executive director who possesses qualification and experience in accountancy and/or audit. Moreover, the committee shall review and monitor the external auditor's independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices. 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. Moreover, the Direction states that the 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 Audit Committee shall also take appropriate actions against the officers responsible for failure to identify specific risk and take prompt corrective 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 CB.
The Direction states that the Board has to ensure that annual audited financial statements and periodical finance statements are prepared and published in accordance with the formats prescribed by the regulatory and supervisory authorities and applicable accounting standards and that such statements are published in the newspapers in an abridged form in Sinhala, Tamil and English.
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