FRA Issues Governance Rules for Fin

The Financial Regulatory Authority (“FRA”) recently published on its website its board of directors’ decision No. 164 of 2018 with governance rules for licensed financial leasing and factoring companies (the “Decision”).[1] The rules contained in the Decision are mandatory as a condition for the continuation of licensing, and companies are given six months to comply, which start running from the date of the Decision’s coming into effect following publication in the Egyptian Gazette, which is yet to take place. The governance rules in the Decision refer to internal governance policies and systems, the board of directors and its sub-committees, the auditors, conflict of interest and disclosure and transparency rules.

Background

Corporate governance is the set of rules, systems and processes that guarantee a balance between the interests of a company's shareholders, management and other stakeholders. It is a key element in improving economic efficiency, growth and enhancing investor confidence in a given economy. While many corporate governance guides are of a voluntary nature, – meaning companies elect whether or not to adhere to their rules – mandatory corporate governance systems are put in place where there is a public interest in assuring the protection of rights and checks and balances within the structure of the company and how it operates. In Egypt, the Egyptian Institute of Directors, which operates under the FRA, issued the first version of the Egyptian Guidelines on Corporate Governance in 2005, the most recent issue of which (Version 3) was last updated in August 2016.[2] Although generally non-mandatory, the Guidelines remain important as they most often act as the basis for FRA rules and regulations. Stricter corporate governance and compliance rules are applied to companies depending on their type of activity and whether or not they are listed. FRA thus issues a set of mandatory corporate governance regulations for listed companies and for the non-banking financial activities it supervises. These corporate governance principles can be divided into six groups: 1) effective corporate governance framework, 2) the rights of shareholders, 3) the equitable treatment of shareholders, 4) the role of stakeholders in corporate governance, 5) disclosure and transparency, and 6) the responsibilities of the board.

Summary of Governance Rules for Leasing and Factoring Companies

• Internal Governance Policy and Systems

The Decision mandates that the company puts in place an internal governance policy that has rules for issues such as risk management, confidentiality and accountability. An internal compliance officer must be appointed by the board of directors to ensure the application of these internal policies, in addition to governing laws and regulations. In addition, the company must have an internal governance department to monitor the implementation of governance procedures and ensure its efficacy.

• Board of Directors

It is up to the company to decide a suitable number of board members given that the majority be non-executives, and that at least two are independent. Cumulative voting must be provided for in the company’s bylaws as the method for electing board members. An independent director may not serve on the board in excess of two consecutive terms, and the term may not exceed six years, or they are considered a non-executive member. Companies must also disclose to FRA the end of a board member’s service on the board and its reasons. A person may not combine the positions of chairman of the board and managing director except in emergency cases which must be disclosed to the FRA, and a board member may not be on the board of two financial leasing/factoring companies at the same time. In addition, the company has to satisfy board conditions that apply to non-banking financial companies in general, and listed companies must adhere to rules that are specific to them.

• Committees

The Decision sets out three committees that the board must form as a minimum. These are an audit committee, a risk committee, and a governance committee. It also lays out the tasks that must be assigned to these committees as a minimum. The general assembly approves the manner of the election of any such committees, their working methods, terms, and remuneration. These sub-committees must report periodically to the board, and they must convene at least once every three months. The audit committee must be comprised of at least three non-executive or independent members, at least one of whom must be a financial/accounting expert. The risk committee must be formed of at least three members, with at least one independent board member and a majority of non-executives. The Decision only stipulates that the governance committee be formed of non-executive and independent members with no specification of numbers.

• Conflict of Interests

Financial leasing and factoring companies cannot enter into transactions or offer financing or services to board members, managers, or their close relatives. A board member cannot have a direct or indirect interest in any of the company’s contracts or operations, nor can they compete with the company’s business except if such is authorized by the general assembly.

• Disclosure

Material occurrences must be disclosed to the shareholders and FRA. Board of directors must include in their annual report that is made available to the shareholders at least three days prior to the convention of the annual general assembly meeting the data stipulated in the executive regulations of the Companies Law. Said data includes the company’s general standing, outcome and future operations, projected profits, main activity, asset valuation, any material changes, losses, employment and wages, stocks, payments and benefits made to board members, any transactions with conflict of interests etc. The company must also disclose to FRA the following:

1. Shareholders structure, board composition, and top management.
2. A commercial register extract, with notification of any amendments as soon as they occur.
3. Ordinary and extra-ordinary general assembly meeting minutes within 10 days from their date.
4. Annual financial statements, board of directors’ report, and auditor’s report within three months from the end of the fiscal year and at least 21 days prior to the date of the annual general assembly.
5. Quarterly financial statements along with a limited audit within 45 days at the most from the end of the quarter.

• Auditor

An independent auditor or more must be appointed annually from FRA’s certified auditors’ register upon recommendation from the audit committee. The auditor’s appointment must not exceed six consecutive years, after which they must be replaced by another independent auditor and may not be appointed again before the lapse of three years.   [1] FRA Board of Directors Decision No. 164/2018 with governance rules for licensed financial leasing and factoring companies, available through this link (in Arabic). [2] Egyptian Institute of Directors, Egyptian Financial Supervisory Authority, “The Egyptian Guidelines on Corporate Governance”, Version 3, August 2016, available through this link (in Arabic).