Brits Rap Insurers’ Controls; Japan Woes; More

The Financial Services Authority has fined a British subsidiary of New York-based American International Group $1 million for failing to operate effective controls in its call centers. The regulator accompanied the fine with a warning to all insurance companies, telling them to make sure they keep on top of call center risks.

The FSA said that London-based AIG subsidiary UNAT had a lack of effective control and oversight over its call center operations. The company used nine call centers to sell general insurance products that AIG underwrote. The regulator reduced its fine from $1.2 million because the company cooperated and settled early.

The FSA found the company had good controls on paper, but they were not followed in practice. For example, UNAT had procedures in place to check whether the call centers had the necessary FSA authorization before they started trading, but the call centers started selling to consumers before a due diligence review of controls and procedures had been completed. The FSA found that the company still hadn’t finished the review of one call center more than eight months after it had begun selling to customers.

In another case, a UNAT call center sold insurance without FSA authorization. The firm’s compliance team raised concerns, but UNAT failed to fix the problems and the center sold insurance for six months without authorization. It sold around 4,000 policies to consumers in that time.

Cole

“Selling general insurance products to consumers through call centers involves greater risk,” Margaret Cole, director of enforcement at the FSA, said in a statement. “UNAT was aware of the higher risk but failed to carry out proper checks on the call centers it used.”

The company’s lack of effective control meant there was an “unacceptable risk” that customers who bought policies from the call centers would not be treated fairly.

The call centers stopped selling general insurance in March 2007, pending the outcome of the FSA’s investigation. The FSA said that UNAT had improved its systems and controls and worked to ensure that no customer had suffered loss.

FRC Tells Boards to Look Beyond Big 4

The U.K. Financial Reporting Council has published draft guidance aimed at helping public companies decide whether to appoint more than one external audit firm. The move is part of its efforts to increase competition in the auditing market for large public companies, which is dominated by the Big 4 accounting firms.

The guidance examines some of the questions a board should consider if it is thinking about sharing audit work between two or more firms. It also sets out some of the circumstances where this might be a good idea. For example, a company might want to appoint an extra firm to audit an overseas subsidiary.

The FRC paper argues that it “may be possible to achieve a high-quality and cost effective audit” by using auditing firms from more than one network. One firm would audit the parent company and the group’s consolidated financial statements; one or more other firms, coordinating with the group auditor, would do other audit work. Such arrangements are common in other European countries, but rare in Britain.

Currently, large U.K. companies tend to appoint a Big 4 firm by default; the FRC wants to get them at least to consider alternatives. It recently published separate proposed changes to the Combined Code on Corporate Governance that would make boards more accountable on that point. If adopted, boards would have to explain to shareholders why they decided to appoint or reappoint a particular auditing firm.

The regulator is also reviewing changes to ownership rules that make it difficult for accounting firms to bring in the investment capital they would need to grow quickly. The FRC has conceded that, under the existing rules, it would take years of investment before any firm outside the Big 4 could make a “meaningful increase” to choice.

Cleary

Grant Thornton, one of the firms that would like to compete alongside the Big 4, welcomed the latest proposals. But Michael Cleary, the firm’s U.K. chief executive, said in a statement: “There is still a lot to be done by firms, regulators, and companies if there is to be substantial change in the larger public interest market. The overall shape of the market has not changed significantly, although most participants believe that a reliance on just four major audit firms is unsustainable in the longer term.”

In the past 15 months, Grant Thornton has increased its number of FTSE 250 audits from one to five.

Japanese Corporate Governance “Failing”

The Asian Corporate Governance Association has published a white paper urging Japanese public companies to improve their corporate governance standards or risk further undermining the confidence of foreign investors.

The “Japan White Paper,” as the document is called, argues that the system of governance in most Japanese listed companies “fails to meet the needs of stakeholders or the nation.” The ACGA says the paper represents the first time that global institutional investors have worked together to raise concerns about corporate governance issues in Japan. The document has the support of leading global pension funds and fund mangers, including Aberdeen Asset Management in Singapore; the California Public Employees’ Retirement System (CalPERS); and F&C Asset Management in the United Kingdom.

The paper argues that Japanese governance practices are failing for three reasons: They do not provide sufficient supervision of corporate strategy; they “protect management from the discipline of the market” by making takeovers difficult; and they limit the returns on equity investment.

In addition, the paper makes recommendations on six issues. These include removing poison pill takeover defenses, introducing more fairness and transparency on shareholder votes, and bolstering independent supervision of management. “It is still common for listed companies in Japan to be run as if management, not shareholders, were the owners,” the ACGA said.

Japan is often lauded for its version of “stakeholder capitalism,” where the business balances the interests of shareholders with other groups, such as employees and the wider community. But this view “is outdated and fundamentally inaccurate,” the paper said.

“The rights of shareholders as owners of listed companies need to be better recognized and protected,” it added. “The interests of shareholders and other stakeholders can best be aligned through an enlightened adherence to the rules and conventions of international capital markets.”

Guidance on Anticorruption Standards

Transparency International, the Berlin-based anticorruption organization, has published a working paper aimed at helping companies comply with the Organization for Economic Cooperation and Development’s Guidelines for Multinational Enterprises. The guidelines are a set of social, labor, environmental, and anticorruption standards for global companies.

The working paper explains the guidelines and how they can be used to fight corruption in the private sector. It contains brief examples of recent cases where civil society groups have filed complaints against companies for alleged bribery and other violations of the standards.

For more information on the Transparency International working paper and the full guidance from the Organization for Economic Cooperation and Development, please see the box at right.