The Chartered Institute of Internal Auditors (IIA) has published a new draft code of conduct designed to overhaul the management of risk and strengthen governance in the UK's financial services sector in the wake of the financial crisis and scandals such as the rigging of the Libor rate.

It is the first time that sector-specific guidance has been produced for the UK's banks and other financial institutions, and follows similar recommendations issued by the Basel Committee and the US Federal Reserve Bank.

The draft code was developed by a committee chaired by Roger Marshall, audit committee chair at several companies including insurer Old Mutual, with representation and observers from leading banks, insurers, the FSA and the Bank of England.

The code says internal audit's primary role must be clearly stated as helping to protect the assets, reputation and sustainability of their organisation, while the scope of internal audit should be unlimited and internal auditors should not be barred from assessing the management of any risk in any part of the business.

Internal audit should assess whether the organisation's processes and actions are in line with its values, ethics, risk appetite and policies. To ensure its independence and authority the primary reporting line of internal audit should be to the chairman of the board of directors, not to the chief executive. The chief internal auditor should be at a senior enough level within the organisation (executive committee or equivalent) to have sufficient standing and authority to challenge the executive.

The code recommends that internal audit should not be part of, nor responsible for, the risk management, compliance or finance function in an organisation and should be adequately resourced, skilled and quality assured.

The IIA, which was asked to produce a new code by the Financial Services Authority (FSA), says its recommendations will provide UK financial services firms with a sector-specific benchmark against which boards and regulators can assess the effectiveness of their internal audit functions.

Roger Marshall said: 'Our aim is to encourage internal auditors to obtain a consistently wide view across the range of risks within their organisations and exert greater influence in ensuring that those risks are managed throughout the financial services sector. This will help clarify internal audit's role in relation to, for example, the quality of information on which boards base their decisions, or whether the risks associated with key decisions such as on takeovers, are properly managed.'

The draft code is open for comment until 12 April 2013. All responses document should be sent to Chris Spedding, secretary to the committee, HERE.