What leaders think
Posted on

Do Regulators Dominate Board and Board Committee Agendas in UK Financial Services

Hoggett Bowers Articles main image (1)

We were delighted to host a prominent group of Board and executive members at our recent breakfast roundtable to discuss ‘Do the Regulators dominate Board and Board Committee agendas in UK Financial Services’.

This was brought to life through our outstanding speaker:

Martin Stewart: became a Regulator in 2010, joining, the then, FSA to lead the post financial crisis supervision of UK Banks and Building Societies, and to be part of the team that designed the UK’s twin peaks regulatory approach and establish the PRA in 2013. He is now a visiting professor at the London Institute of Banking and Finance, Chair of Danske Bank (UK), and Chair of the Board Risk Committee at Coventry Building Society. He is also a board advisor to Banks, Regulators and Governments on risk and regulatory matters.

Martin opened the discussion with three controversial statements:

Regulators do dominate Board agendas. Pre-financial crisis Regulators didn’t have the level of dominance that exists post 2008. Regulators are not looking to rebalance, this will only come with Government intervention. Working with Regulators around the world, this is not a UK specific dilemma, there are similar reactions and dynamics to the financial crisis in the US, Australia, and across Europe.

How did Boards and Regulators get things so wrong pre the Financial Crisis. Were Boards blind to the risks that led to the Financial Crisis? When joining the Regulator, he was struck by the fact that nobody trains people to become Board members. How do individuals know if they are doing a good job, or not? He found the standard of Boards to be mixed, some firms had fantastic people in place, equally, some had poor and weak individuals at their top table.

Why were Boards so poor? There was a multitude of reasons, but the most common factor was a poor Chairman. The banks that failed in the UK during the financial crisis had under performing Chairs. Everything falls into place when a firm has a strong Chair place, able to manage senior individuals, not least, the CEO with a tendency to possess a distinct ego.

Regulators could not have ignored the financial crisis, the bottom quartile of insurers and banks were that poor, action had to be taken. Today, the Regulators will provide data to support the fact that improvements have been made, particularly in the bottom quartile of firms. However, it’s a selective narrative, when analysing the top performing firms pre-financial crisis, they do not appear to be performing as well, today. The Regulators are dominating the agenda. This reduces the peripheral vision if you are running a complex financial institution, limiting your ability to anticipate the risks that are likely to catch you out.

Boards in other industries can be far more risk astute as opposed to regulatory risk astute. Striking the right balance is challenging. The  Chair should provide the confidence to use the peripheral vision of the Board, ensuring they do not feel inhibited by the Regulators.

The Senior Managers and Certification Regime (SMCR) does hem firms in. SMCR was ‘the Christmas present’ the Regulators never wanted, resulting from the aftermath of the financial crisis, when bankers were not taking any accountability for what happened. The theory of SMCR was sound, but the implementation was flawed. One of the key consequences of SMCR is the negative perception of FS from people outside the industry and their reluctance to join a FS Board due to the level of personal risk. This has reduced the gene pool of brilliant people on banks and insurance Boards.

The lack of cognitive diversity has been a problem on boards for many years. Martin recalls attending a Board meeting with a firm that wasn’t in good health, all the Directors were gentlemen of a certain age and wearing similar attire. He asked the Chair if he had a diversity policy, responding, “yes, we had a woman on the Board once, never again”! The Chair couldn’t understand why he needed cognitive diversity around the board table. The firm now no longer exists.

In 2011/12 it was rare for firms to share their shortlists with the Regulator prior to appointing an individual. This resulted in the Regulator rejecting a candidate for reasons confidential to them. Consequently, banks and insurers had to professionalise the way they conducted their searches, engaging credible search firms who could take comprehensive referencing and cover the whole market identify diverse talent.

Governments rarely step back and conduct effectiveness reviews of the regulatory system post financial crisis, which does require reassessment, bearing in mind the initial rushed approach to implement a new regulatory system. The Regulator has little incentive to take a risk-based approach, opting for the safer conversative option as their default.

In summary, it’s far from perfect and will not change, subject to rewriting Government policy. The challenge for business is to optimise opportunities in a deeply flawed regulatory regime.

Q. What parts of Regulation would you discard?

A. The Regulator should not move into the Climate space. They should have a clear line of who does what, i.e., in the Operational Risk area there is pressure from the PRA and FCA with no clear lines of demarcation. Looking at the former policy on diversity and targets rather than expressing a sentiment of defining what is good and setting clear expectations of the Chair. Discarding 60% of the regulatory framework would still leave a safe financial system.

Q. Regulators view the governing body in the same way as the executive. Is this a mindset issue about compliance as opposed to risk of failure, driving granular behaviours on Boards?

A. Unless you fall within the major banking or insurance groups, your supervisor will be inexperienced, and a high likelihood will not understand the role of a Non-Executive Director. Gently nudging the inexperienced Regulator in the right direction is the best approach to adopt.

Q. What can firms do to make their Board agendas less regulatory focused?

A. Change the agenda around, placing all the regulatory items at the end of the meeting. This focuses the discussion on strategy and business from the outset. Sub committees can do the heavy lifting, the board only needs to spend a few minutes on the ICAAP, having prior approval from a very competent Risk Committee. You must have confidence in the chairs of the sub committees.

Q. We have two proactive and aggressive Regulators setting their own agendas, which are often contradictory. Would we be better off with a single Regulator?

A. No regulatory system is perfect, whether single or dual structured. There will be duplication in a dual approach, it has never been harmonious. The current regime will be in place for the life of the next Government, at least.

Q. I agree with your approach on committees, but it sometimes feels like the CRO is the Chief Regulatory Officer, and the Board Risk Committee is the Board Regulatory Committee, meaning a lot gets pushed to the Risk area. Do you have a way of resolving this issue?

A. No. The sheer amount of documentation to action means the peripheral vision of the board is not where it should be. It’s better the Risk Committee gets bogged down than get passed to the Board. It’s critical the CRO attends Board meetings, even if not in the capacity of an Executive Director to provide the Risk dimension.

Q. Internationally, can we learn from other Regulatory frameworks?

A. In 2013, the Government was keen to get more inward investment into UK FS by reducing the barriers for banks and insurers. This has now dried up for 2 reasons: 1) The UK is a less attractive jurisdiction to invest in post Brexit. 2) The Regulator does not roll out the red carpet for new businesses to set up. They will typically interact with junior Regulators.

In Paris, new businesses will meet a senior Regulator first, providing a different impression and experience compared with the UK.

In other international jurisdictions, central banks have different pay and rations to their Regulators, which isn’t the case in the UK. You need a different cadre of people in the Regulator compared to Economists in the central bank. This posed real challenges for the PRA.

Q. What makes a good Chair?

A. A good Chair has two ears and one mouth, low ego and listens to all views and then summarises in a succinct way. A good Chair hires the right people around the board table. It’s a unique set of subtle skills.

Acknowledgements:


Hoggett Bowers are very grateful to all our guests and a special thank you to:

Alex DuncanChief Risk OfficerJust
Craig BuickEx Group CEOCabot Credit Management
Fabrice BrossartCROAIG (Europe) Limited
Feike BrouwersChief Risk OfficerMonument Bank
Gerry MallonChief Executive OfficerTesco Bank
Giles FairheadChief Risk OfficerPension Insurance Corporation
Hanna KamCROHiscox
Jeremy MarsdenNon-Executive DirectorReassured
Len SinclairNon-Executive DirectorFNZ Group
Melissa BrownCROMS Amlin, Business Services
Michael CrawfordInterim Head of ERMBeazley Group Plc
Pavlos TranakidisChief Risk OfficerFidelity Investments International
Perry ThomasNon-Executive DirectorYuLife
Rachelle FataniDeputy Chief Compliance OfficerAon
Rod AshleyCEOAlba Bank
Sarah WhiteleyGeneral CounselCabot Credit Management
Zoe ShapiroCROPhoenix Group
Sharon TorpeyChief Audit OfficerBupa
Sir Andrew LikiermanNon-Executive DirectorMonument Bank