Click the headings below for more information:
- I have a problem. What should I do?
- What are the penalties for non-compliance or failure?
- What help can a NED obtain?
What help can a NED obtain?
NEDs may, under the terms of their service contract, formally request or seek advice from a lawyer, accountant or auditor or some other type of specialist firm, including a management consultant.
Some form of change management or risk mitigation programme may be required which, by definition, companies may have to undertake by reference to, or with assistance from, an external source. NEDs can often be a valuable resource in suggesting such types of assistance, or recommending particular firms of experts, based upon their previous managerial experience.
There is of course, no substitute for “getting it right from the start” and induction training or high quality Board performance education for new companies is essential.
For existing organisations, regular competence reviews of controlled functions and professional development sessions for all Directors can add value.
Dealing with Regulators
As we have seen, the PRA advances its objectives using two key tools.
Firstly, through regulation, it sets standards or policies that it expects firms to meet.
Secondly, through supervision, it assesses the risks that firms pose to the PRA’s Objectives and, where necessary, takes action to reduce them.
The PRA’s approach to regulation and supervision has three characteristics:
- A judgement-based approach: The PRA uses judgement in determining whether financial firms are safe and sound, whether insurers provide appropriate protection for policyholders and whether firms continue to meet their Threshold Conditions
- A forward-looking approach: The PRA assesses firms not just against current risks, but also against those that could plausibly arise in the future. Where the PRA judges it necessary to intervene, it generally aims to do so at an early stage
- A focused approach: The PRA focuses on those issues and those firms that pose the greatest risk to the stability of the UK financial system and policyholders
The PRA approach to supervision does not seek to operate a “zero-failure” regime. Rather, the PRA seeks to ensure that a financial firm which fails does so in a way that avoids significant disruption to the supply of critical financial services.
Similarly, the FCA’s Objectives indicate that they want consumers to use financial services with confidence and have products made available to them that meet their needs, provided by firms and individuals they can trust.
To achieve this objective, they regulate firms and financial advisers so that markets and financial systems remain sound, stable and resilient. They also encourage transparent pricing that’s easy for everyone to understand. The FCA’s aim is to help firms put the interests of their customers and the integrity of the market at the core of what they do.
Indeed, recent experience would suggest that the FCA is as much focussed on the issue of fairness to the consumer as it is on a strictly legal interpretation of insurance policy documents.
In December 2014, the FCA published its latest revised strategy.
The FCA believes that “change is the new normal” and therefore it must be in a position to meet the unexpected.
The key features were:
The FCA’s Mission Statement includes a new approach model for regulation that identifies potential harm to consumers or markets and isolating possible remedies.
Of particular interest among the priorities, is the plan to revamp the Treating Customers Fairly principle into a Duty of Care obligation.
Also highlighted was the FCA’s work on culture and governance, particularly extending the Senior Managers & Certification Regime.
The FCA Business Plan 2017 set out potential risks and priorities for the coming year.
Technology figures strongly on the regulator’s list of areas for supervision in the immediate future.
At the heart of the relationship between an authorised firm and the regulators is their assertion that: “A firm must deal with its regulators in an open and cooperative way, and must disclose to the regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.”
In addition, through the Compliance Function, or by other appropriate means, companies are well advised to establish a regular and constructive dialogue with their nominated supervisor in their main regulatory body (i.e. the PRA or FCA).
Since the introduction of the “twin peaks” regulatory regime, both the PRA and FCA have become much more actively focused on the role and responsibility of NEDs who may routinely be asked to perform, for example, the following types of task:
- Leading remedial action, if required, following some form of regulatory review
- Justifying the range and relevance of management information (MI) received
- Attending one-on-one interviews with the regulators
At a Directors’ Briefing for NEDs, held at Lloyd’s in November 2014, on the subject Conduct Risk, the PRA stated publically that it: “welcomes feedback from and liaison with NEDs who provide an unvarnished view of compliance and regulatory conduct not filtered by Executives.”
By working closely and positively with the grain of regulation, companies in the authorised sector can not only avoid or anticipate potential problems, but they can benefit from being attuned to and emulating regulatory best practice.
Appropriate reporting to an insurance Board by those responsible for compliance can assist the NEDs by helping them become better attuned to regulatory issues. Such a procedure may be construed as a form of “self-help” for an insurance NED, whose guiding principle should always be “to get it right.”