Posted: 15th July 2015
The PRA has released a consultation paper (CP) on the issues of corporate governance.
If you’re a member of a board in a financial services firm it’s definitely worth a read, particularly if your firm is, or will be implementing the Senior Managers Regime (SMR) or Senior Insurance Managers Regime (SIMR). Under the SMR (I’ll be referring to the two as SMR), your Board members will be held ever more accountable for decisions they do or do not make.
Whilst there are more general guidelines out there for what constitutes good or effective governance (the UK Corporate Governance Code for example), this paper is more specific to the PRA’s interests. It helps your firm to navigate the intricacies of regulation in the context of the board, nicely complementing the upcoming SMR rules. It should be taken in earnest as a high-level guidance to good practise.
The PRA holds certain aspects of board governance particularly high-risk in terms of compliance and regulation. As such, it has set out its expectations in 12 specific areas in the CP. These are areas a Board should hold a magnifying glass over when considering its regulatory responsibilities. Instead of simply listing these areas, we’ve identified two significant themes to start setting your sights on; aligning personal accountability with group decision making, and the role of non-executive directors (NEDs).
THE BOARD, DECISION MAKING AND ACCOUNTABILITY
The SMR focuses on personal accountability, but firms are run collectively by Boards on behalf of shareholders. Many firms have been asking how these two concepts will work together in the new regime.
Where does responsibility lie according to PRA CP18/15?
Below is a summary of some of the guidelines within the CP and shows which are aligned to board responsibility, and which to individual.
| BOARD | INDIVIDUAL |
| Corporate strategy | |
Setting corporate strategy is central to the Board’s responsibilities, and should wholly be owned and signed off by the Board. | However, as stated in the SMR, the chairman and the chief executive hold leading roles in Board development and maintenance of the business model. This includes giving NEDs the time and opportunity to contribute to strategy development and challenge any decisions before final sign off by the Board. |
| Culture | |
| Culture is the collective responsibility of the Board | It is down to the chairman to lead the development of the firm’s culture and Board standards overall. |
| Business strategy | |
The business strategy should be owned by the Board. The risk appetite that supports the business strategy should be measurable and well-articulated. This means in a way that can be readily understood by employees throughout the business. | Executive management manage the business on behalf of the Board, as allocated by the Board. |
| Delegation and escalation | |
The Board should be precise over who is responsible for what. Any limitations and accountabilities that come with these responsibilities should be clear. This way, the Board can articulate definitively what Board matters are and how executive management can report and escalate matters to them. | Executive management must use their judgement in escalating matters of particular significance. They should also actively make sure they inform their Boards of key business developments, decisions and activities at an appropriate but early stage. In particular, executives have a responsibility to ensure that their Boards are able to exercise their role. |
| Board sub-committees | |
| Alongside supporting the Board, the committees are also accountable to the Board. But, they should not relieve the Board it of any of its responsibilities. | Where a firm has a dedicated risk committee, the chair is considered responsible for safeguarding the independence, and overseeing the performance of the firm’s executive risk functions, including the chief risk officer. Alongside the risk committee, the Board also needs to ensure oversight of other control functions such as compliance. |
The role of NEDs
Non-executives have a key role to play in holding management to account for embedding and maintaining culture and compliance. Under the SMR, NEDs are brought into scope much more. Amidst the complexities and confusions of increased accountability, there have even been fears that many good NEDs will leave the financial services industry. Many have questioned how they can carry on being truly independent whilst meeting the new responsibilities. This paper clarifies their role as far as the PRA are concerned. They should:
- Hold management to account against delegated matters
- Be able to challenge the executive effectively and promptly
- Not simply delegate responsibility for major decisions to specialists
- Call on appropriate professional advice as needed
- Alongside the chairman, they should actively guard against the risk of being provided with unworkable and impractical levels of information
- Have unrestricted access to a firm’s employees and information about the firm in order to carry out their duties.
Balancing the Board
In the aftermath of the financial crisis, the regulatory approach to Board effectiveness has changed drastically, and more and more accountability is king. Use the PRA’s guidance to navigate the balance between group and personal responsibility. Getting it right – clarity of roles and accountabilities, the right reporting structure, the right collective dynamics – can harness executive and non-executive insight, management, oversight and leadership, delivering excellence throughout your firm.
For information on how Huntswood can support your firm in its implementation of the Senior Managers regime please visit our dedicated SMR page
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