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Board matters - essential updates on governance and regulatory issues





UK Corporate Governance Code - Not a FTSE 350? It's still relevant for the PRA and FCA

Board members have a huge raft of responsibilities in the financial services industry, so a few helpful sources and resources are usually appreciated. The Financial Reporting Council has just issued its promised updated UK Corporate Governance Code. Boards have much to do and even more to read so it's a blessing that the Code is sensible, relatively short and jargon-free. Whilst in theory this is only really important if your firm is in the FTSE 350, or you want to comply with international best practice, the reality is that the PRA and FCA take the Code as an addition to their rules. There's some proportionality, but by and large full compliance is expected.

This year has seen the bi-ennial updated Code published, which brings together all of the significant alterations since 2012.
 Alongside the expected enhanced Going Concern, Risk Management and Internal Control, Remuneration and Shareholder Engagement requirements, the FRC has also highlighted the importance of the Board’s role in establishing the ‘tone from the top’ for culture and values. "The directors should lead by example in order to encourage good behaviours throughout the organisation." Echoes of the PRA and FCA here.

On challenge and Board dynamics the FRC says "...key to the effective functioning of any board is a dialogue which is both constructive and challenging. One of the ways in which such debate can be encouraged is through having sufficient diversity on the board, including gender and race. Nevertheless, diverse board composition in these respects is not on its own a guarantee. Diversity can be just as much about difference of approach and experience." Personally, as someone who evaluates the effectiveness of Boards, I welcome this clarification and expansion on what many see only as gender and race specific. The most effective Boards I come across represent a rich and varied set of experiences and approach, which importantly is collegiate in discussion rather than entrenched in opposing positions.

Although more was expected this year on Succession Planning (a hot topic with the regulators) the FRC is considering general diversity as part of a review of Board Succession Planning and will consider the need to consult on these issues for the next full update to the Code in 2016. Full details and updated Code here... 

In the meantime regulators are expecting Succession Plans to be more than a piece of paper dusted-off for them and are now asking for evidence of the people development aspects to ensure that the Succession Plan can be enacted.



Board composition and Competency Frameworks
The regulators have been increasingly vocal on the subject of Board composition and the whole competency framework piece, ensuring all the right skill sets are covered to avoid group-think, etc.' even for the smallest of regulated firms. This is coming up as part of the Approval process and firms are being asked to verify the appropriateness of skill-sets and Board development as part of the authorisation process and ongoing plan agreed with regulators. There's a definite refocusing by regulators onto Boards from the outset as we're increasingly being asked to support firms much earlier in their life cycle.

What's the right size for a Board and attendees?
The latest feedback from the PRA to client firms on their Board size is that 'small is beautiful' and ideally somewhere between 4 and 6 Board members. For many, especially including those in the LLoyd's market this is somewhat of a shock with Boards of up to 19 in number plus the attendant cast of thousands. Even when firms justify a Board of some 10-12 people the PRA response is that those with less than 6 members are the ones that 
have been impacted by PRA thoughts on the matter. My own experience is that the more people in the room the more likely the Board is to be used as a ratification tool with no serious debating or decision making actually taking place. Whilst it's useful for keeping non-Board members updated, the more non-Board attendees the less likely for truly open views and discussion.

PRA Funamental Rules replace old Principles
The PRA’s Fundamental Rules replacing the Principles were announced just before the Summer. Boards need to be familiar with their content. Briefly the 8 Fundamental Rules are that a firm must:
• 1 - conduct its business with integrity.
• 2 - conduct its business with due skill, care and diligence.
• 3 - act in a prudent manner.
• 4 - at all times maintain adequate financial resources.
• 5 - have in place effective risk strategies and risk management systems.
• 6 - organise and control its affairs responsibly and effectively.
• 7 - deal with its regulators in an open and co-operative way, and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
• 8 - prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.

In the same document are several other useful statements for Board members to be completely familiar with from a regulatory perspective. Possibly a good subject for a Board CPD session if you've not had time to ensure everyone is informed. Full document here...

Junker proposes creation of EU financial services directorate

There has been much debate over the last few months on how the UK would be affected by Junker's appointment. The creation of a EU fs directorate could have been worrying for the UK, however, depending on how the hearings go this potentially is good news if the UK's Lord Hill is appointed to replace current fs Commissioner, Michel Barnier. A surprise move by Junker but thought to be one to placate the UK. Noteworthy is that the remit will not now include any say on executive pay. Interesting too that Michel Barnier has pleaded for fairness at Hill's hearing in a frank outgoing interview with the FT last weekend. We'll know a lot more in the next couple of days on this one.

Using behavioural risk to add business value
Governance groups and regulators are starting to propose that a "behavioural risk" view is needed to support enterprise risk. Although there is no working definition of behavioural risk, the FCA has already levied fines of more than £50m for behavioural offences that remain only loosely defined. Regulators in the US, Australia, Singapore and mainland EU are now looking to expand their remits into behavioural risk. More on this subject in future newsletters... 


Board-related CPD programmes
We are developing an extended range of Board-related programmes and briefings for firms to run in house. Our particular focus is on the roles and responsibilities of Board Members and Committees, which are of particular interest to both the PRA and FCA, including the role of Non-executive Directors. We also run induction programmes for new Boards and new NEDs. More here...

Board development
Award-winning BP&E Global's Board-ready Leadership Programme - starts next Spring (5 days over 3 months) More here...  Also available in-house as a programme or separate modules.

Until next time...

Kind regards

Judy Delaforce
Managing Director
BP&E Global Ltd - Board Performance Matters
020 7764 0721


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