As the FCA makes clear its intentions to scrutinise firms' business ethics and cultural attitudes, Tony Rawlins, senior manager at Moore Stephens, asks if your board's requisite skills are up to scratch.
As the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) near their five-month anniversary, what has changed?
To my mind, the major changes taking place in the regulator's approach reflect its concentration on behavioural issues such as business ethics and cultural attitudes, particularly in the behaviour of boards and senior management and the manner in which business is conducted.
The FCA has made it very clear that it is not simply looking at a firm's adherence to the rulebook but that it will take a view on the broader issues of morals and outcomes.
Good board, deliver us
Given this, we thought a closer look at the board make-up, particularly the demonstration of skillsets at this level, would be useful to ensure firms are executing best practice and so avoiding any future regulatory pitfalls. Throughout the article we refer to the "board" but this relates to any executive team responsible for managing a regulated firm.
The skill requirements of boards are often overlooked and a broad assumption made is that those appointed to lead and direct a firm have the requisite knowledge.
Unfortunately, recent events in the banking sector have shown that this assumption is not always correct and, while emphasis has been for publicly listed companies to demonstrate evidence that directors have the necessary skills to undertake the role, this is not always the case for smaller firms.
Indeed, a number of skilled persons reviews - or Section 166s - recently undertaken have identified more focus on the core skills of the board.
Balance and understanding
From our experience of the regulator's approach, there is a growing emphasis on corporate governance, particularly the components of leadership, senior management structures and skill sets. The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives.
It is important that a firm should be headed by an effective board collectively responsible for the long-term success of the company. The management team should present a balanced and understandable assessment of the company's position and prospects, to look at the risks and set in place formal and transparent arrangements.
It is not a pre-requisite for firms to set in place terms of reference for their board. However, it is best practice, and useful, for firms to describe the purpose and structure of the board, set out the parameters within which the authority of the board is delegated and set out the parameters concerning how individuals or group elements are accountable to the board. As a broad brush, this should include the areas outlined in the box, above right.
In this way, the firm is demonstrating to the regulator that there is a clear understanding of the functions of the business. It also provides a clear structured approach to the management of the firm, better assists in the formulation of strategy and business planning, and demonstrates a process of monitoring and control by the board.
This article continues...
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till