It’s fair to say that the PRA’s recent consultation paper on its Supervisory Statement isn’t the longest document that it has ever produced. But as it applies to all firms regulated by the PRA, it needs to be read.
Because it deals with the very important topic of corporate governance, and most specifically, board governance – an important subject for all firms.
The document at first appears quite short, and as it’s in the form of a Supervisory Statement, it’s not a set of rules in the strictest sense – rather an expression of what the PRA expects to see from firms, when focusing on its supervisory activity.
And in this particular case, the PRA is saying what it expects to see as acceptable practice in terms of the construction and operation of firms’ boards.
The devil is in the detail
It might be tempting to not give this document too much attention, on the basis that the PRA states this is not intended in any way to cut across either the new Senior Managers and Senior Insurance Managers’ regimes. Neither is it designed in any way to contradict with the Financial Reporting Council’s Corporate Governance Code.
But for PRA regulated firms, when the PRA says it expects certain things, those firms should pay close attention – and if they cannot meet those expectations, then they need to think about what they can do in future in order to meet them.
Let’s take a closer look
A question of non-executive directors
There are numerous mentions of non-executive directors (NEDs) in the document. This is because the PRA considers the presence of independent individuals on boards to be very important; it wants to see the appropriate level of challenge being provided to the activities being carried out by the executive directors and the senior management.
However, NEDs are expected to have the appropriate breadth of understanding both of the industry and the firm’s specific business, to enable them to carry out their role competently.
Also, firms are expected to be able to support the NEDs in this development, providing access to professional assistance where it is required.
Given the amount of regulatory change that is affecting NEDs at the moment (as well as senior managers) this is an issue that is arguably more important now than it has been for a long time. NEDs not only have to get to grips with their new responsibilities under the senior persons’ regimes, but they have to be able to understand and apply all of the regulatory changes that are affecting various sectors at the moment.
For banks, for example, there is a huge amount to deal with; the ring-fencing arrangements for the larger firms, the new capital requirements, the lessons learned from the recent enforcement actions, the FCA’s focus on culture – to name but a few.
So the message for NEDs is clear – they are expected to keep their knowledge and understanding of regulatory matters up to date – and where that needs to be facilitated by training, then firms are expected to support their development.
But what about the rest of the board?
For those board members who are executive directors, there are some interesting messages in this Statement.
Firstly, the PRA has been quite explicit in its expectation that the board has a duty to ensure that the firm for which they are responsible is continually in compliance with the Threshold Conditions for authorisation.
This is interesting because it brings these Conditions to the front and centre; to remind firms that these are no longer just a gate of entry to achieving authorisation.
So, boards need to make sure that they understand exactly what these Threshold Conditions are, and how they can be complied with.
A question of culture
This is a big one as far as the FCA is concerned at the moment, but the PRA also has its eyes on culture too. In this Statement, it states that boards are expected to ensure there is an ethical culture embedded within the firm and then subsequently maintained.
Which leads to the questions – how well does the board understand what the regulators consider to be a strong culture? And how much do the control functions need to understand this too, so they can advise the board accordingly?
The big issue of bonuses
Or, incentives, as the PRA calls them in this Statement (which admittedly can include non-monetary incentives but do include bonuses as well). On this subject, the PRA states that it is the board which is ultimately responsible for how the remuneration structure is designed and run. And that includes incentives, which must be “…aligned with prudent risk taking”. In other words, designed not to encourage excessive risk-taking.
But, to what extent does the board understand the regulators’ explicit requirements and expectations when it comes to setting bonus structures?
Training in sharp focus
What this Statement does is it shows not only where boards need to check the details of how they operate, to make sure they meet the PRA’s expectations in every way, but also, as a check for knowledge and understanding.
If this needs to be improved in any area, then external training, or in-house training become pragmatic options, especially for a smaller number of people who may require something a little more specialised.
And that’s where Industry Events Online shows its strength – the new look website makes it easier than ever to search for training options. One less thing to worry about, especially if the PRA starts to sharpen its supervisory position with regard to board governance. It’s best to be ready when that happens!
By Martyn Oughton a Professional Member of the International Compliance Association (ICA). Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.
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