global insurance management

Non-Executive Directors


Jan 30 2012

Non-Executive Directors

Relevance:             All firms that have Non-Executive Directors

Action required:     Ensure Non-Executive Directors are fulfilling their role effectively.

We now know that the FSA will be making contact with all firms within its “smaller firms” category over the next 2/3 years.  We also understand that they will be particularly interested in the specific areas of “Governance, Culture and Controls”, and one aspect they have focussed on is the role of the Non-Executive Director (NED).

Indeed, the FSA has recently held a conference specifically aimed at NEDs and from it has produced a guidance consultation document entitled “Delivering fair treatment for consumers of financial services”.

Not all firms will have NEDs.

A NED is someone that is expected to bring experience and an external viewpoint to assist and, where necessary, challenge the board of a company, making sure that board decisions are balanced.  NEDs are not involved in the management of the company or in its internal running but they must fully understand how the company operates and how business risks are managed.  After all, NEDs are part of the board that is collectively responsible for the success or failure of the company.

The role of a NED has been the subject of wide-ranging deliberation and resulting publications; not least from the FSA.  Going back to 2006, the FSA issued The FSA’s Risk-Based Approach; a guide to NEDs, which briefly outlined how the FSA conducted its review of a firms risk management process.  The “Treating Customers Fairly” initiative also expected NEDs to be active in ensuring that the firm’s culture would incorporate the stated consumer outcomes.

The FSA has now decided that “with the creation of the CBU (Conduct Business Unit), and the move towards the FCA (Financial Conduct Authority), it is an appropriate time to re-engage with NEDs on the important role they need to play in challenging their firms to deliver on their regulatory responsibilities to customers.”

Yet another new phrase has come along – Retail conduct risk; the risk of a firm treating its retail customers unfairly and delivering inappropriate outcomes.

To help firms manage their retail conduct risks, the FSA expects NEDs to consider the following areas and challenge where appropriate to ensure that:

a)    Business proposals are aligned with the firm’s strategy and are within its stated retail conduct risk appetite.

b)    The firm’s culture is such that it delivers good behaviours and outcomes, both prudentially and for customers.

c)    The NEDs have the right information to enable them to make robust decisions and if they feel they do not, then they should ask for it.

d)    The firm has identified risks to customers.

e)    Appropriate actions are in place to mitigate and monitor such risks.

f)     The Board supports the identification and escalation of issues when they go wrong and ensures appropriate resolution.

g)    The business learns from identified issues and draws out the wider implications.

More information can be found using this link to the previously-mentioned FSA document:

http://www.fsa.gov.uk/pubs/guidance/gc11_30.pdf

We will help all client firms with any risk management issues and processes, irrespective of whether they have NEDs or not.  However, those firms with NEDs must recognise that any assessment by the FSA is likely to include an interview with at least one of them and so they must be properly prepared. 

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