While we are celebrating the increasing number of women on plc boards, there is growing concern in the area of financial services that changes being introduced by the regulators could result in talented individuals no longer wishing to serve on the boards of companies in that sector.
Towards the end of last year, Alan Thomson and Renato Fassbind both quit as directors at HSBC. It was reported that they were unhappy with the direction in which regulation was moving. At that time the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) were consulting on the new Senior Managers Regime (SMR) and the FCA was proposing to hold all directors (both executive and non-executive) accountable for the decisions they make and oversee. Things have now moved on and in late February the PRA and FCA published a further joint consultation document on the proposed SMR. As it currently stands, the new rules will now only cover executive directors and those non-executive directors (NEDs) with particular roles, such as the Board Chair, Senior Independent Director (SID) and committee chairs and will not apply to other NEDs. There will be a new criminal offence in the case of bank failure and in addition, directors will be guilty of misconduct if they cannot show they took reasonable steps to avoid or prevent a regulatory breach – the presumption of responsibility.
This is the most controversial area because it seeks to reverse the normal burden of proof. Instead of the regulator having to prove a director was in the wrong, if the regulator takes the view that the director was at fault, the onus will be on the director to prove they were not. Proposed penalties are lifetime bans and heavy fines. The regulators have published guidance with details of prescribed responsibilities for NEDs and examples of situations where sanctions may apply, the kind of actions which may constitute reasonable preventive steps and details of how firms and individuals may evidence them.
Although the pressure to hold individuals to account is understandable, directors take decisions all together as a board – the concept of collective responsibility. This was clearly evidenced recently when Douglas Flint (Chairman of HSBC) and Stuart Gulliver (its Chief Executive) appeared before the Treasury Committee in relation to the allegations about executives in its Swiss private bank encouraging tax avoidance and evasion by its clients. They each refused to take personal responsibility for the situation, relying on the collective responsibility of the whole board.
The new rules place great emphasis on the role of NEDs being “policemen” and monitoring what goes on at a company. However, the board is meant to provide entrepreneurial leadership and set strategy. Oversight of risk management is clearly vital, but there also needs to be room for an organisation to do business and not to be so constrained by the rules that it cannot fulfil its basic function of making a profit.
As this debate unfolds, two high profile ex-regulators have signed up to join the boards of banks. Howard Davies who is a former Chair of the FSA and former Deputy Governor of the Bank of England is to take on the role of Chair at Royal Bank of Scotland from 1 September. Lord Adair Turner, also a former Chair of the FSA, is to join the board of the start-up bank OakNorth as its SID. Will we end up in an environment where only ex-regulators feel brave enough to become directors of banks and is that good for the businesses?
Financial institutions are hiring literally hundreds of compliance staff to cope with all the new rules imposed by the regulators. This adds costs and bureaucracy but it is questionable whether it adds any value or begins to tackle the real issues. While no one would deny that the financial crisis should not be repeated it is questionable whether we have yet got the right solution. A way must be found to embed a new kind of culture throughout financial institutions – it’s about governance, not compliance.