The speech by the FSA’s Rosalie Langley Judd and the publication of PS10/15 (‘Effective corporate governance’ – see previous article in this Regulatory Roundup on Approved Persons) serve to demonstrate, if there was ever any doubt, the importance that the FSA places upon corporate governance.
Rosalie’s speech is interesting in that as well as referring to the changes being brought about by PS10/15 it also provides a useful summary and reminder of the FSA’s change in its approach to firms (‘enhanced supervision’) following the financial crisis as well as one definition of governance(“Governance can be described as board oversight of management activities and management oversight of staff activities in line with management requirements”).
It is interesting to note that one of the ARROW risk elements that the FSA gives a double weighting to is ‘governance, management and culture’ (and reference is made to Hector Sants’ recent speech on culture and whether the regulator should seek to regulate culture).
In learning more about what went wrong at firms in the crisis, the FSA have highlighted three areas of governance where issues have been found and which can be summarised as: lack of sufficient challenge; poor understanding of higher risk products and activities; and lack of adequate management information. These three areas will come as no surprise to firms that have been subject to ARROW, and possibly thematic, visits.
We have known for some time that the FSA is spending more time on interviewing applicants for approved persons roles; the decision to interview is fundamentally risk based. Rosalie informs us that since October 2008 the FSA have interviewed just over 660 applicants for such roles, 36% of which have been in the last six months (the FSA calculates that the interview process costs each firm an additional £1,850 and the FSA £1,000).
The speech details the four stage process that the FSA may go through in the process of approving a person, including the key competencies for significant influence functions. There is more about this process in Chapter 3 of PS10/15.
The speech concludes by confirming that governance is part of the FSA’s intensive supervisory approach and that the regulator’s emphasis is now on ‘supervising governance in action’.
