Regulators Expectations of Institutional Governance


You might have asked yourself “what governance expectations do regulators have?”. Well, regulators seek good governance and deem it critical that businesses deliver effective management to support and strengthen compliance. Regulators understand that firms affected by the COVID-19 crisis must adapt and review their actual governance, as necessary. 

Overall, regulators expect firms to be operated and controlled by the board. Besides, boards must show decision-making capabilities and understanding of the business. The board is expected to be responsible for setting strategies and demonstrate accountability during implementation.

Specialists have highlighted crucial points with regard to meeting regulatory expectations of institutional governance:

Clarity and transparency

Regulators believe that clarity and transparency are the pillars for great governance at regulated firms. Regulators expect that firms act openly with employees and make clearly available information on rules, policies and actions, leading to a clear sense of organization responsibility, and an assurance that firms are being efficiently administered and free of any irregularity. 

In addition, to have robust documentation of the firm’s governance arrangements into a governance framework, such as setting up board and committee structures, roles, responsibilities which will give better clarity and transparency internally and with regulators. 

In normal circumstances, a 12-week rule is applied to provides enough time for firms to deal with temporary or unexpected Senior Manager Functions absences. Although, UK regulators, the FCA and PRA, are currently gathering evidence to confirm if the 12-week rule gives dual-regulated firms enough time to deal with temporary absences of SMF as a result of the pandemic.

Role of responsibility 

Another point to look at is the examination of the firm’s governance structure. You may have to redesign your governance structure to meet regulatory expectations to stay ahead of the curve and avoid regulatory scrutiny.

The role of responsibility can be embedded through training, improved documentation, communication and involvement from senior managers. It is important to give specific training for your line managers and their role, focusing on the tone from the top within their teams, focusing on delegation, leadership and escalation. Regulators do expect this kind of specific training and accountability from senior managers.

Setting the tone is all about creating a culture where everyone has ownership and responsibility for doing the right thing because it is the right thing to do. This can only stabilise the senior management team, who need to not only set out the key company values but also personally demonstrate them through their actions.

The FCA, for example, request that firms keep records of governance map and scope of responsibilities for certain approved persons. All records must be kept up to date. 

Provide quality information and reporting

One of the key considerations for firms to meet regulatory expectations is the ability to report appropriately. Firms are required to formally document responsibilities and accountabilities, however, this kind of report can easily lead to confusion and governance failings if the previous steps are not adhered to. For firms to report properly, they must be clear on what information is relevant and what should be reported.  

Culture – tone from the top

In recent years, a shift towards individual accountability and culture has occurred. Regulators expect firms to access their governance models and ensure appropriate governance arrangements have been adopted for a healthier organizational culture. At this stage, investing time in training to ensure senior executives and the whole company are aware of the organization’s values and culture is vital.

Firms must be aware that mindset is very important. If an organization has a culture of misconduct, this behaviour will likely repeat itself leading to a poor outcome. These poor outcomes will then lead to fines and reputational damage, badly influencing the market and industry.

As every firm is different, encompassing different priorities and leadership, no model fits all regarding culture. So regulated firm must decide which framework to follow or which works best for them.

The FCA and other regulators across the globe have been paying very close attention to the culture of firms and what boards and management are doing to shape the culture, of which governance is a key factor. 

Due to Covid-19 crisis,  the FCA and PRA confirmed their intention to provide flexibility to dual-regulated firms around SMCR requirements. These regulators have specific provisions for firms in these circumstances and understand it may take longer to submit a revised Statements of Responsibilities (SoRs) under the current circumstances. For single regulated firms, the FCA has confirmed that it does not require them to have a single Senior Manager responsible for their coronavirus response.

"We understand it may be necessary to adjust standard certification processes and policies. And we recognise that what constitute reasonable steps may be altered by the current circumstances. However, even in these circumstances, Certified staff who are not fit and proper should not be re-certified." FCA on April Statement. 

The Senior Managers and Certification Regime

The FCA introduced the Senior Managers & Certification Regime in March 2016. The legislation was originally aimed at extending regulatory accountability to the senior managers within the top banks to reduce corruption and enforce an increased culture of compliance in the UK's financial services market. The SMCR aimed to establish a framework that would:

  • Focus accountability on a narrower number of individuals at the top of the bank
  • Encourage senior individuals to take greater responsibility for their actions
  • Make it easier for both banks and regulators to hold individuals to account

Furthermore, the SMCR was extended beyond the initial group of banks, building societies, credit unions, investment firms and insurance firms operating within the UK, to all Financial Conduct Authority (FCA) approved firms in 2018. The extension impacted over 60,000 financial services firms operating in the UK and over 200,000 individuals working within these organizations. 

MCO Conduct Risk solutions help financial services firm address regulatory obligations, talk to us today for a no-obligation consultation by clicking here. 

Blog Banner - Webinar - Register Now-1