Background

No doubt about it, 2016 is sure to prove a significant year on the regulatory front. Governor of the Bank of England, Mark Carney, set the scene last year for a new era in financial services when he proclaimed: “the age of irresponsibility is over”.

To that end, regulators have been busy revising the ground rules. New regulations such as Solvency II, Senior Managers’ Regime, Senior Insurance Managers’ Regime, EU Mortgage Credit and UCITS V have either already come into force or will do so in the coming year. 

The introduction of new regulation will of course have a significant impact. In ensuring they are implemented correctly and consistently, financial services firms will need to adopt an integrated and enterprise-wide approach that brings together business units and the key functions such as risk, compliance, finance, HR and IT.

There will also be significant talent implications for regulated firms in terms of hiring strategies, processes, assessment and selection and succession planning – both for the coming year and beyond.

Implications

The wide range, complexity and evolution of regulation means there is a critical need for financial institutions to review their organisational structure and capabilities. With continued pressure on group risk and  compliance functions to evolve comes a very different role and expectation to what has gone before. Bound up with that, the skillsets required are changing and financial institutions are seeing the benefits of a risk function which brings together people with a diverse range of skills and experiences. 

Training and upskilling will also be priorities for example in the retail banking and consumer finance space as they seek to ensure that respective functions (e.g. distribution, marketing) possess the requisite standards of professional knowledge and competence and adapt to new regulation

Remuneration is a key consideration. Last year saw the Prudential Regulation Authority and Financial Conduct Authority establish new rules for alignment of remuneration with risk. These include: increased timeframes for deferred compensation for Senior Managers and for staff whose actions could have a material impact on a firm; and clawback rules.

As these new rules come into effect, firms must focus on ensuring suitable risk cultures are embedded. Moreover, remuneration arrangements will be more closely aligned to ethical conduct. Quite how this will play out in practice is causing much consternation with financial services businesses expressing concern that London will miss out on exceptional talent as this will discourage those who are internationally mobile to stay or relocate to the UK.

Governance

In 2016, regulatory developments will also place further demands on governance. This will include reviews of – and potential changes to – governance processes to take account of the increased number of people brought within the scope of regulation.

Requirements around producing governance and accountabilities maps, for instance, will have reverberations for recruitment processes. Firms will need to reconsider and revise these maps when hiring new talent.

While there has been much emphasis on new reporting requirements and metrics (e.g. capital requirements, liquidity ratios), we are also seeing increased focus on behavioural standards, such as acting with integrity and observing proper standards of market conduct. In response, we are seeing an increasing use of tailored psychometric options and assessments of candidates  against behavioural competences.

Hiring managers must satisfy themselves that staff in key functions exhibit an appropriate level of probity. Consequently, robust due diligence needs to be conducted and documented during the recruitment process prior to applying for regulatory approval.

Further developments in the regulatory referencing process will come to the fore in 2016 as firms ensure their hiring decisions are as informed as possible. The PRA and FCA are currently consulting on this issue and, in light of the wide range of firms and individuals affected by these developments, their conclusions will no doubt make for interesting reading. The industry hopes that any changes to the regulatory referencing process do not inhibit referees from providing invaluable feedback on prospective candidates.

We also see regulators placing further focus on individual and collective accountability at board and executive levels and on firms having good governance models and controls in place. Greater demands have been placed on non-executive directors to ensure suitable scrutiny of management, on everything from strategy to risk management and business models. 

In light of the fact that NEDs will need to be fully appraised on a wide range of issues – so that they can provide proper scrutiny and, where appropriate, challenge – firms must have in place systems and processes that produce high quality, easily accessible management information. Potentially, 2016 may bring further reviews/upgrades to IT systems and data governance reporting, to better assist NEDs in their responsibilities around scrutiny and exercising good judgement. 

Firms will need to demonstrate how they are maintaining high quality decision-making at board level and mitigating the complacency of ‘group think’. We anticipate more time and resource will be allocated to putting appropriate succession planning policies in place. These must be suitably robust, striking a healthy balance between continuity and fresh perspectives.

Diversity will also be a key theme for boards in 2016. The onus is on firms to ensure they can call upon a diverse range of backgrounds and skillsets, allowing the board to manage all elements of the business effectively.

Anne Murphy

Anne Murphy is Head of Odgers Berndtson's UK Financial Services practice in which she also leads the risk, regulatory and compliance team. She identifies risk specialists for Boards and executive c...

Insights

Insight

20 years of gender diversity in Financial Services - What now?

The financial services industry was one of the first sectors to appreciate the benefits of gender...

Insight

A corporate affairs function for the modern world

In today’s world of instant news and citizen journalism, reputation can make or break a balance s...

Insight

Organisational redesign & the future of the workplace

Every year, Deloitte publishes its highly respected annual Global Human Capital Trends report. Th...