By Marcus Sephton, Partner, KPMG (Marcus.Sephton@kpmg.co.uk)
Personal accountability for regulatory failures
There has been an enormous amount of regulatory change in recent years with the creation of the FSA and the coming into effect of the Financial Services and Markets Act 2000 late last year. The fabled date of 'N2' (1 December 2001) created a considerable amount of work for financial services firms as they familiarised themselves with the 3000 odd pages of the FSA Handbook and reviewed their existing arrangements, systems and controls to ensure that they were ready and able to comply. The complexity and extent of change, combined with transitional provisions, meant that these preparations spilled over into the first half of 2002.
Firms are still dealing with issues such as the need for refresher training for approved persons, the need to assess the suitability of staff who are potential approved persons, and ensuring that they are able to comply with notification requirements, not to mention keeping pace with new consultative documents and commencing preparations for the implementation of the Integrated Prudential Sourcebook (PSB) in 2004.
The FSA's regime is based on a series of high level principles and standards which it expects firms to comply with. A basic tenet of the regime is that the FSA will hold senior managers personally accountable for regulatory failures. In recent weeks there has been increasing evidence of just how seriously the FSA is taking these principles. For example, the FSA is in the process of imposing heavy fines on some life insurance companies. Its new, more aggressive, approach to publicising these actions means that the FSA will include comment on failures by the senior management of named firms in its press releases. The potential reputational impact of such public 'naming and shaming' is significant.
This means that senior managers and directors of financial services firms need to have adequate oversight arrangements in place so that they can be satisfied that their business is well controlled. In addition, those senior managers and directors and their employees need to be competent for the roles they undertake.
Why is the FSA interested in Human Resources issues?
In recognition of the fact that corporate governance structures are only as successful as the people within them, the FSA regime focuses not only on the need for appropriate organisational structures, systems and controls, but also on the need to ensure that the people employed by firms, particularly to undertake significant roles (for example, those people who are 'approved persons') are competent for the roles they undertake. These 'people' considerations are addressed in various parts of the FSA Handbook, for example:
Sections of the FSA Handbook
| SYSC |
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| APER |
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| FIT |
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| SUP10 |
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| TC |
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Operational risk management: managing 'people risks'
More recently, the FSA's CP142 on operational risk systems and controls clearly identifies 'people risks' as an important aspect of operation risk. While much of the guidance provided here on people risk merely supplements what is already set out in SYSC, there are new areas which will need careful consideration by firms, for example:
- Firms are encouraged to have systems for monitoring indicators of 'people risk' (such as overtime, sickness and employee turnover levels) and operational losses and exposures.
- Firms should have adequate systems in place to ensure the availability of critical people resource and should have contingency arrangements for situations where this is unavailable. This suggests that the FSA also has an interest in succession planning. Indeed, some recent FSA visits to firms have focused on, among other things, the issue of succession planning.
- Firms should consider the relevance of the guidance on people risks to employees of third parties providing outsourced arrangements to the firm, a possible implication being that the regulated firm then becomes effectively accountable for the adequate people management of third party service providers.
The importance of effective performance management approaches
Many firms are finding that Performance Management approaches lie at the heart of managing their regulatory risk in these areas. A well-structured and implemented people management approach, including an effective performance appraisal process for individuals, that is supported and sponsored by senior management, will mitigate many of the risks raised by the new regime. It should, for example, answer the following key central questions:
- What are our employee resourcing needs to achieve our business objectives and priorities ?
- What reporting lines and structures best suit our business strategy, plans, services and culture?
- How will we ensure that staff are working to consistent objectives and standards of performance ?
- What skills do we need in the organisation to operate effectively and what training is required to ensure those levels of skill ?
- How will we communicate and then reward the right behaviours in our managers and other employees?
To address these questions, many firms have established or reviewed job-descriptions and role profiles; introduced regular objective setting and performance reviews; established practical competence profiles which set out the minimum technical and skills requirements for key jobs at all levels; introduced new training programmes and assessment mechanisms and reviewed their "HR back-office", including HR records systems.
While most firms have areas of strength in some of the above, all have weak spots where they are at risk. Often this is at senior management level or in the back office; in both cases, HR management and process have historically been weak. How many senior managers have clear job descriptions and regular performance reviews? How many back offices invest in high quality structured technical and management training? Another critical issue at senior management level is the need for mechanisms within the governance process that provide for effective oversight of, and challenge to, the decisions being taken by senior management.
The need for dialogue between HR and Compliance
The FSA's interest in people risks reinforces the need for effective dialogue between Human Resources managers and the Compliance Officer so that HR policies and decisions appropriately address regulatory requirements. Some firms still have a way to go towards achieving this.
Conclusions
The new FSA regime marks a much wider interest on the part of the regulator in the day to day management of firms. The dependency of most financial services firms on the effective management of people and the development of their skills and capability to deliver business results in a compliance and appropriately controlled manner means that people risks have assumed a pivotal place on the regulators' agenda.
Ensuring effective compliance with the people management aspects of the new regime presents many practical challenges for firms, perhaps the most important being the need to ensure the competence of staff, and particularly of those undertaking the role of 'approved persons'.
Most aspects of your HR policy and management will now be directly impacted by FSA regulation and it is important that you understand the requirements, and are aware of forthcoming requirements and their impact on people management so that you can ensure that your HR arrangements address relevant regulatory considerations. In the words of one senior HR manager recently "Even if Compliance aren't very good at communicating with me, I make sure I see all the regulation and get my people to act on it - I know I'm not an Approved Person, but I also know who my Board will sack if we get criticised by the FSA."