In our latest series of articles ‘Gearing up for the downturn’ we explore how financial services firms are preparing to help their customers achieve good outcomes through the recession. This article looks at the key considerations for Boards.
The Boards of regulated financial services companies have a vital role to play in steering their firms through the economic downturn now facing the UK. The regulatory expectation is that firms will support customers experiencing financial difficulty, and with as many as 1 in 4 UK adults already affected (based on data between February and June 2022 - FCA financial lives survey 2022), firms need to prepare.
In this article, we explore key strategic and operational considerations for Boards, to reduce risk and protect customers during the period ahead.
What are the big strategic considerations for Boards?
Economic Impacts: Consumers and clients will likely have fewer financial resources at their disposal for discretionary or non-essential expenses. Boards will need to assess their current business strategy and its resilience in a negative economic climate where demand for products could be significantly lower than before.
Within the asset and wealth management sector investor engagement will be key, as many will want to understand the potential impact on their portfolio. Boards and Investment Committees should continue to challenge the performance and liquidity of funds against the defined investment policies and understand whether key investor communication channels are geared to address investor concerns and questions.
Risk and Resilience: Boards will need to consider their financial liquidity and capital adequacy obligations to ensure they are resilient to economic turbulence and that they have systems and controls in place to highlight early warning signs of financial distress. Boards should also ensure adequate stress testing and scenario analysis is conducted and buffers are maintained in line with regulatory expectations.
Product Suitability and Pricing: The Consumer Duty requires firms to assess and consider if the products they offer are suitable and are in the best interest of consumers. Firms will need to consider the types of products and services on offer as well as their pricing strategy in light of the current environment. They will also need to consider extending repayment terms, altering repayment approaches and training employees on how to communicate with distressed individuals or those who may be vulnerable.
For advisory and portfolio management firms, a client’s attitude to risk or capacity for loss could change during this period. Boards should, therefore, continue to challenge how effective their suitability processes are for encouraging disclosures and ongoing engagement with clients.
What are the big operational considerations for Boards?
The current environment will also impact firms internally, including financially, operationally, and from an employee wellbeing perspective. From this angle, Boards will also need to consider:
Remuneration and Incentives: Consumers should not be adversely affected by remuneration arrangements and firms will need to find the right balance to ensure that employees are incentivised and motivated to deliver good consumer outcomes.
Culture: Linked to the above, it will be paramount that the ‘tone from the top’ places continued emphasis on compliance, conduct and employee wellbeing over financial gain.
Capacity to Deliver: Most firms will face an increase in customer demand over the forthcoming period. Firms need to ensure they have the capacity and capability to deliver. Areas that are most likely to be immediately impacted are front line call centres. Second line of defence will also need to be appropriately resourced and skilled to handle the additional monitoring required during the downturn.
CLICK HERE to read more about how firms can prepare for increased demand
What are the key factors for Board effectiveness?
The cost-of-living crisis is going to challenge all financial services firms. Boards need to ensure that they there are geared-up to operate as effectively as possible during this time, so that they can ensure their firm succeeds. This means having the right skills and experience, the right broader governance arrangements, and the right data and management information (MI) to make good decisions.
The Board may want to consider whether it has the right people to navigate the recession. This may mean seeking additional support from those who have previously guided firms through challenging times, or bolstering skills in disciplines such as economics, risk and resilience (eg. through different types of training or board briefing sessions).
Boards and Committees are also likely to have larger and more complex agendas. The length and frequency of key meetings should be reviewed, and it may be necessary for new meetings or committees to be established. Communications also need to be effective so that between meetings momentum is maintained and issues can be escalated and resolved.
MI needs to be robust and timely to ensure that the Board are kept up to date, and to enable them to make swift and well-informed decisions. This should include analysis of financial and non-financial risks, compliance related matters, customer outcome monitoring, as well as stress-testing and scenario-based forecasts. Boards should challenge the content and quality of the MI they receive to ensure that it provides adequate analysis and insight. The frequency of monitoring and reporting may also need to be adapted, with new sources of information sought to provide the broadest view.
Firms may be asked by regulators to rationalise the decisions they have made. In this case, having a clear audit trail evidencing the information used to inform decisions is crucial. Meeting minutes demonstrating discussions and challenge, roles and responsibilities maps to demonstrate appropriate assignment and delegation of responsibilities, and robust policies and procedures which demonstrate due focus on customer outcomes and adherence to regulatory requirements will also be key.
How can BDO help?
If you would like support to enhance the effectiveness of your Board in navigating the tough condition ahead, please get in touch today with Richard Barnwell or Shrenik Parekh.
We have extensive experience in supporting firms in enhancing board effectiveness, evaluating board skills and experience, and developing and delivering tailored board training plans.
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