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 Non-executive directors: What to expect from an ARROW visit
An ARROW visit is an on-site risk assessment programme which assesses corporate governance and a firm’s control environment.
During a visit, the FSA usually interviews the senior management team, including non-executive directors, particularly if they chair key committees.
Non-executive directors are not expected to provide a detailed view of all operations, but the FSA is interested in their perceptions of the firm and the steps they take to satisfy themselves that risks are identified, measured, monitored and controlled.
The FSA has listed the following types of issues that could arise during a non-executive director interview:
- whether you, and your fellow non-executives, have a good oversight of the risks facing your firm;
- how effective the controls are within the firm;
- the adequacy of the firm’s infrastructure, including whether the firm’s people know which legal entity within a group that are actually operating;
- what controls there are in place to ensure that business is conducted properly with customers and markets?
Good governance is vital for good risk management since it is only through having good governance that a firm is able to assess and mitigate its key risks.
The FSA’s risk-based approach to regulation places a great deal of emphasis on governance and the responsibilities of senior management. The FSA will assess whether your firm is effectively managed and decision-making is appropriately challenged.
During an ARROW visit, the FSA supervisor will review how decisions made by the Board are actioned, and assess the quality of risk assessment and planning. If the FSA is not satisfied with the governance structure, they will expect firms to take action.
The FSA exerts pressure on executive management to ensure non-executive directors are of a high quality; and expects those non-executives to challenge the Executive Board, where necessary.
The FSA expects non-executives to be honest and competent and expects them to "ask the challenging questions, to understand the business models and sources of profit in the firm, along with the risks which those entail" (Sheila Nicoll, Retail Firms Division, 17 September 2008).
If you agree to become a non-executive director, you must expect the FSA to assess your competence and to hold you accountable if you conduct yourself in a way that is below the reasonably expected standards. .
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Remuneration Policies
The FSA has issued a 'Dear CEO' letter concerning remuneration policies, and whilst inappropriate remuneration schemes may primarily focus on investment banking and trading, the FSA has warned that widespread concern is not exclusively in these areas.
Remuneration structures must be consistent with sound risk management frameworks, and Boards of firms must ensure remuneration policies can be monitored and potential risks created by them able to be mitigated.
The FSA conducted a review of remuneration policies in September and plans to arrange further visits before the end of the year.
The FSA have stated, "We would encourage firms to review compensation policies throughout the firm (not just in trading and investment banking areas) to be sure they are consistent with sound risk management".
Some examples of good practice include taking into account appraisals and other qualitative measures; and involving HR in setting compensation (so an independent role is achieved).
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May 2008
The Financial Services Authority (FSA) has recently published their Interim Report on the Retail Distribution Review (RDR). This has been formulated following an initial review of the feedback to the RDR Discussion Paper the FSA has received from industry bodies (and other parties) including amongst others the British Bankers' Association (BBA), the Building Societies Association (BSA), the Investment Management Association (IMA), the Association of British Insurers (ABI) and the Association of Independent Financial Advisers (AIFA). Although this report is an interim measure, with the FSA due to provide an in-depth analysis of the feedback to the RDR in October 2008, it provides a valuable indication of where we may finally end up!
This briefing sets out the main points of the FSA report, along with some pointers on industry views from the industry bodies and their responses. It aims to provide you with a reference point for the current views concerning the RDR across a range of financial sectors, which you may find useful in understanding how those sectors are reacting to the proposals.
Download (doc)
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In-sure
FSA publishing the new Insurance Conduct of Business Sourcebook
This month's edition sees the FSA publishing the new Insurance Conduct of Business Sourcebook, a new tax regime for insurance companies, the connected travel insurance becoming regulated, the FSA warning insurers that ARs are failing to treat customers fairly and CEIOPS publishing a set of papers in preparation of Solvency II...
Download (doc)
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November 2007
Permitted links for long term insurance business
Large amounts of money are invested in unit linked investment funds every year. Yet, these investments used to be subject to a regulatory regime that has been implemented in 1994 and has not substantially changed until recently. With Policy Statement 07/17 "Permitted links for long term insurance business" the Financial Services Authority (FSA) decided to completely revamp the permitted link regime and updated the classes of assets which are allowed as investments in unit linked contracts.
Download (doc)
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August 2007
Responsibilities of Providers and Distributors
In July 2007 the Financial Services Authority (FSA) published
on its website "Provider and Distributors Regulatory Guide Instrument
2007" (FSA 2007/41). The Annex to this instrument sets out the text
of the new Regulatory Guide "The Responsibilities of Providers and Distributors
for the Fair Treatment of Customers" (Guide) by which
FSA expresses its view on the various duties owned by product providers or distributors
to retail customers during the life-cycle of a product under the FSA Principles
and under detailed rules. The Guide takes into account changes to the Handbook
that have already been made or are due to come into force on 1 November 2007
with the implementation of MiFID.
Download (doc)
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July 2007
FSA process guide to decision making on Schemes of Arrangement for insurance firms
In this paper, the FSA explains how it engages with Schemes of Arrangement (Schemes) and, in particular, their process for reviewing the Schemes which the firms they regulate propose and the criteria they use in that assessment. Their 11 Principles for Businesses set overall requirements for all financial services firms. As part of principles-based regulation, their aim in this publication is to give the reader predictability, consistency and certainty on the tests they will use to determine whether a firm has acted appropriately in relation to these principles in promoting a Scheme. This paper will be of interest to anyone involved in the UK insurance run-off market – including the management, advisers and policyholders of firms proposing Schemes, trade associations and market commentators
View Publication
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