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. .