UK: Reaching New Heights

Last Updated: 12 November 2018
Article by Chris Hodge

A new qualification aims to support the professional development of financial service regulators

The regulation of governance is becoming ever more intrusive. Where it once consisted of setting out principles for organisations to follow and requiring reporting on them, regulators are increasingly tinkering with the mechanics of how governance works.

This will not exactly come as news to readers of Governance and Compliance. According to the ICSA's new research report, 'Next Generation Governance', nearly 45% of younger governance professionals believe that regulators have more influence over the standards of behaviour within their organisation than any other external stakeholder, as do nearly 30% of their older colleagues.

"Are regulators qualified to exercise the responsibilities they are taking on?"

This phenomenon is visible everywhere, but particularly where organisations are overseen by sectoral regulators – sectors such as academies, sports and financial services (where the Senior Managers and Certification Regime introduced in 2016 in the UK will be extended to insurance companies and asset managers by the end of next year).

What this means in practice is that some of the decisions that were once the responsibility of boards and governing bodies care are now being taken by – or being heavily influenced by – regulators. Which begs the question: Are regulators qualified to exercise the responsibilities they are taking on?

Different stages

Well-designed and targeted regulation can result in considerable benefits for regulated organisations as well as those affected by their activities, but there is also almost unlimited scope for unintended adverse consequences. This is as true of the regulation of governance as it is of every other area of regulation.

Broadly, there are three stages at which regulators can potentially get things wrong: diagnosis, design and enforcement (including supervision).

Diagnosis

In most cases, regulators take action to solve some sort of problem or to influence behaviour in a positive way. If you don't properly understand the root causes of the problem or behaviour you are trying to influence, the likelihood of choosing the right approach and having the desired impact is greatly reduced.

Design 

Even when the nature of the problem has been correctly diagnosed, great care is needed when drawing up the detailed requirements. This is particularly important when introducing general rules. 'One size does not fit all' has become a cliché when talking about governance, but it is a cliché because it is true, and poorly drafted or targeted rules can impose disproportionate costs or require organisations to adopt practices that are unlikely to be effective.

Enforcement and supervision

In some ways, this stage is the trickiest of all for regulators to get right. If they enforce detailed rules or interpret high-level principles in exactly the same way in all circumstances, they are accused of box-ticking. If they exercise judgement or discretion, they are accused of being inconsistent, unfair or having been hoodwinked. In addition, often those who enforce the rules are not the ones who wrote them, and they may not interpret them as intended.

Training and guidance

There are many well-established regulatory practices and processes that can help to mitigate these risks, such as regulatory impact assessments, consultation with regulated organisations and their stakeholders, risk-based enforcement and the 'think small first' principle. However, processes are only as good as the people who operate them. Unless the individuals responsible for designing or implementing the regulatory approach have an adequate understanding of the subject matter, due process may not be sufficient.

Regulators are getting more involved in the detail of how governance operates in individual organisations at the same time as we are realising that good governance is not just about the mechanics but more intangible concepts such as board dynamics and organisational culture, which reinforces further the mantra that 'one size does not fit all.'

"Regulators ought to be able to speak enough of the language to have a conversation with the organisations they regulate"

For regulators and supervisors properly to exercise the responsibilities they are taking, it is important that they have an adequate understanding of these different factors, how to identify them, and how their own actions impact on them. Without that understanding, it will be difficult for supervisors to make informed judgements on whether an organisation is well governed, as opposed simply to complying with the letter of the law; and the likelihood of that law missing its target or having unintended consequences because of how it was written will greatly increase.

That does not mean that regulators have to become governance professionals themselves, but they ought to be able to speak enough of the language to have a conversation with the organisations they regulate – to get their points across clearly and to assess what they are being told.

That is why the ICSA is supporting the initiative in Jersey described below and why I would encourage any regulators reading this to think about what training and guidance might help them to do their job effectively.

Why we want to lead by example

If the financial crisis of 2008 taught us anything it was why we need good governance. We have seen many examples in both local and international markets where failures lead to significant reputational risk, losses and real customer detriment.

As the regulator, we cannot be present at every transaction. So one of our key areas of focus for our supervisory activities is the strength of a firm's board and its governance. The core principle of all our codes of practice is the need for robust systems, controls and appropriate governance to define, measure and monitor effective performance.

At the JFSC, we regard qualifications as one of the components to ensuring staff working in Jersey's finance industry have the necessary governance and compliance knowledge, and we set standards accordingly for the competencies that we expect regulated persons to demonstrate.

It is only right therefore that we practice what we preach and make sure our own people are suitably qualified to appropriately supervise and understand the firms we regulate.

As regulators we are used to asking firms 'why?' But equally we need to turn the question on ourselves: why is a rule written in a particular way? Why do we need the rule at all? Why are we regulating the activity in the first place?

Our experience of the training available for regulators is that it addresses the 'whats' and 'hows' of regulation, but not necessarily the 'whys.'

Qualifications are often skills-based and technical and do not focus on the underlying purpose of regulation and the alternative methods that can be taken.

In recognition of this, we are taking a more co-ordinated approach with a new learning and development programme. And a huge positive is the certificate level qualification that we now have available locally for individuals pursuing a career in regulation.

It goes without saying that we heavily support the professional development of our people. We provide financial support for supervision managers undertaking professional qualifications and we recognise them when they successfully complete their studies.

Effective regulation requires effective regulators. By starting with the 'why' we intend to develop supervisors who are curious, motivated and always seeking ways to improve.

Jill Britton is director of supervision at the Jersey Financial Services Commission

A new certificate

The effective regulation of financial services is recognised as essential to the health of any successful developed economy. Subsequently, those individuals who supervise regulated financial services license holders need to be equipped to carry out their supervisory oversight with the utmost confidence of the general public.

Following the Global Financial Crisis a decade ago, regulators are under more pressure than ever to ensure that their staff are aware of the risks facing them in the effective supervision of these important businesses.

In recognition of this challenge, BPP Education Group, in collaboration with a number of regulatory bodies, have developed the International Certificate in Financial Services Regulation (ICFSR).

This new certificate, which will be accredited by ICSA: The Governance Institute, ensures a level of international recognition that will enable regulatory bodies to demonstrate that their relevant employees meet the high standards required of financial services supervisors globally.

The award of this qualification will enable professional supervisors to demonstrate their seriousness in their pursuit of the highest standard of professional oversight, whilst allowing jurisdictions to set themselves apart as being sincere in their desire for an appropriately regulated financial services industry.

The qualification is rigorous, yet accessible and is supported by interactive tutor led classroom sessions, delivered by experts in the regulation of international financial services who understand the challenges of complex regulatory environments.

The inaugural cohort of eight students started the qualification in October of this year and will sit their examination in June 2019 with a second cohort will starting the qualification in February of 2019; places are still available for students looking to enrol.

The further professionalisation of financial services is essential if society is to have confidence in the industry and given the important role that regulators play in this, we believe that this qualification is an important development in the evolution of the industry.

Natalie Dimond, managing director of BPP(CI) Ltd

Chris Hodge is policy advisor at ICSA: The Governance Institute

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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