The lack of sufficient Corporate Governance with the UK Financial Services industry.
In a recent speech, Lord Myners (Financial Secretary to HM Treasury) stated the recent failings in corporate governance of the banking sector have been shown in the last few months. His view only confirmed that of the Organisation for Economic Co-operation and Development, which stated that although the lack of corporate governance was not the sole or direct cause to the current financial crises, it certainly facilitated (or did not prevent) the industry practicing misjudgement, poor performance and a failure to anticipate systemic risk.
These views were echoed in a recent roundtable discussion sponsored by els and chaired by Joshua Rozenberg where leading industry professionals debated the premise that although the market has taken a better appreciation of risks in the last few months, there is still a long way to go before it has properly integrated it satisfactory to help prevent or restrict this from happening again.
As a historical comparison, the changes in corporate regulation and governance changed substantially soon after the WorldCom and Enron collapse with the introduction of the Sabannes Oxley legislation in the US which was largely reborn into the Companies Act 2006. However, neither of these two pieces of legislation could have foreseen the financial crises that were just around the corner. With the collapse of Lehman Bros, the nationalisation of Northern Rock and the government acquisitions of nearly all the share capital of most of the major banks including RBS, HBOS and Lloyds TSB, these current forms of Governance have now been outdated by events.
It is now time for a wholesale review of the corporate governance requirements and obligations of the financial services industry and in particular the banking sector. The government has already started with the commissioning of a review of corporate governance within the banking sector by Sir David Walker, which is hoped would work in tandem with Lord Turner's review of the UK banking system. Although it is unclear whether such reviews will also cover extensively the cross-border problems the UK has recently faced, including Lehman Bros and Kaupthing.
The key to move forward is to give a higher level of regulatory control by the FSA in order to inspect and demand certain corporate governance including risk analysis systems, not only be in place but be evidenced in every deal that is undertaken by the institution.
Although the remuneration practices within the industry are already under consultation by the FSA, with a proposed draft code which will in turn be implemented directly into the FSA handbook, it is worth considering that there also needs to be a higher level of personal responsibility taken by those on the board (both executive and non-executive) and where there are failings then sanctions can be taken which would include the non-payment of bonuses as well as suspension or reduction of pension payments.
The second fundamental part of the FSA's remuneration policy is the use of the Internal Capital Adequacy Assessment Process (ICAAP) in order to assess a practices exposure to difficulties coming from the policies etc in place concerning mediation.
The question being put forward now is yet again; are the responses by the government and the FSA a knee-jerk reaction to the events that have taken place and a combination of a selection of policies that are too little, too late to be of any effect either now or in the future.
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