ISE 2012: UK regulator’s emphasis on board role in risk management could attract “wrong” sort of execs

Following the bank crisis the Financial Services Authority in the UK has focused more closely on the board’s role in risk management in a move which could be bad for non-executive directors according to a legal expert.

Nathan Willmott, partner at Berwin Leighton Paisner, outlined to delegates at Insurance Strategy Europe how the economic downturn has mean the shift of emphasis onto the quality of senior management decisions regarding risk.

Despite no formal changes in law Willmott said since the banking crisis the FSA has taken a more "extreme approach" to risk management in financial institutions.

"The FSA is putting more emphasis on senior management and their role in risk management but if they push too far then the wrong sort of people will be willing to be non-executive directors and people will be unwilling to become board members because of requirements. Expectations are going up in terms of personal knowledge of risk," he explained.

He explained that non executive directors are expected to complete an informal review of risk measures in place on joining a firm and are also expected to undergo a formal FSA interview rather than the rubber stamping that has been seen previously. Although he conceded some positive have arisen too: "Boards are debating risks more than they used to."

Comparing this with the situation across Europe one delegate raised the point that in Italy a board of auditors sits with the board, while another added that monitoring like this goes across all industries for Germany and not just the financial services, suggesting that the UK is only just catching up with the continent on this issue.

Willmott added that the UK industry was watching with interest to see the outcome of the first challenge to the emphasis after John Pottage was fined for failings by his subordinates.

Mr Pottage personally committed no offence, but he was hit with a £100 000 penalty because the FSA alleges that he had failed to take action to deal with "serious flaws in the control environment at UBS Wealth Management" when he was appointed to head the division in 2006.