Governance and diversity in financial markets

GT_Kathryn Morgan_Portrait

Kathryn Morgan, director of regulatory operations, Gibraltar Financial Services Commission on managing for good governance in a diverse sector as reflected in the experience of the financial services industry in Gibraltar.
“With proper governance, life will improve for all.”
— Benigno Aquino III
Although Sr Aquino was speaking about government rather than company governance, his words are, in my opinion, very true for financial services companies. Looking at failures of financial services companies over the last thirty years, the root cause is always poor governance, whether from an inexperienced board of directors, over ambitious executives, poor organisational design or a combination of several of these.

Challenges of managing a diverse sector

The Gibraltar financial services sector is varied and includes insurers, banks, insurance intermediaries, funds, e-money, consumer credit, payment services, bureaux de change, pension schemes, auditors, insolvency practitioners, professional trustees, company managers and the Gibraltar stock exchange.  Each area has different requirements imposed by European, international or local legislation in respect of governance.
[pullquote]Bringing people from outside the jurisdiction into a firm’s governance structure is useful, and brings the challenge of accessibility.[/pullquote]The Gibraltar Financial Services Commission (GFSC) has statutory objectives to protect consumers and the reputation of Gibraltar. We consider that good governance in the firms and individuals we supervise is key to us achieving our objectives. In the last two years we have increased our focus on governance by interviewing NEDs; reviewing recruitment policies for board members and discussing with board chairs; reviewing board meeting minutes to assess participation; publishing expectations of experienced investor fund directors; and meeting the chairs and CEOs of key firms regularly to set out our expectations and to understand progress and changes in the business.
We set out the outcome we are looking for and usually ask a company to develop a solution that satisfies us. This is better than prescriptive rules, which often lead to structures to get round them.

Managing conflicts of interest


The population is 32,000 people. Whilst it’s a very well qualified group, there is a limited pool of experienced people. There is also scope for conflicts of interest. These are not an issue, as long as they are identified, communicated to stakeholders and managed properly.
Bringing people from outside the jurisdiction into a firm’s governance structure is useful, and brings the challenge of accessibility. We like to know that external people are involved in a business and that we can speak to them easily, both to find out what is happening and to explain key messages from us. We look for boards that balance experience, local knowledge, industry knowledge and that can challenge effectively.
In addition to considering technical expertise we consider how they approach certain – not having perfect experience is not a barrier to entry.

Governance or culture?

It is increasingly clear to me that a firm can have beautiful, well thought out policies covering remuneration, treatment of customers, capital management and so on, and at the same time disregard all of them in the day to day running of the business. It was interesting to note that this experience was shared by other non-financial regulators at the table.
Good governance on paper is not a guarantee of good governance in practice. This means that regulators need to focus on culture in the firms they regulate, which is not easy to measure.
[pullquote class=”left”]”A firm can have beautiful, well thought out policies … and at the same time disregard all of them in the day to day running of the business.”[/pullquote]Having said that, regulators know poor culture when they see it – examples that spring to mind are rudeness to regulators, keenness to use political pressure, preparedness to massage results, refusal to face reality (a “jam tomorrow” attitude), and high staff turnover.
The difficulty for regulators is that because culture is hard to measure objectively, it is hard to design supervisory measures or regulations to mitigate poor culture.  And of course, culture derives from “tone from the top”, so regulators focus on the culture and behaviour of boards and executives.  Some regulators use anthropologists when interviewing people who will be doing key roles – this can give a better insight into culture.  And healthy cynicism from regulators is always good – for example, not being unduly impressed by board effectiveness evaluation exercises which could be merely ticking boxes to make the board feel happy.

How to manage for good governance

I always hate presentations that talk in high-level fluffy language and fail to give any practical tips.  So here are my tips for regulated entities (and not just those in financial services) on how they can convince their regulator that their governance and culture is working and appropriate:

  1. Set up a well thought out governance structure.
  2. Document it
  3. Communicate it through the firm in a way that means people understand it and can use it.
  4. Use your governance structure and demonstrate that you are using it by:
    • Producing readable board packs that reflect reality and that ask for decisions;
    • Minuting board meetings, and board sub-committee meetings, in appropriate, usable detail;
    • Documenting tricky situations to show what has been learned and how the system of governance kicked in;
    • Being able to explain how senior level recruitment is done – how are key competencies identified and how do they fit with other people in the team.
  5. Demonstrate accountability – set out some examples of how the CEO is challenged by her/his direct reports. Similarly for the chair and the board challenging the CEO.

Basically, have some good stories about how the governance structure works and how the organisation has learned from bad experiences.

The views expressed in this article are the author’s own and not necessarily shared by Solvency II Wire.

‘The Governance Trap and the Future of Regulation’ is a collaboration between Solvency II Wire and the Centre for Analysis of Risk and Regulation (CARR) at the London School of Economics.

The event was held in London on 03 March 2016 and hosted by DWF LLP.   dwf
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