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The Turner Review is to be welcomed as a potential major step forward in regulating the UK financial services industry. The devil, of course, will be in the detail and in just how intrusive the regulator will be in practice. Many points made in the report are clear and unarguable. It is a long time since a report from a regulator has been argued both from an academic perspective and from a business perspective, rather than simply a regulatory need. It is to be hoped that consultation papers from the FSA will follow the lead of its recent new Chairman. The Turner Review contains many points worthy of commentary and Chase Cooper's Regulatory News will make such comments in the coming weeks.
The following two points are the first of those:
It is clear to all that the securitised credit market was the trigger for the current debacle although it is simply the most extreme example of significant change that has been happening in the financial services industry over the last two decades. To single out securitised credit, whilst it makes sense currently, may be seen to be a little too convenient with hindsight. This, however, is balanced in the report with a sensible call for additional capital for proprietary trading activity. Given the trend of linking bonuses for senior management to RoE or RoC, the need for additional regulatory capital will assist significantly in linking bonuses to performance. The further suggestion of a capital buffer to be put aside during good times will additionally help link remuneration to longer-term performance, provided bonus calculation is on the bottom line and not at some intermediate level.
FSA has significant expectations around increasing professionalism and access for the risk management functions, and will take a far greater interest in the quality of risk management people (as well as processes), how the function gets routine, more formal access to the Board, and how its independence is strengthened, embedded and preserved. This clearly presents challenges to banks and their risk functions in upgrading both the skillsets of the individual players – with a particular focus on influencing and presentation skills, but also on understanding the nuts and bolts of the businesses – and in then increasing the significance and influence of the risk organisation for banks across all of their commercial activities.
Greater independence for the risk management function will only add to risk management’s influence in an organisation if it is considered part of the senior management structure by the organisation, and able to engage on equal terms. On the other hand, we should not expect businesses to be run by risk management but rather risk management to contribute equally with other functions in the running of the business. At the end of the day, the Board of Directors as a whole must be responsible for running the business. It is commendable to see that the Turner Review explicitly considers and highlights the responsibilities of non-executive directors in this regard, who will be expected to act dynamically as the conscience of the organisation.
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