Navigating a Complex Landscape: Key Risks and Challenges for Non-Executive Directors in Financial Services

Valuable insights from the inaugural Financial Services INED workshop held at MHA in London on the 22nd of February 2024.

Twenty Independent Non-Executive Directors (INEDs) in banks and other financial institutions from across the UK gathered at a recent workshop hosted by MHA to discuss the pressing issues and risks they face in the year ahead. Hosted by the Chair and Managing Partner of MHA, Rakesh Shaunak and chaired by Sundeep Bhandari, an experienced INED, the conversations painted a complex picture of what it means to be an INED in 2024, highlighting the need for adaptability, robust risk management and a deep understanding of the evolving regulatory landscape.

As well as wider concerns about geopolitical risk and managing change, these were some of the key themes for the INEDs with their focus on financial services that arose from the discussions that took place, all under Chatham House rules:

Sustainability and Technology Take Centre Stage

A key concern was the sustainability of business models in the face of rapid technological advancements. Participants emphasised the need to embrace new technologies and adapt operational models to mitigate associated risks by ensuring there was a robust risk framework in place. This sentiment resonated with many of the INEDs, who saw technology as both an opportunity and a potential threat.

Carlison Morris, Audit Partner at MHA, gave an example of the latter by highlighting the importance of having in place appropriate controls for outsourced services, especially where these relate to IT, citing an increase in ‘back door’ cyber security risks where lax controls around outsourced IT have exacerbated incidents.

Regulatory Compliance: A Balancing Act

Navigating the ever-changing regulatory landscape emerged as another major challenge. From Consumer Duty to s166 reviews, all the INEDs present felt it was a major part of their role to stay abreast of evolving regulatory and compliance demands which are an increasing burden financially as well as in terms of management time. Alex Shapland, an INED and consultant to MHA highlighted the growing frequency and variety of regulatory interventions, while others noted that such actions have become the ‘new normal’ that were part of business as usual for major financial services companies, albeit there was also agreement with Sundeep Bhandari’s point that a degree of proportionality is emerging where systemic risk does not apply.

Effective Governance and Risk Management: Cornerstones of Success

The importance of strong governance and risk management practices is now a given across the financial services sector. Shakeel Aslam, Partner and Head of Internal Audit at MHA noted the need for more comprehensive governance across all operational aspects, while many of the INEDs present emphasised the need for more robust first-line defence controls.

Conversely, others with an eye on cybersecurity, stressed the importance of understanding how technology works to effectively manage risk. Many of the participants highlighted their growing concerns that Boards and INEDs sometimes lacked the technical knowledge to make valid judgements on technology matters that are often intrinsically complex. The INEDs would welcome a stronger internal technology presence on the Boards they sat on particularly if the individual was a strong communicator and highlighted the need for continued education of INEDs in this area.

Data, Reporting and the Human Element

Data quality and transparent content were considered crucial for informed decision-making. However, some INEDs felt the pendulum had swung too far in favour of information overload, recommending briefing packs for Board meetings that were tailored to the reader's needs and avoiding encyclopaedic volumes of content. At the same time risk functions were too often under resourced leading to questions around the effectiveness of current risk controls that may depend on a small group of staff with variable levels of experience.

Looking Ahead: Embracing Change and Collaboration

The workshop concluded with a forward-looking discussion. While some expressed concerns about the PRA's approach to issues like diversity and inclusion, others saw new opportunities arising through technology and emerging talent. Collaboration and open communication were seen as key to overcoming challenges across all areas.

As Rakesh Saunak the Chairman of MHA pointed out, the role of the INED is an ever more important and demanding one. How can INEDs continue to add value and make effective change while spotting challenges that are on the horizon when they are facing ever increasing demands on their time to deal with regulatory compliance? Better flowing and more concise information will definitely help.

Overall, the workshop highlighted the multifaceted nature of the skills set required by INEDs in financial services. By staying informed, adapting to change and prioritising effective governance and risk management, all the participants agreed they can continue to help their respective organisations navigate the complexities of the financial landscape and achieve sustainable success, but it requires a concentrated focus on priorities.