Firms that are large enough for line management and functions, such as Human Resources, Compliance and managing the T&C arrangements, to be carried out by different individuals should establish a governing body for their T&C arrangements. This “T&C Committee” should meet regularly to carry out the three key activities of:
- Monitoring the effectiveness of the TC arrangements
- Acting as the change control for the arrangements
- Authorising exceptions to the arrangements
In its Risk Outlook 2013 the FCA states that ‘Firms need to ensure they are putting the consumer and the integrity of markets at the heart of their business models and strategies. This includes making cultural changes that promote good conduct outcomes throughout the business; establishing appropriate oversight and governance around the design and innovation of products and services; and ensuring they are transparent in their dealings with consumers.’
Hence, it follows that, if the inputs for T&C are bespoke to each firm, then measuring these inputs will not tell us if the arrangements are appropriate and effective.
I would suggest that a major component of Conduct Risk is people risk and that the best way to mitigate people risk is, to quote the Securities and Investments Board (remember SIB?), for a firm to ‘have adequate arrangements to ensure that they [members of staff]are suitable, adequately trained and properly supervised’. That is, to have T&C arrangements established and operating.
So if a firm’s T&C arrangements are a key component of its Conduct Risk mitigation strategy then it follows that these need to be subject to “appropriate oversight and governance”. What might this look like in practice?
There is no model way of establishing and implementing T&C arrangements as these need to be appropriate for the firm’s business model and culture. Hence, it follows that, if the inputs for T&C are bespoke to each firm, then measuring these inputs will not tell us if the arrangements are appropriate and effective. To learn this we need to measure the range of outcomes that T&C should be having an effect on. To do this we will need to identify appropriate and relevant management information (MI) and establish procedures for its reporting and review. The MI should show not only the current levels but also any trends in those levels. In this way any performance issues, or potential issues, can be identified and dealt with so that the desired outcomes are achieved.
Relevant MI will include not only the aggregated Key Performance Indicators (KPI) for the individuals covered by the arrangements but also KPI for the arrangements themselves. For example; is the time taken for new joiners to attain competence or is the number of Personal Development/Action Plans in place within the expected range? Also a firm could review any MI trends to determine whether the monitoring/assessment activity is targeted where there is the greatest potential for conduct risk. Such a risk-based approach might seek to identify experienced individuals with a high quality assessment track record where a reduction in observations may be appropriate alongside an increase in observations for less experienced individuals or those that have experienced a reduction in quality.
The MI should also be used to evaluate the impact that investments in training and development are having on business performance.
Inevitably there will be times when the arrangements need to be revised. This may be because the regulations have changed (for example the implementation of the Mortgage Market Review), the firm is changing its business model, or the review of MI has identified that some aspect of the arrangements is not working as well as it might. To ensure that such revisions are identified in a timely manner a firm should conduct some form of regular, say quarterly, review of the performance and operational effectiveness of the T&C arrangements.
Once the need for a revision has been identified, the changes will need to be made in a controlled manner with input and approval from those areas of the business that have a stake. These are likely to include the senior management of the business area affected, risk and compliance, HR and Training/L&D. We may also need to review the remuneration and rewards to ensure that these are still consistent with the revised T&C arrangements.
As an example; a large general insurance firm decided to move from an Advised Sales model to Non-Advised Sales. This required the T&C arrangements to be reviewed and the approval of a revised T&C scheme, including a revised definition of competence for the firm’s Call Centre operation. The transition was supported by monthly MI tracking of progress against plan and associated management actions.
Despite all of the above there will be instances, from time to time, when an exception should be made to the T&C arrangements. In such circumstances we require a process for approving the exception so that a local manager is not put in the difficult position of either insisting on compliance with inappropriate requirements or opting to “break the rules”.
A domestic lines general insurer usually experiences a seasonal requirement for additional staff in some areas. It therefore needs a process for the review and approval of revised parameters for T&C related activity, reflecting the short term nature of the seasonal appointments. This has, for example, included allocation of specific customer transactions to individuals so allowing for their training and assessments to be targeted accordingly along with increased levels of supervision to ensure that risks are controlled.
So how might we set up appropriate decision making structures that will enable interaction between management and other stakeholders? The answer is, I suggest, to establish a governing body for its T&C arrangements. This “T&C Committee” should be comprised of the key functions which have a direct interest in the effective operation of the arrangements. This is likely to include Senior Management, operational line management, Compliance, HR, and Training.
This “T&C Committee” should meet regularly to provide the effective oversight and governance of the T&C arrangements by carrying out the three key activities identified above of:
- Monitoring the effectiveness of the TC arrangements
- Acting as the change control for the arrangements
- Authorising exceptions to the arrangements
Example of Terms of Reference for a T&C Committee
- Purpose
The purpose of the T&C Committee is to provide independent and objective management assurance over the adequacy and effectiveness of the arrangements for ensuring the competence of members of staff and to assist and advise the Board in ensuring that the firm maintains effective T&C arrangements.
- Role and responsibilities
To monitor and review the effectiveness of the T&C arrangements
To review key performance measures for the T&C arrangements
To review the procedures for meeting the Regulatory Reporting requirements relating to T&C
To provide feedback to line managers across the business to ensure consistency in the application of the T&C arrangements.
To act as the change control for the T&C arrangements
To consider any changes in the business model that may impact on the T&C arrangements for any employees and make appropriate revisions to the T&C arrangements
To consider any relevant regulatory actions and amendments to the rulebook that may impact on the T&C arrangements for any employees and make appropriate revisions to the T&C arrangements
To consider requests for exceptions to the T&C arrangements and authorise these when appropriate
To report to the Board on the Scheme’s effectiveness and any exceptions authorised every 3 months.
