Rising tide of financial regulation washes over recalcitrant boards





Nearly half of the world’s biggest financial institutions are still not doing enough at board level to address risk management and bonuses, even as regulators clamp down.

Despite a wave of new regulations around the world introduced in the wake of the financial crisis that focus on improving culture in institutions from the top down, just 60 per cent of boards have “open discussions” about their risk management, new research shows.

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Only half of respondents to Deloitte’s biennial risk survey thought it was their risk management team’s responsibilities to assess pay against culture.

“This new focus on risk culture and ethics is more than just ‘buzzwords’ — it is a very real thing with teeth,” said Edward Hida, who leads Deloitte’s global risk group. The firm surveyed 71 financial institutions with a total of $18tn of aggregate assets.

US regulators have moved beyond looking purely at banks’ capital and liquidity levels when assessing their safety and soundness and now include “qualitative” assessments of their risk management in annual stress tests, an approach UK supervisors will also follow.

The UK, which has introduced a criminal offence of recklessly mismanaging a bank, in an attempt to hold the highest echelons of management to account, has some of the toughest laws on remuneration in the world.

Tougher regulation, including the fallout from global probes and subsequent litigation, are also an increasing concern for the world’s biggest companies.

In a separate survey by Norton Rose Fulbright, regulatory investigations and litigation were the top concern for general counsel, and the third-highest type of dispute their company was facing.

Even though investigations into manipulation of Libor and the foreign-exchange market are wrapping up, financial institutions are concerned about continuing regulatory probes into other benchmarks, including precious metals, and over reviews around commodities trading, said Chris Warren-Smith, the head of investigations for Europe, Middle East and Asia at the law firm. There is also an increasing interest in the UK in sanctions compliance, he said.

The spectre of past scandals will continue to haunt British banks, according to Standard & Poor’s, which predicts conduct and litigation charges for the four biggest lenders will peak at almost £14bn this year.

Authorities including the US Department of Justice and the UK Financial Conduct Authority are also looking at past wrongdoing to see if something is a repeat issue in order to ratchet up penalties, he said.

UBS is at risk of having its 2012 non-prosecution agreement with the DoJ over Libor annulled as part of negotiations on a deal over forex manipulation, the Financial Times reported this week.

“The other thing you’re starting to see, like with the UBS issue, is a lot of pressure on the DPAs and NPAs,” Mr Warren-Smith said. “You’ve got the DoJ saying we’ll tear these up if we need to.”

The firm surveyed the responses of 803 corporate counsel at companies around the world, the majority of which had revenue of more than $1bn. Half of the legal executives who responded said their company had recently hired outside counsel for help in a regulatory probe.

For regulatory proceedings, size of company does matter, the survey found. More than half of larger companies report that they have one or more pending against them, compared with 16 per cent of smaller companies. Among companies with revenue of $1bn or more, more than half said they have one or more regulatory case against them.





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