FSA tells mutuals to tighten risk management

4 March 2010 | By Natalie Thomas

Speaking at a Building Societies Association corporate governance seminar yesterday, he says the events of the financial crisis clearly exposed material shortcomings in the governance and risk management of some firms, not least in some building societies.

He says although poor governance was only one of many factors that contributed to the financial crisis, it was an important factor, along with other failures such as on capital and liquidity and, as we have acknowledged, some failures of the regulatory system too. 

He says: “We will all be aware of the adverse publicity relating to a number of societies that have recently experienced difficulty.

“Here we saw societies pursuing higher-risk strategies, with the build up of non-traditional lending, such as commercial, self-certification, non-prime loans, and buying other firms’ mortgage books, all without keeping the requisite eye on maintaining asset quality. 

“Societies went after this higher-margin business without the requisite challenge from their boards. “

He says it doesn’t want to remove all risks from societies, but it does want to make sure that societies are well-run, recognise the risks they face and put in place appropriate strategies, systems and controls. 

The FSA will be releasing a policy statement shortly, regarding building societies diversifying away from the traditional business models.  

Ashley-Fenn, says: “In short this policy statement is likely to say that if you are doing this type of non-traditional business, you must ensure you have the necessary risk management systems and controls and skills in place – something we are also asking of other firms, such as banks.”

The FSA wants to introduce a number of new, more specific, controlled functions that it says will capture the key roles in organisations.

He says: “We believe that nearly all of the new controlled functions we are proposing could be relevant to building societies, namely: chairman; senior independent director; chairman of the risk, audit, or remuneration committee; and the finance, risk and internal audit functions.”

The FSA plans to interview candidates for larger, more complex or risky firms, who are applying for the top roles.

He says: “We consider that it will be appropriate for many firms, according to their nature, size and complexity to appoint a chief risk officer but that there will be others for whom it will be clearly unnecessary or disproportionate. 

“So we are leaving it open.  We are not limiting the scope of our proposed guidance to specific firms.   At this stage these are only proposals; however, if you are in any doubt about whether you should appoint a chief risk officer in line with this guidance, you should probably discuss the matter with your supervisor.”