ICAAP Workshop
The Guernsey Financial Services Commission followed up last year’s industry presentations with ICAAP workshops aimed specifically at the Guernsey banking sector - see press release.
The Director General of the Guernsey Financial Services Commission, Nik van Leuven, opened the Workshop with the following comments:-
It used to be said that when policemen look young, you know you’re getting old. Looking around, I sense that when non-executive directors look young, it’s time to retire!
I welcome you all to this presentation on the ICAAP process, with particular reference to the involvement of non-executive directors. I bring to these issues more than the interest and concern of Guernsey’s financial services regulator – I was for 30 years a banking non-executive director – of Kleinwort Benson, and also of banks now of memory, including Bank of America (Guernsey) and Bristol and West International.
Today’s sessions follow last October’s Commission’s presentations, which were themed ‘Inform and Engage’. This morning’s brings together non-executive directors – both independent and group – but deliberately excludes executives who have their own this afternoon. For the Banking Division, today is very much a first, but certainly not the last.
The Commission are firmly of the view that non-executive directors are crucial to financial services businesses, and are particularly encouraging the development of independent non-executive directors as a vital professional cohort. We are doing so because non-executive directors bring independence, skill and experience to boards, and so different perspectives and the confidence to challenge. They should also bring knowledge, the Commission being much mindful that ‘a little learning is a dangerous thing’.
Non-executive directors must be proactive in getting involved in ICAAPs rather than waiting to be asked. This means they must engage with their executives and understand what is to be expected of the process. A well done ICAAP will bring concrete business benefits, whereas badly it’s ICAAP is a waste of time.
ICAAPs are about assessing capital requirements, which go to how banks ensure resilience. So, they touch not only on capital but all the means banks have to protect themselves. In consequence an ICAAP addresses, amongst other things, how a bank’s finances and activities are to be managed by its executives and managers, and supervised by its board. Risk considerations are thus vital. The crisis showed that there was not nearly enough robust assessments of real risk, and much of what was thought beforehand to be remote or fanciful risk, if it were thought of as such at all, turned out to be real, and so critical to survival.
Good governance is at the heart of ensuring not only effective planning, to make a bank robust and resilient, but also good execution, which includes the effective practice of risk management. Some years ago I participated in a fun debate of which the proposition was ‘Today’s Risk Managers are Tomorrow’s Chief Executives. ‘ Some 20 or so years ago it was relatively easy – in a jocular way – to dismiss this as self-evidently untrue, but now I am not nearly so certain, for its strikes me that risk management lies besides entrepreneurial flair at the heart of effective business practice.
The Commission places great importance on the contribution non-executive directors should make to boards, and in particular to their oversight of their businesses’ activities. The Commission wants non-executive directors to be fully involved in major issues. This is in line with the draft Corporate Governance Code, in course of publication.
The Commission will be increasing its involvement with non-executive directors, particularly in the development of dialogue through the SREP progress. ICAAPs and SREPs will now be key regular exchanges between banks and the Commission, and will cover not only governance but also resilience.
Today we intend to explain how the Commission sees you, as non-executive directors, contributing to the ICAAP process, which of course is a major issue for all directors, not just non-executives. Executives tend to concentrate routinely on management of expected losses, whereas we believe that non-executive directors are better placed to see risks arising from unexpected circumstances, though the Commission also believes that executives, in order to be effective, should always have the unexpected in mind.
Advocate Kirk, Head of Commercial, Collas Day, who chaired the non-executives Panel Discussion said it was a valuable seminar:-
"Any event which facilitates dialogue between the Commission and non-executives, whether it is by way of technical briefing or simply explaining the Commission's expectation of non-executive directors, should be encouraged".
He said "it would be useful to have regular engagement between the Commission and non-executives where issues effecting banks and their non-executive directors could be frankly discussed."
Bob Moore, Panel Chairman of the Workshop's afternoon session, said:-
"The Panel Session allowed the Chief Executives of four Guernsey subsidiaries to share their experiences with their peers regarding certain aspects of the 2009 and 2010 ICAAP processes, organised around a number of topics. These were: Methods and approaches for quantifying certain risks which by their nature are hard to quantify; How to deal with Group concentration risk within an ICAAP; Issues arising from different objectives of Parent, local Board, local Management and local Regulator in respect of the subsidiary's ICAAP; How to keep an ICAAP dynamic; and Benefits gained from the ICAAP process. The Panellists' comments reflected different ways in which each has approached certain aspects of the ICAAP process, as well as the variety of their businesses including the impact of their Parent's different home jurisdictions, the size of the local Guernsey business, and the particular product/ service emphases of the local operation. Examples used by the Panellists and their analysis of the different issues were wide-ranging and thought-provoking. A common theme was, however, the value and importance of the ICAAP process becoming engrained as a tool within the local organisation at all levels, including general management and of course the Board. Feedback from the session suggested that the Panellists' comments had raised some interesting perspectives on these issues for the audience, which was drawn from the Island's banking CEO's and CRO's."
Presentations during the workshop are available below:
Board-Effectiveness-and-Capital-Adequacy.pptx
The-SREP-and-Capital-Adequacy.pptx
The-ICAAP-a-non-execs-view.pptx