UK: Banking Regulation and Supervision - Lords Economics Affairs Committee report published

The House of Lords Select Committee on Economic Affairs has today published its report Banking Regulation and Supervision. The abstract is available here. Conclusions and recommendations are in chapter 11. Chapter 7 deals with bank governance and focuses on non-executive directors, the remuneration of bankers and Government shareholdings in banks. 

With regard to the role of corporate governance, the Committee states in chapter 7 (para. 178):

Maximising shareholder value gives bankers a clear objective, and ensures that they are accountable for their actions. But since bank shareholders, boards and management are not exposed to all of the costs of their decisions, corporate governance legislation as it relates to banks should recognise this fact by modifying shareholder rights as necessary, for example through the introduction of rigorous procedures for shareholder approval of senior bankers' remuneration, of the appointment of directors and of arrangements for assessing risk".

With regard to non-executive directors, the following recommendations are made:

Non-executive directors need experience at high level in business, public affairs and other relevant fields, the personal qualities to obtain clear and full answers from management, and the ability to understand the bank's businesses and the risks being undertaken. Selection procedures should stress these requirements, and directors should be drawn from a diverse range of backgrounds so as to minimise the danger of 'group think'.

There is also a case for a risk committee of non-executive directors with relevant expertise, able to devote significantly more time than a conventional non-executive, to the assessment of the bank's risk profile, independently of the bank's executives. They would need to be remunerated accordingly and be provided with suitable support. All non-executives should have access to outside advice.

Once appointed, non-executive directors should have adequate access to information and advice, from experts inside and outside the firm. Formal mechanisms to acquire this information are desirable. Larger firms should consider establishing a permanent support staff for their non-executive directors.

Bank non-executives need sufficient experience, and a broad enough perspective, to enable them better to challenge the bank's management. To accomplish this, there is a strong case for relaxing term limits on non-executive appointments, and for lifting age restrictions on non-executives.

The possibility that non-executives in financial firms be required explicitly to sign off on their fields of competence should be considered by the firms themselves and, if necessary, by the Government".

The report makes further recommendations concerning the operation of the tripartite model of regulation but it does not go as far as Sir Martin Jacomb in a paper titled Re-Empower the Bank of England published yesterday by the Centre for Policy Studies. Sir Martin, a former director of the Bank of England, calls for a much greater role for the Bank of England in regulating individual banks. Indeed, he argues that the Financial Services Authority should become a subsidiary of the Bank of England.