Warning over new rules for non-executive directors in financial services

By Adam Brown for IR Magazine

Upcoming regulations will force higher fees and lower quality of non-executive director candidates, Tyzack Partners says.

Upcoming UK regulations meant to hold non-executive directors responsible for breaches of good governance may have a ‘dramatic and damaging’ effect on board diversity, according to a report by executive search firm Tyzack Partners and board effectiveness consultancy Advanced Boardroom Excellence.

‘The financial services sector could be in for a shock when it comes to recruiting new blood from 2016 onwards,’ the firms write in a press release announcing the report. ‘The introduction of the Senior Managers’ Regime next year could act as a deterrent to, and lead to a narrowing of, experienced and capable business people considering non-executive directorships at leading financial services companies.’

The report comes in response to an announcement last month by the UK’s Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) that non-executive directors in the financial services industry will be included in the Senior Managers’ Regime, effective from next year. Inclusion in the regime means non-executive directors will be held responsible for breaches of governance, must obtain regulatory pre-approval and will have to follow the FCA and PRA codes of conduct.

Increased responsibilities for non-executive directors in the financial services industry will exacerbate issues surrounding board compensation, the report states. The authors say pay ‘already lags behind the commitment, responsibilities and personal reputational risk of the role.’ The report, which includes interviews with 30 non-executive directors from various sectors, also notes that increasing regulation will both increase the cost of governance to companies and lower the quality of candidates for the role.

‘A side-effect of regulation creep is a potential trio of dysfunctional outcomes: an upward pressure on higher board fees, which in turn increases the already significantly high costs of corporate governance, and a dwindling pool of willing, experienced and credible candidates,’ says David Dumeresque, partner at Tyzack.