Governance and operational resilience: Asset management

Introduction

The financial services sector as a whole, and more specifically the asset management sector, have had to react to the immediate issues brought about as a result of the COVID-19 pandemic. Whilst a number of asset managers report that they have managed the effects of the pandemic better than initially anticipated, there is a clear need for many to re-evaluate their governance and operational resilience frameworks.

Governance considerations

Senior managers and boards have spent the last few months tackling the issues arising from COVID-19. The pandemic has tested the effectiveness of firms’ governance frameworks. It’s often said that in times of crisis a firm’s leadership, their management, their culture, their conduct are tested such that it tests the effectiveness of these arrangements and core values which underpin the firm’s ethos. What this means is that boards must maintain good standards and not allow these to dip during a time of crisis as this would not reflect well in the eyes of the regulator, particularly if it results in negative consequences for investors.

There are a number of areas for asset managers to consider in ensuring they have an effective governance structure in the current environment:

• Competence and capability

Asset management firms should also bear in mind competency, capability, capacity when assessing whether the right team and individuals are in place at each stage. As firms move from stage 1: immediate crisis management to stage 2: returning to business as usual, and then onto stage 3: considerations about longer term strategy, the set of individuals involved with each stage may not necessarily be the same individuals as those who helped steer the firm through the early stages of the epidemic, who then go on to lead the workforce out of lockdown, before moving the workforce back into a new way of working. This is also particularly relevant if firms are reallocating prescribed responsibilities of a furloughed Senior Manager to a member of staff that is not a senior manager.

• Management Information (MI)

MI continues to be a vital source of information. Boards and senior management rely heavily on the timely provision of MI to identify issues and to assist in making informed decisions on how best to operate as the situation develops. Robust MI provides senior individuals with a clear picture on several aspects of the business, for example, the rapid regulatory changes, changes to fundraising timelines, investment period, valuation, liquidity fee and risk management information. Additionally boards and senior management are expected to probe managers about the firm’s operational resiliency of their critical service providers to assure themselves the firm has credible back up plans in place should the third party vendors encounter difficulty.

• Check and challenge

Boards and senior management are expected to scrutinise and question the issues highlighted in the information with which they are provided. It is crucial for the senior individuals to actively and constructively engage in dealing with the risks a firm face. Any check and challenge should be rigorous and well-documented (for example, through board minutes).

• Regulatory obligations

With the majority of staff working remotely, firms are increasingly facing challenges meeting their regulatory obligations, particularly around timely regulatory disclosures, compliance monitoring and telephone recording. The FCA has acknowledged that firms may face challenges meeting their regulatory obligations during these times and made adjustments where they thought it necessary. However, firms are still required to meet their regulatory obligations in a timely manner, and where they are unable to, the FCA should be duly informed.

• Conduct

Like most firms around the world, asset management firms’ have faced a number of operational challenges and have quickly had to adjust to the rapidly changing environment, whilst also ensuring they have robust and dynamic plans in place to deliver consistent services to their customers and other key stakeholders.

Many asset managers have been gathering feedback from staff to understand their thoughts towards working remotely and how this has impacted productivity and driven their day to day decisions. Prior to the pandemic, firms had not considered the impact of staff working arrangements on the conduct risk and operational resilience of firms and this has become a new area to now watch. Bearing this in mind, it is crucial to maintain a clear message in that a firm’s regulatory obligations, and in particular the conduct rules and requirements, have not changed in light of COVID-19.

Operational resilience considerations

Operational resilience is a topic that has risen to increased prominence over the recent year and COVID-19 has brought it into even sharper focus. Regulators and supervisors around the world recognise that financial institutions are now providing a significant amount of their services online, accompanied by a significant increase in the number of their staff working remotely from home. Under this unprecedented situation, financial institutions are expected to ensure both business continuity and the security of their services, while driving their workforce from various locations.

There was a concern about how the asset management industry would be able to operate effectively during this pandemic, considering that physical meetings are important for sourcing deal flow or carrying out due diligence. Aside from firms seeing the importance of online digitalisation of their services, there has been a shift in focus on people. Firms have identified that failure to keep staff motivated in this challenging environment could pose an even bigger threat to the resilience of the firm. Therefore reviewing and streamlining how business leaders and senior management are engaging with its staff is crucial to keep them motivated and the business going. 

Now is a crucial time for businesses to review and enhance their operational resilience. Firms should consider: 

• Board engagement 

There needs to be clear and defined governance arrangements with person(s) identified as responsible for operational resilience who have sufficient seniority, oversight and a clear role in identifying and mapping business services. Core firms should consider appointing a senior individual, while for enhanced firms, operational resilience is owned by the SMF24. 

The identified person must engage across the business and across different teams and locations to avoid managing operational resilience issues in silos and to ensure a holistic client focussed approach. Tone from the top is important here as is the ability to provide effective challenge. 

• Defining and mapping important business services 

Firms need to have a clear understanding of the most important business services to customers and this may vary from sector to sector or by business line to business line. Importantly, firms would be wise to seek feedback from customers to determine what services they value and rely on most in the event of a severe operational disruption. 

• Establish impact tolerances for each important business service 

This means setting a risk appetite and using an outcome-based metric methodology to define a firm’s tolerance for each important business services, and then identifying risks and threats and vulnerabilities of the important business service. The metric would include factors such as tolerable duration of disruption and volume to disruption, number of customers impacted and timeframes in terms of inability to provide key business services.  

• Scenario testing 

The important step here is to document lessons learnt which can then be used to calibrate the risk appetite and impact tolerance including identifying other areas of improvement. There is a danger that firms will not give enough focus on scenario testing given the fact that their operational resilience has been put to the ultimate test in light of COVID-19, however as part of a firm’s operational resilience framework, firms should test a range of different scenarios and scenarios that focus on readjusting to a world where we may need to live with COVID-19 for the foreseeable.

• Ensuring effective and timely communications

Internal and external communication plans are important tools to help the firm keep customers and other stakeholders appropriately informed. Externally, delivering the correct message to the public about the firm’s services is used to protect the firm’s reputation. Internally, delivering appropriate communication throughout the firm will help ensure that staff understand what they need to do in their teams, across teams, and how communications and messages are managed when corresponding with customers and service providers. 

Embedding a culture of resilience is fundamentally important and will encourage better preparedness and continuous improvement. Rather than looking at operational resilience as a regulatory tick-box exercise where no one size fits all, ensuring effective operational resilience is for the benefit of firms as it enables them to make improved and informed decisions and help better prepare for change and equip them with flexibility to deal with severe disruption.