External help: what good is it anyway?
By Simon Tweddle
Can you spot the difference?
Two pictures, two projects, both unfinished.
Picture 1: The boat
When you look at your boat, you immediately realise you need to do some maintenance and restoration before you can launch. You find a firm to come and restore your boat, or you invest your own time in learning how to do it yourself. It takes longer on your own: you must balance your time with other commitments. You make a few mistakes along the way and need to put them right, hopefully before you launch. Whatever you choose to do, you know from the start that the task isn’t easy, so you approach it thoughtfully.
Picture 2: The sandcastle bucket
On the other hand, anyone can build a sandcastle. It’s easy, isn’t it? There is nothing to ‘fix’ and you have the capability to fill the bucket with sand and invert it. Take a closer look at the “sand.” When the bucket was lifted, the castle collapsed. Maybe the sand wasn’t fit for the purpose, maybe you built it in the wrong place, or maybe the foundation was not strong enough. If you’re REALLY unlucky, the castle will hold its form for a while, lulling you into a false sense of security before the tide washes it away.
Let’s put that into a business context
Ok, so perhaps I’ve stretched my holiday photographs a little too far!
Nonetheless, over the years I’ve seen firms assume something is easy without really understanding what they’re dealing with, what the business need is, or (increasingly these days) what the regulators actually expect.
Where’s the evidence for that?
Over the past few years, we have witnessed first-hand that some firms, to varying degrees, didn’t really understand the regulatory expectations for both Operational Resilience and the New Prudential Regime for Investment Firms (or IFPR) in the U.K.
Some firms met the challenge head on, invested, got it right. Some firms didn’t and are weighing up how to meet minimum requirements as quickly as possible now, just in case they get contacted by the FCA, have already been contacted, or, with respect to IFPR, because the ICARA completion deadline of March 2023 is rapidly approaching.
What some firms have said to us
Operational Resilience- “I don’t really see the difference between that and having a good business continuity plan, which we’ve already got,” “We’ve already got process maps,” “We know what our issues are.”
IFPR- “We’ve got a solution for K-Factors,” “We know what our risks are,” “If the FCA ask us for a wind down plan we’ll get in touch.”
We’ve heard something similar in some quarters for Consumer Duty (the subject of a future insight blog). “We don’t have consumers; let’s move on.”
Maybe it was just banter (a word that has a more sinister meaning today than perhaps it did 5 years ago). Or maybe they had weighed the risks of investing vs. being, well frankly speaking, caught out. FCA have limited resources they have to prioritise what they invest in (hunt) too.
What’s the lesson?
Thinking a project will be straightforward without understanding the requirements and the detail of your business is a bit like my sandcastle analogy. “We’re a simple business so it should be easy.” Complexity doesn't always come from products and services though. How are the products and services delivered? Are the processes repeatable? Are the processes being repeated? How many people are there in the value chain, and what are the interdependencies front to back?
I've spent around 30 years in financial services employed by and working with various types of firms. Over those 30 years I’ve observed that (in many cases) the more senior an individual is, the simpler the business seems to be to them. The business hasn't changed; their perspective on it has. In many, but not all cases, they’re getting further away from some important details, often relying on information that is aggressively managed before it gets to them.
As external advisors, we often hear “I didn’t realise it worked like that. Would that really happen? Why has no one described it that way before?".
Yes, it does work like that, yes that may really happen. In fact, it did happen somewhere else, and the reason it hasn't been described like that before is because it hasn't been analysed properly and documented in a way that can be consumed and understood.
Modelling a business process using some fit-for-purpose software rather than Microsoft Visio and PowerPoint is a good place to start. Another is getting some external help from people who have seen regulatory change and business-as-usual done many ways at many organisations as recently as yesterday or last week. Moreover, and perhaps most importantly, external advisors have seen the regulatory responses to what several firms have decided to do previously, taken part in such remediation work and particularly when the external advisor is Shapes First, left the business in a position to be able to do it themselves going forward.
So what?
Whatever you might think of the regulatory regime, or the authorities charged with implementing it, maintaining a good regulatory standing matters. Damage is costly in many ways. It’s been our experience that once trust is lost, the firm is on the back foot for … well, years. A skilled persons review (section 166) can cost high six figures in total and consume thousands of person days – usually the expensive person days: your senior managers, material risk takers and senior conduct staff.
If you are a senior manager, a material risk taker, senior conduct staff, or on the Board, you'll serve yourself and your firm well if every so often you get an external opinion on something before it goes somewhere there is no coming back from. To the FCA. Especially, if as a rule, you tend not to get external support.
How can you be sure what you’re about to send is indeed fit for purpose? It has been put together by people who, as good as they are, are doing something for first time or using the same methods and ideology as the first time it was done years ago, may have never seen it done another way, or (and let’s be really candid now), could be part of culture that views the word “change”, or phrase “a different approach” synonymously with “what went wrong?” or “who is to blame?”. Coming back a notch or two from there, I’m sure many of you have read the research about group think, usually in the context of diversity and inclusion. Well, the same principle applies here: everyone gets used to doing things the way they’ve always been done, and we’ve all got tales of how that can turn out.
Irrespective of how your firm has become, let’s say, “of interest” to the FCA, don’t indulge your optimism bias, or those who won't participate in the downside if it goes wrong. Generally speaking, people on the FCA register participate in downside more than others. FCA interest can be an early warning sign for something and should not be underestimated.
Why would you believe me?
Of course, I would say all of this! I'm running a business that provides external support. The irony is that businesses like ours thrive because firms don't use us enough. Let that settle in…
When you’ve spent as much time as we have supporting non-bank financial services firms, especially broking firms, respond to regulatory interventions of varying severity you realise that the detail and how it is presented is everything. If you've never had to deal with a regulatory issue at your firm and you have one, you will learn an enormous amount, very quickly. Getting external help won’t stop you learning, but it might save you a few sleepless nights.
How can you benefit from external support?
Like you, we have built a business based on what we’re good at. We’re good at practical advice and producing tangible deliverables. It’s rare to find a group of people who really understand how your business works.
With respect to broking, many of us have worked for and with several firms in the broking sector consistently over the last 10 years. We have a detailed understanding of the broking business, we’ve built our business around what you do, which means we can add value much more quickly than you might expect.
This is not to say that we don’t also understand payment services, insurance, and asset management, but at this time in our own business cycle, and as a result of several engagements over the last 5 years spanning multiple disciplines, we feel we are uniquely qualified to service the broking community in facing regulatory challenges in a cost-conscious environment.
You don’t need it to be perfect, but you do need it to be done.
Get in touch. We listen first. We help you get it done with proportionality at the forefront of our minds.
Shapes First. Helping you shape up for the future. info@shapesfirst.com
