Being an Independent Non-Executive Director in different jurisdictions: lessons learned from Mazars in Ireland roundtable

Mazars recently hosted a Financial Services INED Roundtable Dining Event in Dublin[1]. Over 50 financial services independent non-executive directors (INEDs) attended, from banking, asset management, funds and insurance entities operating across the EU and UK.

The roundtable focussed on the challenges facing INEDs in the current unpredictable macroeconomic environment. The new and emerging risks and the evolving regulatory landscape make it increasingly time-consuming for INEDs to gain sufficient knowledge of the institution they are overseeing. Moreover, the different supervisory frameworks, and their impacts on individual accountability, can influence behaviours and the attractiveness of the INED role.

In this article, we discuss some of the highlights from the discussion in the panel but also from the broader points of attention raised by INEDs attending the event.

“Sitting on the Board of several banks, I have learnt that living with the regulatory rules that I helped draft as a former senior regulator is hard.  I think every regulator should be made to do it!”

Sylvie Matherat, Senior Global Advisor, Mazars

The importance of robust governance for the supervisors

While the mechanisms implemented in the UK, Ireland and the rest of the EU differ, robustness of governance is at the heart. They all require banks to have effective management bodies, and Boards’ independence is a shared core principle, for which INEDs play a crucial role.

However, gaps in supervisory expectations remain. For example, in last year’s assessments of banks’ governance, the European Central Bank (ECB) identified remaining weaknesses in some banks’ Board composition, such as insufficient number of INEDs, lack of knowledge and expertise in technical areas such as IT, and issues with the functioning of the Board (such as insufficient time set aside for debates).

The 2023 failure of US banks and the takeover of Credit Swiss has accentuated this need for strong internal governance and effective risk controls, and significantly increased the supervisory urgency and focus on this area.

“The ECB reiterated that it will apply the necessary escalation mechanisms and tools, including financial fines, for banks with inadequate governance.”

Eric Cloutier, Eric Cloutier, Partner – Global Head of Banking Regulations, Mazars

Challenges facing INEDs within a subsidiary of a larger group

Many of the regulated firms operating in Ireland have a group relationship. What are some of the benefits and challenges associated with being an INED in a subsidiary of a broader financial services / non-financial services group? 

Ultimately, INEDs are responsible for their local entity and this view is aligned with the regulatory authorities.  There are however potential conflicts of interest which may arise for INEDs in an entity which is part of a large global group. These can originate, for example, from differences between group and local strategy, the need to ensure legitimate governance at a local level, and the way local INEDs interact with the group NEDs.  Too often, informal interactions are also the source of potential conflicts between the group and the subsidiary.

The local INEDs can manage these potential conflicts by interacting with group NEDs more frequently, clearly outlining local regulatory requirements and ensuring substance (‘hearts and minds’) and governance of decision-making are rooted in the local entity. A broad range of other measures can also be implemented, such as having an independent chair, implementing sound local governance controls, and mixing the number of NEDs and INEDs so that INEDs outweigh the NEDs. Most entities are already doing this, as these are clear principles for INEDs.

Current and emerging areas of focus for INEDs

Based on your experience and knowledge of what is happening in other jurisdictions, what are some of the common and emerging areas of focus that are impacting Boards, particularly INEDs?

In the current macroeconomic and geopolitical environment, INEDs are preoccupied by a large number and multifaceted emerging risk areas, which also ultimately impact strategic direction and decisions.  Therefore, INEDs invest significant time to gain sufficient knowledge but also for interpreting the potential impacts of the diverse new regulatory requirements and what the supervisor is expecting from the board and its members in this regard.

In terms of actual topics in focus by INEDs of banks, the spectrum is broad. But what is most challenging are the new and emerging risks – and their regulations. For example, climate risk is now increasingly under supervisors’ scrutiny and requires much more attention from INEDs. Cyber risk is also a significant area of focus in the current geopolitical environment. New technologies (such as AI) and digitalisation also require new skills and understanding as they present both significant opportunities and risks. All these risks also come with related regulations[2] to be familiar with – at least in essence.

However, there might be local nuances, including the importance put by the regulators and supervisors in the different jurisdictions. But also differences on what the consequences might be for the bank, its executives, and potentially the NEDs and INEDs in case of non-compliance. Climate is a good example, where the topic is put very high on the agenda in the EU, with the ECB having recently mentioned that banks which do not remediate serious gaps with its expectations may be subject to financial fines. This is not the case in the UK, and even less pressure is applied to USA banks for climate risks.

INED skills requirements and implications 

As a chief credit risk officer, I am in an environment where some of our key risks are non-prudential, op resilience, DORA, cyber security, etc. At a Board of Directors level, particularly INED, how do you manage the need for skill and competence in these areas?

This question builds well on the previous question in which we raised the challenge of interpretation between the board and the supervisor. 

“In the new regime in Ireland, assurance to the Board will become a key tool for every INED”

Chris Monks, Partner – Head of Prudential Risk, Mazars, Ireland

We do note that external bodies, such as the bank’s supervisor(s), seem to expect that INEDs should know everything. However, this is not possible, but also not necessary or practical.  Although INEDs are very successful people in their field, they cannot be expected to be experts in every aspect of the business. In some large organisations, it may be possible to have INEDs that are specialists in specific areas, but this may not be the case where there are only a couple of INEDs on a Board.

The complexity and case-by-case nature can lead to a different interpretation by the supervisor of what level of skills is needed for the board members for diverse technical topics to do the job properly. The right level of skills needed by INEDs can greatly vary depending on the bank’s size, business, model, and individual specificities. Discrepancies can be observed between the board’s interpretation and the supervisor’s expectations – which can lead to surprises and challenges for INEDs. 

Thus, it was agreed that ‘reasonable steps’ are required and that sufficient Board training, governance sign-offs, independent 2LOD or 3LOD reviews or external assurance can be used to support the INEDs’ understanding and to increase their comfort.  Additionally, fora like coffees and informal preparation sessions with executives were very valuable in the past. Most of this interaction between the INED and the executives or senior managers should be formalised within the Board or Committee meetings.

All this will still not prevent all gaps of interpretation between what consists of ‘reasonable steps’ and skills requirements. But it can support to justify to the supervisor the Board’s individual situation. 

Foreseen impact of SEAR, learning from SMCR

“A key impact of SMCR in the UK is that it has positively impacted culture and behaviours, according to 94% of senior managers surveyed by the Prudential Regulation Authority (PRA) in the UK[3]. Similarly our own recent survey of compliance executives, showed 86%[4] expect IAF will result in positive cultural change in Irish financial services”

Kian Caulwell, Partner- Head of Financial Services Consulting, Mazars, Ireland

Published data from UK Finance, PRA and FCA, notes that it has led to an improvement in culture since SMCR came into force. What are the potential impact of an accountability regime in Ireland, against the backdrop of European requirements in this area?

SEAR in Ireland will lead to a number of actions including older INEDS retiring, increasing cost per INED, potentially riskier firms may find it hard to recruit INEDs. On the other hand, it will also lead to enhanced interaction between the INEDs and 2LOD and 3LOD and external assurance providers.

These new rules, it should be noted are codifying and documenting things that are already in place in all well run financial services entities and this will lead to increased clarity and accountability amongst executives and the Board.

Moreover, if we look at the UK example with the SMCR, some of the initial concerns raised such as attracting talents or the costs of INEDs did not fully materialise.

The requirement for strong governance remains

The question of accountability is not a new one for INEDs, and the recent changes in Ireland should not have significant impacts, at least not to the extent of the Chair and the Executives. 

Thus, the topic of strong governance is only expected to remain – and even solidify, which has a broad range of implications for INEDs. This is overall positive for INEDs in our view, by greatly elevating the importance that the role will maintain in the future. On the other hand, INEDs must also remain aware of the increasingly demanding and time-consuming requirements to gain knowledge of the rapidly evolving risks environment and regulatory landscape.

[1] The panel discussion was composed of our keynote speaker Sylvie Matherat – Global Senior Adviser Mazars and who holds numerous INED positions in banks across Europe, of Eric Cloutier – Global Head of Banking Regulations, and of Chris Monk – Head of Prudential Risk Ireland. 

[2] In the EU for example, a broad range of new regulations being introduced, such as Digital Operational Resilience Act (DORA), Markets in Crypto Assets Regulation (MICA), Capital Requirements Regulation 3, the AI Act, only to name a few. 

[3] Evaluation of the Senior Managers and Certification Regime (bankofengland.co.uk)

[4] Individual Accountability Framework (IAF) Awareness and Readiness survey 2023 from Mazars in Ireland and the Compliance Institute – Mazars – Ireland