In addition to their obligations under the Companies Act 2006 Non-executive directors (NEDs) on the boards of UK banks are also subject to the rules and guidance provided by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). An article in Financial Times (8 March 2023) underlines the challenges this can raise for NEDs.

Under section 172 directors are required to act to promote ‘the success of the company for the benefit of its members as a whole’. Section 172 goes on to require directors ‘to have regard to’ a number of other factors, but the classic position is that these ‘factors’ have always been subordinated to the duty on directors to promote members’ interests.  Directors, including NEDs, could be forgiven for thinking that the balance between these two provisions is no longer as clear as it was, and that the FCA’s active agenda as a conduct regulator is one of the key drivers in this change. 

For some time, the FCA has tended to regard NEDs at regulated firms, including banks, as needing to have an eye on the interests of retail consumers. At one level this might be seen as a not unreasonable position and consistent with the ‘have regard to’ requirement in section 172, but there is a concern voiced by some observers that the FCA wants NEDs to adopt a more assertive role which could result in NEDs finding themselves in situations where they feel that they have conflicting obligations.

Notwithstanding these concerns there appears to be no let-up in the FCA’s policy agenda. According to the Financial Times’ Nikhil Rathi, the FCA’s Chief Executive, told the Treasury select committee that the FCA has ‘engaged directly’ with the boards of some high street banks ‘for failing to pass on interest rate rises to savers as swiftly as hikes [to borrowers]’.  This observation suggests the FCA thinks that the boards of banks are failing in their duty to consumers. Whilst the criticism appears to be aimed at bank boards as a whole, it presents an obvious issue for NEDs because the FCA will expect to see them challenging the actions, or omissions of the executive.  Furthermore, a NEDs life is not going to get any easier with the introduction of the FCA’s Consumer Duty in the summer of 2023 which is likely to further ramp up the pressure on bank boards. 

How should NEDs react to such criticism from a senior regulator? What approach should they take when challenging bank executives? In conversations we have had, NEDs occasionally voice concerns that the regulators seem to almost want NEDs to act as if they were executive directors. It is as if strategic challenge alone is not sufficient and that there is an expectation that NEDs should get into the ‘weeds’ of decision making with the risk that they end up second guessing the executives.  Where NEDs do overstep the mark it usually has a detrimental effect on the relationship between the executive and the NEDs. The most effective boards operate as a unit with each member of the board performing key role.  Like any team their effectiveness as a collective is weakened when the scope of roles becomes compromised.

Read the full Financial Times article >