Rules on handling risk aim to avoid financial crisis

BANKS and other financial services outfits will today be presented with fresh rules on how they measure risk in an
effort to avoid a repeat of 2008’s financial crisis, which brought the world’s economy to the brink of collapse.

Under the proposed code, which has been drawn up by a group of senior figures in the City, internal auditors will play a bigger role in tackling the risk-taking that led to “toxic” home loans during the financial crisis and the subsequent Libor and PPI scandals.

Regulators – including the Bank of England, the Treasury and the new Financial Conduct Authority – will be able to use the code as a yardstick when judging whether banks are taking risk seriously enough.

Auditors will have a broader remit to look at reputational and systems risk, as well as the traditional credit and financial risk with which financial services companies deal.

The code is designed to help internal auditors to more-effectively protect their companies from problems that could damage the reputation of, or confidence in, the financial system, or which could lead to government bailouts for the banks.

Roger Marshall, audit committee chairman at insurer Old Mutual and chairman of the group that drew up the guidelines, said: “Our aim is to encourage internal auditors to obtain a consistently-wide view across the range of risks within their organisations and exert greater influence in ensuring that those risks are managed throughout the financial services sector.

“This will help clarify internalaudit’s role in relation to, for example, the quality of information on which boards base their decisions, or whether the risks associated with key decisions such as on takeovers, are properly managed.”

The rules follow on from similar guidance drawn up by the Basel Committee and the US Federal Reserve Bank.

Ian Peters, chief executive of the Chartered Institute of Internal Auditors, which formed the code committee, said: “The proposed guidelines complement the existing international internal audit standards, which are set by the Global Institute of Internal Auditors.

“However, the code will, for the first time, provide UK financial services sector-specific guidance.”

The guidelines were welcomed by the Bank of England and the Financial Services Authority (FSA).

Andrew Bailey, executive director of the Bank of England and managing director of the FSA’s Prudential Business Unit, said: “The expectations of internal audit functions within financial services firms have hitherto been set too low.

“The regulatory authorities expect firms to have robust internal audit functions capable of providing genuine challenge to management and driving improved governance, risk management and internal controls. I hope this guidance will help to achieve that.”

Brendan Nelson, chairman of the audit committees at BP and Royal Bank of Scotland, was a member of the group, alongside former Lloyds Banking Group chief risk officer Carol Sergeant.

Other members included Paul Boyle of Aviva, Paul Lawrence of HSBC, and Professor Andrew Chambers of London South Bank University.

The consultation on the draft code is due to close on 12 April.