Salz Review - Wall Street Journal

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159 Salz Review An Independent Review of Barclays’ Business Practices The Second Line of Defence – Control Functions 12.44 Several second line of defence functions collaborate to design and operationalise the internal control environment. As defined by Barclays, these include: ― Risk: The role of the Risk function is “to deliver appropriately effective and efficient risk management and control that is consistent with Barclays’ strategy, through providing risk management capability including independent and appropriate challenge at every level, from a single transaction to an aggregate portfolio view, while ensuring ‘no surprises’”; 248 ― Legal: The primary role of the Legal function is “to protect and create value for Barclays by managing legal risks and advancing opportunities”; 249 ― Compliance: The Compliance function is “responsible for oversight of regulatory activities undertaken by Barclays and its remit is to support Barclays in complying with financial services legislation”; 250 ― Finance: The Finance function “operates as a strategic business partner, … supports decision making, providing accurate relevant and timely financial information and analytics to internal and external stakeholders; acts as an independent control function, consistently challenging the status quo and holding the business and the finance function to a high standard of integrity and transparency”; 251 ― Human Resources: The purpose of the HR function is to “be the strategic partner of choice to the business providing advice on all aspects of the people agenda – supporting business leaders and colleagues to maximise performance, fulfil their individual and team’s potential and enable business outcomes”. 252 Independence and Influence of Control Functions 12.45 Most of the control functions in the business units reported directly to the business unit management as their primary reporting line. While we acknowledge that this enabled the function to collaborate closely with the business, we consider such arrangements could compromise their ability to challenge the business. More recently, the functions’ reporting lines have changed and are now weighted more heavily towards Group functions. This process has stopped short of severing all reporting lines to the business. Some banks have gone further and insisted that the control functions report exclusively to the Group function heads, which Barclays has done for one function, Compliance (in January 2013). This is a question of balance – the right balance of proximity, knowledge of the business and independence should be determined by management and should be regularly reviewed, including by the relevant Board committees. 248 One Barclays – Functional Model, 14 November 2012. 249 Barclays Legal definition. 250 Barclays Compliance definition. 251 Source: Barclays Group Finance. 252 Barclays, OneHR Vision.
Salz Review An Independent Review of Barclays’ Business Practices 160 12.46 In order for control functions to have a strong enough voice to challenge businesses, they need to be sufficiently independent, understand the business, and be adequately represented at senior management forums. The number of control function personnel directly represented on Barclays’ Group ExCo has changed – there were periods in the past when some were directly represented, but from 2005 to late 2009 Compliance, Risk and HR were not. Finance has always had a seat on ExCo. Barclays’ General Counsel has had a seat since November 2009, representing the Legal and Compliance functions but Compliance did not have direct representation until January 2013. The Group Chief Risk Officer and the Group Head of HR also joined the Executive Committee in November 2009. 12.47 As we pointed out in Section 10, the control functions should play a significant role in people management processes, in particular performance management and remuneration. Barclays established policies and processes to ensure that the Group Risk function was able to provide input to the Remuneration Committee on Group and business unit performance. It also operated an annual process to identify areas of concern and communicate them to the HR teams in advance of the pay-round. This level of scrutiny seemed to apply mainly to the more senior management. 12.48 Having explicit methods to appraise individual behaviour and performance against risk and control objectives is also a key lever in ensuring that a control culture is encouraged within the businesses. We have seen personal development objectives for the Retail and Wealth and Investment Management business units that have included such metrics, including the introduction of a balanced scorecard with a clear risk element and a semi-annual opportunity for Risk and Compliance functions to provide input to performance reviews. However, this approach has not been consistently implemented across the Group. Capability of the Control Functions 12.49 Effective control functions are built around sufficient people with the right skill sets and supported by effective data and IT systems. Interviewees have suggested that management of credit and market risk are reasonably resourced (with some exceptions). In contrast, they said that the operational and conduct risk functions were under-resourced at various times. This is partly because the number of experienced senior individuals with operational and conduct risk experience is lower across the industry than for credit and market risk; and partly because the roles have developed more recently. Interviewees told us that these issues are being addressed but the talent pool will remain challenging for the next few years. 12.50 Interviewees suggested that many parts of the bank’s systems and IT had received large amounts of investment. In some cases, we heard specifically that the control function infrastructures were built before a new business was allowed to start operating. Conversely, in the period following the Lehman acquisition, numerous control and compliance issues have been identified, some of which we believe were linked to business growth, out-dated systems or a failure to integrate systems.
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Salz Review - April 2013
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