A governance framework that has a practical overview of your business and treats customers fairly became mandatory for financial service providers (FSPs) when the new fit and proper requirements came into effect on 1 April 2018.
As the core of corporate governance, a governance framework comprises the rules and procedures that set out what a business is about, and how it will function and deal with internal and external issues. It is set up and shaped by the leaders of a business or company directors to direct and control the business.
Board Notice 194 of 2017, Part 5 Section 37 lists what you need to include in your FSP’s governance framework. Some of these aspects are:
- A business plan that sets out the aim and scope of the FSP.
- A business continuity plan, to limit any loss if there is an interruption in the FSP.
- A recovery plan, to restore the FSP financially if it incurs any major losses.
- Accounting policies and procedures that must be in place to track and ensure the FSP’s financial soundness.
- Risk management policies, to identify potential risks to the FSP and how to minimise these risks.
The policies and procedures in your governance framework must be tailored to match the nature, size, scale and complexity of your FSP.
Why is corporate governance important?
While a governance framework has become mandatory for FSPs, there are other reasons not to ignore corporate governance. It is vital for the survival and growth of a business, helping to ensure a sustainable and profitable business.
According to the US-based firm, Preferred CFO, 82% of small businesses fail due to cash flow problems. But 78% of these failures are due to lack of business planning and failing to view the business holistically. This can be termed a lack of corporate governance.
Furthermore, research shows that businesses with an advanced governance framework spend less time fixing mistakes. They can also adapt faster and have a higher employee retention rate.
Why businesses fail at corporate governance
Businesses fail at corporate governance for various reasons, including:
- Lack of adequate leadership experience. This filters through the business and causes chaos and confusion. To overcome this issue, leaders in the business should upskill and train themselves and their staff.
- Confusion over the role of good governance. People think good governance is about having a good compliance function. However, governance is more than compliance and taking this narrow view might push the business to a compliance only focus instead of considering good business principles.
- Lack of long-term strategic view. Very few financial planning practices have a future view of longer than 12 months. Instead, they are run from month to month with no real strategic view in place. The strategic view should incorporate a three to five year view, but an aspect of positivity must be embedded in the business culture for this to happen.
The only ways to combat the abovementioned obstacles and issues are to define an organisational culture and implement a way of business thinking and not just goal thinking.
With the introduction of Board Notice 194, the compliance function and business management function can no longer be split. Masthead’s value proposition centres around this concept, which is why we integrate practice management with our compliance service. To find out more about practice management or a governance framework, speak to your Masthead compliance officer.