Scaling the climbing wall
Escalation and cascade in financial institutions
Financial services regulation places legal entity governance at the heart of its management and accountability standards, but many firms in this sector are organised according to business units and functions that span both legal entity and jurisdictional borders.
Navigating the complex array of committees and management levels in a global organisation can be difficult, a challenge that is particularly acute when a problem requires escalation for timely remediation. On the flipside, group level decisions may have a substantial impact on the UK firm. Effective cascade of relevant information is vital to ensure the effects are properly analysed and any issues are fed back.
Part 1 of this blogpost will help you consider how effective your firm’s escalation framework is, while in Part 2 we set out key questions for assessing information cascade.
1: How do I know if my firm’s escalation framework is effective? Three questions to ask.
Escalation in a financial services firm is multi-faceted. These three questions should help distil the important angles:
| How we can help | |
| 1. Senior Managers must necessarily rely on delegation for the proper functioning of their areas. When a material problem arises several rungs down the management chain, how do Senior Managers ensure that they are made aware in a timely fashion? | We have often helped firms establish and document clear escalation standards for staff, which are embedded through regular training and Senior Managers communicating their personal expectations. Getting the balance right is important but tricky; being overly prescriptive can lead to wavering over whether to escalate and things falling through the gaps. |
| 2. Where a significant issue arises in an overseas affiliate which impacts the UK regulated firm, is it clear what level of oversight, or awareness, is expected of UK Senior Managers and how that is achieved? | We are frequently asked about the remit of a Senior Manager’s responsibility for overseas events which impact the UK firm; examples range from remote booking incidents to group-wide decisions on IT strategy. While a Senior Manager should not be responsible for any and all activity with a UK nexus, effective escalation and dialogue between overseas managers and UK Senior Managers is key. We can help set the parameters to manage regulatory risk without unduly burdening Senior Managers. |
| 3. Making changes in response to issues identified at a local level often requires group input. What mechanisms are in place to engage HQ and how smooth is that process? | Effective governance infrastructure is vital here; for example, does a UK technology risk committee have escalation channels to the group equivalent? The role of the committee chair should be clearly articulated in effecting escalation; he or she supported via processes which include standing agenda items, templated management information and minuted action items. We have helped firms achieve success in this area, information you can use to benchmark your firm’s own practices. |
While written standards, committee architecture and procedures form the plumbing of an escalation framework, its success in practice will depend on the firm’s culture. “Speaking up” needs to be encouraged and “witch hunts” avoided; these messages which must come from those at the top of the escalation ladder and reinforced and they are passed down the rungs to more junior staff.
2: What you don’t know can’t hurt you, or can it? Information cascade
In large global organisations, a UK regulated firm is often one of several internationally located entities, each subject to its own set of regulatory rules and standards. Even the smartest group executive is unlikely to be familiar with all such rules and standards. However, to reduce UK regulatory risk, it is essential that the needs and requirements of the UK firm are “heard” at the top table. To achieve this, the UK firm needs to know what is being discussed at that table. Cascading that information does, therefore, matter. As with escalation, when it comes to cascade culture plays a fundamental role, providing a prime opportunity for those at the top of an organisation to demonstrate openness and transparency.
Does my firm have the components of a cascade framework and how effective is it? Three questions to ask.
| How we can help | |
| 1. Do group-wide decisions impact the UK firm, and, if so, is it clear how group decisions are cascaded to UK Senior Managers, Boards and committees? | In most organisations, group-wide decisions will have some bearing on the UK firm such that UK regulatory risk needs to be considered. We have experience helping firms articulate their expectations in relation to information cascade, be that through a committee architecture or senior executives. |
| 2. Are there effective procedures to feed UK requirements into group decisions or strategy-setting? | The composition of group governance fora, terms of reference and standing agenda items all play a role in formalising the feedback mechanism. We can advise on what components are most appropriate for your organisation. |
3. Are responsibilities for information cascade clearing assigned to individuals, including board or committee chairs?
| While passing information up and down the management reporting line chain may be considered easy, ensuring that group-level board or committee decisions are cascaded to local equivalents may not be. We have advised on how to apportion responsibilities between committee chairs, company secretarial and UK CEOs to achieve this. |
