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Treasury Consulting for Building Societies

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Published: 6th August 2010 by William Webster

In the current environment building societies are finding it difficult to keep up with the changes that are affecting them. One area that causes concern is treasury. That's because it’s a specialist area and regulation has become much more intrusive.

A common difficulty faced by societies when dealing with treasury risk is the limited expertise that is available.

This is where consulting can help you. It has a number of advantages:

  • You obtain expertise as and when you need it without adding to your headcount;
  • There is a fresh look at the risks that affect your business - some may be new;
  • It's easier to make comparisons and establish whether your risks are unusual;
  • Improvements are discussed and recommendations are made;
  • There is help with presenting this to the board;
  • The agreed course of action is determined;
  • Progress is verified.

The benefits are real

Treasury has been identified as an area of high risk and the regulator is taking a much closer look at the risks individual societies pose.

Lack of resources will lead to questions concerning the identification and management of risk and the effectiveness of governance. If the regulator is not comfortable it can use its legislative power. This may take the form of "guidance" but it can go a lot further (s166 skilled persons report FSMA 2000). This will have serious implications for the viability of the society.

Where risk management is weak increased restrictions will apply. You will be forced to cut back on the products you offer. You will need to hold more liquidity and capital buffers. It will become much harder to price savings and loans competitively. It threatens ongoing viability. This however is not your only concern.

Treasury risk is real. Being reliant on the FSA to identify your risk leaves much to chance. Their track record is not good, their resources are stretched and they too are in a period of great uncertainty.

Peace of mind only comes from having risk properly controlled and in this case it's entirely in your hands.

Avoid conflict of interest

Banks and brokers are remunerated from treasury deals and this can influence their opinion. No matter how hard you try there will always be the potential for conflict of interest.

Independent treasury consultancy protects you, the board and members alike because there is no hidden agenda and no conflict.

What we do

Every society faces different risks this is why consulting is always tailored to what you need. This may be a one off project, a progressive process of improvement, remedial action or simply the means to ensure you have addressed all the issues at hand.

Here are some examples.

1. Treasury risk assessment

This is a full analysis of all the material treasury risks. It covers liquidity risk, credit risk, market risk and operational risk.

The report includes a management summary, a breakdown of all identified risks, their significance, the recommended action and the time scale over which this should occur.

It is accompanied by high level board presentation of the key risks and governance issues.

What are the advantages?

Managing regulation: It makes sure that your adopted treasury approach is accompanied by the correct level of risk management and it complies with the guidance in Policy Statement 10/5: A specialist sourcebook for building societies.

In depth analysis: It goes into much more detail than either an internal audit or FSA review. This is because it is undertaken by a treasury expert who has first hand practical experience and knows the questions to ask.

Uncovering risk: It is likely that some risks will be larger than you anticipated. It is quite conceivable that it will uncover some risks that had previously gone unnoticed.

Risk mitigation: It will identify the courses of action that you can take in order to manage the risks that are identified.

Validation for the board: It sets out the facts, promotes discussion, debate and challenge all of which are crucial to governance. It also facilitates agreement concerning action that needs to be taken.

Setting priorities: Action is prioritized and there is confirmation to the board that it has taken place within the given time frame.

2. Improving treasury risk management

You may already be aware (or have been told) that specific risk and reporting processes in treasury require improvement. The difficulty is that you have limited resources and now need help, where do you go to find an expert? Look no further.

What are the advantages?

Rapid response: Your requirements are urgent; an initial meeting can normally be arranged within 7 days and remedial action within 21 days.

Practical answers: You will receive practical recommendations that are proportionate to the business you have.

Time management: Senior management time will not be wasted explaining how things work, it will be spent on mitigating the risks that course concern.

Agreement: You will be well placed to get agreement from the Board in order to undertake your plan of action.

3. Preparing treasury policy documentation

In some cases the relevant policy is missing, has serious gaps or has been repeatedly amended and it shows up too. It flags weak risk management and invites criticism.

Good policy is mandatory. It needs to be detailed, to explain the risks you face, to show how you manage those risks and who is responsible. Furthermore policies need to be embedded in the risk culture.

Preparing these policies is no simple task. They need time and coordination. It's where consulting can help you.

It can identify gaps, recommend improvements and prepare drafts that reflect what you do.

What are the advantages?

Reputation: Good policy enhances the credibility of the management and board because you have thought through the risks.

Time management: Preparing draft policy is not easy and it is time consuming. There are probably more immediate things that require your attention too.

Consistency: New policy provides you with an opportunity to explain what you do.

4. Improving your draft risk assessments

Regulation requires you to make your own assessment of risk in order to establish the level of capital that is required (ICAAP), the amount of liquidity that is held (ILAS) and the approach that is taken to treasury risk management (sourcebook).

These documents are onerous and consultancy can help you.

Sometimes the assumptions can be questionable and important risks are neglected. Do you feel uncomfortable with your draft before it is circulated for board approval?

5. Independent guidance for the board

Making decisions about financial risks is not always straight forward particularly if you are an NED. Regulation is difficult to interpret and there is so much of it.

NEDs reliant on the executive for guidance need to ask themselves this question. "How are we involved in governance of risk?" It's not easy.

The FSA expects NEDs to take an active role and personal risk is high now that the FSA is discussing removing limits on NEDs liability.

If you need to promote a healthy board discussion about risk policy, risk appetite, limit structures and strategy an independent analysis and presentation can be the catalyst.

6. Board training

As a director what do you need to know about risk?

A good place to start is the board pack you get. The regulator places a great deal of emphasis on it too. Yes, it should be accurate, timely and capture present and forward looking risk. But can you put your hand on your heart and say you understand it all?

What's the answer? It's simple. Let's us take what you have and then explain what it tells you and what you need to look for. We may even suggest a few additions and improvements for you. It won't take days but you will be glad you did it (particularly if the FSA interviews you).

7. Retained treasury expertise

In smaller firms many treasury issues are dealt with by the Finance Director or the Chief Executive. Is this you? Do you echo the sentiments of many in your position?

"Treasury isn’t rocket science but it would be useful to have a touchstone, to know what's expected and reasonable".

This can be difficult and expensive. Just where do you get suitably qualified people?

Retained expertise, it means you have your own treasury expert for as little a day a month.

You can adjust this to coincide with policy reviews, regulatory reporting and projects and at any time you can telephone and email for advice.

There's one more advantage. Retained expertise costs less.

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Related Documents

Registration RequiredRegulation > Consultation Paper 09/17: A Specialist Sourcebook for Building Societies June 2009 100% relevant

1st August 2009

The general thrust of the CP is that Societies must prove that they have both the management and the systems capable of effectively dealing with the risks they face. This is part of the enhanced supervisory approach now adopted by the FSA. It states that systems and controls must match the level of complexity in a firm's business model. The FSA will adopt a more interventionist approach in order to ensure this is the case. The proposal is that building societies and the regulator will determine whether the risk management policies adopted are appropriate. Where they are not the Society can either simplify its business or improve its risk management. The FSA also intends to limit societies diversifying their business without a full assessment of capital adequacy. The FSA has considered applying similar CP 17 guidance to the banking sector but has decided on account of the "lack of homogeneity" that this would not be practical and in their case a firm-by-firm approach is more appropriate. The CP addresses treasury and lending. It contains five approaches to treasury management, three areas of treasury guidance and three approaches to lending. Consultation closes on 5th September 2009 with implementation due in early 2010 when a new Building Societies Sourcebook (BSOCS) will replace IPRU-BSOC.


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