The Role of the CPO: Leading in a Regulated Environment

Russell Reynolds Associates co-hosted a breakfast event with Promontory Financial Group (part of IBM Consulting) at the end of March 2024. The participants were a group of sitting Chief People Officers operating in highly regulated environments (such as banking, insurance, fintech, etc.) both in the UK and internationally. The discussion was centred around the theme of ‘how to lead organisations within a fast-evolving regulatory environment’. A number of themes were covered such as people risk, succession planning, rewards and incentives through to critical culture DE&I topics.

Introduction – how has the relationship between the regulators and Chief People Officers changed?

Only a few years ago, regulators did not meet with CPOs. This has rapidly changed and regulators have significantly intensified their connections with human resources leaders. This will continue to grow.

The array of topics that regulators wish to discuss with CPOs is varied and crosses many parts of the business.

The role of the Chief People Officer can be seen under two dimensions:

• One is the horizontal dimension, whereby the CPO is an active contributor of the strategic decision-making process held at ExCo level.
• The other one is the vertical dimension, whereby the CPO is seen as the leader of a function (in its own right) that crosses all the elements of the business and supports them from a strategic and operational perspective. From the recruitments made in a specific division through to AI development, the CPO needs to flex and support all areas.

What does a good Chief People Officer look like to a regulator?

Three themes, in particular, are the ones that a CPO “owns” in the eye of a regulator. We call these the ‘three Rs’:

1. Recruitment and right people – CPOs need to be able to present their hiring strategy to regulators, assess their talent pipelines and share potential people risks and how they intend to overcome these through succession planning and retention, performance management and reward protocols.
   
   
2. Remuneration and right controls – this involves the presentation of both the rewards strategy and its delivery. CPOs must be able to demonstrate, for example, the ways in which the strategy incentivises the right behaviours (and disincentives the wrong ones), how it impacts on their performance management approach or, for example, how are malus and clawback decisions are made.
   
   
3. Risk and reporting – through meticulous reporting CPOs are often asked by regulators to show their market knowledge and to demonstrate the risks associated with their recruitment, performance, remuneration approaches, (as well as employee relations in large, unionised environments).

And, increasingly, CPOs are asked by the regulators to report back on their impact on Culture and Diversity, Equity and Inclusion for their businesses, including through specific, data-driven measures.

The participants shared their experiences of dealing with the regulators. Some of the themes that were highlighted were:

1. It often happens that sentiment tests run by the HR function show positive results and yet there are always a few elements of discontent that are hard to uncover. What are the most effective ways to unpick them? What tools really work? One contribution from one of the members of the audience was particularly well received: instead of running cumbersome, company-wide 360-feedback surveys, an initiative that could be more powerful is to run shorter behavioural feedback surveys (approx. 10-13 questions in an “strongly agree-strongly disagree” scale) to the direct reports of the Managing Directors (i.e., ExCo-1) to gauge their insights on their bosses’ leadership approaches, inclusivity, strategy-setting, etc. The results will provide clear data and a good behavioural analysis of the leadership team. Results can also be compiled to provide a year-on-year performance analysis.

What’s to be expected in the future?

• Every regulator thinks about the impact on customers and this is becoming more of a focus, including through Consumer Duty in the full product / service chain.
• Likely to continue to interrogate the link between the people strategy, culture and performance.
• There continues to be huge pressure on compensation from the regulators with “strong expectations” around reduction of variable rem in light of controls shortfalls: some leaders will not push back to regulators and that’s frustrating – setting precedents that are hard to change. There are always opportunities to be pragmatic with regulators and to show responsible thinking and acting.

What do regulators expect on DE&I from CPOs?

• This is a hugely important and contemporaneous theme. Monitoring DE&I is top of mind for regulators: this spans diversity of hiring as well as diversity of decision-making (who are the people on the interview panels for example) being monitored.
• In a number of countries it unlawful to have positive actions towards an underrepresented group is illegal as considered discriminatory).
• In financial services – outward-facing discrimination - discriminatory pricing in insurance, access to banking for disadvantaged people etc. would probably be important elements to be tackled by the regulators.

Do CPOs find it easy to attract talent in financial services in the UK?

What role do regulators play in this dynamic? There were differing views within the room: in the Fintech sector it is not hard to attract, even though juggling between tech and regulations originating from financial services. Interestingly, in order to bring in more diversity of thought – attracting people from outside of industry into FS or fintech – the regulator has sometimes resisted these appointments because they lack sector knowledge. Potentially this represents a vicious circle which many of the CPOs in the room have had to navigate. However, the trend seems to be that there is increasingly mobility across industries and more competition. There were useful stories shared from CPOs within investment banking around becoming more like a technology company: structuring roles, bandings, gradings so that employees have the same experience and have familiarity with a structure which might have differing drivers for staff. Emotional skills/abilities absolutely critical: for CPOs in particular this means that if they are not able to deploy high EQ, CPOs won’t fly. This comes full service again back to culture. Incorporating the regulatory timeframe into recruitment - incoming hires likely now not to resign until they’ve gained approval; how to make onboarding smoother for people coming from overseas (as it’ll be likely outside 90 days) e.g., approval process 5 months for a chair for an FCA-regulated PE business: the person was doing the job but FCA was very late in confirming the appointment.

How can CPOs forge their way forward in highly regulated frameworks?

• There were good examples of where Chairs/Leaders in organisations had called the regulator to discuss trade-offs with new executives entering roles. With the right counsel, undertakings and pragmatism, trade-offs can be made.
• In a good regulatory interview they will cover leadership style, that level of detail such as “how do you challenge and when have you been challenged?” Looking at behaviours, helping to look at skills and capabilities which can cross sectors, drawing on transferable skills.
• The notion of helping to support leaders/executives onboard becomes increasingly important. People in the room shared examples of where new hires hadn’t succeeded: typically the CPOs did not pick up small topics of discontent early enough. A proper onboarding programme incredibly helpful.
• Change management frameworks typically lacking: wholesale change, all time upfront, the shift that is happing, nomenclature has now changed to “cultural add” better than cultural fit

Contact us to register your interest in future events