GOVERNANCE REPORT
79
DEEP DIVE REPORTS The Committee reviews “deep dive” reports during the year on key risks to the business. This helps the Committee gain a thorough understanding of different aspects of the Group’s risks and consider whether the risk management framework adequately monitors and reports on the risk exposures in each business area. The deep dives also allow a fuller discussion of the approaches taken by management in mitigating the risks and enable appropriate challenge from the Committee. One of the Committee meetings during the year was dedicated to conduct risk, including deep dive reports into a number of conduct risk matters. Reports this year included: • a report on property risk, which focused on house price growth outlook and reviewed progress against actions and plans to improve risk management around lifetime mortgages; • the Group’s investment portfolio strategy, the risks associated with the strategy and different asset classes; and • a range of conduct risk subjects, including operational resilience, pension transfer advice, vulnerable customers and product governance. RISK GOVERNANCE The Committee ensured that the risk framework continued to be developed in line with the business needs, and that policies and practices were kept up to date. It reviewed and approved the risk management plan for the year. It also considered the appropriateness of the risk appetites, against which the business plan and strategy are assessed. The Committee carried out a deep dive on the overarching risk appetite framework and challenged the capital risk appetite for the Group, Just Retirement Limited (which writes new business) and Partnership Life Assurance Company Limited (which is largely in run-off). The target solvency ratios for different levels of capital risk appetite for each were increased as a result of challenge from the Committee. An external review of the effectiveness of the Group’s risk management was undertaken during the year. The outcome was presented to the Committee and Board. The Committee has provided oversight of progress in implementing the recommendations from this review. RISK OVERSIGHT During the year there was a focus on the risks associated with lifetime mortgages and the regulatory capital implications of the PRA’s SS3/17, PS31/18 (Solvency II: Equity Release Mortgages) and CP7/19 (Solvency II: Equity Release Mortgages – Part 2). There was a focus on particular aspects of the Group’s implementation of SS3/17 which included a revision of the Group’s existing notes structure to deliver a framework so that it meets the requirements of SS3/17. The changes to the notes structure, the expected capital impacts and implementation steps were extensively reviewed and challenged by the Committee at a special meeting for this purpose. The Committee then recommended the revised note structure to the Board. EMERGING RISKS The Committee received a report on emerging risks setting out the results of a review of a comprehensive range of emerging risks, undertaken by the Risk function. Emerging risks which could impact on property prices represent the highest potential impact on the Group. The potential impact on the UK property market from climate change was considered. It was noted that there were a number of different emerging risks which could be aggregated under climate change. Each risk was relatively low in terms of impact on the Group. However, collectively they could be more significant over time both in terms of impact on property prices and/or the impact on laws and regulations affecting the Group.
BUSINESS RESILIENCE Operational resilience, including cyber security, continued to be an area of focus during the year. A deep dive on operational resilience was reviewed during the year. This focused on the key risks to the property estate (including supporting infrastructure), cyber threats and failures of key suppliers or outsourcers and the approach taken by the business to mitigate these risks, for the Committee to assess. The Committee considered the continued impact of Brexit on the business of the Group. As the Group does not operate in other countries within the European Union (“EU”), the principal effect is the impact on the economy, particularly interest rates and house price inflation, due to uncertainty arising from the outcome. In addition, the position of customers who receive regular guaranteed payments who since inception of the guarantee have moved to countries within the EU, was identified as a specific risk. CONDUCT RISK The Committee regularly reviews and challenges management’s view of conduct risks across the Group. The risk to appropriate customer outcomes is considered against a dashboard of measures in general, and against the quality of advice provided by advisers in the HUB Financial Solutions business and the number and root cause of complaints arising within the Group. As noted previously, the Committee devoted one of its meetings to an in-depth review of a range of conduct risks across the Group. The Committee carried out a review of the Group’s approach to vulnerable customers. The Committee considered the application of the policy and the ability of the business to identify vulnerable customers, particularly when there may be a change in circumstances that increases vulnerability. To ensure that the high standard of risk oversight is evidenced, the Committee requested, and subsequently saw, increased visibility of second line review throughout the Committee and Board reporting in 2018. Further improvements were seen during 2019.
On behalf of the Group Risk and Compliance Committee
Keith Nicholson Chair, Group Risk and Compliance Committee 11 March 2020
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