Nicola Megaw is the Chief Legal Officer and Company Secretary at Nucleus Financial Group. She has been with the group, a leader in the wealth management platform space at the vanguard of financial technology, since 2012. She studied law at the University of Aberdeen and trained at Shepherd and Wedderburn LLP, where she gained experience in capital markets, funds and financial services, as well as general corporate advisory work. Nicola has a passion for diversity and inclusion and actively champions Nucleus’ work in this area.

HK:  Nicola, would you set the scene for us by telling us a bit about Nucleus?

NM:  We are a wrap platform, based in Edinburgh. Our goal is to create value through the strategic alignment of financial advisers and their clients. We aim to achieve this by having a compelling proposition for our platform users and customers, an attractive value proposition for shareholders, and a motivating people proposition to inspire high-quality execution. We recently listed on the AIM market and have always been FCA-regulated. Both of these factors give rise to a number of rules and regulations that create a healthy tension with our desire to innovate and disrupt traditional financial services.

HK:  How have you been helping the firm to prepare for the Senior Managers and Certification Regime?

NM:  The SMCR will apply to us from December 2019, but we are already making changes to our governance arrangements to move towards an ethos of aligned accountability. As a fintech firm, I’d imagine we are grappling with many of the same issues as our peers in this emerging industry. Our product relies on our behaviours, as much as our software, regulation, and the governance and risk management frameworks within which we as financial industry professionals must act. On the face of it, things like agile methodologies for software development may not necessarily equate with individual accountability. Nevertheless, we want to empower our teams to deliver momentum and growth. We resonate with the Spotify model of ‘aligned autonomy’, and are challenging ourselves to ensure our governance structures balance autonomy and alignment with accountability. We aim to build a model that supports our senior managers to derive the trust they need that operations are running as intended, and the tools to validate that trust through positive conduct and accountable behaviours as much as reporting and attestations. In our view, ‘I will’, not ‘I must’, tends to lead to more accountable and ethical behaviours.

HK:  That’s a very progressive approach. Does the SMCR differ greatly from the previous regime, in your opinion?

NM:  This is a regime that will work through behaviours more than process, and if it is implemented well in each firm, I think it is for the better of the industry as a whole. I like to think of it as providing a structure that will empower and enable a company’s people. This is an opportunity for business leadership to get behind what the regulator is trying to achieve.

HK:  An aspect of the regime itself is getting the industry, and regulation thereof, fit-for-purpose for the next stage of the market’s lifecycle. What questions do you think it raises about the nature of corporate governance in the UK?

NM:  Looking at the positives first, there is certainly some overlap with what our UK corporate governance regimes and the regulator are trying to achieve, particularly as corporate governance in 2019 heralds the increased importance of the ‘stakeholder’, alongside the long-established idea of ‘shareholder primacy’. Customers, users and the workforce – those with whom and for whom the business operates – are back in the centre of the value conversation. This aligns with two of the core conduct rules that apply everyone in each SMCR firm – the duty to act with integrity, and to pay due regard to the interests of customers and treat them fairly. Also, the governance codes are all now moving towards shorter, sharper principles – accordingly, the focus is on how you do it, not if you do it. Seeking the approach that’s right and proportionate for a given organisation is the way forward. I welcome this approach in the SMCR too. Where it doesn’t join up, though, is in how SMCR calls the concept of the unitary board into question.

HK:  That’s an important point, for sure. Can you expand on that issue?

NM:  Some see this as a regulatory reaction to an inability to prove the culpability of boards as a whole. Do corporate failures lie with boards as a whole, or does it come down to an individual in particular? It’s always a tricky question to answer. At Nucleus, we are focusing hard on ensuring that we do not create homogenous bias in our decision-making, by introducing targets and voluntary regimes to measure our diversity as a collective. But how does that sit with regulations that effectively split the accountability between different board roles, as the SMCR does? At senior executive level, this may have the desired effect. We’ve recently seen the CEO of Barclays personally fined a substantial sum under the SMCR for conduct concerns, and TSB’s former CEO has stepped down after the FCA publicly endorsed the view that he was individually accountable for the IT meltdown in 2018. But how can the equivalent be true for some, but not all, of our Board’s non-executive directors? Additionally, the chairs of each committee will hold senior management functions in their own right, distinct from the non-chairs. How does this align with the basic company law principle that all directors are equal in terms of corporate responsibility? Not only will this undermine collective decision-making, but it will also inevitably lead to a new discussion on remuneration. It will also be interesting to see how the asset management industry reacts, as the FCA’s study into the industry has led to recommendations that all firms have at least two independent non-executives on each board.

HK:  It’s an evolving discussion, that’s for sure, and some of the questions raised are going to make interesting topics for consideration by the City’s law firms, I am sure. In the meantime, you alluded to diversity in your last answer. We know diversity is high on the agenda at Nucleus, as of course it is for many firms in the financial services industry. In your view, does the increased focus on individual accountability seem likely to promote and facilitate that growing diversity and inclusion agenda?

NM:  I think this is a really interesting angle. If diversity is the desired outcome, inclusion must be the act. At its core, achieving greater diversity by addressing under-representation across a range of factors is simply the right thing to do, both morally and ethically. However, there is also – helpfully – a business imperative that is increasingly hard to ignore. Cognitive diversity – that is, diversity of thought – is a must for a healthy decision-making environment. The manner in which we address inclusion will go a long way towards making sure that we are creating the right conditions for our people to do their best work – and this goes all the way to the top. Whilst SMCR highlights that certain individuals may be culpable for certain activities, the new regime also acknowledges one of the basic tenets of good leadership. Accountable individuals must take ‘reasonable steps’ to prevent breaches, and to discharge their responsibilities. In practice, this will be achieved day-to-day through strong delegation, coupled with appropriate oversight, and careful consideration of the evidence required to demonstrate challenge in decision-making. Done right, using such a ‘trust and validate’ approach, accountable leaders can still create the space and environment for those to whom responsibility is passed to let the team develop and grow. Where we run the risk of creating non-inclusive environments is when we do not create the conditions for healthy debate, challenge and shared decision-making.

HK:  What’s the ‘next frontier’ in the inclusion conversation, in your opinion?

NM:  I’d like to see kindness play a prominent part in our industry’s corporate structures and values. Supporting the principles of fairness and respect, of inclusion, and of putting our customers interest first. I think with this approach to our structures, our peer-to-peer, adult-to-adult collective decision-making and support mechanisms can flourish. This extends to a concept of relational leadership – behaviours that promote trust and human connections, and promoting the team despite individual culpability. We’ve all heard of the ethos of “disagree and commit”. It makes sense, of course, but ideally, we should be striving to achieve a consensus, following healthy debate and challenge. This is as true at the executive table as it is at the board.

HK:  In the words of David Hume, “truth is reached through disagreement between friends.” Do you think the SMCR will have a positive impact on the industry overall? What possible adverse effects can you envisage?

NM:  As we touched on earlier, I do fear that if we don’t do aligned accountability right, we risk threatening that basic tenet of corporate governance, the unitary board. Does our regulator really have the right to create opposing forces between ‘regular boards and ‘regulated boards? If we isolate our top team and their decisions, we could be inviting additional stress and mental health strains, which, needless to say, will be counterproductive. It will be interesting to see how the impact of certain public mistakes will be considered by the FCA in terms of those already subject to the regime, and what long-term impact that may have on the attractiveness of non-executive and senior positions in financial services. From a positive perspective, though, this is about culture, conduct, behaviours. We are kidding ourselves if we don’t also recognise the importance of these things in how we lead our people and our companies. The regulator is at times reluctant to help us design processes. It can sometimes be hard to get a clear message on what good looks like, particularly with conduct risk. With the potential for more fines against individuals, I’d like to see the industry react by developing behaviours and cultures that support aligned accountability – teams, collectively driven and comprised of autonomous, empowered individuals who are supportive of one another.

HK:  Yes, it’s interesting to see the regulator already flexing its muscles and showing the industry that it is serious. A final question is this: how do we get this to be about encouraging and embedding positive behaviours, rather than simply dodging fines?

NM:  The SMCR shouldn’t be, or be seen as, a system designed to catch people in the act of poor behaviour, thereby promulgating a fear culture – fear of not being good enough, or fear of a negative regulatory reference. That said, it needs to have an impact and people need to take it seriously. The regulator can achieve this to an extent by making it clear that the consequences of violations are serious. Companies can recover from fines, but can individuals recover their careers after a negative regulatory reference? Ultimately, company leadership teams and boards need to display the cultures and behaviours that are going to make this a positive success. That means promoting good governance, finding an equilibrium between taking risks and maintaining controls, and creating a positive, forward-looking culture of kindness, resilience and collective endeavour.

HK:  An inspiring note on which to end this fascinating conversation. Thank you for your time and your thoughts, Nicola.