Commenting on the macro trends and issues that will have the biggest impact on the financial services (FS) industry in 2011, Nigel Vooght, global FS leader at PwC, said:
“If the old financial services world was characterised by product complexity and accelerated growth, the words associated with the new order must surely be regulation, regulation, regulation. There is a feeling among CEOs that all the things that were on their minds last year are going to become painfully tangible this year. There is definitely more pressure and change to come, particularly when pending regulation hits.
“Organisations will have to deal with new regulatory requirements while simultaneously proving they can be socially useful, transparent, deal with limited resources, compete in emerging markets and so on. And while reputation and compliance issues currently seem more urgent, developing sustainable strategies to deal with big picture trends like ageing populations, technological advances and changing customer profiles will soon be just as pressing. The list of challenges set to disrupt ‘business as usual’ is seemingly endless – early identification of issues and scenario planning will become business critical this year.”
Regulation, regulation, regulation
At the start of 2010, global bankers identified regulation as their third biggest industry concern – preceded only by political interference and credit risk (Banking Banana Skins report by the CSFI in association with PwC). Beyond banking, insurers are grappling with preparing for Solvency II and equivalence while investment managers are trying to design a solution for the new Alternative Investment Fund Managers Directive (AIFMD) that won’t have to be later unpicked to comply with Dodd Frank, UCITS IV (Undertakings for Collective Investment in Transferable Securities) or FATCA (Foreign Account Tax Compliance Act).
Regulatory interpretations of new laws in the US are still pending. In the UK, the Independent Commission on Banking, which could determine the future of universal banks and competition rules is formed but not due to report until the end of 2011. Meanwhile, Asian regulators are waiting to see what happens. Amidst multiple proposals to change the regulation and structure of the financial markets, but in the absence of clarity on how they will interact and be enforced across different geographies, regulation is set to be a major source of disruption for companies operating across multiple jurisdictions.
Britain’s got talent
FS firms have historically relied on high remuneration to attract top talent so dealing with new constraints on pay and reconciling the various regulations in different jurisdictions will be a real challenge. European pay regulation is now the strictest globally, with the UK’s FSA Code, applicable from 1 January 2011, being the most stringent. The impact will be felt on hiring strategies and international mobility programmes. When the US pay regulations are published in April, banks will have a clearer picture of the international landscape – the expectation is that London, alongside other FS centres such as New York, will continue to attract top performers but there will be pockets of movement to places like Switzerland and emerging markets. In the UK, bonus season will be a milestone as we start seeing the ramifications of UK restrictions.
The bigger picture has to include an acceptance that FS companies have an increasingly expensive and ageing workforce with skills that are misaligned to evolving customer requirements. There are opportunities for those organisations that can get to grips with the different rules, be agile in re-deploying people where necessary and develop a strategy to hire and ring fence people with the right technological, relationship-management and product development skills.
Does Uncle SAAAME need you?
The rise of the SAAAME (South America, Africa, Asia and the Middle East) countries as a dominant bloc for trade and investment will continue apace forcing a continued shift in power. For example, PwC estimates that China will usurp the US as the world’s largest economy by 2025. But these countries do not need to look to the West for capital, decision making, consumers or labour so could conceivably become a self-sufficient trading bloc and will play an increasingly central role in the FS industry, particularly banking. Three of the largest banks in the world by market capitalisation are Chinese and other leaders have heavy emerging market exposure, where they can capitalise on big, relatively unbanked populations and booming demand for financial products.
While emerging market organisations can enter the west and do so aggressively, for Western financial services organisations, remaining relevant in the new world order depends on getting access to these markets and differentiating their product from those already there. While the emergence of middle classes in some of the SAAAME countries is creating an unprecedented thirst for financial products, infrastructure will need to be improved in parallel. SAAAME organisations wanting to benefit from foreign entrants will need to choose their partners carefully so their local position is not compromised.
Today’s dog is risk
Every dog has its day and today’s dog is risk. The crisis has highlighted what the European Commission described as the “absence of a healthy risk management culture at all levels of certain financial institutions”. Risk culture is a key element of the new risk management principles being promoted by the Committee of European Banking Supervisors (CEBS) in the wake of the G20 declaration. In many countries, regulator guidance is requiring risk officers to take on a swathe of additional responsibilities in financial firms. People with the skills to move beyond box-ticking into strategic interactions with the board are commanding a premium. The combined pressures of needing risk officers with the right skills and experience, combined with regulatory requirements, will drive inflation in risk officer pay.
One of the most career and earnings enhancing moves in the current environment is to ensure that you have the word ‘risk’ in your job title. From a business perspective, successfully embedding a strong risk culture means setting the right tone from the top, clear accountability, risk training and awareness, risk-adjusting reward, creating a visible presence for risk and compliance teams in business teams and separating remuneration of risk staff from frontline performance.
A new standard for insurers
After a gestation period of around 12 years, July 2011 should see the birth of a revised accounting standard that will change things considerably for insurers. The International Accounting Standards Board (IASB) is expected to change the way that insurance contracts are accounted for. The systems, operational and accounting impacts of the new standard will be significant, especially for life insurers.
The impact of the Solvency II capital requirements across Europe and equivalence plans in other territories, such as Bermuda, has been well-documented. But insurers will need to consider how the two requirements will interact. Because the reporting landscape for insurers has become overly complex and not well understood, or valued, by the capital markets, 2011 should be the year that insurers review their entire corporate reporting model to maximise value to shareholders.
Avatars and ‘hacktivists’
Remote working and the proliferation of email, handheld devices and conference calling has meant global networks can be effective and people can work from almost anywhere. Now reliant on virtual teams, global companies are no doubt thankful for technological advances. They should also be mindful of potential impact on reputation and security, as recent ‘hacktivist’ attacks on credit card companies have shown.
Adopting new technology will be fundamental to remaining relevant to customers. From online banking to employee benefits modelling, customers have growing expectations that they will be able to access instant and interactive information on their terms. While bank manager avatars are a way off, harnessing cloud computing capabilities or mobile phone payment platforms should be on retail banks’ minds.
No big deal
European FS deal activity in 2010 failed to live up to recovery predictions cast at the beginning of the year. But further industry-wide restructuring and investment for growth resulted in a flow of mid-market deals during the latter part of the year. Signs of recovery accelerated through bank restructuring and as private equity firms started to play a bigger role in the sector again. Deal values across the sector rose to €17bn in the third quarter, a 55% rise from the previous quarter, and the highest value seen since the second quarter of 2009.
Throughout 2011, mid-market activity is likely to dominate as insurers consolidate, banks undergo further restructuring and consolidate in stressed areas, and the rebound in private equity grows. Increased disposal of bank branch networks and non-core activities, such as asset management by banks which need to satisfy European Commission state aid conditions, are also on the cards. There will be an increase in growth-orientated transactions – with cross-border deals aimed at developing and strengthening a commercial presence in rapidly growing markets, such as Turkey, the Middle East and North Africa. Emerging market businesses may also seek to acquire European expertise, especially in wealth management or investment banking, to use across their home or emerging markets. Continued deal activity is expected in growth segments of the diversified financials sector, particularly involving businesses providing support services/market infrastructure to financial institutions, such as payment processors, loan servicers, trust and fund administration providers, exchanges and clearers.
Climate finance: show me the money?
Recent discussions on finance at Cancun were promising, particularly the establishment of the widely anticipated and welcomed Green Climate Fund. The fund will be used to distribute a significant part of the large sums of money committed in the Copenhagen Accord to help developing countries respond to climate change, and the World Bank will serve as the interim trustee for the first three years. The proposed fund is good news but missing half the puzzle. It is designed to distribute the funds, not raise them.
More work is needed on potential new sources of funds and the role of the private sector in meeting the goal of raising $100bn per annum by 2020 to support climate action. This could be a major opportunity for the City of London, in terms of debt and equity financing, insurance and funds management. The Government's Capital Markets Climate Initiative could play a central role in securing a mandate for private finance. A number of the G77 remain unconvinced of the role of markets and private finance to address climate change. But private finance has got to have a big role if we are going to get anywhere near the $100bn goal. The private sector is up for this and the money is there, but it is going to require much better joining up between policies and funding from the public sector and investment by business. We are seeing moves toward this, for example with demonstration projects for carbon capture and storage, and plans to pump money into the forest carbon market through the FCPF Carbon Fund. But more of this joined-up thinking is required.
Will the trickle become a flood?
Competition between geographical FS centres is reportedly rife. For example, during 2010, a significant number of hedge fund managers, with collective assets under management of US$50bn, relocated to Geneva. In the longer-term, the existing large asset management clusters in New York, London and Boston will be joined by Singapore, which may become the leading cluster in the Asian region. Tighter regulation and higher taxes are currently working against the United States and Europe but the key factor will be the increase in public and private capital available in Asia – which will fuel growth in asset management in the region.
Noted trends in private equity and hedge funds are spilling over into other FS industries with two geographical shifts taking place – towards the East and towards more favourable tax environments. But a stable tax regime is not the only thing taken into account when deciding where to locate. So while FS is a highly portable industry, strengths in infrastructure, transport links and being a central time zone should prevent the trickle out of the UK becoming a flood in 2011. The pull of capital could see the east win out in the end.
He who rejects change is the architect of decay
The future shape of the financial services industry is uncertain. In the West, the financial sector is likely to shrink as a percentage of GDP but governments will ensure it contributes to the real economy regardless of sector growth.
To rebuild stakeholder trust and customer confidence, the industry will have to prove it can be transparent and socially useful – and this means going beyond generating tax take (excluding the one-off bonus payroll tax, FS contributed 11.2pc of Britain's taxes in the 2009/10 fiscal year, paying £53.4bn). During 2011, we will see how the uneasy tension between seeking return on equity and being socially useful plays out. The only real clarity we have is that the environment that most in FS have spent their careers has changed - those that set out successful strategies to deal with this over the course of the year could well be the big brands of the future.
“If the old financial services world was characterised by product complexity and accelerated growth, the words associated with the new order must surely be regulation, regulation, regulation. There is a feeling among CEOs that all the things that were on their minds last year are going to become painfully tangible this year. There is definitely more pressure and change to come, particularly when pending regulation hits.
“Organisations will have to deal with new regulatory requirements while simultaneously proving they can be socially useful, transparent, deal with limited resources, compete in emerging markets and so on. And while reputation and compliance issues currently seem more urgent, developing sustainable strategies to deal with big picture trends like ageing populations, technological advances and changing customer profiles will soon be just as pressing. The list of challenges set to disrupt ‘business as usual’ is seemingly endless – early identification of issues and scenario planning will become business critical this year.”
Regulation, regulation, regulation
At the start of 2010, global bankers identified regulation as their third biggest industry concern – preceded only by political interference and credit risk (Banking Banana Skins report by the CSFI in association with PwC). Beyond banking, insurers are grappling with preparing for Solvency II and equivalence while investment managers are trying to design a solution for the new Alternative Investment Fund Managers Directive (AIFMD) that won’t have to be later unpicked to comply with Dodd Frank, UCITS IV (Undertakings for Collective Investment in Transferable Securities) or FATCA (Foreign Account Tax Compliance Act).
Regulatory interpretations of new laws in the US are still pending. In the UK, the Independent Commission on Banking, which could determine the future of universal banks and competition rules is formed but not due to report until the end of 2011. Meanwhile, Asian regulators are waiting to see what happens. Amidst multiple proposals to change the regulation and structure of the financial markets, but in the absence of clarity on how they will interact and be enforced across different geographies, regulation is set to be a major source of disruption for companies operating across multiple jurisdictions.
Britain’s got talent
FS firms have historically relied on high remuneration to attract top talent so dealing with new constraints on pay and reconciling the various regulations in different jurisdictions will be a real challenge. European pay regulation is now the strictest globally, with the UK’s FSA Code, applicable from 1 January 2011, being the most stringent. The impact will be felt on hiring strategies and international mobility programmes. When the US pay regulations are published in April, banks will have a clearer picture of the international landscape – the expectation is that London, alongside other FS centres such as New York, will continue to attract top performers but there will be pockets of movement to places like Switzerland and emerging markets. In the UK, bonus season will be a milestone as we start seeing the ramifications of UK restrictions.
The bigger picture has to include an acceptance that FS companies have an increasingly expensive and ageing workforce with skills that are misaligned to evolving customer requirements. There are opportunities for those organisations that can get to grips with the different rules, be agile in re-deploying people where necessary and develop a strategy to hire and ring fence people with the right technological, relationship-management and product development skills.
Does Uncle SAAAME need you?
The rise of the SAAAME (South America, Africa, Asia and the Middle East) countries as a dominant bloc for trade and investment will continue apace forcing a continued shift in power. For example, PwC estimates that China will usurp the US as the world’s largest economy by 2025. But these countries do not need to look to the West for capital, decision making, consumers or labour so could conceivably become a self-sufficient trading bloc and will play an increasingly central role in the FS industry, particularly banking. Three of the largest banks in the world by market capitalisation are Chinese and other leaders have heavy emerging market exposure, where they can capitalise on big, relatively unbanked populations and booming demand for financial products.
While emerging market organisations can enter the west and do so aggressively, for Western financial services organisations, remaining relevant in the new world order depends on getting access to these markets and differentiating their product from those already there. While the emergence of middle classes in some of the SAAAME countries is creating an unprecedented thirst for financial products, infrastructure will need to be improved in parallel. SAAAME organisations wanting to benefit from foreign entrants will need to choose their partners carefully so their local position is not compromised.
Today’s dog is risk
Every dog has its day and today’s dog is risk. The crisis has highlighted what the European Commission described as the “absence of a healthy risk management culture at all levels of certain financial institutions”. Risk culture is a key element of the new risk management principles being promoted by the Committee of European Banking Supervisors (CEBS) in the wake of the G20 declaration. In many countries, regulator guidance is requiring risk officers to take on a swathe of additional responsibilities in financial firms. People with the skills to move beyond box-ticking into strategic interactions with the board are commanding a premium. The combined pressures of needing risk officers with the right skills and experience, combined with regulatory requirements, will drive inflation in risk officer pay.
One of the most career and earnings enhancing moves in the current environment is to ensure that you have the word ‘risk’ in your job title. From a business perspective, successfully embedding a strong risk culture means setting the right tone from the top, clear accountability, risk training and awareness, risk-adjusting reward, creating a visible presence for risk and compliance teams in business teams and separating remuneration of risk staff from frontline performance.
A new standard for insurers
After a gestation period of around 12 years, July 2011 should see the birth of a revised accounting standard that will change things considerably for insurers. The International Accounting Standards Board (IASB) is expected to change the way that insurance contracts are accounted for. The systems, operational and accounting impacts of the new standard will be significant, especially for life insurers.
The impact of the Solvency II capital requirements across Europe and equivalence plans in other territories, such as Bermuda, has been well-documented. But insurers will need to consider how the two requirements will interact. Because the reporting landscape for insurers has become overly complex and not well understood, or valued, by the capital markets, 2011 should be the year that insurers review their entire corporate reporting model to maximise value to shareholders.
Avatars and ‘hacktivists’
Remote working and the proliferation of email, handheld devices and conference calling has meant global networks can be effective and people can work from almost anywhere. Now reliant on virtual teams, global companies are no doubt thankful for technological advances. They should also be mindful of potential impact on reputation and security, as recent ‘hacktivist’ attacks on credit card companies have shown.
Adopting new technology will be fundamental to remaining relevant to customers. From online banking to employee benefits modelling, customers have growing expectations that they will be able to access instant and interactive information on their terms. While bank manager avatars are a way off, harnessing cloud computing capabilities or mobile phone payment platforms should be on retail banks’ minds.
No big deal
European FS deal activity in 2010 failed to live up to recovery predictions cast at the beginning of the year. But further industry-wide restructuring and investment for growth resulted in a flow of mid-market deals during the latter part of the year. Signs of recovery accelerated through bank restructuring and as private equity firms started to play a bigger role in the sector again. Deal values across the sector rose to €17bn in the third quarter, a 55% rise from the previous quarter, and the highest value seen since the second quarter of 2009.
Throughout 2011, mid-market activity is likely to dominate as insurers consolidate, banks undergo further restructuring and consolidate in stressed areas, and the rebound in private equity grows. Increased disposal of bank branch networks and non-core activities, such as asset management by banks which need to satisfy European Commission state aid conditions, are also on the cards. There will be an increase in growth-orientated transactions – with cross-border deals aimed at developing and strengthening a commercial presence in rapidly growing markets, such as Turkey, the Middle East and North Africa. Emerging market businesses may also seek to acquire European expertise, especially in wealth management or investment banking, to use across their home or emerging markets. Continued deal activity is expected in growth segments of the diversified financials sector, particularly involving businesses providing support services/market infrastructure to financial institutions, such as payment processors, loan servicers, trust and fund administration providers, exchanges and clearers.
Climate finance: show me the money?
Recent discussions on finance at Cancun were promising, particularly the establishment of the widely anticipated and welcomed Green Climate Fund. The fund will be used to distribute a significant part of the large sums of money committed in the Copenhagen Accord to help developing countries respond to climate change, and the World Bank will serve as the interim trustee for the first three years. The proposed fund is good news but missing half the puzzle. It is designed to distribute the funds, not raise them.
More work is needed on potential new sources of funds and the role of the private sector in meeting the goal of raising $100bn per annum by 2020 to support climate action. This could be a major opportunity for the City of London, in terms of debt and equity financing, insurance and funds management. The Government's Capital Markets Climate Initiative could play a central role in securing a mandate for private finance. A number of the G77 remain unconvinced of the role of markets and private finance to address climate change. But private finance has got to have a big role if we are going to get anywhere near the $100bn goal. The private sector is up for this and the money is there, but it is going to require much better joining up between policies and funding from the public sector and investment by business. We are seeing moves toward this, for example with demonstration projects for carbon capture and storage, and plans to pump money into the forest carbon market through the FCPF Carbon Fund. But more of this joined-up thinking is required.
Will the trickle become a flood?
Competition between geographical FS centres is reportedly rife. For example, during 2010, a significant number of hedge fund managers, with collective assets under management of US$50bn, relocated to Geneva. In the longer-term, the existing large asset management clusters in New York, London and Boston will be joined by Singapore, which may become the leading cluster in the Asian region. Tighter regulation and higher taxes are currently working against the United States and Europe but the key factor will be the increase in public and private capital available in Asia – which will fuel growth in asset management in the region.
Noted trends in private equity and hedge funds are spilling over into other FS industries with two geographical shifts taking place – towards the East and towards more favourable tax environments. But a stable tax regime is not the only thing taken into account when deciding where to locate. So while FS is a highly portable industry, strengths in infrastructure, transport links and being a central time zone should prevent the trickle out of the UK becoming a flood in 2011. The pull of capital could see the east win out in the end.
He who rejects change is the architect of decay
The future shape of the financial services industry is uncertain. In the West, the financial sector is likely to shrink as a percentage of GDP but governments will ensure it contributes to the real economy regardless of sector growth.
To rebuild stakeholder trust and customer confidence, the industry will have to prove it can be transparent and socially useful – and this means going beyond generating tax take (excluding the one-off bonus payroll tax, FS contributed 11.2pc of Britain's taxes in the 2009/10 fiscal year, paying £53.4bn). During 2011, we will see how the uneasy tension between seeking return on equity and being socially useful plays out. The only real clarity we have is that the environment that most in FS have spent their careers has changed - those that set out successful strategies to deal with this over the course of the year could well be the big brands of the future.
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