Sibos Amsterdam: Banks need to learn to say no to investors
The financial services industry may face a "tsunami" of regulation, but regulation alone is not going to prevent another counterparty failure or protect investors. The only solution, said today's Big Issue Debate panel is for banks to look inwards and stop rewarding bad behaviour. More importantly perhaps, they need to learn to say no to clients that expect unrealistic returns."We need to learn to say no. No to investors that expect certain investment returns," said Markus Ruetimann, group chief operating officer, Schroder Investment Management. Ruetimann then proceeded to tell a joke that was meant to symbolise the "image problem" the financial industry now faces; "Twelve dead hedge fund managers at the bottom of the ocean is a good start."
No doubt some investors would find the latter mildly amusing but their laughter would soon be replaced by anger as they remembered how much hedge funds and other invesment vehicles gambled with their life savings and lost. Even the taxi drivers in Amsterdam are peeved with the bankers, equating a lot of what went on within banks and other financial institutions in the run up to the crisis as casino-style "gambling".
The theme of today's Big Issue Debate at Sibos in Amsterdam was rebuilding trust, but if you think politicians and regulators can get it right in terms of protecting the consumer and rebuilding trust, then you will have to think again.
Gerrit Zalm, CEO, ABN AMRO Bank was the only panellist that appeared to put his faith in new regulations such as Basel III. "Basel III is a good step forward. You need to have more capital and there are prescriptions about liquidity. It is in the right direction," he said. Zalm also added that Basel III may impose some sort of global standard on banks, although he acknowledged that national regulators are likely to continue to do things differently. There are also issues around the bureacracy involved in governance of supervision, Zalm conceded.
Ruetimann said the challenge for the regulators was to get the balance right and not to overregulate or to give investors a false sense of security. "It is about finding the balance between a proportionate response by regulators and transparency in terms of how we interact with investors about risk/reward," said Reutimann. But if most regulators were unable to or unwilling to curb the behaviour that resulted in the 2008 financial crisis, how can we suddenly expect them to get it right this time.
That was the point William Cohen, contributing editor for Fortune magazine was trying to make when he said the crisis was a "missed opportunity" in terms of governments and regulators fixing some of the fundamental problems that exist in capital markets. According to Cohen, the problems , at least on Wall Street, began when private financial firms went public back in the 1970s. Shareholder value and profitability suddenly became more important and firms' owners were no longer personally liable for their full net worth. That's when firms started gambling with customers' money. "Basel III and the Dodd-Frank Act are solving the wrong problems," said Cohen.
Despite his bullishness on Basel III, Zalm agreed that EU regulators missed the opportunity to create a European system of supervision. He added that it is too late to change it as national governments are not going to want to give away powers to a European system.
No amount of regulation however, will be able to stop another "flash crash" which was blamed on the rise of algorithmic trading or another counterparty failure, said Ruetimann. In the end not only does the blame for the financial crisis lie with the industry, but the solution to it also rests with the industry. "How many financial crises have been blamed on client service," said Cohen. "My client asked me to do it. We (the banks) have to look at ourselves. People continuously did things on a daily basis that they were rewarded to do. When the rewards are wrong, the behaviour is wrong."
Guest blogger John Gubert was also at the Big Debate session and had this to say:
There were several messages, especially from Schroders' Ruetimann, for our securities industry. The backcloth, as indeed for the first big issue debate on regulation, was depressing - no wonder as bankers are now at the bottom rung of the public approval ladder!
We heard that self regulation is something of the past. But few appear to believe that the tsunami of new regulation is proportionate to the change that is needed. There is more supervision, but is that just an added layer of bureaucracy or an enabler to simple and clear regulation? The view, unfortunately, was in favour of the former rather than the latter.
Even the bankers cited remuneration as one of the areas for change. There was concern that regulation had failed to resolve this issue. Too many remuneration packages are still geared to sales rather than long-term sustainable contribution. Base salaries have increased and that gives companies less flexibility to match performance with pay. And yet many of us (and my former employers definitely did) have been on the "side of the angels" for many decades with a substantial amount of annual compensation being linked to three-to-five-year performance related deferrals.
A second impact of regulatory change has been a focus on other performance factors than revenues and bottom line as measures of success. The most valuable one related to client longevity and the custody business, which is marked by long- term relationships, and it is a good example for the rest of the industry..
A further impact of increased regulation was said to be its possibly negative influence on business growth and innovation. There has always been a different risk appetite from company to company for new products; but has risk appetite fallen too far? Are businesses so scared that they are overcautious? This challenge can only be overcome by sound leadership. The final impact noted by the panel was the change in company leadership. Styles are changing and organisations are moving to a much more balanced scorecard to assess performance. Perhaps this is driven by necessity but the result is positive.
The scary thing about all the regulatory change, its impacts, whether on performance, corporate philosophy, compensation strategies or innovation, is that few believe the new environment will prevent another crash or another corporate failure with systemic impacts. That needs a cultural shift. For - and nobody seemed to mention it - in the end the odd one percent of the business were the main guilty parties. The bulk of bankers were actually honest!
Date Posted:27th October 2010