By Matt Shaw, Associate Partner – Crossbridge, the financial markets consultancy
A bitter pill to swallow
In 2012 many investment banks find themselves in a situation where profits have been flat or in decline for the last 2 to 3 years and now they must incur mandatory costs for the next 2 to 3 years in order to implement a raft of regulations, compliance with which will reduce their profitability yet further. Putting issues of timing, extra-territoriality, regulator’ capacity, economic and political diversions (such as the US Presidential Elections and the Euro-crisis) to one side, it is clear that the financial services industry is entering a period of sustained reform.
Jamie Dimon, chief executive of JPMorgan Chase, estimates that Dodd-Frank alone will add an additional $400m-$600m to the firm’s annual cost base. By some estimates, the return on equity of the banking sector as a whole will fall from about 20 percent to around 12 percent, which does not provide investors with a great deal of compensation for the volatility of the capital-markets. Already depleted change budgets, for at least the next few years, will mainly be spent on US, European Union and global regulatory reforms. These variously seek to address some of the systemic stability issues which have come to light during the recent financial crises and combined, they affect almost every area of the financial services industry – the wholesale, retail and insurance markets, from individual and corporate customers, to buy and sell side participants, to trading venues and infrastructure providers.
Regulators are starting to put much more emphasis on the quality, richness, volume and transparency of the data they receive from financial institutions and are using this as a proxy to enforce additional and more robust controls, and increased substantiation, that regulated firms are adhering to policy, providing full disclosure and complying with the law.
By mandating the use of the unique Legal Entity Identifier (LEI) on all trades, regulators are effectively forcing firms to clean-up their counterparty data structures and values and the internal linkages with the various front office businesses which enable counterparties to trade. Over the next few years it seems regulators are moving towards a global single view of counterparties, but exactly how market participants will obtain and register their LEI is not yet finalised. It is another matter as to which sovereigns, governments, corporates and individuals will accept this scrutiny into their banking transactions and intrusion into their privacy. There are competing identity schemes being put forward by different regulators (unfortunately), although LEI seems to be approaching a ‘tipping point’ and if it is adopted by one of the major European or Global regulations, it will surely become the industry standard. LEI could become the ‘passport to trade’ for market participants who fall under the regulations (which is most).
There are similar initiatives to create global identifiers for standardised derivative products and their underlying contracts and this too may become more feasible as regulators force more and more OTC products onto exchanges and through central counterparty clearing. As with LEI, we could see the formation of centralised securities and contract registries. What will this do for financial innovation and the creation of new products? Of course, it remains to be seen how and where the market for specialised bi-lateral contracts and structures (to meet a specific risk profile and market view) will persist in the new environment…but the demand will be met.
In theory at least, improved identification should lead to improved classification and linkage of transactions, counterparties and products and this is what drives many risk and accounting provisions, controls, limits and reports. Given enough computing and manpower, local and global regulators (and by implication the firms they regulate) should be able to build a more detailed picture of the network of transactions and risk concentrations across different products counterparties, industries and countries, but do regulators really expect to turn top-down surveillance into bottom-up sousveillance?
Where does it hurt?
Underpinning much of this change is data – the information which is used to identify, classify and enrich a firm’s transactions and to consolidate, control and report on its books and records. At the data level the different regulations (Dodd-Frank, EMIR/MiFID2, FATCA, Basel 2.5/3, Recovery and Resolution Planning, CASS, and IFRS to name a few) often come crashing together. If we focus instead on the different data domains, we can see common patterns start to emerge.
|Internal Legal Entity Structure|
Figure 1 shows some of the data improvements and changes firms might be expected to make.
Whether they have a leading edge service-oriented messaging infrastructure or a dual-key and reconciliation-based information architecture, Crossbridge believes that firms need to review their data lifecycle quality, ownership, standards and flexible storage solutions, and map these onto their book of work, in order to identify where cost-savings can be achieved. We recommend a consistent approach to the delivery of data solutions, from developing business rules to data and structural enhancements, to BAU process and capture updates, through to data remediation and migration. Figure 2 shows some of the trade-offs to be considered.
|Remediation/Migration||Population reduction versus complexity of BAU process updates.|
|Client Focus||Impact on new and existing client lifecycle service from the group, division, line of business and platform perspectives (with regional variations).|
|Risk Appetite||Non-compliance risk assessment (data quality and false positives/negatives).|
|Cost/Benefit||Cost-benefit analysis of data quality (fitness for purpose, not perfection).|
|Enterprise Solution||Buy (vendor), build (in-house/open-source) or partner (externalise).|
Delivering coherent and cost effective solutions is made difficult given that data organisations need to support project focused ‘point deliveries’ with fixed compliance deadlines. The situation is further complicated by inflexible or monolithic data capture, storage and distribution platforms and unclear ownership amongst the many suppliers and consumers of the data.
A miraculous recovery
Some technology start-ups (Google and Facebook included) start with a data model and subsequently develop their business models on top. Since their business models are under threat, maybe it is time for banks to develop data models to retro-fit to their already well established (but often multi-faceted, multi-vendor) business and operating models? It is often said that there is no competitive advantage to data. Maybe, maybe not, but a firm-wide focus on data quality can reduce operating and transaction costs, improve risk aggregation and management, and optimise balance-sheet and inventory utilisation. More and more firms are starting to view data as an asset and understand the importance of data quality as an enabler not just for regulatory compliance, control and reporting processes, but also for integration, differentiation, reputation and profitability enhancing initiatives.
Complex financial product accounting, risk analytics and valuation models are becoming increasingly commoditised – companies like FinancialForce.com and OpenGamma already offer highly modular, scalable, fault-tolerant, cloud-based (or ready) accounting and risk management platforms. Could it be too long before we see the emergence of Microsoft Azure Ledger, Google Financial Risk Analytics, or Amazon Transaction Banking? If banks overcome their ‘not built here’ syndrome they could begin to work with trusted and proven platform service partners who promise to cut operating costs and ‘not be evil’. As more OTC products become standardised on exchanges, algorithmic trading and STP will be used to drive down the ‘cost per trade’. Could a ‘big data strategy’ steal the march on regulators and competitors and allow a firm to refocus on value creation activities, such as trading and hedging strategies, structuring and contract origination, advisory, sales and marketing?
As we have seen above, regulators are beginning to force the issue with more prescriptive identity and classification schemes, which will result in the externalisation of firms’ trade, counterparty and product information in centralised regulatory repositories. Vendors such as Avox (a commercial subsidiary of the DTCC) are already starting to realise the value in this model as they match, merge, validate and re-distribute counterparty data to and from a number of large banks – they offer a ‘Counterparty in the Cloud’ service (although the matching algorithm is a little more ‘fuzzy’ than for iTunes). It is not a great leap to envisage them (or a competing vendor or consortium) leverage the standardisation afforded by the LEI and extend their business and data validation teams to provide a shared KYC and client on-boarding service. Although anti-competition and risk concentration concerns would need to be addressed, the benefits to clients are clear; they will only have to go through the standard regulatory KYC ‘passport application’ process once and then negotiate legal and commercial ‘visas’ with each of the firms with which they wish to trade. Maybe some aspects of the global markets’ client on-boarding process will be outsourced yet further and delegated back to the governments, regulators and credit ratings agencies that mandate these ‘approved’ classifications, ratings and identities for counterparties and products. If you are going to demand ID, you have to issue the passports.
UBX appoints new Chief Investment Officer
In line with its strategy to explore and invest in companies and platforms of the future, UBX—the Fintech and Corporate Venture Capital arm of Union Bank of the Philippines (UnionBank) — is announcing the appointment of Matthew Kolling as the company’s Chief Investment Officer (CIO).
As CIO, Kolling will be managing UBX’s Corporate Venture Capital (CVC) fund. He will also play a key role in raising capital for UBX while assisting the company in key corporate transactions, including the structuring of joint ventures and acquisitions.
Prior to his appointment at UBX, Kolling has been Head of Venture Investments at Aboitiz & Company since 2019, wherein he had been working with UBX on investment portfolio decisions. Before that, he held senior positions in Private Equity, Venture Capital, and Investment Banking at firms such as Providence Equity Partners and Morgan Stanley in New York.
Kolling has more than 20 years of experience in managing investments and deals in the Technology and Telecommunications industries and is active in Venture Capital and startup communities in the Philippines and the Southeast Asian region. He currently chairs the Manila Angel Investors Network, among others.
“We at UBX are excited to welcome Matt as our new CIO. We firmly believe that Matt will be instrumental in driving value creation opportunities, both within the CVC fund and our corporate ventures. We look forward to working with him as we fulfill UBX’s vision of a future where banking services are embedded into everyday experiences that matter,” said UBX president and CEO John Januszczak.
Meanwhile, UnionBank president and CEO Edwin Bautista said, “The addition of world-class talents in our pool reinforces our strategy to future-proof the organization and our business as we prepare for many new opportunities that come with the changing times.”
It’s all relative: Older generations feel helping out the family financially is more important since the Covid-19 outbreak
Before Covid, 23% of people prioritised helping younger generations out financially, that increased to a third as a result of the pandemic
A recent survey* conducted by Hodge has revealed that the Covid pandemic has led to more people wanting to help younger family members financially.
A third (31%)** of those questioned said that since the Covid outbreak giving a financial gift to children or grandchildren is more important to them, compared to 23% who said it was a priority before the pandemic.
The traditional “Bank of Mum and Dad” is still very much open for financial help, with parents being responsible for 72% of the gifts, but the study also revealed that financial gifts can come from all corners of the family – including children (14%) and siblings (14%).
The survey also found that a third of people have received a financial gift from family, with those aged between 25-34 as the most likely to receive
The most popular reason for gifting money to family is for special occasions such as a quarter of gifts were given for weddings and birthdays but 11% of people have received money to help with big purchases such as cars and houses. In addition, 19% of people have received help with day to day finances, with around 14% of those receiving a gift have done so to pay off debt.
Emma Graham, Business Development Director at Hodge, said of the research: “Our study showed that, as a nation, we all want to help our family out when it comes to money. And whilst we all think of the Bank of Mum and Dad or Gran and Grandad as a traditional source, we were surprised to see that 14% of brothers and sisters are also helping out.”
The findings come from a recent intergenerational study conducted by Hodge, who interviewed over 3000 people about their attitudes towards finances and their aspirations for the future. The full research findings can be found at https://hodgebank.co.uk/2020/05/19/money-its-all-relative/.
As part of the study, people were also asked about paying back the gift, with 40% of beneficiaries expecting to pay their parents back, but this dropped to 28% if the gift came from grandparents.
From the gift donor’s perspective, 26% expect the gift to be paid back, however just 15% of grandparents expected the money back.
Hodge has produced a set of guides on how families can navigate the tricky subject of giving financial gifts within a family, as well as the considerations and steps that be families should think about taking before a gift is given, such as is it a loan or a gift and thinking about contingencies if the family member’s circumstances change. The guides can be found here: https://hodgebank.co.uk/news/
Emma continued: “It’s clear that families feel strongly about offering financial support to each other if they are able and this has increased since the Covid pandemic. Before Covid, 23% of people prioritised helping their families out financially in the next five years. Since the Covid-19 outbreak that has increased to a third of people saying helping a family member financially had become more important.
“So, it is clear that the Covid-19 lockdown and subsequent predicted economic downturn, has led to more families looking to share wealth to help younger children or grandchildren during this difficult time. Many people may look to Later Life mortgages, where many products have reduced their rates and have flexible lending criteria, to help out a loved during these difficult times.”
New report identifies the factors which will determine SMEs’ chances of a successful COVID recovery
· Analysis of the performance of over 1,000 UK small and medium-sized businesses by Allica Bank provides roadmap for SMEs
· Regular training, an openness to innovation, and a clear vision all contribute heavily to an SMEs’ chances of success
· Allica Bank has launched a programme of free workshops to expand on the findings and support business owners
Business bank, Allica Bank has combined data and insight from over 1,000 UK SMEs with a multiple regression analysis to determine what factors most closely aligned with an SMEs’ chances of success and separated the highest-performing businesses from their peers. These ‘rules for success’ have been compiled from the research data to support British businesses as they look to chart a course to post-Covid recovery.
The full report identifies six behaviours for small and medium businesses to follow, to maximise their chances of a successful COVID recovery. The six top-line rules emphasised by the data were:
Rule 1: SMEs should regularly train staff
Of the top-performing businesses analysed, 47% provided training for employees at least on a quarterly basis, compared to just 32% of other businesses. Regular employee training was linked closely to success by the model.
Despite this, many small businesses have neglected training and nearly half (46%) of the small businesses analysed only provide training for employees about once a year or less often. This included 15% that never provide employer-funded training. This discrepancy could represent a significant opportunity for small businesses to unlock the potential of their employees and thrive in the post-Covid economy.
Rule 2: SMEs need to focus on innovation and technology
Looking again to the best performing businesses, 76% were found to either continually (39%) or often (37%) be considering new opportunities for technology in their business. This is compared to only 51% for businesses considered to be outside of the top ranks, out of which only 27% admitted to continually looking for new technology opportunities.
Rule 3: Small business must have a formal, long-term vision
Nearly two thirds (66%) of the most successful businesses in the survey had a formal, long-term vision, compared to just 50% of businesses outside the top 100. Looking to the businesses that scored the lowest on the SME Performance index, only 37% claimed to have a formal, long-term vision.
Rule 4: SMEs should broaden their customer reach and find new markets
Of the top-performing businesses, 65% of these have overseas customers compared to just 40% of the worst performing businesses. Among the best performing SMEs, over a third (34%) identified international expansion as one of the top three drivers for their success.
Rule 5: SMEs need to develop reinvestment plans
22% of the best performing SMEs reinvested some of their profits into the business in the past three years with an average 9% of profits being redeployed. Tellingly, this is nearly double what other businesses admit to reinvesting in their business (5%).
Rule 6: SMEs should engage with local business organisations and networks
Of the top 100 SMEs, 30% had obtained external credit to expand over the past three years (compared to 24% of other businesses). Meanwhile, only 16% of all other SMEs had engaged with local enterprise partnerships or growth hubs in the past three years (compared to 23% of the top 100 SMEs).
Chris Weller, Chief Commercial Officer, Allica Bank, said:
“All small businesses are different, as are all small business owners, but one trait they share is an innovative resilience. Whilst the coming months and years will undoubtedly continue to present extreme challenges, there is no doubt that small and medium sized businesses across the UK will rise to meet them head on.
“To give them the best chance to succeed, though, they need to be equipped with the right tools. There is certainly no silver bullet or panacea for every small business, but as this study has found, there are a number of common factors found in the most successful businesses that allow small enterprises to thrive and that they can consider individually for their business.
“This research has identified common ‘rules for success’ that speak to every aspect of running a business, not just the financials. Once we saw these results, we wanted to use them to help small businesses begin to re-build and prosper, by outlining common factors and then examining how best they can be practically applied to businesses in all sectors of the economy.
“Small business owners and their employees have been hit hard by the crisis, but they have the drive and resourcefulness to breathe new life into the economy and bring energy to post-Covid Britain. Our commitment at Allica Bank is to give them the support they need to do so, every step of the way.”
The full report contains a wealth of additional data and insight into each of these topics. As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.
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