Post on 18-Dec-2015
Chris Harvey
Managing Partner
Global Financial Services Industry Practice
Global Financial Services
Harnessing the forces of change
The forces of change
2
COMPLIANCE CAPITAL
CUSTOMERS COMPETITION
New Regulation
FATCAIFRS
Liquidity
Basel IIISolvency II
New Entrants
Consolidation
Emerging Financial CentersTrust & Reputation
Buying Behavior
New Product Demand
Consumer Protection
Diminished short-term funding
Cross-Sector
AML
The forces of change
3
COMPLIANCE CAPITAL
CUSTOMERS COMPETITION
• Operating models
• Risk management
• Governance
• M&A
• Product development
• Talent
• Strategy
• Finance transformation
Forces of change impacting decisions in all areas of business, e.g.:
Forces of Change
• Lack of trust between governments
and financial institutions
• lobbying & influence continues
• threat of regulatory arbitrage remains
• Still uncertain regulatory environment
• highly politicized process
• inconsistent approach between
countries
• operational details remain vague
• Sovereign states pursuing tax revenue
• increased reporting requirements
• threat of significant penalties
Compliance
4
Foreign Account Tax Compliance Act (FATCA)
• Requires institutions to identify and document all US account holders
• Failure to comply = 30% withholding tax on US-source income and sales proceeds
• Applies to all payments made after December 31, 2012
Impact of Change
• Negative impact of resisting change
• could lead to more penalties
• spotlight on sensitive areas, e.g.
executive compensation
• Compliance ‘flexibility’’ is now critical
• compliance a process not an event
• product development a moving target
• extra cost of compliance
• FSIs facing conflicting regulations
• no ‘one size fits all’ fix across borders
• significant downside risk
Compliance
5
JP Morgan Chase estimates that
the US Dodd-Frank financial
legislation will cost the bank
almost $1 billion in lost revenue.
Harnessing Change
• Scenario planning on ‘tipping-points’
• what triggers a move in location
• what triggers a product exit
• alternative compensation plans
• Develop agile compliance solutions
• scalable/flexible data collection
• greater training/compensation for
compliance function
• Balance compliance risk & reward
• anticipate and budget for penalties
• quantify competitive advantage of
flexible compliance function
Compliance
6
What will be your focus on regulatory compliance as you prepare for the recovery?
Forces of Change
• Definitions of capital have changed
• stricter Tier 1 definition
• minimum common equity levels
increased
• Capital is no longer a ‘commodity’
• cost of capital has increased
• decreased use of short-term funding
• true value of liquidity now recognized
• New capital standards introduced
• Basel III for banks
• Solvency II for insurers
Capital
“Analysts have predicted that if all
the proposed regulations were
enacted it would require banks to
add an additional $221billion in
capital.”
The New York Times
7
Impact of Change
• Stable sources of funding now vital
• diversified capital sources favored
• new liquidity ratios now mandated
• Has made some products unprofitable
• products relying mis-match funding
have largely disappeared
• increased cost of capital has erased
the margins on other products
• Greater care in deploying capital
• targeted use to ensure risk-adjusted
return on capital is maximized
Capital
8
What will be your institution’s focus regarding LIQUIDITY?
Harnessing Change
• Target liquidity creating business
• higher cash flow businesses attractive
• diversify into retail-style areas of the
industry to boost liquidity
• Focus on capital efficient products
• identify products most capital efficient
• target market leadership in these
products; exit non-efficient products
• Improve measurement of capital use
• use data analytics and modeling to
better understand capital performance
• data-mine historical data for insight
Capital
9
What will be your institution’s focus regarding CAPITAL?
Forces of Change
• Loss of trust with institutions
• remain ‘suspicious’ of institutions
• threat of customer mobility remains
• Economically damaged
• fewer big ticket financial transactions
• need to ‘catch-up’ retirement
investment plans
• More educated about risk
• more scrutiny on financial products
• flight to quality
Customers
10
0%
5%
10%
15%
20%
25%
30%
6.7%
19.0%
22.6%23.2%
28.5%
What do you anticipate will be the most pronounced change in CUSTOMER’S behavior?
Impact of Change
• Customers ‘stickiness’ reduced
• increased willingness to change
providers
• Reduction in fees
• fewer mortgage transactions,
insurance policies, etc.
• customers more price sensitive
• Products need to withstand scrutiny
• clearer value proposition within each
product offering
• improved risk management to identify
higher risk customers
Customers
11
Percentage of customer indicating they will not switch banks this year
J.D. Power and Associates 2010 U.S. Retail Banking Satisfaction Study
Harnessing Change
• Rebuild trust & reputation
• promote economically constructive
activities (e.g. increased lending, etc.)
• educate employees on the value and
importance of corporate reputation
• Fight to preserve margins
• extend efficiency efforts
• target less-price sensitive segments
• Focus on quality
• exist lower quality products
• focus on individual customer risk
• leverage brands
Customers
12
What key steps will your institution focus on in order to rebuild TRUST & REPUTATION
Other
Introducing customer charters
Clarifying disclosure information
Issuing additional disclosure information
PR campaigns to educate the public
Re-aligning values in corporate culture
Making employees aware of reputation issues
0% 10% 20% 30% 40%
2.7%
5.9%
12.3%
12.9%
15.2%
22.0%
28.9%
13
Forces of Change
• Emerging market players
• growing brand presence and
sophistication of local providers
• regional ambitions of national
providers
• New entrants
• non-traditional providers leveraging
their service expertise (e.g. Tesco)
• entry dependent on attitude of local
regulators (e.g. Europe vs USA)
• Consolidation
• ‘bargain’-driven acquisitions
• acquisitions for capital scale
Competition
What positive opportunities have emerged from the financial crisis and economic downturn?
Impact of Change
• Erosion of experience advantage
• ‘western’ providers cannot rely simply
on superior industry experience
• Improving the customer experience
• traditional providers need to improve
service responsiveness
• ‘Dumb-bell’ shaped sectors
• larger leading institutions
• fragmentation and specialization at
lower end
Competition
14
2007 45
2010 28
Number of global financial institutions >$50bn market capitalization
15
Harnessing Change
• Boosting emerging market operations
• investment to take emerging market
operations to the next level
• defensive tactics in strategically
important regions
• Return to service innovation
• leverage service technologies
• recruitment of market facing talent
• focus on service training
• Strategic acquisition/divestments
• decide which end of the market to
focus on
• target acquisitions/focus on PMI
Competition
What will be your institutions focus regarding TECHNOLOGY?
Harnessing Change
• Develop flexible compliance solutions
• Balance compliance risk & reward
• Scenario planning on ‘tipping-points’
Conclusion
• Focus on capital efficient products
• Improve measurement of capital use
• Target liquidity creating business
• Fight to preserve margins
• Focus on quality
• Rebuild trust & reputation
• Return to service innovation
• Strategic acquisition/divestments
• Boosting emerging market operations
Forces of Change
COMPLIANCE
CAPITAL
CUSTOMERS
COMPETITION
17