INDEX:Financial Services Group of Livery Companies
THE FINANCIAL SERVICES GROUP OF LIVERY COMPANIES
ISSUES FOR CONSIDERATION BY THE LORD MAYOR
Financial Services is more than Banking It is also: Insurance Shipping Professional Services Arbitration IT Information Services Trade Facilitation Inspection Insurance is different from Banking To simplify: Insurance is long-term. Banking is short-term. Insurance matches assets and liabilities by term. (Retail) banks borrow short and lend long. Insurers pool risks. Banks price risks. Insurers ring-fence assets supporting their liabilities to their retail customers’. Banks don’t – yet. Insurers balance their books maybe monthly or yearly. Banks do it daily. Insurers and banks provide guaranteed benefits and benefits that can be matched. Insurers may also use discretion in contract benefits to smooth risks or to provide cover that could not be provided on a guaranteed basis. Insurers measure profit as value-added. Banks measure margins. Insurers allow for behavioural risks in pricing and provisions. Banks take them as they come. Insurers’ liabilities are relatively complex, their assets relatively straightforward. Banks’ liabilities are relatively simple, their assets relatively complex. Insurance should be regulated differently from Banking Regulation is dominated by bankers and banking thinking. Regulators seek to unite the two industries for simplicity. An example of a consequence is that solvency, for insurers and bankers, looks at a risk of ruin over only one year. It is important, particularly for regulatory discussions, to distinguish between the two sectors.
Basel III applied to insurance is, basically, Solvency II. Solvency II works well for life assurance, but not at all for general risks (commercial and personal insurance lines). If Solvency II is enacted for life, it can work with relatively few problems, although at great administrative cost. If Solvency II is enacted for general risks, costs for approximately 85% of consumers will rise noticeably.
Insurance is a significant contributor to UK’s economy and the balance of payments. It is the DNA of capitalism but it can be adversely affected if the BoE/PRA structure is too focused on treating everyone in a similar view to that set down for banks. There is a real need for the BoE/PRA to be balanced so that the business sectors other than banks are truly recognised and treated in accordance with their risks and not those modelled on the banking sector.
The Best Interest of the City and Firms in the City is to fully meet Client Expectations and Shareholder Interests City provides world class standards in business services. Important to ensure it continues to do so. Excellent quality of managers and staff. Essential that all managers and staff recognise the importance of meeting client expectations and shareholder interests. Implications are not just about governance and regulation, but also the culture within firms.
Marketing puts Customers’ Needs first – Good Product Design follows Good marketing is the major force to replace product-push with customer-pull. Marketing is the discipline that brings the voice of the customer to the Board and to decisions on business strategy. Good marketing compels firms to justify their existence by demonstrably satisfying identified customers’ needs – with excellent product benefits, advice and delivery. Marketing enables quantum increases in profitable “top-line” volume, so kicking off the process of value-creation in the firm. It is then for internal disciplines to turn that advantage into “bottom-line” profits. Promoting products and services that don’t meet customers’ needs is a short route to destroying shareholder value. Marketing is more than PR. Marketing includes communications alongside customer research, product development, packaging, pricing, distribution, brand and reputation management, customer relationship management et al. In turn, communications includes public relations alongside advertising, direct marketing, sponsorship etc. Hearts and Minds: Win one with Empathy; the other with Data; don’t confuse the two You will not overcome an emotional argument by using rational data. Perceptions are facts in the minds of the perceivers (beauty is in the eye of the beholder) – don’t underestimate the power of perception. Innovation and ‘Innovation’ In wholesale markets and those with informed and sophisticated buyers, regulation should not be so prescriptive as to stifle innovation, which will forestall meeting client requirements, and prevent competitive success, especially in international markets. In some retail markets where the balance of information is heavily in favour of the product provider, ‘innovation’ can be an excuse to provide additional margins for the provider and the distributor at the expense of the customer. Where needs are simple, product benefits can be simple and understandable. Here, innovation in presentation, service quality and delivery is valid. The Professions Provide an Example to the City Many of the professions provide assurance of the expertise of individuals. They provide a set of expectations, even duties, on qualified people to maintain their professional development. Members are required not to bring the profession into disrepute. As a result, members of the professions in the UK are regarded as first rate internationally. Firms should consider independent accreditation as a prerequisite for prospective employees in many more areas of expertise. The very active jobs market in the City is a source of strength to the City. However firms should not rely on previous employment and interviews as an assurance of the detailed technical ability and reliability of recruited staff. Newer professional bodies should ensure they can provide high standards of ability and assessment, and provide codes of practice and have the means to deal with complaints about individuals. The City should look after the Society it depends upon. Firms in the City depend on the contribution of unskilled, skilled workers and tradesmen as well as staff with qualifications and experience in business matters Healthy public communities in Greater London providing such services are a long term strength of the City Many firms already have a fine record of assisting public communities and disadvantaged members of them The City through its Livery Companies likewise has a long tradition of supporting good causes. The City is made up of three interconnected but different communities: Professions, Livery and firms. Want to see all three providing support to public communities to a greater degree. More can and should be done. Adds to the strength and confidence of the City Board Accountability through an Independent Performance Review Reporting requirements for many public companies tend to be grounds for an annual tick box activity whereby their responses tend to address the form rather than substance. This approach conceals the Board’s real ethos in the myriad statements and disclosures made to shareholders and the public. Dominant directors, be they MD, FD or a non-Exec Chairman can be extremely dangerous to an organisation. If there had been substance in addressing the “real” spirit of the requirements perhaps the financial crisis may have been identified earlier. Board transparency and accountability can only come from a real and independent assessment of Board performance which can be tackled i) by an external performance evaluation or ii) by requiring a majority of all boards to be independent non-executives or iii) investors, particularly the institutions who represent the public (pension and insurance funds), taking a more proactive role in the sustainability of the DNA of a public company beyond the pure return motive. Points ii) and iii) are unlikely to find favour but the introduction into the City Code of a triennial mandatory external Board performance review by disinterested parties may be the answer. The Institute of Chartered Secretaries and Administrators Board Performance Unit is a disinterested body which can perform such a task. Those companies that have undertaken full external evaluations with the ICSA unit are generally the more successful and openly managed companies that seem to understand that the company belongs to its shareholders and is not the play thing of management.
Banking, Financial Regulation and Competition The Independent Commission on Banking is drawing up plans to reform the banking sector, with the intention of increasing financial stability and promoting competition in the industry. At the same time, reforms will see the Financial Services Authority abolished with its macro prudential regulatory responsibilities transferred to the Bank of England. ICAEW welcomes the ICB’s preliminary conclusions as a valuable contribution to the debate, but warns that reforms to the banking sector or its regulators must balance the security of the banking system with the need to deliver finance for economic activity and recovery. Both the European Commission and the UK’s OFT are considering the competitiveness and regulation of the audit sector. Audit must serve investors, business and society better in the wake of the financial crisis. Competition in the sector is crucial but the dominance of some firms is a result of business preferences and market evolution. Concentration of audit provision is a regulatory failure Choice was restricted even before the implosion of Andersen. The regulators did not act to reverse the restriction. The banks’ insistence on using the Big 4 is a restraint of trade. The fact that most of the Big 4 are composed of separate legal entities makes demerger easier. Tax Simplification and Competitiveness The UK needs to develop a much more straightforward and stable tax system. It is increasingly and overly complex, often difficult to comply with and expensive to administer. It fails to offer businesses and taxpayers the certainty and stability they need, and risks undermining confidence in the UK as an investment destination. ICAEW’s economic research shows that UK enterprises see the tax and regulatory environment as their major concern. We should continue to reform the way tax law is formulated in order to encourage clarity, fairness, effectiveness and certainty. The Finance Bill process must allow meaningful consultation and scrutiny to take place, and the government’s plans for tax simplification require renewed commitment and enthusiasm. Tax Issues The competitiveness of the UK tax system is important. There are already welcome reductions in the corporate tax rate, and an indication of the intention to reduce personal tax rates (including the 50% rate) before the next election. The Government’s new approach to tax policy, making for a more stable and rational system, is also proving effective. There are many attractive features of the UK corporate tax system; the substantial shareholding exemption for capital gains, the exemption of overseas dividends and full interest relief (albeit tempered by complex anti avoidance provisions). However HM Revenue & Customs’ (HMRC) approach to their perception of avoidance can be heavy handed. It remains to be seen whether the current review of a possible General Anti Avoidance Rule (GAAR) will lead to positive outcomes. Disguised remuneration: HM Revenue & Customs have announced how they will settle existing cases where there is a link to employment with Employee Benefit Trusts. New legislation will tax such arrangements from 6 April 2011 The tax rules for residence and domicile continue to be reviewed. A mooted statutory tax residence rule should provide more certainty in an oft disputed area. The long awaited new rules for Controlled Foreign Companies, particularly for finance companies, have been delayed again; now expected in June 2011 A consultation on the taxation of Life Insurance Companies to take effect from 1 January 2013 is underway Migration The UK government plans to cap non-EU immigration, as part of a broader policy intended to cut inward migration. ICAEW is concerned that an unintended consequence may be to diminish UK competitiveness by limiting the scope of UK-based businesses to hire the best talent. Accountancy is one of the many globally mobile financial and business professions which give the City of London a major competitive advantage. Skills The UK requires a strong skills base if it is to compete globally, particularly with emerging economies which place such emphasis on educating and training their workforces. More specifically, skills policy must facilitate the opportunities for innovators and entrepreneurs to turn their ideas into commercial success. Financial skills are crucial here. Addressing low levels of financial expertise and commercial awareness in the wider economy, particularly for young people who have been hit hard by the downturn, is another essential way of strengthening enterprise in the economy. European Regulation A significant proportion of regulation affecting the City originates at EU level. Government and business must present a united voice for the City of London in Europe and work to minimise the UK’s ‘gold plating’ of EU legislation and regulations. Legal Services are vital to the UK Economy and respected Abroad Profits of the largest 100 law firms in the UK – mostly in the City – increased by 1% in 2009/10 to £4.07bn. Legal services generated £23.1bn or 1.8% of the UKs GDP in 2009. The UK is one of the 2 leading centres for international legal services and the UK is the leading centre for international dispute resolution. Nearly 320,000 people were employed in legal services in the UK in 2009. Exports of legal services were estimated at £2.8bn in 2009 (down 14% on the previous year). 15% of English & Welsh solicitors work in the City. City firms have International Practice Rights Particularly relevant in China, India, Japan, South Korea and South Africa. Through the International Division of the Law Society and the City of London Solicitors’ Company. Important early input adds value to new legislation. European Commissions’ proposals on European Contract Law. Bribery Act 2010. UK Competition Reforms UK Insolvency Rules London is the place for Dispute Resolution Use of English Law New Commercial Court [More from the Arbitrators] The Love of Commission is the root of some Mis-selling Examples: PPI commission can be over 50% of the premium and paid to the loan provider. Many customers didn’t realise they were paying for it; many were paying for inappropriate cover eg redundancy cover doesn’t apply to the self-employed. PPI was bundled into the provision of the loan and sometimes implied as a condition of taking the loan. This practice may continue even when commission is reduced under the Retail Distribution Review. US sub-prime debt was imported to the UK on the back of brokers’ commission paid by underwriters who did not look at the underlying risks. Pensions mis-selling. Endowment mis-selling. Precipice bonds. Commission is different from bonus. Commission is paid before determining gross profits. Bonus is paid out of gross profits - if a ‘bonus’ is a cost in determining profits, it’s really commission. Sales targets can be as damaging as commission.
Dominance Risk (by bad dominants) is a Killer and not provided for Examples: Robert Maxwell – Mirror Group Roy Ransom – Equitable Life Michael Bright – Independent Sir Fred Goodwin – Royal Bank of Scotland Long-Term Capital Management (a dominant culture) Enron, WorldCom Antidotes are rigid insistence on openness, transparency and accountability and honest attention to the findings of risk management and control systems.
Commodities Markets drive up food prices Some evidence that food will become the "new climate change" as a big ticket issue. A series of bad harvests, including the disastrous fires in Russia last year, combined with high oil prices have pushed food prices to an all-time high. There is speculation that the recent wave of revolutions in the Middle East are in part due to food price hikes. The City is a centre for commodity trading. One of the commodities that is traded is food. There are accusations that certain institutions are speculating in food futures and driving costs higher. Some academic evidence that food prices overshoot due to trading; some academic evidence that speculators help prices find the right level. Could require anyone trading to be able to “take delivery” (however that might work). Greater market liquidity and financial risk structures help the entire food supply chain better manage risk.
The following await supporting points
Audit is too concentrated (more)
Rating agencies are incompetent
UK retail banks should be broken up
Global investment banks should be broken up
AML procedures are too onerous and catch nobody