Regulation as a Driver of Change: The New Breed of Banking Professional

The political and public backlash following the global financial crisis has put the role of banking very firmly into the limelight – and not always for the best of reasons. However, the fact remains that the UK financial services sector is at the very heart of the British economy. In fact only a couple of weeks ago, in his speech delivering the Government Spending Review, Chancellor George Osborne said: “Many hundreds of thousands of jobs across the whole UK depend on Britain being a competitive place for financial services.”

However, in order to ensure our place as a leading financial services sector, confidence has to be rebuilt. Arguably, one of the key causes of the credit crunch was the lack of regulation and that has led to an evolving landscape of regulatory reform. This, coupled with the ensuing hard line from both Europe and the Financial Services Authority (FSA), means that banks have to upgrade systems, strengthen their stress testing and improve corporate governance. The result is an increasing demand for a whole new breed of professional in areas such as compliance, regulatory reporting and valuations.


Compliance is, therefore, a hot topic across all product lines and asset classes. Not since the implementation of the Markets in Financial Instruments Directive (MiFID) in 2007 have we seen the sort of feeding frenzy that we are now witnessing. However, with an increasing number of European directives in the offing, compliance is a role that has had to evolve and the old-style ‘back-office box ticker’, who was often seen as a hindrance to the business, is of no use in this new world order.

Today’s compliance professionals need to demonstrate gravitas, solid business acumen and technical credibility. They need to be able to stand up to the sales and trading teams and demonstrate not only their technical expertise, but also their relationship management skills. Sales and trading teams, not surprisingly, are pretty ambivalent when it comes to regulation – they see it as a hindrance to executing business. Consequently, it is up to the compliance teams to make it easy for the front office to do their job. That means taking a strategic view and predicting what the problems might be before they actually arise. It’s about understanding the business – not hindering it.

We are seeing strong demand for compliance professionals at vice president/director level – particularly those who have experience of different jurisdictions. Business is global and institutions may have operations across different countries, so someone who can look at compliance across different jurisdictions is hot property at the moment. Regulatory affairs and relations is also a very busy area. With the amount of regulation coming through, people who can implement new policies and procedures, as well as taking the legislation, putting it into laymen’s terms and rolling it out across the bank, are in high demand.


Of course, it’s not just compliance departments that are shoring up in terms of headcount. While compliance will look at regulation from an operational perspective, it also needs to be considered from an accounting perspective. The FSA is getting more and more demanding in terms of the amount of information it requires, and so the business as a whole is getting far more concerned with regulatory issues. Whereas historically, the chief financial officer (CFO) may have spent 10% of their time on regulatory issues, it’s now more like 30-40%. Consequently, regulatory reporting specialists – the accountants who manage the relationship between the bank and the regulators – now have a far higher profile internally than in the past. And like compliance, there’s much more of a focus on the ability to interact across different parts of the business, particularly non-finance and non-regulatory departments, requiring the structures to adapt and evolve from how they were structured pre-crisis.

This is nowhere more evident than in the requirements around Basel lll, which will force banks to increase their capital ratios. One of the many effects that Basel III will have is a requirement for the regulatory policy and advisory teams to provide more detailed analysis and advice on transactions to the front office. But it’s not just about number crunching – it’s also about having the people skills to be able to challenge the business when it’s needed. It’s about project management. While all the regulations have what appears to be a long lead-time towards implementation, they throw up new projects in terms of systems, processes and procedures. For example, we’re aware of one institution’s regulatory project function being lined up for involvement in more than 100 different projects next year.

There are some, though, who would argue that not only is the Basel lll enforcement timeline of 2019 too lenient, but also that it will only apply to banks. The ‘shadow banking’ world of intermediaries, such as hedge funds and private equity houses (where regulation is lighter than the banks), will keep getting riskier. According to Shirish Pandit, programme director of leading German business school ESMT and an ex-investment banker: “The shadow banking world is already big – its lending exceeded that of traditional banking even before the crisis. It remains as risky as ever, because when these institutions face liquidity problems, they can threaten the stability of the entire financial system.

“Being non-despositary banks, they are free from compliance requirements such as Basel lll. Consequently, the regulation certainly does nothing to curtail the power of the shadow banking system. The Damocles sword of the next possible bailout of a ‘too big to fail’ bank still hangs over the taxpayer. If Basel lll is not supplemented by regulatory reform in other areas, such as compliance requirements of ‘shadow’ banks, changes in accounting disclosures, governance of credit rating agencies, etc, then it will only serve to lay a good basis for Basel lV following the next crisis,” Pandit adds.


Food for thought indeed, and this brings us neatly to the question of risk. Banks are now looking at building whole new functions around valuations in the wake of the FSA regulations and, in some cases, have really only just scratched the surface. Obviously, valuations matter because securities pricing is directly related to investment risk. Consequently, we are finding that those with experience of valuations and model review are in extremely high demand. Building these departments from the top down is proving to be a challenge.

There are only a handful of people that are capable of heading up these functions and they are being very aggressively counter-offered – buy-backs are common. Consequently, the banks need to be hiring at the other end of the scale to ensure that there will be enough people coming up through the ranks later on – otherwise they could be storing up real trouble for the future. The evolving nature of regulation is not going to ease – the pressure will only become greater and the ‘wait and see’ approach just isn’t an option.


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