Working towards a coordinated and comprehensible, globalised financial services industry
By Julian Korek, CEO and Founding Member of Kinetic Partners, the global professional services firm – The last 12 months has been another year of change for the financial services industry. We at Kinetic Partners recently surveyed 300 senior executives in banks, asset management firms and hedge funds globally to compile our 2014 Global Regulatory Outlook Report.
This report draws on insights provided by our clients and contacts across the financial services and regulatory world as they look forward into 2014. We have combined these views with the results of our research and used them to create a detailed picture of the global regulatory landscape. Through this, we were able to highlight the range of unresolved challenges and issues relating to regulation that will face the financial services industry in 2014 and beyond.
Attitudes to regulation soften, but the need for global coordination continues
Our research reveals a slight softening in attitudes towards regulation within the industry: 30% of CEOs now say they recognise the value of regulation in creating a more stable financial services environment, up from 20% a year earlier. At the same time, the number of CEOs who believe that financial regulation will destabilise the financial services industry has fallen from 20% to 10%.
One consistent theme we observed during our research was a strong desire for more coordination between regulators in different parts of the world. Many firms operating in multiple locations must deal with numerous, sometimes conflicting, regulatory regimes. Almost three out of 10 CEOs cited a single global regulatory framework as the most important factor in delivering an effective compliance system for the international financial services industry. Those polled also acknowledged additional important variables in achieving this goal: 25% of respondents thought principles-based regulation was the most crucial factor, with 23% highlighting better communication from regulators.
Meanwhile, it is also clear from our research that, five years on from the trauma of 2008, many in the financial services industry do not believe that regulators and industry participants have either learned or acted upon the lessons of the crash. Just 3% of financial services professionals polled believe that the regulatory changes implemented since 2008 have done enough to prevent a future crash. An additional 41% of respondents said they believed regulators have only partially addressed the key risks that could lead to another crisis. And when asked whether they thought regulators fully understand how the financial crash happened, 85% said they thought regulators have a limited understanding or no understanding at all.
The global financial centre: London down, Shanghai up
With regard to the ranking of global financial services centres, respondents to our survey overwhelmingly cited New York (49%) and London (44%) as the ‘current pre-eminent global financial centre’. However, when they were asked where that centre would be located in five years’ time, doubts about London’s future prospects were raised. Only 26% thought London would still be a contender for the title in five years’ time. New York lost some ground too, with only 40% of respondents affirming its supremacy, down from 49% the previous year.
When asked to name the leading emerging financial centre in 2018, almost half (48%) of respondents named Shanghai, while just 7% named Dubai and Sao Paulo, the second most popular choices. Although Shanghai still faces significant barriers to attract international business and develop regulatory expertise, these are not insurmountable. Given the expertise resident in China’s existing financial epicentre in Hong Kong, as well as a fast growing, but lesser known, financial services centre in Shenzhen, China’s model, if successful, could serve as an exemplary rubric to be copied in similar centres. As such, rising competition for markets such as London is only going to grow.
Perceptions, trust, focus on tax and enforcement
Another key theme to have emerged this year is the extent to which negative perceptions of the financial services industry continue to influence the actions of politicians and regulators. These negative perceptions have served to increase pressure on governments and politicians to ‘do something’ about problems within the industry. One consequence of this has been a general increase in regulation, including tax regulation, which creates national competition. We are also seeing indications that some regulators will impose more fines and punishments upon individuals as well as the firms that employ them.
Interestingly, 27% of CEOs (and perhaps not surprisingly 40% of firm-wide employees) feel that making executives criminally responsible for the actions of employees within the firms is a good thing for the industry, as opposed to only 33% who disagree. Where regulators focus their enforcement efforts, striking a balance between targeting firms and holding individuals responsible, in particular, may very well be on many industry executives’ minds.
Moving into 2014, it is likely that a key focus for industry leaders will be to understand the implications for businesses following recently passed legislation. It is clear that firms, investors and regulators alike still have plenty of work to do if they want to create a more coordinated and comprehensible globalised financial services industry in an uncertain and, at times, unstable world.
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