With ever increasing regulatory scrutiny facing IFCs, Marcus Killick examines the state of play in the financial services industry.
Whom to believe, whom to trust? I write this at a time when, to some we are on the road to recovery, to others the road to ruin. Where some see the bright light at the end of the tunnel, others suspect the brightness may be the headlights of an oncoming train.
I ceased being a regulator a little over a year ago. I am now back in the private sector and, I confess, loving it. Of course I see things differently than previously, this is inevitable. I was frustrated by the overregulation emanating from Europe previously (and wrote frequently about it), I am now doubly so. Yet there are opportunities.
I now have the privilege to sit on the board of a new bank and to Chair a new stock exchange. Both exist because of opportunities that were not previously there. The bank was partially spurred into life by the decision of another bank to significantly downscale in the jurisdiction - Necessity indeed being the mother of invention. The bank has a chance to pick what is best about modern banking and be unburdened by the legacy of the last few years (aside from the inevitable enhanced capital and other regulatory obligations).
The exchange, being an EU entity and therefore having Single Market access, can flourish in the new cost conscious environment without the expensive baggage that many older exchanges face. It can therefore deliver the speed to market needed in the modern environment.
These are two examples of the positive changes we are now seeing. New products and services are beginning to flourish again; innovation is being allowed to emerge from the blanket of risk aversion which covered the finance sector.
Yet I still cannot shake off the feeling that things are economically less rosy internationally. The Greek debt (and let us not forget Cyprus and others) is in danger of becoming a generational issue. It cannot be seen as simply an exaggerated economic cycle. It is a game changer.
The prolonged period of low interest rates and the use of quantitative easing are medications which, if coming from the pharmaceutical industry, would still be nowhere near FDA approval. Indeed there would even be controversy as to what should be contained on the label. Perhaps the following; “Contains Quantitative Easing, side effects may include, rampant inflation, stock market collapse and bond market distortions. Keep out of the reach of small countries. To be taken until symptoms improve or death results.”
If you consider I am exaggerating the risks, The UK government is repaying debt originating from the South Sea bubble crisis of 1720 in order to “lock in the historically low interest rates for the long term” This is how far from the ordinary economic cycle we have gone.
Turning to the issue of the post-crash moves to tighten financial service regulation and the state financial service engineering that lies behind it, here the jury is still out. There is no doubt that regulatory initiatives have macro-economic aims behind them. Moves to radically change bank structures and levels of capitalisation go beyond that needed for pure market stability. I do not believe there is anything wrong with politicians using financial regulatory tools to achieve macro-economic change but they are not ideal. There is too much tinkering which, in turn, creates risks of unintended consequences. Greater capital requirements imposed upon banks (not helped by the bank tax levy) mean there is less money to lend. This slows up any recovery as it inhibits industrial and other investment. Less lending via conventional also means greater use of non-conventional lenders such as crowd funding.
Yet we are where we are. The smaller international finance centres have not been immune to the tribulations over the last few years. Ireland caught the brunt of it and others have had to trim budgets. All have had to adopt new standards of transparency, particularly regarding tax. Our reputations have improved but legacy issues resulting from poor behaviour in the past can sometimes come back to haunt us.
The truth is that many of the changes were necessary as a number of the centres have moved into more mainstream financial services activity based on quality of service not level of secrecy, built on significant competence not extreme confidentiality. Insurance, funds, banking, securities and bonds, all still use the smaller centres as their incubators. We are more responsive and faster than our larger competitors. It is an edge we must keep.
To do so we must ensure we adapt to greater financial service regulation with care. We certainly should not see the UK or USA as beacons of quality regulatory supervision. Proper regulation and regulatory supervision in the smaller centres is not achieved by mimicry of what goes on elsewhere but by its adaption and making fit for purpose for the jurisdiction concerned. What is right for Wall Street may be disastrous for Bermuda. One size does not fit all.
Good regulation does exist and it does result in good business and better profits. But good is not defined by size or complexity. A larger regulator is not necessary a better one. An expensive regulatory system does not necessarily deliver a better service to business. Reams of new regulations do not, by themselves, make systemic risk lower or investors safer.
Some initiatives should be welcomed, at least in their aim. A better trained industry, more transparency to clients on fees and risks together with work to change the toxic culture that existed in parts of the industry, are all to be welcomed. Regretfully they are accompanied by less desirable changes.
There are a number of decisions being made in the UK and elsewhere which I believe will be regretted in the years to come. One of the most significant of these is the UK Governments decision to liberate individual’s pension arrangements. In essence those over the age of 55 will have far greater access to their pensions. Whilst this has been met with delight by a number of financial service firms who will be able to offer their investment services in the management of these liberated assets, I view the whole thing with deep concern.
Yes, the Government is providing free advice to people, yes it gives greater freedom of choice, and yes it may reduce the costs to individuals in the management of their pension. However some people will see the arrival of what may be the largest amount of money in their lives, as a lottery win.
They will not plan for their potentially lengthy retirement; they will buy new cars and cruises. Great for a short term economic boost but disastrous for their quality of life latter on. Furthermore fraudsters and charlatans are already gathering like sharks around an injured seal. The inexperienced, gullible and greedy will be open season. No regulatory system can cope with this. So what happens in twenty years’ time when the needs of those who dissipated their savings are great? When they need their money for care homes and help?
To this can be added the reduced cap on what people can save tax free for their retirement along with other negative changes over the years. Indeed, Menzies, the chartered accountants, has estimated that in the ten budgets since 2006 eight have been negative for pensions. Yet this is at a time when the UK population is aging. The current 27 pensioners for each 100 workers will move to 42 by 2050. This figure can be helped by significant increases in migration into the UK but I am hearing few arguments in favour of this from most British politicians.
At a time when the young are saving insufficiently for their retirement and tax breaks for pension planning are being reduced, the initiative to give people access to their pension pots is, in my mind, irresponsible.
So, in answer to who to trust? A few years ago a good friend gave me a paperweight he had bought at the Ronald Reagan memorial library. I kept it on my desk as a regulator and still have it in the office at the law firm where I now work. It has a quote on it. “Trust…but verify”. It still seems apt.
Marcus Killick OBE
Marcus is an English Barrister and member of the New York State Bar as well as a Chartered Fellow of the Chartered Institute for Securities and Investments and a member of the Chartered Management Institute (Diploma in Management and Leadership) and the Chartered Insurance Institute, Marcus was awarded the OBE in the 2014 New Year’s Honours List Marcus was also Chairman of the Gibraltar Investors Compensation Scheme and the Gibraltar Deposit Guarantee Board as well as the Group of International Insurance Centre Supervisors Prior roles include Chief Executive Officer of the Gibraltar Financial Services Commission, Deputy Chief Executive of the Isle of Man Financial Supervision Commission, Head of Banking and Investments at the Cayman Island Monetary Authority and Director in KPMG's Financial International Regulatory Services Team. Marcus was one of the founding directors of the United Kingdom Association of Compliance Officers (Subsequently renamed the Compliance Institute).