Last Wednesday, Theglasshammer.com held its first annual event in London for senior women in the capital markets. Our panel’s topic, “How to manage risk and find growth in the new regulatory environment,” opened up dialogue for senior women to discuss how to do business in the financial markets in 2012 and beyond. The event drew almost 100 senior women from leading financial firms in the City as senior women from both the sell-side and the buy-side came to network and participate in a closed-door discussion. The focus of the event was to address how to navigate the markets, find growth, and stay compliant in an increasingly regulated environment.
Moderator of the event, Monica McConville, Partner, Practice Leader, English Law Equity Capital Markets at Shearman & Sterling, invited the panelists to give their perspective on the way capital market regulatory changes might impact day-to-day business.
The panel, consisting of Mary Pragnell, Managing Director, Regulatory Response, GBM Treasury, RBS Global Banking and Markets; Joanna Cound, Managing Director, Government Affairs and Public Policy, BlackRock; and Dr. Sonja Koerner, Partner, Risk, Financial Services, Ernst & Young, tackled a set of questions posed by regulatory reforms in the post 2008 crisis ‘New Normal.” To manage risk and continue to grow as an industry, we contemplated how could we predict, define, and manage some of the unintended consequences of regulators’ actions.
Cost and Infrastructure Challenges
Pragnell opened the discussion by explaining that RBS is working closely with clients to ascertain their main challenges. She stated that it is important to anticipate the increased costs associated with the implementation of the regulatory changes for all banks and that it would be an interesting and challenging year ahead as the regulatory changes came into effect.
Last Wednesday’s headline on the front page of the Financial Times’s Companies & Markets section, “BlackRock joins call for action on ETFs,” created an opportunity for Cound, to open up dialogue around regulatory challenges from the client’s perspective. Speaking from the buy-side perspective, she explained that part of the firm’s fiduciary duty includes examining the unintended consequences of regulations on pension funds, institutions and private clients.
Cound referenced the newly proposed Financial Transaction Tax (FTT) as a perfect example of how regulators do not always understand the impact of regulation on investors and their investment position come retirement. She urged focus on the unintended consequences of the raft of legislation, in the context of examining and dealing with the cumulative consequences and their impact on the industry.
She added that it would be a challenge to estimate the cost of compliance with the new regulations at this stage or the potential impact on creativity. “BlackRock spends considerable time meeting clients, on client conference calls and producing thought pieces to aid our clients understand the potential implications for them.”
Pragnell said that the new regulations could only lead to “dramatic increases” in the costs of capital and liquidity which would not merely be transitional costs and would need to be absorbed and reflected in either lower profitability or passed through to clients via higher prices. This would be a challenge for the sell-side in terms of evaluating business models and highlighted the need to come up with creative solutions to ensure that client needs can continue to be met.
Dr. Koerner weighed in on the discussion from an advisory perspective, and concurred that if the capital buffer was to increase by two or three times the current rates, then organizations may face penal capital charges. She stated that if one believed structured credit was already struggling, then, with the introduction of penal charges, it faces an uncertain future.
She continued that it is essential for the organizations’ Finance, Risk, Treasury, and IT functions to understand the new regulatory landscape and have a coordinated response. This is a major infrastructure challenge and has obvious cost implications, she explained.
The only thing we can be certain of, in the “New Normal” is perhaps uncertainty. A major challenge highlighted by all three speakers was the lack of consistency in the regulators’ approach. This global inconsistency means that business will have a duty to determine the best location for legal entities to get the best approach.
The challenge of reducing internal costs, even as regulatory costs are increasing, currently seems difficult to meet without geographical arbitration. And because regulations will be implemented at different times in different regions, some geographical markets will have an advantage over their neighbors.
Cound pushed back on the geographical differences, though, and explained, “Our clients are global so we are looking to global solutions. We want to avoid creating the potential for arbitrage.” She continued, “The US regulation has extra-territorial effects which the European Commission has mirrored back. We need to determine which regulations – US and/or EU – apply to global clients to avoid inconsistencies, duplication and arbitrage.”
Although all agreed that it is optimal to respond to regulators jointly, via professional associations, it is also important to engage with their clients. Cound added that the financial services industry is most effective when sell-side and buy-side engage together with policy makers. She said, “BlackRock actively seeks to do so when their analysis of regulation is the same as the sell-side, for example when it risks reducing market liquidity and investment performance for clients”
Pragnell agreed that the trade associations can be invaluable, but urged all attendees to take a proactive approach to ensure optimal outcomes for all parties. She commented that interaction with the regulators and politicians is not useful or productive if people are only pursuing it out of self interest. As a player in the capital markets, RBS, like other banks, needs to look after the interests of clients and consider the broader economic impact.
Clients may not have always understood the risks they were undertaking, Pragnell said, but she agreed that transparency is needed in those circumstances where it clearly benefits the client. She added that there are fears that regulators have not fully considered the elements of regulatory change that give the biggest benefits while minimizing the downside to the end user.
In terms of where the industry is going, the last word went to Dr. Koerner with her prediction that as the regulatory pressure collides with the pressure to keep costs down, we shall see further consolidation in the industry.
The Glass Hammer would like to thank the panelists for their insights and we would also like to thank RBS for sponsoring this networking event. Subscribe to theglasshammer.com newsletter to stay informed about our upcoming events.
By Nicki Gilmour, Founder and CEO of The Glass Hammer and Caroline Doran, Partner, Employment Law, Royds Solicitors