Monday September 17 2012 - Top 10 Risk Management News


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Monday September 17 2012 - Top 10 Risk Management News

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,“We will look at how firms make their money, how they paytheir staff and whether they are designing, and selling products withcustomers in mind.This is a change from the traditional regulatory model, which involvedsetting standards and then looking back at what firms have done.”Who said that?Martin Wheatley, Managing Director, FSA, UK (speaking about the“incentivisation of sales staff”).A really interesting change in the regulatory model.Read more at Number 8 of our list.Today we can also enjoy the speech by Jaime Caruana, General Manager,Bank for International Settlements (at the Federal Reserve Bank ofKansas City’s 36th Economic Policy Symposium).He said that “There is little doubt that, since the crisis, we have had thewidest, deepest and most far-reaching regulatory cooperation in history. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  2. 2. Page |2Participation has broadened, coordination has intensified, andimplementation will be peer-reviewed.Institutionally, all G20 members have joined the BCBS.Similarly, the Financial Stability Board’s membership has become moreinclusive.Emerging market representatives bring useful macroprudentialexperience to the table.And attention is being paid to vulnerabilities in the shadow bankingsystem, outside the narrow scope of the regulated sector.Cooperation has intensified with Basel III’s requirement for more andbetter capital, backstopped by a simple leverage ratio and internationaloversight of weights and implementation.Cooperation has also widened with the inclusion of internationalstandards on liquidity management.”But he continued: “I am acutely aware that, even as intended regulatorycooperation has reached an all-time high, the risks of fragmentingbanking along national lines have grown.”Read more at Number 1 of our list.Welcome to the Top 10. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  3. 3. Page |3Policymaking in an interconnected worldLuncheon speech by Jaime CaruanaGeneral Manager, Bank for International Settlements -The Federal Reserve Bank of Kansas City’s 36thEconomic Policy Symposium on “The changing policy landscape”Jackson HoleGabriel Bernardino, Chairman of EIOPACreating a global insurance supervisory LanguageConference on Global Insurance SupervisionQuarterly Banking Digest, Q2Important parts and Highlights10 September 2012Government lays new MoneyLaundering regulations before ParliamentOn 10 September the Government introduced legislation to Parliament toimplement important changes to the Money Laundering Regulations2007. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  4. 4. Page |4For a European Public SpaceRemarks by Mario Draghi, President of the ECB onreceiving the M100 Media Award 2012, PotsdamBasel III JobsAverage salary % change year-on-year +12.50 %(Source: by the Chancellor of the Exchequer, Rt HonGeorge Osborne MP at Scotland CBIThe incentivisation of sales staff – are consumersgetting a fair deal?Speech by Martin Wheatley – Managing Director, FSA _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  5. 5. Page |5Interesting comments for the ComFrameA compilation of comments on a common framework forthe supervision of internationally active insurance groups,known as ComFrame by the International Association ofInsurance Supervisors (IAIS)Jumpstart Our Business Startups ActFrequently Asked QuestionsIn these Frequently Asked Questions (“FAQs”), theDivision of Trading and Markets is providing guidance oncertain provisions of the Jumpstart Our Business StartupsAct (“JOBS Act”) as they affect firms and their obligations with respect tosecurities analysts (“analysts”) and research reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  6. 6. Page |6NUMBER 1Policymaking in an interconnectedworldLuncheon speech by Jaime CaruanaGeneral Manager, Bank for InternationalSettlementsThe Federal Reserve Bank of KansasCity’s 36th Economic Policy Symposiumon “The changing policy landscape”Jackson HoleLet me extend my thanks to PresidentGeorge and the organisers for theopportunity to address this gathering – atan event that is more keenly anticipated bypolicymakers and journalists with every passing year.My question today is: Is there scope for more international cooperation inmonetary policy?After all, we see international cooperation as essential for financialregulation.Why do we reject keeping one’s own house in order as a precept forfinancial regulation but accept it for monetary policy?The question is not a new one. In his famous Critical essays on monetarytheory, Sir John Hicks argued that individual central banks have onlylimited influence because:“… they have been national central banks. Only in a national economythat is largely self-contained, can a national central bank be a true centralbank; with the development of world markets, and (especially) of worldfinancial markets, national central banks take a step down, becomingsingle banks in a world-wide system …. Thus the problem that was(partially) solved by the institution of national central banks hasreappeared …. on the world level”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  7. 7. Page |7That was in 1967, during the waning days of Bretton-Woods.And financial integration over the past 45 years has made the problemthat Hicks identified even more intractable.The burden of my remarks today is that central banks need to take a moreinternational perspective, recognise their collective influence and takeinto account monetary policy spillovers.Monetary policy that contributes to financial stability needs more of thecooperation that we already practise in financial regulation.Let me break my main question into four questions and then turn to each:1. What was the state of cooperation infinancial regulation and monetary policybefore the crisis?2. Where does cooperation stand after thecrisis?3. Why is the scope for internationalcooperation in monetary policy oftenunderestimated?4. Do we need to improve the institutionalframework for monetary policycooperation?Q1. What was the state ofinternational cooperation in financial regulation and monetarypolicy before the crisis?Since the financial liberalisation of the 1970s, the cooperation onregulatory standards for large international banks as embodied in Basel Iand II extended well beyond any cooperation in monetary policy outsidethe euro area. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  8. 8. Page |8This cooperation involved:(i) Exchange of information;(ii) Information-sharing based on a common understanding of how theworld works;(iii) Joint decision-making; and(iv) Standards set by an international committee.The very first papers circulated to the Basel Committee on BankingSupervision (BCBS) in 1975 surveyed the “Rules and practices to protectthe banks’ solvency and liquidity”.It turned out that these varied a great deal.Subsequently, regulators evolved a common intellectual framework andcame to speak a common language.In 1988, Basel I went one step further, to joint decision-making. It setdefinitions of capital, risk weights for assets, and, crucially, a minimumratio of capital to assets.These formulations were based on consensus, not enshrined in a treaty orin international law.Instead, the original Basel accord was enacted in national law andenforced by national regulators.In fact, market pressure quickly made Basel I the standard even for banksin countries not represented on the BCBS.The driving forces for this cooperation are well known.As countries liberalised their capital accounts and moved to floatingexchange rates, banks seized the opportunity to intermediateinternational capital flows. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  9. 9. Page |9Soon after, Bankhaus Herstatt and Franklin National collapsed.These banks were not globally systemically important financialinstitutions, in today’s parlance, but their messy failures did help to driveforward international cooperation on bank regulation.When, in August 1982, the big banks suddenly stopped lending to LatinAmerica, Congress increased the IMF’s resources but demanded highercapital levels for big US banks.Concerns about competitive neutrality then prompted the FederalReserve to pursue joint action in what became Basel I.Basel III, to be discussed in a moment, has marked an even more explicitshift towards internalising the externalities imposed by big banks andbanks’ collective behaviour.By contrast, monetary policy remained mainly national after thebreakdown of Bretton Woods.Attempts at cooperation were episodic, mainly relating to exchange rates.This gave monetary cooperation a bad name – especially in countries withcurrent account surpluses, which came under pressure to expanddemand.At the level of theory, monetary policy shifted from the 1930s focus oncompetitive devaluation, first to the post-war treatment of monetarypolicy as just one instrument in overall macroeconomic stability policy,and then in the past 25 years to the guardian of domestic price stability.Flexible exchange rates, it was thought, would provide buffers againstexternal shocks while policymakers kept their own house in order.In fact, the largest economies not only remained relatively closed but alsohad banking systems with very low proportions of foreign currency assets.To be sure, the quality of global monetary policy discussions hasadvanced over the past generation, as a common intellectual frameworkevolved. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  10. 10. P a g e | 10Indeed, one could argue that monetary policymakers shared a morethoroughly elaborated intellectual framework than did their counterpartsin financial regulation.Even so, this shared framework could be indifferent (or even hostile) tocooperation in monetary policy.Q2. Where does cooperation stand after the financial crisis?The short answer is that we have agreed to cooperate more deeply on theregulatory/financial stability front.But on the monetary policy front, the pre-crisis convergence of views hasbecome strained.There is little doubt that, since the crisis, we have had the widest, deepestand most far-reaching regulatory cooperation in history.Participation has broadened, coordination has intensified, andimplementation will be peer-reviewed.Institutionally, all G20 members have joined the BCBS.Similarly, the Financial Stability Board’s membership has become moreinclusive.Emerging market representatives bring useful macroprudentialexperience to the table.And attention is being paid to vulnerabilities in the shadow bankingsystem, outside the narrow scope of the regulated sector.Cooperation has intensified with Basel III’s requirement for more andbetter capital, backstopped by a simple leverage ratio and internationaloversight of weights and implementation.Cooperation has also widened with the inclusion of internationalstandards on liquidity management. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  11. 11. P a g e | 11Recognition of potential procyclicality in the operation of capitalstandards has led to the adoption of mutual recognition in the newcountercyclical capital requirement, which empowers host countryauthorities.Tougher solvency standards have been set for banks whose failure couldhave system-wide effects.We should not minimise the challenges ahead.I am acutely aware that, even as intended regulatory cooperation hasreached an all-time high, the risks of fragmenting banking along nationallines have grown.While there are long-standing differences in the tax treatment of loan-lossprovisions, national bank bonus taxes have been imposed and nowfinancial transaction taxes are being discussed regionally.While Dodd-Frank is improving the funding model of US-charteredbanks, other banks that rely on wholesale funding have gained marketsshare in dollar intermediation.While important advances have been made, serious obstacles remain inconcerting resolution regimes given different bankruptcy laws.A particularly troubling source of fragmentation along country lines is theinclination to put up national barriers against contagion.As Mario Draghi has said, “even though each of them may be right,collectively they have been wrong”.While regulatory cooperation is the prerequisite for open financialmarkets and the free flow of funds, capital controls seem to be gainingacceptance as a response to the challenge of managing currencies whenyields are zero in most major money markets.These developments threaten to segment financial markets, not only inthe euro area but around the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  12. 12. P a g e | 12Nevertheless, I remain hopeful that the movement towards globalconsistency and more harmonisation will prevail over the forces workingto fragment international banking regulation and supervision.On monetary policy cooperation, there were notable steps during thecrisis.Widespread, and ultimately in some cases, open-ended, cooperation inforeign-currency funding through central bank swaps had both themonetary goal of controlling the relevant market rates like Libor and thefinancial-stability goal of providing emergency funding.Such arrangements are temporary.But the willingness of central banks – not least the Federal Reserve – toact quickly and massively averted what could have been a meltdown.The global nature of the crisis also saw episodic cooperation in policy ratesetting.For instance, on 8 October 2008, interest rates were simultaneously cut bythe Bank of Canada, the Bank of England, the ECB, the Federal Reserve,the Riksbank, the Swiss National Bank and the People’s Bank of China,in a concerted move that was strongly backed by the Bank of Japan.But a number of issues have strained the pre-crisis convergence of viewson monetary policy.What can monetary policy contribute to financial stability? And how doesmonetary policy work alongside macroprudential action?Q3. Why is the scope for international cooperation in monetarypolicy often underestimated?This question raises three more.First, do flexible exchange rates insulate economies as some theorysuggests? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  13. 13. P a g e | 13Second, are bond markets so globally integrated that policies affectingyields in major countries now have a bigger impact on yields in othercountries than they once did, possibly exerting an even larger effect thanlocal policies and conditions?And third, can central banks properly assess the aggregate impact of theiractions on global outcomes, or do they suffer from a fallacy ofcomposition?Starting with exchange rates, flexible rates do of course help to insulate acountry from inflationary or deflationary shocks coming from abroad. Butthey do it imperfectly.First, since major currencies are used internationally, the policy rates setby their issuers directly affect monetary conditions elsewhere.Borrowing in foreign currencies may be rare in the biggest economies,but it can be significant elsewhere.And common monetary and risk factors affect the flow of internationalbank credit and portfolio capital.Since the crisis, while credit to US households and businesses has barelyresumed its growth, dollar loans to such borrowers in the rest of the worldhas grown at up to 20% and has reached about $7 trillion.Second, the foreign exchange market’s behaviour does not always satisfythe textbook interest rate or purchasing power parity conditions.Exchange rate movements do not merely compensate for interest orinflation differentials.Instead, most of the time, currencies with an interest rate advantageactually appreciate against lower yielding currencies and can do so forsome time, making the domestic industry less competitive. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  14. 14. P a g e | 14The depreciation of higher-yielding currencies tends to happen fastduring episodes of stress in global asset markets, and many emergingmarket economies have found this destabilising.Next, there is the issue of international bond markets.As policy interest rates and official bond purchases affect bond yields,their effects ripple across globally integrated bond markets.This happens even with independent setting of policy rates and floatingexchange rates.Large-scale bond purchases can have global effects whether they are partof an explicit monetary policy or a side-effect of currency intervention.There is evidence that the large Japanese interventions of 2003–04lowered global bond yields, as dollars purchased in the foreign exchangemarket were invested in bonds.There is also evidence that the Federal Reserve’s recent large-scalebond-buying has also reduced global bond yields.So the integration of global bond markets makes for a global interest inpolicies that, intentionally or not, affect bond yields in major markets.Turning to the possibility of a fallacy of composition, I believe that aninternational perspective is essential if we are to correctly assess theimpact of central bank policies on global outcomes.The price dynamics in commodity markets – which are increasinglysimilar to those in financial markets – could be taken as a signal of globaldemand pressure rather than being considered by central banks as asupply shock for each of them.Similarly, each emerging market central bank might hesitate to raiseinterest rates out of concern for capital inflows, given the very low interestrates prevailing in major currencies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  15. 15. P a g e | 15Indeed, if central banks were to take an international perspective, theymight discover that they would all be better off by raising rates, therebysetting global average interest rates more appropriately.These questions are not easy to answer.How can we cope with these spillovers: the interconnections arising fromthe behaviour of exchange rates, the globalisation of bond markets, andthe collective impact of policies?John Hicks knew that the one simple answer to the limitations heidentified – a global central bank – would be totally unrealistic.National central banks have national mandates, and meeting these isalready difficult enough.We know less about the workings of international linkages than we doabout domestic linkages.How interest rates will affect the major centres in other countries dependsin part on those countries’ own policies and institutions.And it would not be difficult to add to this list.A number of factors combine to make nation states less than willing tocooperate on monetary policy.For instance, monetary policy can be redistributional, shifting wealth andincome between creditors and debtors.This makes it even more politically charged than regulatory policy – ifthat is possible.Nevertheless, I do not believe that monetary policy can be restricted tokeeping one’s “house in order” at all times. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  16. 16. P a g e | 16While such house-keeping is necessary, monetary policy does requireinternational perspective and cooperation, particularly when it providesthe backing for financial stability.Q4. Do we need to improve the institutional setting for monetarycooperation?We hope that the structural trend that deepens interdependence, namelythe globalisation of financial markets, continues.If it does, there will be periods, in good times and bad, when internationalspillovers will be substantial and highly relevant for monetary policy.If this notion and the underlying analysis are accepted, then the questionarises of how to strengthen cooperation in monetary policy.This does not necessarily mean monetary policy coordination at theglobal level, but it does require central banks to better appreciate,internalise and share the side effects that arise from individual monetarypolicies.This will require a shift to a more global analytical approach, one thatseeks to factor in collective behaviour, interactions and feedback effects.This would also help us to better frame international cooperation.I therefore tend to agree with the recent call from prominent academicsand practitioners for global considerations to play a more explicit role inmonetary policy frameworks.But I am more sceptical about their proposal to formalise cooperativearrangements.The major central banks would not be able to publicly outline the mutualconsistency of their policies.Drawing attention to areas of inconsistency and dissent would probablyundermine effective cooperation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  17. 17. P a g e | 17Traditionally, the BIS and the various Basel committees have alwayssought to complement the domestic analysis at central banks with a moreglobal perspective.The informal but structured nature of the meetings that take place at theBIS has often facilitated analysis and discussion of the many internationaldimensions of monetary policies.For example, after providing support to a central bank review of globalliquidity we are working on regular indicators that seek to capture globalfinancial conditions.These and other global measures also serve as inputs to vulnerabilityanalysis and the early warning exercise conducted by the FinancialStability Board and the IMF.The IMF is playing a role as well, with its spillover reports andmacroeconomic policies consistency analysisLet me conclude by saying that much needs to be done.Moving towards a more cooperative approach makes more sense thanreversing the internationalisation of markets and segmenting thosemarkets in the hope of protecting them against spillovers.We need more research on these questions and I hope that some of thepowerful analytic talents represented here at Jackson Hole will bebrought to bear on them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  18. 18. P a g e | 18NUMBER 2Gabriel Bernardino, Chairman of EIOPACreating a global insurance supervisoryLanguageConference on Global Insurance SupervisionGood evening, ladies and gentlemen,On behalf of EIOPA I would like to thank theInternational Center for Insurance Regulation forthe cooperation and efforts in organising together with us this Conferenceon Global Insurance Supervision.I am very happy to see today so many colleagues from the supervisoryauthorities as well as prominent experts and executive officers of theinsurance industry.Our purpose with this Conference is to create a platform of discussionand exchange of views about the international context of insurancesupervision.Your presence and contribution to this event is key to its success and willcertainly contribute to a better understanding of the different regimes andwill foster further convergence of practices of insurance supervisionworldwide.Insurance markets are increasingly global.Many insurance groups have nowadays a huge part of their revenuescoming from business outside their home countries.This creates new opportunities but also new challenges for insurers, butalso for supervisors.The promotion of sound and stable insurance markets calls for moreinternational cooperation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  19. 19. P a g e | 19We firmly believe that the best way toreinforce financial stability and consumerprotection is to develop strong globalregulatory and supervisory standards.This will create a level playing field forinternational players, foster a commonlanguage between supervisors and improveinternational cooperation and informationexchange.I would like to share with you some views onthe ways of improving the efficiency ofsupervision from a global perspective.ComFrame ( Common Framework for theSupervision of Internationally ActiveInsurance Groups (IAIGs) - ComFrame is an integrated, multilateral andmultidisciplinary framework for the group(wide supervision ofinternationally active insurance groups.ComFrame was initiated in response to the recognition that, despite thegrowing relevance of IAIGs in the global insurance marketplace, nointernationally coherent framework exists for the supervision of suchlarge, global groups.I would like to stress that EIOPA is highly committed to contribute to theestablishment of such standards and, in this regard, we consider ourparticipation in the IAIS very important. EIOPA is actively contributingto the work of ComFrame.We consider it necessary to enhance regulatory capital requirements inorder to achieve adequate consumer protection on a global level.Of course, while calling for this measure, we take into account differentperspectives and developments worldwide. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  20. 20. P a g e | 20Seen historically, the EU had experienced comparable discussions adecade ago.We fully support the move to enhanced group-wide supervision.Cooperation between supervisors in colleges is essential for the propersupervisory approach to Internationally Active Insurance Groups.We believe that information sharing and supervisory cooperation underconditions of professional secrecy is a key, determinative element ofeffective supervision.We need more shared supervision.Furthermore, Comframe should comprise a capital element, establishingstrong principles for group capital calculations concerning the risksincluded, the metrics used to assess them and the overall level ofconfidence.Without this consistency, there is no level playing field internationally.It is not about one unique system, but about a set of strong principles thatwould deliver a range of closer and compatible systems.Comframe should not be another regime on top of the already existentones.The local regimes should evolve to comply with Comframe.This is my vision. I recognize that we cannot deliver this immediately, butat the IAIS we need to set a timetable and concrete milestones to developthis concept in a step by step approach.We need to be courageous and open-minded.We need to be open to change and evolution because the industry realityis also evolving and changing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  21. 21. P a g e | 21An extra effort needs to be done by all of us because like Charles Kettering(a famous American inventor) said one day: “People are very openminded about new things as long as theyre exactly like the old ones.”Systemic risk in insuranceThe crisis prompted a new look at systemic risk, including in theinsurance sector.The identification and regulation of Globally Systemically ImportantInsurers is currently being discussed under the umbrella of the FinancialStability Board and the IAIS.EIOPA is keen to contribute to a robust identification process of G-SIIsand to develop appropriate regulatory and supervisory tools to deal withtheir characteristics.Traditionally, systemic risk was a banking concept.However, the recent crisis showed us that certain activities developedunder the insurance sector can also pose systemic risk.Insurance companies or groups that engage in non-traditional, ornon-insurance, activities (for example: CDS, financial guarantees orleveraging assets to enhance investment returns through securitieslending are more vulnerable to financial market developments and,importantly, more likely to amplify, or contribute to, systemic risk.Of course, this assessment may change over time, depending on theinnovations and changes in insurance business models, especially in lifeinsurance, as well as in the complex interactions between insurancegroups and financial markets.We should be especially attentive to any kind of maturity transformationand leveraging occurring in the insurance sector.As a consequence, the identification of a systemically important insureras such, should be a direct reflection of its source of systemic importance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  22. 22. P a g e | 22While the size of traditional insurance activity is still an important factor,it should not be the dominant factor in the identification process.Clearly, the non-traditional and non-insurance activities and the degree ofinterconnectedness with other components of the financial system aremore relevant from a systemic point of view.Consequently, the differences between insurers and banks in the impactof failures suggest that requirements for loss absorbency and resolutionregimes for insurers should accept these salient differences and proposesolutions that differentiate accordingly.As a conclusion I would like to underline that we should have no illusions:the creation of global insurance supervisory standards is a very longprocess that is complicated by the difference of cultures and unevendevelopment of supervisory systems in different countries.But it is important that the regulators all over the world are willing toreach mutual understanding and to develop a common supervisorylanguage, which will help us to promote stability of the financial markets,to enhance their transparency and to foster consumer protection.Together we can achieve these objectives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  23. 23. P a g e | 23NUMBER 3Quarterly Banking Digest, Q2Important parts and Highlights- Capitalisation improved slightly as system-wide leverage declines. The aggregate risk asset ratio (RAR) increased to 22.1% during the quarter due to a decline in risk-weighted assets (down 0.7%) and an increase in capital (up 0.6%).- Some banks continue to experience significant asset quality challenges driven by the recessionary environment. Although non-performing loans (NPLs) relative to total loans declined from 8.3% to 8.1%, large exposures to the real estate sector have led to a rise in specific provisioning and charge-offs, which has affected the banks’ earnings capacity.- Sector earnings have been impacted by higher provisions. Provisions to NPLs increased from 16.2% to 26.2% in Q2 2012 as a result of prudent efforts aimed at mitigating the impact of future asset impairments. As a result, the annualised RoE declined from 8.9% in Q1 2012 to 1.2% in Q2 2012, and the annualised RoA fell from 1.0% in Q1 2012 to 0.1% in Q2 2012.- The Bermuda dollar funding gap widens further. The BD$ loan-to-deposit ratio increased to 154.0% (up from 151.0% in Q1 2012 and 142.0% a year earlier) as BD$-denominated customer deposits declined (down 1.3%). However, the large FX-denominated deposits, which declined by 5.1% during the quarter, continues to supplement the BD$ funding gap.- Lower investment activity and interbank lending have mitigated negative effects on domestic credit supply thus far. Lending remained stable despite de-leveraging during the quarter resulting from decreases in investment activity and deposits with other financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
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  27. 27. P a g e | 27Table V shows the liquidity condition of the banking sector over the lastfive quarters.ProfitabilityQuarterly returns declined sharply as banks start absorbingnon-performing loan balances aggressively.Despite stable net interest income over the quarter, increases inprovisions resulted in lower profitability in the sector on average.Annualised RoE and RoA decreased to 1.2% (Q1 2012: 8.9%) and 0.1% (Q12012: 1.0%), respectively. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  28. 28. P a g e | 28NUMBER 410 September 2012Government lays new MoneyLaundering regulations before ParliamentOn 10 September the Government introduced legislation to Parliament toimplement important changes to the Money Laundering Regulations2007.The changes will reduce the regulatory burden imposed by the currentregulations, while strengthening the overall anti-money launderingregime. These proposals were set out in July 2012 following extensiveconsultation and are expected to save firms around £3 million a year.The changes to the Regulations will come into force on 1 October.NotesThe Government announced the changes it was bringing forward toMoney Laundering regulations in July 2012.TheMoney Laundering Regulations 2007 require regulated businesses tohave appropriate systems and controls in place to identify and verify theidentity of their customers and carry out ongoing monitoring asappropriate, based on their own assessment of the risk from moneylaunderingand terrorist finance.The Government’s approach to money laundering regulation is designedto make the UK financial system a hostile environment for moneylaundering and terrorist finance, while minimising the regulatory burdenimposed on UK businesses.Changes to Money Laundering Regulations to reduce burden onBritish businessesOn 17 July 2012 the Government published its response to a consultationon changes to the Money Laundering Regulations 2007 and the impactassessment of the proposed changes. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  29. 29. P a g e | 29Following the consultation the Government will now take forwardproposals to reduce the regulatory burden imposed by the currentregulations, while strengthening the overall anti-money launderingregime.The proposed changes to the regulations will apply to businesses that areat low risk of money laundering and terrorist financing and are thereforenot required to be regulated to the same extent as other institutions,under current global standards.The aim of the changes is to make the UK’s money laundering regimemore effective and proportionate, with the proposed changes saving firmsaround £3 million a year.The Government committed to performing a post-implementation reviewof the 2007 Regulations, which implement the European Union ThirdMoney Laundering Directive, two years after they came into force.This review was undertaken in 2009-10, in conjunction with the BetterRegulation Executive, and entailed an extensive call for evidence,meetings, conferences and interviews.The Government’s response to the review was published in June 2011 andcontained a consultation on seventeen proposals to improve the regime,reducing the impact of the regulations.The changes to the Regulations are intended to come into force on 1October. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  30. 30. P a g e | 30NUMBER 5For a European Public SpaceRemarks by Mario Draghi, President of the ECB onreceiving the M100 Media Award 2012, PotsdamImportant partsIt is no secret that the course of Europeanintegration is currently difficult. The globaleconomy is facing serious challenges.These challenges are not all of Europe’smaking, as some observers would have usbelieve. But Europe is perhaps experiencingthem more acutely than others.The reasons for this are complex. But onepart of the explanation is clear: the originalinstitutional design of the euro area did not meet expectations.In the euro area we have a single monetary policy, but our economic andfinancial policies are only loosely coordinated.This is because the euro area is a union of nation-states with strongnational traditions and preferences.While there was sufficient consensus to share a currency, economic andfinancial policies remained organised largely at the national level.The global crisis has revealed the vulnerabilities in this arrangement.Loose coordination of policies neither ensures stability nor does itfacilitate effective crisis management.The institutional design of the euro area therefore has to be reviewed toput our economic and monetary union (EMU) on a more secure footing.But how should this be done?There are two possible paths. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  31. 31. P a g e | 31The first is to go “back to the past”, to make the original design workbetter.The second is to develop a new architecture that properly reflects lessonsof the crisis.In my view, the first path is not viable. We have seen that the euro area istoo interconnected for economic and financial policies to be a purelynational responsibility.We must find ways to guarantee that national decisions do not harm othermembers of the monetary union.In the event of a crisis, there should be effective mechanisms for crisismanagement.And where necessary, this means going beyond coordination, becausethis is a matter of europäische Innenpolitik.We have also seen that maintaining stability requires commoninstitutions that can react to events.The euro is the world’s second most important currency.It makes up 25% of the world’s foreign exchange reserves.1.5 trillion euros are traded daily on the world’s foreign exchange markets.And it is used daily by the 330 million citizens of the euro area.A currency that plays a central role in the lives of so many people has to bemanaged with effective decision-making.The second path, designing a new architecture, is therefore the only wayforward.The key challenge today is to present a vision to Europe’s citizens of whatthis would entail – which is precisely the theme of this conference.Together with the Presidents of the European Council, the EuropeanCommission and the Eurogroup, I have been given the task of working onsuch a vision for the next decade. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  32. 32. P a g e | 32We have aimed to be as pragmatic as possible: to establish what are theminimum requirements to make the euro function to its full potential.And our conclusions are both realistic and attainable.Member States will have to pool more sovereignty in selected policy areas.This is a clear lesson of the crisis. But we will not need to cede all powersto Brussels.Sovereignty will only be pooled where it is essential to ensure a stable andprosperous monetary union.This will be accompanied by broad democratic participation andlegitimation.Our vision for EMU has four pillars – fiscal union, financial union,economic union and political union.Progress on all four should be made simultaneously.The first three pillars will help to steer fiscal, financial and economicpolicies in a sustainable way.They will also help to create institutions commensurate with the degree ofmonetary integration in the euro area.But today I would like to focus briefly on the fourth pillar, political union.This pillar is essential for engaging euro area citizens more deeply andmaking the other three pillars legitimate.Some observers argue that because of the common decision-makingimplied by the other three pillars, political union has to come first. I donot agree.Political integration can and will develop in parallel with economicintegration.Over the past 60 years of European integration, this has always been thesequence.For example, public engagement with euro area issues has naturallydeepened through responding to the crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  33. 33. P a g e | 33To commit money via the European Stability Mechanism, Member Stateshave had to explain the responsibilities of euro membership to theircitizens.Parliaments are now taking a sharper interest in European affairs.Closer economic integration has de facto strengthened democraticengagement.But this does not mean that we should not strive to strengthen democraticparticipation in Europe further.Democratic engagement already takes place through the Council ofMinisters – where citizens are represented by elected ministers – and theEuropean Parliament – where citizens elect their MEPs directly.But more has to be done to make the voice of Europe’s citizens heard. Weneed what in Germany is called demokratische Teilhabe.And this is where you are needed. I would like to ask all of you –journalists and publishers but also policy makers and academics – to helpto develop a genuine European public space, eine europäischeÖffentlichkeit.Most of us in Europe are exposed mainly to our national media in ournational languages.These media naturally define our perspective: our sense of the “public”tends to stop at national borders.But this no longer describes reality.What is happening in other Member States matters to all of us. Problemsthat cross borders require citizens to find consensus around commonsolutions.Again, the crisis is itself having an effect.For example, newspapers in some countries now take a keen interest inthe welfare systems of other countries.Citizens closely follow the elections of ministers they would previouslyhave never heard of. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  34. 34. P a g e | 34Certainly, there is an unwelcome side to this related to the potential forreviving outdated national stereotypes.But there is also a positive side insofar as it leads citizens in the euro areato develop a sense of belonging together and to care about decisions inother regions.One way to strengthen this trend would be to exchange more mediabetween countries. And here I would like to invite your contribution.Could you consider, for example, publishing what we might call“imported pages” from foreign newspapers?This would allow citizens to get a better sense of how issues are seen inother countries; it would increase cultural sensitivity; and it couldgenerate Europe-wide debates that divide along policy lines rather thannational lines.Over time, such debate would help to put European decision-making ona more legitimate footing.“Imported pages” are but one idea, a starting point. It is with yourdedication and creativity that more such ideas can be developed.It is a privilege to be part of the European project, for citizens andjournalists alike.But it is also comes with responsibilities, for citizens and journalists alike.Ultimately, a genuine European public space is essential for supportingthe long-term vision of the euro area.Citizens need to be in basic agreement that, within a monetary union,certain economic models are no longer possible.They must understand that there are limits to national discretion ineconomic policies that affect the area as a whole.In other words, there needs to be a new consensus on economic policiesthat will reinvigorate the European social model and make it fit for the21st century. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  35. 35. P a g e | 35This is a discussion we must begin today. Setting EMU on a path towardsstability is essential so that we can move permanently beyond the crisis.It will send a clear signal to citizens and financial markets that the euroarea is committed to staying the course.And it will remove any grounds for doubting the euro’s future.There are many reasons to be optimistic that Europe will find this path.The pattern over recent decades has always been to move forwardtowards a stronger and more united Europe.When we have faced challenges, we have invariably found solutions.Those who have predicted the worst have turned out to be mistaken.What’s more, the solutions we need do not require extreme approaches orimpossible choices. They require a structured and achievable pathtowards completing EMU. This is fully within our reach today.I am confident that one day I can return to this beautiful historical settingsans souci.In the meantime, I am most grateful for your support.Thank you once again for this award and your kind words tonight andthank you very much for your attention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  36. 36. P a g e | 36NUMBER 6Basel III JobsAverage salary % change year-on-year +12.50 %(Source: first part of the table below looks at the demand for Basel III skills inIT jobs advertised across the UK.Included is a guide to the average salaries offered in IT jobs that havecited Basel III over the 3 months to 11 September 2012 with a comparisonto the same period in the previous 2 years. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  37. 37. P a g e | 37Note:IT Jobs Watch provides a unique perspective on todays informationtechnology job market. They present a concise and accurate map of theprevailing UK IT job market conditions. One of our favourite web sites. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  38. 38. P a g e | 38NUMBER 7Speech by the Chancellor of the Exchequer,Rt Hon George Osborne MPat Scotland CBIThank you Nosheena, for your introduction andmay I say it’s a real pleasure to be here.I would like to begin by congratulating the CBI andthe Scottish business community.Over the last few years you have achieved amazingthings in difficult economic times.Of the 900,000 new private sector jobs created in the UK over the last 2years, 85,000 have been here in Scotland.Of the 15,000 net new manufacturing jobs created in the UK over the lastyear, 4,000 – almost one third – have been here in Scotland.That is the fastest increase in the number of Scottish manufacturing jobssince records began.Politicians often claim that their Government has “created” thousands ofjobs.But I know that’s not true.Governments don’t create jobs – you do.The people in this room and beyond, who take risks, have the ambitionand drive to build businesses.And our job is to create the conditions to help you do it.That’s why the message of all the changes we have made this week issimple: this Government means business. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  39. 39. P a g e | 39In my own department I’m particularly delighted that Paul Deighton, theman who delivered the best Olympic Games ever, has agreed to join theGovernment as the Minister responsible for delivering the economicinfrastructure that the whole United Kingdom needs if we are to remaincompetitive.The economic outlook remains uncertain but there are some positivesigns.Our economy is healing – jobs are being created, manufacturing andexports have grown as a share of our economy, our trade with theemerging world is soaring, inflation is down, much of the necessarydeleveraging in our banking system has been achieved, and the world isonce again investing in Britain.But the scale of the challenge is so great that there are no quick fixes oreasy routes to recovery.The debts built up in our economy over the last decade will take time tounwind.Added to that was a steady decline in competitiveness, the full extent ofwhich was masked by the tide of the borrowing boom but which has beenexposed once that tide receded.None of this has been made easier by the eurozone crisis, which firstflared up the weekend before this Coalition Government was formed andhas cast a long shadow of uncertainty over our economy ever since.Our strategy remains the same one set out at the beginning of thisGovernment.Fiscal responsibility to show the world that we will deal with our debtsand keep interest rates low.Monetary activism to support demand and spread the benefits of thoselow interest rates through the economy.And a far-reaching programme of supply side reform to restore our lost _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  40. 40. P a g e | 40competitiveness and deliver real prosperity for the future instead of theillusion of prosperity built on debt.Despite strong headwinds that strategy is already delivering results.The deficit is down by a quarter in just two years, and the safe havenstatus that our credibility has earned is delivering record low interestrates.That is a direct benefit to the taxpayer, our private sector and ourindebted banking sector – and without it our economic future would bebleak.Imagine what a sharp rise in interest rates would do now to Scottishbusinesses and Scottish families.Monetary policy has supported demand and steered a steady paththrough a series of external price shocks so that inflation is coming backtowards target.But monetary activism means much more than this.Last month the Treasury and Bank of England launched the multi-billionpound Funding for Lending Scheme.It is already having an impact through reducing the price of mortgagesand business lending and it is a perfect example of the firepower that theUK as a whole is able to deploy.And this week we are introducing a new Bill in the WestminsterParliament that will allow us to use our hard-won fiscal credibility toprovide guarantees for new infrastructure projects right across the UK.The full benefits of our programme of supply side reform will only comein the medium term but it is already having an impact.Yesterday the World Economic Forum confirmed that the UK hasimproved its global competitiveness ranking for the second year in a row,from 11th to 10th and now to 8th in the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  41. 41. P a g e | 41As they put it, “The United Kingdom continues to make up lost ground inthe rankings this year, rising by two more places and now settling firmlyback in the top 10.”We have already embarked on radical reforms right across government,not least in welfare where we are tackling deeply entrenched problems toensure that work always pays.We have already made our corporate tax system one of the mostcompetitive in the world with a commitment to get to a 22p headline rate– the lowest of any major western economy – and a clear ambition to gofurther.So much so that global companies like WPP, who left the UK only a fewyears ago, are now returning to our shores.And the changes this year to the taxation regime in the North Sea, withnew certainty on decommissioning costs and a new gas field allowance,are forecast by the industry to generate billions of pounds of newinvestment.I will be making new announcements about the North Sea tax regimetomorrow that should bring more investment and more jobs here inScotland.We are already reducing regulatory burdens and reforming employmentlaw, with an extension of the qualifying period for unfair dismissal fromone year to two years and the introduction of fees for employmenttribunals.But now, in all these areas and more, I am determined that we will gofurther, deliver more and make our competitive edge even sharper.That is precisely what the Scottish economy needs in order to deliverprosperity for the Scottish people.Now I know there are those on both sides who call for a change of course.Some say cut more; others say “no”, spend more. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  42. 42. P a g e | 42We are pushing for more economic reform and faster delivery.But nobody is offering a credible or convincing alternative economicstrategy.There is no easy path to recovery and prosperity.We in Britain have to confront our problems head on, be honest about thescale of the challenge, and be consistent in our determination to succeed.Of course the challenges we face are not simply economic and financial.Last year the Scottish Government won a mandate to hold anindependence referendum.As a result Scotland is facing its biggest decision for three centuries.My sense is that people want the referendum process settled quickly sowe can move on to the real debate about Scotland’s future.Scots rightly want to know where they stand on a whole host of issues –business prospects, jobs, pensions, public services…That’s why the UK Government is committed to facilitating the processand ending the uncertainty that is disruptive for UK and Scottish businessalike.There’s a deal to be done.We’re ready to do it.And we can do it – if the Scottish Government is serious about honouringits election promise to let the Scottish people have their say.Respect for the right of the Scottish Government to hold an independencereferendum should not be misinterpreted as indifference about theoutcome. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  43. 43. P a g e | 43This Government passionately believes that Scotland is stronger as part ofthe UK and the UK is stronger with Scotland in it.As the Prime Minister has already said, our argument is not that Scotlandcan’t go it alone as a separate country should Scots choose to do so.It’s why would you want to?Why would you want to, when as a United Kingdom we’ve alreadyachieved so much?And when - by pooling our talents and resources across the UK - we canachieve so much more.I spoke earlier about the unprecedented economic challenges we face.I’ve spent many, many hours discussing with my fellow FinanceMinisters within the European Union how best to respond to thecontinuing hangover from the financial crisis and the decade of debt.As the members of the Eurozone strive to come closer together, the worldwould be rightly puzzled if Britain’s response was to break apart one ofthe most successful political and economic unions there has ever been.The British union – and its success - is as much a Scottish creation as it isthe creation of any other part of the UK.Scots were among the first – and most successful – in taking advantage ofthe new trading opportunities opened up by union.Glance at any atlas and you’ll find Scottish place names on everycontinent.The influence of Scots has been felt in economic development across theglobe.David Dunbar Buick - born in Arbroath - who founded the famous Detroitcar company. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  44. 44. P a g e | 44Thomas Glover - an important figure in Mitsubishi’s history - who madean immense contribution to the modernisation and industrialisation ofJapan.And William McKinnon whose businesses - forerunners of Inchcape -spanned the shores of the Indian Ocean, from the coast of East Africa tothe new lands of Australia.Today the advocates of independence argue that Britain’s value toScotland is spent.That union is no longer in Scotland’s economic interests.And that those who continue to believe in Britain are wallowing innostalgia.I want to take this argument head-on.I make no apology for sharing all of the instinctive emotional attachmentto Scotland’s place within the UK.Our shared history and culture.Distinct yet intertwined identities.A whole greater than the sum of its individual parts.And I reject the idea that while Britain has a glorious history, it has littlerelevance in tackling the challenges and grasping the opportunities of themodern world.300 years of working together means that today the hard-headedeconomic interests of Scotland and the rest of the UK are inextricablybound up together.Our economic integration and interdependence runs wide and deep.Working people, investment, goods and services all move freely across theUK. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  45. 45. P a g e | 45There are more than 800,000 Scots who live and work in other parts of theUK and half a million people from other parts of the UK who live andwork in Scotland.Each year around 50,000 people move to Scotland from the rest of the UK,and nearly as many people move the other way.High levels of investment come from the rest of the UK into Scotland,with UK firms employing one in five Scottish workers and contributingaround a quarter of Scottish turnover in 2010.Just as there are Scottish firms, like Scottish and Southern Energy, FirstGroup and RBS who are significant employers in other parts of the UK.This deep integration means, for example, that Scottish manufacturerscan produce goods in factories financed through capital in the City ofLondon and built by Scottish engineers.Goods that combine raw materials from Wales and components built inEngland, powered by electricity from Scotland’s offshore wind industry.And goods which are sold to the rest of the UK and across the worldthrough the UK’s road, rail and port infrastructure.Each year Scotland exports around £45bn worth of goods and services tothe rest of the UK - equivalent to 40 per cent of Scotland’s total output.This is more than twice as much as Scotland exports to the rest of theworld put together.And what better illustration of our shared economic interests and mutualdependence could there be than two of Scotland’s most important sectors– renewable energy and financial services.The energy that Scotland generates helps us to meet demand across thewhole of the UK.It is the larger UK consumer base that ensures the significant investmentcosts required for this infrastructure are widely spread and do not fall on _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  46. 46. P a g e | 46Scots alone.And then there is Scotland’s 90,000 strong financial services industry withits distinct contribution to the overall strength of the UK’s world-leadingfinancial services sector.Scotland is renowned for the expertise of its investment managers and lifecompanies – the Alliance Trust, Baillie Gifford and Standard Life to namebut a few.Those working in the industry would be the first to acknowledge thebenefits they derive from the close ties with the rest of the UK industryand, in particular the City of London.Just as those in the City will recognise the historic role and expertisewithin the financial centres of Edinburgh, Glasgow, Aberdeen andDundee.It’s little wonder that the economic fundamentals of the Scottish economyare so aligned with the rest of the UK, and that its structure andmovements are similar.Productivity in Scotland is 99 per cent of the UK average, the closest ofany nation or region within the UK to the overall UK average.The employment rate in Scotland is 101 per cent of the UK average, againthe closest of any nation or region.And earnings are now 97 per cent of the UK average, rising in recentyears.These facts reflect the hard work – including by many of you in this room– who have strengthened the Scottish economy and fostered enterprise.So I am clear: full political and economic union across the UK - a sourceof many of our past successes - continues to underpin the UK’s andScotland’s strength and credibility today and into the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  47. 47. P a g e | 47At the heart of the UK’s strength are the institutions and frameworks weshare.It’s these institutions that support our fully integrated domestic market –more deeply integrated than any single market between separate statescould ever be – and help to drive our prosperity.Now I know that the proponents of independence - applying the mostreassuring bed-side manner - say that an independent Scotland wouldretain everything from the pound and the Bank of England to UKfinancial services regulation.However, I simply don’t think it’s credible to suggest simultaneously thatin an independent Scotland everything will change and nothing willchange.For one thing, although Scotland has always shared the benefit of theUK’s interest rates, which are now at record lows, it’s very unlikely thatthe government of an independent Scotland could borrow as cheaply.And it’s the interest rate on government bonds that is one of the keydeterminants underpinning the cost of all credit in the economy.So there would be higher interest rates: a sobering thought for all Scottishhouseholds with mortgages and all Scottish businesses.And let’s be clear: independence would change the UK’s currentinstitutional arrangements for ever.Scotland and the rest of the UK would become separate, foreigncountries.What’s the point otherwise?Let me take one of our oldest institutions, our single UK currency, thepound Sterling.A single currency that has supported more than three centuries ofeconomic and social integration. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  48. 48. P a g e | 48How can we foresee what effect abandoning this 300 year-oldcommitment – or even talk of abandoning it – could have on confidenceand prosperity?After flirting with the Euro and floating other possible arrangements, theScottish Government’s latest position is that an independent Scotlandwould seek to enter a formal monetary union within a sterling zone.But the conundrum of the Eurozone crisis is how difficult it is to combinecurrency union with full fiscal and political independence.The members of the Eurozone are now faced with what I’ve described asthe “remorseless logic” – the very lesson of the Eurozone crisis – that youcan’t have monetary union without greater fiscal and political integration.Greater fiscal integration – because membership of a monetary unionmeans greater interdependence, not greater independence.That’s why the eurozone are developing plans to control the fiscalpositions of individual member states so that they can avoid the risks ofcontagion for all members of the union.Greater political integration – because sharing a currency – and perhaps acentral bank – means policies that are consistent not divergent.Members must be prepared to forgo individual interests andcircumstances for the interests of the union as a whole.So it’s difficult to argue for establishing a monetary union while pursuingfiscal and political separation.In a world in which a separate, independent Scotland wished to pursuedivergent economic policies, what mechanism could there be for theBank of England to set monetary policy, as it does now, to suit conditionsin both Scotland and the rest of the UK?As Chancellor of the Exchequer, I have seen no such crediblemechanisms proposed by those advocating independence. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  49. 49. P a g e | 49I am not clear they exist.If the Scottish Government cannot provide answers to these basicquestions about Scotland’s currency then the Scottish people are entitledto ask this basic question in return: what path is the Scottish Governmentleading them down?We’re better together.And what about regulation of key sectors of the economy such asfinancial services or energy?Do the separatists propose to dismantle established regulatory regimesfor markets that are highly integrated on a UK-wide basis?Or are they saying that the point of achieving independence is tosurrender regulatory authority over key sectors in the Scottish economy towhat would become a foreign sovereign authority?These are choices independence forces upon you, with consequences thatare unknown - and unknowable - at the time you make them.Again, if the Scottish Government cannot provide answers to thesequestions, then the Scottish people are entitled to question what paththe Scottish Government is leading them down.By contrast devolution within the UK provides Scotland with the best ofboth worlds.Substantial control over its own national affairs combined with thestrength that flows from being an important part of a much larger entity.In a globalised economy the UK’s scale matters.Far from holding Scotland back, the UK provides Scotland with a strong,stable and secure platform.The UK has broad shoulders. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  50. 50. P a g e | 50When Alistair Darling was doing my job, UK taxpayers spent £45bnrecapitalising RBS – and the bank also received £275bn of state supportin the form of guarantees and funding.This support is equivalent to around two years of Scotland’s total outputon any measure.A disorderly collapse of Scotland’s banks would have been devastating fordepositors, jobs and growth in Scotland.That’s why I argue that the whole of the UK benefits from having aGovernment with the necessary fiscal firepower, backed by a crediblecentral bank, which can deliver an effective co-ordinated response to amajor bank failure.The UK has a large and diversified economy supported by a broad taxbase of 30 million individual taxpayers and nearly 2 million registeredbusinesses.We’re better together.And together our voice is heard abroad.However broad our shoulders, future prosperity depends - as it has alwaysdone – on our success as a trading nation.I particularly want to thank the CBI for all the work they are doing to pushScottish exports.Scots have never been parochial in their view of the world.You have always lifted your gaze beyond the horizon.At a time when the global community is striving to remove barriers totrade, I don’t believe it’s in anyone’s interests here at home to erect newborders and barriers to Scotland’s ability to compete in the world market.Being part of the UK opens doors for Scotland and Scottish business. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  51. 51. P a g e | 51There are enormous advantages to being part of one of the biggest andbest Embassy, Consular and trade networks anywhere in the world.14,000 people in nearly 270 diplomatic offices, backed by a further 10,000locals in the 170 countries in which we operate.This is just one example of a broader and fundamental point.Britain’s influence – and Scotland’s reach - is truly global.Scotland walks taller and shouts louder as part of the United Kingdom.So here in Glasgow tonight – a City that has played and continues to playsuch an important part in the story of Scotland and Britain.Let’s remember the great contributions of the past.Celebrate the great work being done today by businesses the length andbreadth of this country.And look forward to what we can achieve together in the days, monthsand years to come.For our vision for Britain is of an economy, open to trade ……a Britain that extends choice and opportunities for all the people of theUK……a Britain that cherishes the rich diversity of these islands……a Britain that taps into the talents to be found in every part of ourcountry to build a more prosperous future for us all.Scotland has played and continues to play a central role in making Britainthe country it is today.A country attractive to inward investment.A country exporting around the globe.One of the best places in the world to do business.And I hope that when the Scottish people come to deliver their verdict, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  52. 52. P a g e | 52Scotland will continue to play that central role within the United Kingdomin shaping our country’s future.We are better together. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  53. 53. P a g e | 53NUMBER 8The incentivisation of sales staff – areconsumers getting a fair deal?Speech by Martin Wheatley –Managing Director, FSAIntroductionWe all know what it is like to walk into a bank to do something simple,like pay a credit card bill, only for the person behind the counter to ask ifyou would like to extend your credit, take out more insurance or look attheir competitive mortgage rates?To be honest, I only have a credit card to shop online, I have all theinsurance I need and the mortgage on my house is fixed.Banks for me were all about making sure my money was safe and my bestinterests were looked after.The type of place where you would go in, have a pleasant chat with theclerk and go about your daily business.Some time ago, financial institutions changed their view of consumersfrom people to serve, to people to sell to.One of the reasons why this happens is obvious – people in our financialinstitutions are being encouraged to sell to us through incentive schemes,bonuses and rewards.We have found evidence of poor practice and we are concerned that thisreward culture is contributing to mis-selling.You can read our concerns in a report published today, which makes itclear this is a problem across the industry.Why we are here today?I am here today to talk about how we as the regulator intend to changethis culture of viewing consumers simply as sales targets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  54. 54. P a g e | 54This paper marks the start of a programme of work that will be takenforward by the Financial Conduct Authority – an organisation I will leadand that will focus on making sure markets work well so consumers get afair deal.Poorly designed incentive schemes are a universal problem across manyindustries.Financial regulators have struggled to get to grips with them, and manyconsumers have paid the price.We know dealing with this will not be an easy task – financial incentivesare central to how businesses operate and are at the heart of problems wehave seen over the years.This is ingrained within firms’ business models, and we need a culturalshift across the industry to deal with it.The main points that I want you all to take away from today’s speech are: - we have found that most incentive schemes that we looked at are likely to drive mis-selling, and this risk is not being properly managed; - while we will be looking at our rules and also the way we supervise, we expect firms to act now to clean up their act in regards to our findings; and - this work will be taken forward by the FCA and we will be taking a closer look at how firms incentivise their staff.Why is this so important now?It has been too easy, for too long, for those selling or giving advice to bemotivated solely by the rewards on offer to them, rather than how toenrich their customer.This paper comes at a time when it’s clear that people no longer believethat they will be treated fairly. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  55. 55. P a g e | 55Recent scandals on Libor and the mis-selling of interest rate products tosmall businesses have added to scepticism about where customers areplaced in financial firms’ list of priorities.But what is also still clear is that we need financial services more thanever.Most of us need to save more for our retirements, but many are not doingenough.And all of us need a strong, profitable financial services industry that cangive us the advice we need to guide us, that can help to protect us fromthe unforeseen, and that can deliver the products that will help us achieveour life goals.But the lack of trust and confidence is amplified each time that someoneworking for a bank, insurer, or investment firm sells productspredominantly driven by financial incentives for themselves and profit fortheir firms, rather than the needs of their customers.And while public attention has been on the huge rewards on offer to thefew, the effect of more modest rewards on the many needs to be dealtwith.We need to deal with how incentives and bonuses are used by firms acrossfinancial services to drive sales, and the knock-on effect this has on theircustomers.In particular it is how front line staff have to hit performance targets,make sales and sign up customers to make a decent living.Even when – as they sometimes tell us – they do not want to be a part ofthat type of culture.This bonus-based approach has played a role in many scandals we haveseen over the years.Incentive schemes on PPI were rotten to the core and made a badproblem worse.This is not like when you go to a fast food restaurant and the server asks‘do you want fries with that?’, or ‘do you want to go large?’. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  56. 56. P a g e | 56We all know they ask these questions because they are encouraged tomake the most of every sale, and when customers are standing at thecounter, they are more likely to say yes.But then we also know what to expect – chiefly lots of salt, calories and abigger waistline.But far fewer of us actually have such a clear understanding of financialservices.We also mostly trust those selling or giving advice to be acting in our bestinterests.These are often complex and long-term products that turn into long-termproblems if they go wrong.The cost of going large may cost us a few pence – the cost of buying thewrong mortgage could see you lose your home.And while it is annoying that when you buy a TV they only seeminterested in selling you the warranty, that is nothing compared to tryingto find a safe home for your money, only for the person in the bank to onlyseem interested in selling you a confusing product that could put your lifesavings at risk.When that happens it is often because the person selling has a financialincentive to meet targets or sell a certain product.And based on evidence we will publish today, you will often find the firmis not doing enough to prevent that happening.What I expect those running firms to do is start looking at what theirschemes are set up to do.The dictionary tells us incentives are something that incites an action.Firms need to ask what type of action it is they incite.Is it to get the best deal for the customer, or is it to get the best deal for theperson or firm selling it?It is too often the latter. It needs to be more balanced. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  57. 57. P a g e | 57Aligning incentive schemes to good consumer outcomesI need to be clear here that I do not have an issue with firms havingincentive schemes.We believe that firms can have incentive schemes that are well managedand can benefit their customers.Where we have identified problematic areas, these firms have alreadystarted to change their schemes or systems and controls.What we are now telling firms is that if you do have an incentive scheme,it has to be structured and managed in a way that treats the people it willaffect fairly.As the FCA this will be important to us and we will look at features ofincentive schemes and related controls and how they deliver fairconsumer outcomes.And it is obvious firms need to make sure performance incentives arealigned to the goals of an organisation.There is a problem of course if the goals are simply to sell as manyproducts as possible – firms need to make money, but not at the expenseof clients and customers.This is about motivating people to do what is right.It comes back to organisational culture and ethics and the truism thatwhat is good for customers is good for firms.We do not want to keep hearing of instances, such as PPI, whereconsumers think they had to buy a product or protection on anotherproduct when they did not need it.People parting with their money need to be sure they are being sold aproduct for the right reasons, rather than just because it makes a lot ofmoney for those selling it.Firms need to ask – am I getting the best outcome for my customers here?This has to become part of firms’ culture and part of how they dobusiness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  58. 58. P a g e | 58The customer needs to be truly at the heart of any businesses set on astrategy of sustainable growth for a long-term future.I believe this comes down to those running firms focusing on the deliveryof quality products and services and less on reward.We need to break the link between incentives and customers getting apoor deal.Getting this right is going to be a priority for me, and it should be for allfirms as well.The FCA will expect all firms to have a culture that puts their customerfirst, sorting out incentive schemes seems to me to be a simple way tostart doing this, and a solid way of helping the industry to rebuild some ofthe trust that has been lost in recent years.We know this isn’t an easy job and we can’t do this alone.Making such a change is going to take time and it’s going to need yourfull support - ultimately we need you to help us.By making these changes your customers will be happier and ultimatelyyour businesses will do better.The reportToday we are publishing some disturbing findings from our recentresearch that illustrate that firms need to start putting their customersfirst when they set up their financial incentive schemes.We looked at 22 firms of all sizes, including high street banks, buildingsocieties, insurance companies and investment firms.And what we found is not pretty.Most of the incentive schemes we looked at were likely to drive people tomis-sell to meet targets and receive a bonus, and these risks were notbeing properly managed.In particular, firms failed to identify how incentives might encourage staffto mis-sell, suggesting they had not properly thought about the risks orsimply turned a blind eye to them. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  59. 59. P a g e | 59They also relied too much on the routine monitoring of staff, not takingaccount of the features of their incentive schemes for example, lookingout for spikes in the sales of each individual before the end of a bonusperiod.I will give you some illustrations of where firms are going wrong andexamples of high-risk incentive schemes we have seen.Some sales managers earned a bonus based on the volume of sales madeby the staff they supervised.This may sound reasonable, until you add in that some of them alsoplayed a significant role in checking whether the sales were fair to thecustomer.This created a clear conflict, yet some of the firms we looked at did notthink this was an issue to worry about.Another is that few firms with face-to-face sales staff had properlyconsidered the risks of bad practice when the salesperson is talking to thecustomer – such as leaving out important information or pressuringcustomers to buy a particular product.Our work found that too many firms had not thought about checkingwhat is actually said to customers.Here are a few of the worst examples: - One firm operated a ‘first past the post’ system, where the first 21 sales staff to reach a target could earn a ‘super bonus’ of £10,000. - At one firm the basic salaries of sales staff could move up or down by more than £10,000 a year depending on how much they sold. - Another firm excessively incentivised one product over another, therefore – despite claiming to offer impartial advice – there was a clear risk that its advisers would sell the product that earned them more money. We also found that the same firm made more money from sales of that particular product than any other, hence the bigger incentives for sales staff. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  60. 60. P a g e | 60 - And another firm allowed sales staff to earn a bonus of 100% of their basic salary for the sale of loans and PPI, but the bonus was only payable to those who had sold PPI to at least half their customers.And I find it alarming that particularly risky incentive schemes, with thepotential for sales staff to earn significant bonuses, without propersafeguards in place, were common across the firms we assessed.Our report today must act as a wake up call to all firms.It sets out the scale of problems we have found and a roadmap to put thisright, with clear expectations and proposed guidance to help firms meetour requirements.We expect all firms to read our paper and think how it affects their firm.We have made sure the firms where we found failings are fixing theirincentive schemes, improving governance and controls and, in the worstcases, checking past sales to identify if mis-selling has occurred.What firms need to doAnd today I am setting out the steps that all financial firms need to take toput this right. 1. First, look at your incentive schemes to see if they increase the risk of mis-selling, and if so how. 2. Second, review whether your governance and controls are adequate. 3. Third, take action to deal with any weaknesses and flaws identified.Firms need to change how they incentivise their staff and learn to managetheir risks.CEO’s are ultimately accountable for the way their staff are incentivised,so we expect them to take a real interest in fixing this.Recurring problems need to be investigated, action taken and redresspaid to consumers who have lost out. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  61. 61. P a g e | 61I want to draw a line in the sand here, and use the report we arepublishing today to set out our clear expectations.This marks the start of a programme of work to reduce these risks, whichthe FCA will take forward, and that will involve further supervisory work,involving a wider review of incentive schemes, enforcement proceedingsand a possible strengthening our rules.I am going to be personally involved in getting this right.This will be part of the ongoing improvements we make to regulation aswe seek to make markets work well and give people a fair deal.The reforms the FCA will carry out are the opportunity to do thingsdifferently and when we begin our life next year you will see a newapproach from us, driven by our new culture and our new way of working.At the heart of this culture will be the ability and the appetite to protectconsumers better.Dealing with behaviour – or people’s conduct – is at the top of ouragenda.From boardroom to point of sale, the behaviour and attitude of financialfirms needs to be examined and assessed – especially in terms of whatexperience and outcomes it offers customers.This will include pre-emptive regulation that takes a broad and deep lookat firms’ businesses individually and across the board.We will look for the bigger issues, find them earlier and deal with themquickly once we spot them.We will look at how firms make their money, how they pay their staff andwhether they are designing, and selling products with customers in mind.This is a change from the traditional regulatory model, which involvedsetting standards and then looking back at what firms have done.We will continue with that, but for far less of our time. Instead, we will bemaking a judgement on what the businesses we regulate are doing now, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)