Resetting the regulation agenda

Given the increasing complexity of the regulatory agenda taking a portfolio approach is key to gaining competitive advantage.

In the following series of videos we explore how taking a strategic portfolio approach can help make and embed a successful transformation.

How banks are dealing with credit riskParliamentary Commission report
Julie Coates and David Kenmir
Capital AgendaImpact of regulation - the capital agenda
Julie Coates and Kevin Burrowes
Richard Oldfield and Julie CoatesImpact of regulation - a strategic portfolio approach
Richard Oldfield and Julie Coates
Julie Coates and Jon TerryImpact of regulation - remuneration and culture
Julie Coates and Jon Terry
Julie Coates and Julian WakehamImpact of regulation - transformation
Julie Coates and Julian Wakeham

Julie Coates and David Kenmir discuss the final Parliamentary Commission report on banking standards and the impact on UK regulation reform.


Julie Coates: Hello, my name is Julie Coates and I lead the Financial Services Regulatory Practice. The Commission on Banking Standards set up following the series of scandals which hit banking, culminating in LIBOR, issued its’ final report last week. The Commission was set up to examine how rebuild trust in banks and I am very pleased to have David Kenmir from our UK Financial Services Regulatory Practice join me to share his thoughts on the implications of the Commission Report.

So David, how do the Commission’s findings fit with some of the other EU and Global Regulation that’s out there?

David: I think the Commission’s report is another really important milestone in the UK Regulatory Reform agenda. I think the challenge though, for the Government and the Regulators is how they implement its’ proposals without being super equivalent to what’s in EU or Global Regulatory standards.

So, for example, some of our clients are already talking to us about whether the leverage ratio goes further than actually what’s required by Basel or may go further than that, and I know some of the people who work in our HRS Practice are very interested in the deferral of bonuses which goes above and beyond what’s in CRDIV.

Julie Coates: And some of the changes in there around the approved persons regime and the introduction of criminal proceedings – they are going to have impacts as well aren’t they, so, thoughts on that?

David: The senior management mind has really been focused by the financial crisis on whether they understand what’s going on in the bit of the organisation that they are running, how do they get the Management Information to show them what’s actually happening and we are already seeing the Regulator spending much more time speaking to front office people than to second line risk and compliance people. So I think there will be a lot more focus in those people’s minds – both on how do they know what’s happening – but also on the risk / reward of the job. Will we see salaries go up and may be bonuses go up controversially, because actually people really want a premium for doing these jobs. But there’s an interesting question for firms as well, if it’s clear what all the individuals in the firm think they are accountable for, when you add it all up are there overlaps but also are there gaps? So, for instance, if nobody thinks they are accountable for compliance, there will be no compliance by definition.

Julie Coates: And presumably culture is important here as well? So thinking about the conduct risk agenda and how you change the culture – not just the remuneration structure –how do you see that impacting?

David: I think culture is in a lot of our client conversations at the moment, and our view and the view of most of our clients is it’s starts with the strategy, what the FCA keep saying is –you say the customer is at the heart of your strategy, what does that mean? And what they are looking for is for banks to be able to articulate that and then show how it’s embedded in the organisation and clearly culture is an enabler of that because it’s the individual behaviours of staff that deliver outcomes to customers. So, yes, lots of focus on that going forward.

Julie Coates: And the customer centric approach – and I’ve heard you talk a lot about that – is that resonating with the clients you’re talking to?

David: Yes, absolutely. Some really interesting work going on with organisations going right back to the strategic direction and going, well what do we want to achieve for our customers, what outcomes do we want to deliver?

Julie Coates: Yes, and so over the next 6-12 months, where do you think the focus should be from the banks and the insurers and the asset managers?

David: Well, if you look at the conduct risk outlook from the Regulator it appears that they’ve moved on from banking, so, they talk a lot about asset management, they talk about insurance, particularly focusing on product design and then distribution. I think they are doing that because they believe that banks should have got this now and they should be well into embedding their programmes. So, clearly banks need to continue doing what they have been doing and we’re continuing to work with many people on their various programmes.

My own personal view is that the big thing in the next 6-12 months is the move of consumer credit from the OFT to the FCA.

Julie Coates: Yes

David: So, the OFT regime has been legalistic, minimal supervision, minimal enforcement and we are moving to an FCA-like regime where there will be ongoing supervision, there is likely to be lots of enforcement action, likely to be more use of unfair contract terms legislation, Section 166s and so on, so that’s going to be a real challenge for the credit card businesses and the loan businesses within the retail banking sector and, of course, for other firms like retailers who will also be dragged into the FCA net for the first regime first time

Julie Coates: Yes, of course, a lot to think about if they are not already thinking along those lines.

David: Yes, absolutely

Julie Coates: And just coming back to one thing– competition – so, how is that going to impact new entrants to the market, are we seeing the changes around competition, do you think that’s going to make it easier, harder, how is that changing?

David: I run our banking licensing practice and when I talk to our clients what they are really pleased about is the lower capital and liquidity requirements for start up banks – that’s gone down really well – and also I think the Regulator is there more to help now than previously, I think that’s coming out of the interactions. I think the big practical challenge still to face is how do you enter the current account banking market, if you want to? The encumbents have got their branch networks –we don’t know what’s going to happen with the Lloyds and RBS packages but and maybe that will change the shape.? But it’s really hard, from scratch, to build a branch network. So, pretty much everybody I speak to wants to do some form of mortgage lendings in secured credits, or SME lending and to fund it through some sort of internet proposition to retail customers. So I think the greatest initial impact will be through the internet channels.

Julie Coates: Thank you David. The measures we have discussed start to tackle some of the challenges in the banking market but clearly banks will still need to do a lot more to rebuild trust. Thank you for watching.

Julie Coates and Kevin Burrowes discuss how banks are approaching the capital agenda.


Hello, my name is Julie Coates and I lead the UK financial services regulatory practice. UK banks are facing unprecedented regulatory upheaval, in particular Basel III is driving far reaching strategic operational and structural implications for the banking sector. Despite the fact that many institutions have already made significant investment and progress to ensure their compliance, there remains a growing sense of concern amongst both regulators and analysts over the validity of risk weighted asset numbers and banks’ overall capital levels.

I am pleased to be joined today by Kevin Burrowes who leads our UK financial services practice and also our global capital proposition. He is joining us to share his insight into how banks are dealing with the capital agenda and what the future holds. So, Kevin, can I start by asking you, for our senior executives and our clients, what are the main things that they are focusing on the capital agenda at the moment?

There are three things, Julie. One is the strategy and what does that mean for capital? The second is optimisation. How do we make sure that we consume as little capital as possible? And the third is how do we deal with Basel, ICB, Volker, CRDIV and all the myriad of other regulations that are hitting them and have a capital impact.

OK, so if I come back to optimising capital and the myriad of regulation, can we just talk a bit more about the strategic lens. So, from the strategic perspective, what are the things that our clients are thinking about?

Return on equity is really difficult for these banks at the moment. Rating agencies, analysts, everybody is saying – you need to generate a better return on equity. So, banks spend a lot of time on strategy. What does that mean for their capital levels? And invariably, there is a gap between what they would like to do and the capital they have got. Raising capital is almost impossible and therefore, what banks are having to do is to shrink their balance sheets by selling businesses, deploying less capital to certain businesses. And of course, that then means that they have to reassess their strategy.

The second thing you talked about earlier was optimising capital. So, I understand that strategically, the banks need to think about what the future holds, but in terms of optimising capital right now, what are some of the things you are seeing them do?

A number of different things, all with very significant challenges. The first one is legal entity structure. Have we ago an optimal legal entity structure whereby capital is being released through the institution? Are we booking transactions into the right legal entities to minimise capital? So that is a big piece of work? The second area, I would say, is sort of the end to end capital calculation. There is a lot of concern outside of the industry with regulators and analysts saying "Well, we don’t understand how these capital numbers are coming together?” And so institutions are spending a lot of time front to back, re-engineering their processes to really generate the right accurate capital numbers. The third area I would highlight is the models themselves, the algorithms and data in these models. Are they generating the right results? And we are seeing a lot of regulatory pressure being put on banks but also management inside banks really saying “Have we got the right models? Do they do the right calculations? Have they got the right data?” because that would help drive some of the capital efficiency in the institution.

OK, one thing I thought you might talk about was stress testing. Are we seeing much around stress testing?

That is another important area. Stress testing clearly is a tool that the regulators, and banks, are using now to say – well in times of stress, what capital do we need - and running those processes efficiently, effectively, sensibly is very important. There are a whole bunch of other things we could spend time on. How do you forecast capital? How do you allocate your capital down to different desks? So, it is a really big agenda for our banks, at the moment.

It is, and one of the other changes that is coming – Vickers, ring fencing? So, as our clients are thinking about the impact of ring fencing, how is that going to play out from a capital perspective?

It is still a really tricky area for them, I have to say. The rules are still unclear. What can be inside and outside the ring fence is still unknown to a degree. So, what banks are doing is they are spending a lot of time simulating – putting certain businesses inside or outside. And then what does that mean for capital? What does it mean for liquidity? What does it mean for where we can move our capital? Which legal entities are we going to use to actually book that business in? And so, there is going to be quite a lot of work that is going to have to go on as the rules become clearer and clearer, about how this is going to be set up and what the capital consequences are for banks.

And so, if there was one thing you would advise our banking clients to do right now, around the capital agenda, what would that be?

The challenge for the banks comes to the point that they have got so many projects going on in the capital space. Many of those projects compete. They are duplicative. They are not lined up. So we call it ‘digging up the road more than once’, if you like. You have to join your programmes together. You have to look at in a holistically fashion in order that, not only do you get to the right capital position, but you save yourself a lot of money because these programmes are burning through a lot of project costs.”

Yes, so not an easy challenge but, I think, if banks look at it more strategically it just makes a lot of sense.

Correct, and some of them are, but many of them are not. So, it’s how do they respond to that challenge, I guess.

Kevin, thank you very much, very helpful and insightful. And thank you for watching.

Richard Oldfield and Julie Coates discuss how companies can take a strategic portfolio approach to regulation to gain competitive advantage.


Hello I’m Richard Oldfield a member of PwC’s Executive Board and I’m here today to talk about the dynamic world of Financial Services Regulation. I’m delighted to be joined by Julie Coates who leads our FS Regulatory Practice. Julie it really is a changing complex world so what’s keeping you and our client’s busy?

Julie: One of the big challenges that’s different right now is how we think about all of that regulation at the same time because there are interdependencies between the regulation, there are various dates at which the regulations kick in. So making strategic decisions by understanding the totality of the impact is really important for our clients rather than moving straight to how do we comply. What strategic decisions do we need to make to change businesses, change segments, change customers, change operating models before we move to compliance?

Richard: So regulations moved right the way up the strategic agenda

Julie: Absolutely.

Richard: What are we seeing from the Regulators?

Julie: There is a lot in the UK happening with the Regulators, we’re about to see the FSA change to the PRA and the FCA. here are two things that are high on their agenda from a prudential perspective, capital – how do organisations think about how much capital they need and how do they allocate it to the various businesses. And then secondly, for the FCA how do we think about the customer outcomes. For our clients its thinking about things from both of those perspectives not just capital but how am I doing the right thing by the customer and making sure that as an organisation thinking culturally about the right customer outcome.

Richard: It is quite hard to think about the future and impact on strategy when all institutions are spending so much time thinking about the issues that they’ve got in their portfolios from historic business. What are we talking about on that topic?

Julie: That is a really good question and probably the thing that our clients are struggling with the most – how do I deal with my forward looking portfolio and my reactive portfolio and at the same time if I am going to revisit and change how I’m dealing with customers culturally are there other things, even though there’s no change of regulation or potential remediation, that I need to think about doing differently. So, I think our clients that are doing this well are making those strategic decisions early and thinking about it as a portfolio.

Richard: How are we helping clients think about pulling that together as a portfolio?

Julie: Yes, that’s a good question and very close to our client’s hearts and we are finding that many of our clients are spending way into the millions on trying to get this right. We are helping them is to focus on - where are the interdependencies, where are the efficiencies, let's have some clear standards in place globally to which we want to adhere, let’s be clear about our risk appetite, let’s be clear about how we want to drive that into the frontline, how do we embed this into the frontline and then how do we actually make sure we’re running one project that goes across the firm rather than separate projects within different business units. So that we’re all joined up, we doing it once and we’re doing it in the most effective way.

Richard: So, how important is culture when we think about the regulatory change agenda?

Julie: I think it’s fundamentally at the heart of what we’re trying to do now. I’ve never heard it talked about so much as right now and I think the firms are getting to grips with – how do I understand what my culture is right now and how do I start to change that.

Richard: Thank you very much Julie, it really is interesting stuff and I’m sure the pace of change won’t slow as we go forward in the next few years and thank you very much for watching.

Julie Coates and Jon Terry consider recent regulations impacting remuneration and the importance of culture.


Hello my name is Julie Coates and I’m the UK’s Financial Services Regulatory Leader and I’m pleased to say that I’m joined here today by Jon Terry who’s our Global FS HR Leader. Hi Jon.

Jon: Hello

Julie: So there are a lot of changes around remuneration coming from the EU and I’d be really interested just to hear a bit more about what they are and the impact they’re going to have.

Jon: Well there’s already regulations on remuneration and the EU have become quite prescriptive in relation to that but as you say there’s a radical change on its way. So over the last few months as part of CRD 4 there’s remuneration issues and the biggest one, the most controversial is around so called bonus capping which will impose a limit on the amount of bonus that can be paid as a portion of fixed pay.

Julie: Right.

Jon: Which is absolutely radical as you said so it would limit the amount of pay that certain individuals, broadly risk takers, can receive, a radical change. And one of the key issues about this not only is the change, but also the level playing field issues because this will apply to those organisations operating in the EU and indeed their worldwide operations but it will not apply for example for US organisations, only for their European operations so we have real level playing field issues here.

Julie: So how are you expecting organisations to respond to this?

Jon: I think a few things are going to be happening. The first is an increase in fixed pay, now immediately I say that you think oh my word that’s going to be an increase in salary and fixed pay is high enough and it reduces flexibility as it is. But there are other elements of fixed pay as well that will need to be looked at and some quite clever thinking will need to be applied, it is very complex and there will be significant constraints on what can and can’t be done.

Julie: So what should organisations be doing right now to get to grips with this?

Jon: Well the first thing you need to do is to be aware of what’s happening and when the directive will be in place early next year. But it will probably be imposed in different EU member states at different times, so stay very close to what’s happening that is very important. Carry out some gap analysis around how is it going to affect your current employees if you made no changes and then look at the range of potential changes that you can make to try to mitigate some of these issues and then really see what works best for your business.

Julie: What about culture, how important is cultural change right now?

Jon: That’s a really, really good question and of course culture is under the spot light but if I connect that remuneration for the moment, there’s no doubt that remuneration in banking has gone down very substantially over the last 4 years since the financial crisis. Probably it’ll be down another 30-40% in investment banking this year for 2012. So, if we go back 4/5 years ago one of the key reasons why people worked in banks frankly was for the pay and it still is a highly paid business but nowhere near as highly paid as previously. So you really need to think about why do individuals wish to work and the culture point is very important here. Are they going to be taking greater risks in order to try to maximise their pay, and if so, the culture of doing the right thing and living to the values of the bank is absolutely critical. That has become even more critical as some of these issues around remuneration could possibly encourage people not always to do the right thing. So a massively critical issue and a very strong connection with remuneration.

Julie: Absolutely, so yes some big challenges for the organisations out there to get right.

Jon: Absolutely.

Julie: Jon, thank you very much for your time today and thank you to the audience for watching.

Julie Coates and Julian Wakeham talk about how companies get to grips with the scale of transformation they need to make.


Hello my name is Julie Coates and I am the Financial Services Regulatory Practice Leader in the UK. I am joined today by Julian Wakeham who’s our Capital Markets Consulting Sector Leader. So Julian a lot happening out there in the world of Regulation and we’re in a position now where the banks are having to make transformational changes. This is about them having to think about their operating models, driving increased rates of return and not just dealing with the regulation, so how are banks dealing with that?

Julian: I think they’re finding it very difficult and in your question you’ve answered many of the points - it’s not simply the volume of regulation or even the intensity of oversight and enforcement it’s the scope. It’s the shift from looking at capital and risk to studying the customer and the actual operating model of banks themselves and that scope of challenge is making it very difficult for banks to put all of the change you need to undertake into one programme and do it in an efficient way.

Julie: So how are organisations tackling this?

Julian: Well I think to be honest they are still discovering ways in which they can pull it into one programme. And the very fundamentals of what they are having to do are changing so that the old balance between competition, cooperation and regulation has shifted and indeed good business practice around competition, cooperation and regulation and what was considered normal practice has changed. It is that fundamental change, that change in culture and the way the banks are having to operate which is making it very, very difficult for banks to get their arms around the scope of transformation they need to undertake.

Julie: And do you see that changing any time soon?

Julian: No I don’t, I think in reality while banks are beginning to get a handle on what they need to do with capital and the impacts of Basel III, they’re beginning to understand the implications of liquidity on their product sets and indeed they’re beginning to make some operational changes and cultural changes. The reality is the oversight from regulators and the intensity of focus on the reason that the banks are there and their reason for business is actually going to continue. Regulators will continue to say what purpose are you providing and it is that challenge of purpose to banks and bankers which is making them have to reconsider continuously, and for some time, exactly what the model is their going take into the next 5, 10, 15 years.

Julie: And you mention there the word culture, how importance do you think that is going forwards for the banks to get that right?

Julian: It’s interesting, I’ve spoken to a lot of banks recently and the answers range from yes, we absolutely need to change our culture to well, is there actually anything wrong with our culture because most of us are good people trying to do the right thing. So there is a big diversity of response to that question. I think the reality is that from a political and social media perspective the culture is perceived as one that hasn’t been serving the interest of the customer and most banks are now resetting their business and resetting their agenda and resetting their culture and people around are we doing the right thing for the customer, is this a customer centric organisation? So I think resetting the culture to the customer is something that’s in-flight and it will continue to prove challenging for some time.

Julie: What about technology – what sort of role do you see technology playing in this?

Julian: I think it’s interesting, I was chatting to a banker the other day and he said “you know we are a technology house with a banking licence”. Technology is at the centre of the service that banks are providing and whether it’s automated basket trading, the speed that that requires and new technology that requires. Or it’s the interface with the retail customer and the distribution of products through that digital interface, the reality is technology is the very heart of how banks operate. And making sure that the people and risk models are embedded within that technology are essential to give that seamless service and experience of customer.

Julie: So what do you think are the key competitive differentiators going to be in this market?

Julian: I think it’s essential that banks understand their customer, they need to have a deep understanding of the franchise, why they are servicing that franchise and in reality can it make a sensible, economic and sustainable return from that franchise? And then can they offer the level of service that that franchise needs so they keep coming back and it is a sticky and sustainable customer. I think the way that banks – once they’ve understood that franchise, once they’ve defined the service proposition to that set of customers, the precision with which they can manage their offering to that customer and the operating performance of their service to that customer will be everything. So in short, know your customer and then manage them with intensity and precision.

Julie: Great, so some key messages that organisations need to get right. Julian thank you for your time much appreciated and thank you to everybody out there listening.