The days of self-regulation are over

The first plenary session this morning was a long one and a good one, hosted by Anna Edwards, anchor for the CNBC TV team who are covering this year’s SIBOS.

The theme was all about rebuilding trust, which Anna defined as “relying on the honesty and reliability of something” and that this is therefore a belief which cannot just be regulated.

She was joined on stage by four pre-eminent financial heavyweights:

• William Cohan, Best-selling author and contributing Editor to Fortune, Journalist
• Markus Ruetimann, Group Chief Operating Officer, Schroder Investment Management Limited
• Naveed Sultan, Head of Global Transaction Services for Europe, Middle East and Africa (EMEA), Citi
• Gerrit Zalm, CEO, ABN AMRO Bank N.V.

Here are a few choice quotes and statements from the session and note that these are necessarily 100% accurate quotations, but are near enough:

Cohan:

This was an entirely preventable crisis and was a crisis of all sorts of failure. It was like a modest forest fire that Wall Street threw gasoline upon, and caused a conflagration of global proportions that didn’t have to happen.

Ruetimann:

The days of self-regulation are over. Now it’s up to the regulators to ensure that the tsunami of new regulations is proportionate and appropriate, and that it ultimately protects the client. Many of our investors have a false belief that the quantity of new regulation will have the quality. That’s not the case.

Zalm:

I’m more worried about the behavioural things that need to change, in that governments have added all sorts of extra supervision on top of what was already there. Hank Paulson made some good recommendations in the USA for example, and then the government added all sorts of extra supervision. That does not give me confidence. They did not bite the bullet in this respect because the result is more complex supervision, rather than the clarity that is required.

Sultan:

There has to be a balance between regulation and self-regulation. Regulation can only go so far in restoring trust and if we look at regulation as the primary source of restoring confidence, then it will not work. As an industry, we need to cooperate with regulators on the principles, and then apply these principles ourselves.

Ruetimann:

Due to regulation, we potentially enter an ice age where innovation and growth is frozen.

Zalm:

Basel III will deliver some common standards, but there are also many other country-level rules that are different and the way supervision is done is different even across European countries. We missed an opportunity here to make this work.

Sultan:

The real answer is to focus on clients, understand their business, their needs and respond to them. By doing so, we make ourselves more relevant to our customers which makes us more relevant to the marketplace and the economy and eventually the community. It does not mean ignore the other stakeholders, but the customer focus is pivotal as we try to rebuild trust.

Cohan:

Any number of financial crises have been blamed on 'client needs'. We need to look to ourselves as bankers.

Zalm:

The first thing is that a bank should not go broke. That does not create confidence in putting your money there. This issue will be resolved by Basel, and I believe remuneration systems are important and should not be a stimulus for excessive risk taking. The second issue is that customers were sold products and services that did not fit their needs. The second issue is about being excellent in serving customers and not having just shareholder value in mind. The only reason for our industry to exist is to provide excellent service to our customers and if that is low on our list of priorities then we will not survive. It should be simpler offerings and simpler communication. For example, with our offerings, only ten percent of the Dutch population can understand our wordings.

Cohan:

We are so quick to blame others, but we should first look at ourselves.

Ruetimann:

It’s the old joke: what do you call a shipwreck of bankers at the bottom of the ocean ... a good start.

Cohan:

People need to take responsibility for their own actions. Do we really need an expensive consumer protection agency? Equally, the crisis is a reflection of this incredible interconnectedness now, and bankers need to accept more responsibility, and more social responsibility, for their behaviour. The top 100 bankers should put their entire net worth on the line over this and the first bank to step forward and do this will be important.

Sultan:

If you want to maximise shareholder value you have to stay in business. If you don’t have the trust of your stakeholders, then you’ll fail.

Zalm:

We don’t want to have second hand stuff on our balance sheet. We only want things on our balance sheet that we understand and have underwritten ourselves.

Cohan:

When it comes to the way banks bonuses are paid, I am not even slightly impressed. It is another huge, missed opportunity. The closest that any firm comes to trying to address this properly is Goldman Sachs. As a vestige of them becoming public in 1999, the last big private securities firm to do that, and a vestige of this is Partner MD’s and MD lites. The Partner MD’s get paid out of the pre-tax profits of Goldman Sachs, rather than their performance. These 300 Partner MDs focus on profits therefore. That’s why they shorted the mortgage market in 2006, forgetting their clients’ needs and everything else. They made $17 billion in 2007, and paid out the biggest bonuses they’ve ever paid, at the same time that other firms were falling apart before our eyes. I’m a beneficiary of that system having worked in an investment bank for over 17 years, but that doesn’t make it right. People are so focused upon generating revenues without any accountability for how they generate those revenues.

Zalm:

If the banks don't understand the atmosphere in society and change accordingly, the politicians will make them change. I cannot speak for the whole industry but within our bank we have had a fundamental change of our remuneration system. We still have variable pay, but it’s no longer related to short-term profit. It’s now related to customer and employee satisfaction, cost controls and other factors.

Ruetimann:

In the asset management industry, the incentives for many decades have been based upon long-term performance of three to five years. In asset management, you don’t find transactional success, it’s long-term success. That creates different behaviour than you would have in a bank.

Cohan:

In terms of managing the firm through that crisis Lloyds Blankfein, the CEO of Goldman Sachs, did a very good whilst others did not. For example, the likes of Lehman failed because of failures at the top and the culture that created.