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HSBC’s David Bagley on the G20, Turner and Compliance

David Bagley, Global Head of Compliance for HSBC, addressed the Financial Services Club last week around the implications of the G20 Summit in London, the announcements of the Financial Stability Board and other global supervisory changes, and what they all mean for a bank’s compliance team.

In a candid discussion, David made it clear that the language of the
G20 had been inevitably high level, and so there had really been little
announced that would be different as of right now.

It will be different in the future though, and there are some firm dates such as June 2009 when the new collegiate of supervisory boards that comprise the Financial Stability Board start their work.

The Financial Stability Board (FSB) itself is there as an early warning system rather than as an actual decision-maker. In fact, it has no decision making powers and so each national and regional regulator can make their own choices. This means that there is no global regulator and there is unlikely to be one.

Equally, there is unlikely to be a regional regulator for Europe, which is why the De Larosière Group recommended strengthening CEBS, CESR and CIOPS but not to make them the EU regulatory power. That power still lies with the FSA, AMF, BAFIN and other national regulators.

So the FSB is the alarm bell and standard setting organisation between nations and regions, but not a powerbase.

The real meat of the G20 pronouncements however had more to do with liquidity – a word that had not appeared on any risk radars or regulatory agendas just two years ago – and capital adequacy. As a result Basel II will be amended to address pro-cyclicality through minimum levels of capital although, as this short clip illustrates, David has reservations as to how easy this will be to put into practice:

If the risk weighted asset ratios and reserve levels for Tier 1 Capital can be managed through the boom and bust cycles of the future more effectively, then the authorities hope the financial world will be a better place.

Whether this can be achieved by 2010 is the critical question.

Alongside increased capital reserves, there is a focus upon liquidity risk, an area that was not even mentioned two years ago by regulators and risk managers. Now, liquidity risks are being debated everywhere, as mentioned last Thursday.

The G20 now recognise that liquidity must be considered within a global framework which will be created and agreed by 2010. David felt this was a lengthy timelines to put in play for a liquidity framework when compared with Basel II.

Along with the commitments about hedge funds and credit rating agencies, David also made the comment that the inclusion of tax heavens was interesting. The fact that tax havens had nothing to do with the causes of this crisis, makes their inclusion suggest political influences are in play.

In other words, the inclusion of tax havens as part of the financial regulatory restructuring is more by choice to address the issue of lost tax revenues than by any justification to address the crisis.

David then outlined what the practical consequences of the G20 meeting would probably mean for compliance functions. At this point, he related it to the Turner Review from the UK’s Financial Services Authority (FSA) which, unsurprisingly, was timed for release two weeks before the G20 meeting.

Something surprisingly timely about that wasn’t there?

Equally, it is interesting that the key recommendations of the Turner Review:

  • Create Europe-wide body to set standards, encourage best practice and focus on the big picture risks;
  • Force foreign companies with branches in the UK to keep more liquidity locally if there are worries about the strength of the overall company;
  • Introduce more demanding remuneration criteria which tie bonuses to long-term success;
  • Force banks to build up their capital reserves during boom years so that they have enough capital during downturns, ending the "pro-cyclicality" of the current system;
  • Create a new stress test, known as the "economic cycle reserve", which will show not only what loans have already soured within a bank but also what the future level is likely to be;
  • Introduce a "core funding ratio" of total assets to capital, which will cap the leverage within banks and can be used to assess their financial strength along with the current equity tier one ratio, which is based on risk weighted assets;
  • Expect offshore jurisdictions to hand over information about hedge funds and other entities which operate in the UK if their collapse could be a threat to financial stability;
  • Play much greater role in assessing the assets on banks' balance sheets, including challenging their auditors over accounting standards if they vary between banks;
  • Regulate credit ratings agencies and ensure they only put a rating on products which they understand; and
  • Consult on a range of other changes, including potential caps on mortgage loans, and possible ban on short selling.

Are strongly aligned with the G20’s agenda.

Something surprisingly correspondent there as well, isn’t there?

Mind you, why would the regulatory authority of the country hosting the G20 Summit Meeting provide a conflicting agenda to that of the G20 agenda?

As David said, both the G20 Recommendations and the Turner Review show the politics at play, with the FSA wanting to show leadership as the UK is still vying to stay at the cutting-edge of global financial structures. The devil will be in the detail, and the details are thin and vague right now.

Equally it is not clear that all the remedies relate to the causes, for example tax havens and hedge funds, and turning this into regulatory structures that can then be implemented through compliance teams will be challenging.

As David summarised it, it is not the supervisory model that counts as much as the quality and energy of supervision. The more proactive and detailed the supervisor in being active in the markets and applying the rules and details, the more likely a prudent and well regulated market.

Finally, lest we forget, there was a line in the G20 releases that there must be no slackening of interests in Anti-Money Laundering and Counter-Terrorism Financing and sanctions. In other words, everything that went before has to go ahead as well as all this new stuff.

That will keep us all pretty busy.

Finally, lest I forget, one area David particularly noted was the involvement of compliance officers in executive remuneration, alongside shareholders and regulators. I had a vision at this point of compliance officers worldwide walking around the management floor with a smile on their faces as they pass the CEOs office sniggering, “it’s bonus time and here’s my budget request for next year”.

Lovely.

** as usual, all presentations, notes and recordings are available in full to Financial Services Club members including remote, online members

The Finanser Blog is sponsored by Just Giving this week.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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