FCA benchmarks review urges FI’s to better manage the risks they face

BY Fraser Tennant

Financial institutions must improve how they identify and manage their benchmark activities and associated risks, according to a new Financial Conduct Authority (FCA) review of oversight and control of financial benchmarks.

The FCA’s review discovered that although there had been some progress made in terms of improving the oversight and controls around benchmarks, the application of the lessons learned from the LIBOR, Forex and Gold cases to other benchmarks had been uneven across the industry and "often lacked the urgency" required given the extent of the failings.

"We have seen widespread historic misconduct in relation to benchmarks,” said Tracey McDermott, director of supervision – investment, wholesale and specialists at the FCA. “It is now critical that firms act to restore trust and confidence in the system. Firms should have in place systems to manage the risks posed by benchmark activities and to address the weaknesses that have previously been identified.”

Additionally, the FCA found that firms were failing to identify a wide enough scope of benchmark activities by interpreting the International Organization of Securities Commissions (IOSCO) definition too narrowly. 

Ms McDermott continued: “We recognise that this is a significant task and firms had made some improvements, but the consistency of implementation and speed at which these changes have been taking place is disappointing.  Firms should take our findings on board and consider further steps to improve their oversight."

Key FCA recommendations found in the review include the need for firms to: (i) continue to strengthen governance and oversight of benchmark activity; (ii) continue to identify and manage conflicts of interest; (iii) fully identify their benchmark activities across all business areas; (iv) establish oversight and controls for any in-house benchmarks where they have not done so; and (v) implement appropriate training programmes.

Responding to the FCA’s thematic review, PwC's UK banking and capital markets leader Simon Hunt said:  “The identification of a complete population of benchmarks subject to the IOSCO definition is a significant challenge that firms have been grappling with.

“Firms that have introduced centralised governance and an oversight body for these benchmarks have been able to strengthen significantly the control infrastructure and understand and manage the risks that they face as an organisation.”

As a follow-up, the FCA has confirmed that it will write to all of the firms involved in the review to offer individual feedback as part of its regular supervision program.

Report: Financial Benchmarks: Thematic review of oversight and controls

Effective risk management enables faster revenue growth, claims new survey

BY Fraser Tennant

Companies that effectively manage their business risks proceed to an upsurge in performance and faster revenue growth, according to the results of a new PwC annual risk survey.

In ‘Risk in Review: Decoding uncertainty, delivering value’ (April 2015), over 1200 global business executives and leaders share their views on how they assess the risks they face in their markets – the risk climate, their companies’ risk management practices and the key risks, both now and in future.

The survey found that: (i) 73 percent of respondents agreed that risks are increasing, particularly in the areas of regulatory complexity and data security and privacy; and (ii) 76 percent of respondents expect revenues to rise over the next two years and are undertaking a variety of strategies to make that growth happen.

“Integrating risk management into the life cycle of your business gives you the opportunity to do two things," suggests Dean Simone, a PwC risk assurance leader. “It helps you understand the implication of risk at the point of decision rather than afterward and it allows you to move very quickly and confidently, knowing that you’ve anticipated the risk and are less likely to have made a mistake that could slow you down.”

The importance to companies of being able to anticipate risk is highlighted by the survey’s focus on the benefits of having a dedicated risk management leader available to prevent expensive misjudgements, enable fast decision-making and drive efficiency. The survey exemplifies this importance when it states that only 12 percent of respondents demonstrated the qualities of "true risk management leaders".

One such risk management leader is Ryan Zanin, chief risk officer at GE Capital. He said: “We understand that both companies and economies run through cycles and you better be prepared to live through a down cycle and weather the storm. Part of our job is to make sure that people understand the choices in the harsh light of day, that there are really no free risks.”

Fellow survey respondent, IBM chief risk officer Luis Custodio, said: “One of the biggest risks is missing opportunities if you are not agile and fast. We do not slow down our business units. The last thing that business leaders want is bureaucracy. Risk management is viewed as an enabler and a support function to the business."

Report: Risk in review: Decoding uncertainty, delivering value

Over-regulation and cyber risk top list of banking & capital markets CEO concerns

BY Fraser Tennant

Over-regulation and cyber risk are the two major threats to banking & capital markets (BCM), according to a new PwC report 'Achieving Success While Managing Disruption'.

The report, which showcases the views of 175 BCM CEOs across 54 countries, contends that over-regulation concerns have increased from 80 percent in 2014 to 89 percent in 2015 with CEOs particularly fearful over the impact of regulatory change.

“The ability to meet current and future regulation is hampered by lingering uncertainty over regulatory details and the potential for reactive and piecemeal implementation,” said Kevin Burrowes, PwC’s UK financial services leader. “It is vital for organisations to develop a proactive approach to regulation, headed by a regulatory leader responsible for liaising with regulators, assessing the strategic impact and co-ordinating the response.”

In terms of the risk of cyber attack, 79 percent of CEOs consider this to be likely and a potential barrier to business growth, although 92 percent still felt optimistic as to the prospects for growth of their own organisations.

Further survey findings include: (i) 86 percent of BCM CEOs recognise the importance of the CEO being the champion of digital technologies in helping to make the most of their bank’s digital investments; (ii) 93 percent of BCM CEOs see mobile technologies as being critical; (iii) 89 percent view data mining and analysis as important not only to gaining a better understanding of customer needs, but also in driving operational efficiency and effectiveness throughout the organisation; (iv) more than 40 percent of BCM CEOs see joint ventures, strategic alliances and informal collaborations as an opportunity to strengthen innovation and gain access to new customers and new/emerging technologies; and (v) 63 percent of BCM CEOs have a strategy to broaden talent diversity and inclusiveness or plan to promote one.

Report: A marketplace without boundaries?: Responding to disruption

CFO risk appetite at seven year high

BY Richard Summerfield

Despite ever increasing uncertainty surrounding the economy of the eurozone and emerging markets, risk appetite among the chief financial officers (CFOs) of the UK’s largest firms is at a seven year high, according to a new report from Deloitte.

Deloitte surveyed 118 CFOs of FTSE 350 and other large private UK companies for its ‘The Deloitte CFO Survey – Q3 2014’ and found that British companies are feeling more confident about taking on business risk than at any other point since 2007. The growth in CFO risk appetite has been predicated on a rebound in the US economy, improving UK growth and the current ease of access to finance. Seventy-two percent of CFOs surveyed said now was an opportune time to take risk onto their balance sheets, up from 65 percent of respondents in Q2 2014.

"With a resurgent US economy, good growth in the UK and plentiful liquidity, CFOs have shrugged off the effects of rising uncertainty and weakness in Europe, sending corporate risk appetite to a seven year high,” said Deloitte chief economist Ian Stewart. “Expectations for corporate revenues and margins remain close to the four year high seen in Q2.”

Yet despite the uptick in risk appetite, perceptions of financial and economic uncertainty also rose in the third quarter for the first time in two years. Fifty-six percent of CFO’s surveyed noted that the level of financial and economic uncertainty that their firms were facing was above normal, high or very high. In Q2 that figure was just 49 percent.

Sentiment about the eurozone has deteriorated significantly in 2014, with a net percentage of -39 percent of CFOs seeing improving prospects for the region going forward, down from +54 percent in Q1 2014. Confidence in emerging markets also continued to decline, with a net balance of -13 percent seeing an improvement. Despite those concerns, CFOs are considerably more optimistic about UK prospects, with a net balance of +85 percent reporting improved growth prospects over the last six months.

In many respects, political upheaval was more of a concern for CFOs than any economic issues during Q3. The potential secession of Scotland from the United Kingdom was a contributing factor to rising uncertainty, along with the impending general election and possible referendum on EU membership. CFOs perceived these scenarios as a greater risks to their firm’s prosperity than an increase in interest rates or weaknesses in the eurozone.

Source: The Deloitte CFO Survey