Just around fifteen years ago, I retired from HSBC. I remained fully involved in the industry for another decade or so, but it was a decade of risk-focused turbulence with the market crash, Lehman, Madoff and other hits to the business. Many firms’ bottom lines were decimated, there were rescue mergers, involuntary acquisitions and a certain number of defaults. The latest five years has been stricken by Covid, seen investors flirting with cyber securities and employees struggling with the need, and then the desire, to work from home.
It has been a period of major change; some beneficial and some far from that. Let me look at our human resources, our product, our technology and our regulation and give you my perspective on some of the benefits, challenges and disasters in those areas.
There have been big changes in people strategies. On the plus side we have greater quality and more professionalism in the industry, linked, in part, to greater diversity and better use of human resources but, in reality, driven to a large extent by the growing importance of all areas of transaction banking to their Groups.
On the negative side we have, what appears to me, to be a struggle to codify and fulfil our duty of care to our people and, in turn, our clients, suppliers and communities. Legislation means that there is a greater explicit duty of care, for decent management in the past did care on a more informal basis. But we have to be careful that we do not go for overkill. Individuals also have responsibility for their mental health, their actions and their choices. We must ensure that softer, but real, issues do not overshadow, or impair, industry’s ability to provide support to those with material and long-term physical or psychological challenges.
On the product side, there are new instruments but many look like re-treads of products we have experimented with in the past. In some cases, technology has made them viable, in others they still carry the risks of opaque structures and dubious liquidity. Reporting is made in greater detail, helped by improved access to our information stores as well as technologies that allow us to leverage mass data into coherent action-oriented reports. There are new products in the digital world such as tokens and cyber securities or digital currencies, but many have questionable value. Several tokens are structurally no different from my experience in the 1970s of creating single property companies whose unlisted shares we sold to investors, both private and institutional. Cyber securities are a genuine danger and will need to be regulated as they open the doors to potential fraud and mis-selling by entities without the financial strength or legal structures to protect investors. And I see little positive in Central Bank Digital Currencies other than in countries where they can be used to extend a digital wallet to unbanked populations or in others where the banking system is so weak that direct involvement puts account holders at financial risk.
ESG is a phenomenon, which in a non-digital and less information-rich age, may have been seen, perhaps wrongly, more as a fad. At an extreme definition, though, it may destroy more value than it creates. It is valuable, especially where it aims to enhance corporate governance in listed companies. My concern is that it will destroy values for communities and investors in, as an example, carbon-intensive industries, before alternatives are viable. The definition of ESG is also challenging because there is no definition that can be universal of a matter that is judgemental and political as well as having changing economic impacts from country to country.
On the technology side, I semi-retired in 2006 from an industry struggling with the lack of standardised information bases at a time when data was becoming clearly the key issue of the future. I left a sector with a growing prime services ambition following acquisition strategies in the alternatives field. And, most worryingly, the new model had to align different technologies, cultures, expertise, share of management mind and client relationship models; there was a need to blend the trading room with relationship management and operational excellence.
There remains, in many firms, a battle to extricate themselves from their multiple silo-based, heavy duty, and often incompatible, legacy technologies in each of those traditional silos. That challenge cannot be cured by the standard 2006 solution of modular platforms or bespoke interfaces. Although today’s API’s and interface solutions are much more flexible than those that we had a couple of decades ago, they are merely interim solutions to a fundamental problem and suffer, as well, client side, from the lack of universal standards.
Today, as my old friend ISO20022 continues its fight for universal acceptance, markets still shudder at the challenges of standardisation, not only on APIs but on the key decade-old challenge of finding a hopefully industry-standard DLT with compatible smart contracts to enable it to handle the complexity of the securities services business without duplicating process and record unnecessarily. And, at the same time the industry has to find ways of safe usage of the Cloud and, above all, its never-ending struggle with cyber security. And to that we can add the need for more contingency as the markets continue their multi-decade process of consolidation.
And finally, we have regulation. I started in the City of London in an era where “my word is my bond” but, in reality, that gave freedom across a range of other areas and abuse was common. In the seventies we had a global regulatory revolution, part driven by the change of markets following London’s “Big Bang” and, ever since, we have had ever more regulation ranging from critical principles to micro-management of almost all client and counterparty interactions. And we have conflict of regulation even within countries, with the same issue being managed in different ways dependent on the regulator in charge. We have the politicisation of regulation, using it, as seen in the dispute between the EU and the UK on equivalence, as a commercial cosh even if the result may increase the very risks regulators are supposed to temper.
I have little comfort for many for the future, for we will see continued material change and, thus, the imperative of greater investment, more training and higher operating costs in markets where competition will constrain prices.
There could well be fusions of the financial and technology giants. There could be fragmentation of services with new FinTech companies disintermediating existing players. There could well be disintermediation of major intermediaries with, as an example, new and easy digital connectivity between funds and investors destroying the need for their service. We could see the emergence of personal pension plans and, with the ending of defined benefit plans as well as greater employee mobility, the decline of corporate pension monoliths. The exact vision of the future is perhaps best left by me for the futurists to decide. My contribution is to say that I believe there will be major, and often unplanned or unexpected, change and it may come sooner than many would hope.