1. finance
2. accounting and auditing

FINANCIAL
SERVICES
FACULTY
FS FOCUS
INSPIRING CONFIDENCE IN FINANCIAL SERVICES
The magazine of the Financial Services Faculty
November 2008 £15
RESTORING CONFIDENCE
4 Conversations on how to face the future
Will TCF force
companies abroad?
14
p
Mixing investments
makes sense
18
p
Guidance on
embedded values
19
p
HIGHLIGHTS
4 CONVERSATIONS ON RESTORING CONFIDENCE
06
Everyone knows the old Chinese curse: “May you live in interesting times.” Who, we wonder,
dreamt up the curse: “May you live in 2008 – and work in the financial services sector”? In
this most challenging of years, and in the years ahead, the financial services profession will at
least have an opportunity to look closely at the causes of our current woes and to devise ways
to ensure they are eased, and never arise subsequently. A massive task, admittedly, and one of
enormous complexity given the breadth, scale and importance of financial services in
contemporary life. But we have no choice but to undertake it.
The faculty’s 4 Conversations conference in October was a bold attempt to shape the debate
in key areas, the aim being to uncover ways in which we might restore and inspire
confidence in what we do.
12 RISK & REGULATION
The continuing liquidity crisis has produced a
veritable flurry of liquidity risk publications in
recent months. These papers from regulatory
and industry bodies provide high level
standards and good practice guidance but as
always, the devil is in the detail. Last month
FSFocus carried a review of the Basel
Committee on Banking Supervision report to
the Basel committee. This month we look at
the other two key reports published in
summer 2008 by the Institute of International
Finance (IIF) and the Committee of European
Banking Supervisors (CEBS).
18 FINANCIAL PLANNING
Investment advisers have long been
advocates of the old adage that you
shouldn't put all your eggs in one basket,
but the wisdom of building a diversified
portfolio has become ever more apparent as
the financial crisis has become an economic
one and stock markets have fluctuated
wildly. No doubt many individuals are wary
of any kind of investment at the moment,
but with confidence in deposit-taking
institutions also shaken, they may appreciate
solid advice that focuses as much on
defensive capability as investment potential.
11 SPECIAL REPORT
In a highly significant move for both parties,
PricewaterhouseCoopers has become the first corporate member
of the financial services faculty. The firm believes this move will
help strengthen its competitive position, allowing it to make
important contributions to faculty debates. It is also keen for
individual PwC staff members to participate in the life of the
faculty and to develop their own standing within the financial
services market. PwC's enthusiasm for the faculty is stimulated by
its ability to draw together prominent figures from the profession,
from product providers and banks, from the advice sector and
from regulators and standard-setters. It provides a unique forum
for mature reflection on the issues of the day, making corporate
membership such an attractive proposition.
23 MARKET MOVES
19 AUDIT & REPORTING
Fair values are being criticised from a number of different quarters and even being blamed
for exacerbating the effects of the financial crisis. Against this backcloth, life insurers have
agreed on a new financial reporting framework that embraces market-consistent embedded
values (MCEV). MCEV reports do not replace the IFRS financial statements of the companies,
but are published as supplementary financial information, complete with their own review
report from an audit or actuarial firm. They are used to help shareholders and analysts
analyse the performance of the company in the period under review.
FINANCIAL SERVICES FACULTY
Latest appointments and promotions from across the
financial services arena, including the insurance, asset
management, building society, advice and planning and
professional practice sectors.
CCH EDITORIAL
Iain Coke
Head of the faculty
Katy Holman
Services executive
John Gaskell
Manager, Financial Planning
Nicola Cross
Business administration executive
Claire Stone
Manager, Audit & Reporting
For enquiries contact Katy Holman at
Katy.holman@icaew.co.uk
020 7920 8417
Michelle Logan
Manager, Risk & Regulation
02 FS FOCUS November 2008
Kevin Pratt
editor
scripsis@aol.com
Nicholas Goldman
commissioning editor
NicholasGoldman@compuserve.com
David Wright
account manager
david.wright@cch.co.uk
CONTENTS
LETTER FROM THE FACULTY
UPDATE
The latest information from your Faculty, including details of
events and the latest news from the Financial Reporting Council
04/05
LEAD ARTICLE
4 Conversations on how to face the future
Kevin Pratt
06
SPECIAL FEATURE
Going boldly
Chris Jones
11
RISK & REGULATION
New thinking on managing liquidity risk
Ian Clark, Richard Barfield and Katie Brannigan
12
Preparing for the FSA's December deadline
Simon Godsave
14
FINANCIAL PLANNING
Shaping investment strategy to match risk profiles
David Dunn
16
Diversification in investment portfolios
Michael Wood
18
AUDIT & REPORTING
Getting to grips with MCEV
Brett Davidson
19
VIEWPOINT
A new president for a new era?
Tom Elliott
22
MARKET MOVES
Key personnel changes at leading financial services
companies and organisations
23
All rights reserved. No part of this work covered by copyright may be reproduced or copied
in any form or by any means (including graphic, electronic or mechanical, photocopying,
recording, taping or information retrieval systems) without written permission of the
copyright holder. The views expressed herein are not necessarily shared by the Council of
the Institute or by the faculty. Articles are published without responsibility on the part of the
publishers or authors for loss occasioned by any person acting or refraining from acting as a
result of any view expressed therein.
It seems that the crisis in financial markets has now turned into the
recession in the so-called ‘real economy’. We see new measures of the
scale of the crisis emerging. Eighteen months ago, few people knew
what a ‘CDS spread’ was. Now CDS spreads are being used as one of
the main measures of market confidence in businesses, while lenders’
interest rate spreads are given increasing focus at a consumer level. A
further new measure is the ‘John Lewis index’. This shows how
consumer confidence is translated to weekly sales of sofas or clothing
at the major high street department store chain
There has been much talk of ‘Wall Street vs
Main Street’, or of ‘the financial economy vs
the real economy’. These comparisons are
not helpful. The financial sector is part of the
real economy. The financial sector is
intertwined with the rest of the economy
and provides important functions to society,
like providing credit, risk management and a
safe place to deposit money.
Conversations. The Right Honourable John
McFall MP, Chairman of the House of
Commons Treasury Select Committee and
member of the Faculty’s Advisory Group,
gave the keynote address after our closing
dinner. During his address, Mr McFall
extended an invitation to the ICAEW speak
to his Committee in the latest enquiry into
the financial crisis.
Our lead article this month (page 6) reports
on the Faculty’s October conference: 4
Conversations – Restoring Confidence. One
of the major themes of the morning session
was the need for the financial services
industry to re-engage with its customers.
Furthermore, in the recent past, when the
industry has talked about its importance to
the economy, it has tended to focus on the
financial contribution and numbers of jobs
the sector provides. Perhaps there is a need
to also talk about why we actually have (and
need) banking, investment banking,
insurance, investment management and
financial advisers.
Michael Izza, CEO of the ICAEW, has agreed
to appear on 11 November, alongside IASB
chairman Sir David Tweedie, and Paul Boyle,
CEO of the Financial Reporting Council.
They will be providing evidence on the
purpose of accounts, role of fair value
accounting in the current crisis and
governance of the IASB. The Faculty has
been contributing to the ICAEW’s written
submission and briefings for Michael in
advance of this important enquiry.
Iain Coke
Head of Financial Services Faculty
Fair-value accounting has been increasingly
accused of exacerbating the problems. There
have been serious suggestions that
suspending its use might solve the problems.
In his address to 4 Conversations, Rene Ricol,
author of a recent report to President
Sarkozy on the financial crisis, reported that
35 minutes of a recent crisis meeting of
heads of state were devoted to discussing
fair value. That is extraordinary, but shows
how seriously the issues are being debated.
In our view, suspending fair value will not
help. Although fair value has its weaknesses
and we do not call for an extension to its
use, there is no better alternative for trading
assets and derivatives.
There was a sting in the tail to 4
FS FOCUS November 2008
03
UPDATE
FACULTY NEWS
FACULTY EVENTS
New eBooks
To reserve your places at the following event, please email
katy.holman@icaew.com or visit www.icaew.com/fsf for
more information.
Institute members and students have access to 200 eBooks free of
charge via the Institute website at www.icaew.com/ebooks. The
eBooks cover business and technical topics as well as career and
personal development.
20 new eBooks have just been added to the website including:
● Introduction to derivative financial instruments: options, futures,
forwards, swaps, and hedging
● IFRS: practical implementation guide and workbook
● How the City really works: the definitive guide to money and
investing in London’s square mile
● Managing business risk: a practical guide to protecting
your business
Tax risk management - new tax planning international report
Includes articles on ‘Managing tax risks and non-tax risks for hedge
funds’, ‘HMRC tax risk assessment for UK business’ and ‘Minority
interests - risk management and UK tax planning and the tax adviser’
For more information, please contact the Library & Information
Service on +44(0)20 7920 8620 or librrary@icaew.com.
Financial Reporting Faculty Update:
The ICAEW's new Financial Reporting Faculty is almost ready to open
its doors to members. Membership will give you exclusive access to:
● The faculty website and our unique online community - a peerto-peer platform encouraging the sharing of news,
uncertainties, concerns, and possible solutions,
● Faculty factsheets - practical assistance on UK GAAP and IFRS
written by experts in the field,
● All of the most up-to-date material issued by the IASB - the full
IASB “eIFRS” subscription service.
● The 'Standards tracker' - an online facility for checking current
standards and recent amendments,
● Discounts on ASB standards and other financial reporting
publications and UK courses,
● Specialised training and CPD services, including e-learning and
online resources.
For information about how to become a member of the faculty
call: +44 (0) 20 7920 3511 and speak to one of our team. You can
also e-mail: frf@icaew.com and visit: www.icaew.com/frf
Faculty Responses
TREATING CUSTOMERS FAIRLY REGIONAL ROADSHOW
The Financial Services Faculty is bringing its Treating Customers
Fairly breakfast seminar series to the regions with the support of
Grant Thornton.
8th November
London
26th November
Leeds
The seminar will debate the main concerns that have emerged in
recent months in response to the TCF initiative. During the
question and answer sessions, attendees will be able to challenge
the panel and give their views on the issues facing financial
services firms in the current market
REPORTING ON THE CREDIT CRUNCH 3: APPLYING FAIR VALUE
Date: Friday 21st November
Venue: Chartered Accountants’ Hall, London
Time: 8.30 Registration/8.30 start – 10.30am
The Faculty team is pleased to introduce the third in our series
of events aimed at helping financial organisations respond to
the credit crunch.
Speakers include:
● Sue Harding, European Chief Accountant, Standard and Poor’s
● Richard Thorpe, Auditing and Accounting Sector leader and
Head of Adequacy Policy, FSA
● Michael McKersie, Assistant Director Capital Markets,
Association of British Insurers
● Chris Taylor, Partner PwC
The event will be chaired by Guy Bainbridge, partner at KPMG. In
addition, we have invited an FD from the 100 Group and an audit
partner with particular experience of going concern audit to join us.
THE FUTURE OF FINANCIAL REPORTING FOR INSURERS
Date: Thursday 4 December
Venue: Chartered Accountants’ Hall, London
Time: 8.30 Registration/ 9.00 start – 10.00am
Listen to the views of the IASB, the US and UK industry and join us
for a debate on the future of financial reporting for insurers.
Having received comments on its proposals for accounting for
insurance contracts, the IASB plans to develop an Exposure Draft
of a new standard during 2009.
The Financial Services Faculty has responded to ICAEW Rep 123-08,
Association of Investment Companies Exposure Draft SORP Financial
Statements of Investment Trust Companies and Venture Capital Trusts
James Dean, Global IFRS leader for Ernst and Young’s Insurance
Practice, will chair the debate.
Please email katy.holman@icaew.com if you would like copies
of any of these documents.
We will be joined by:
● Jan Engström, Board member, IASB
● Hitesh Patel, Finance Director, Lucida plc
04 FS FOCUS November 2008
UPDATE
IASB PUBLISHES GUIDANCE ON FAIR VALUE MEASUREMENT IN INACTIVE MARKETS
The International Accounting Standards Board
(IASB) has published guidance on the application of
fair value measurement when markets become
inactive. The guidance takes the form of a
summary document and the report of an advisory
panel. The summary sets out the context of the
panel report and highlights issues associated with
measuring the fair value of financial instruments
when markets become inactive. It takes into
consideration and is consistent with documents
issued by the US Financial Accounting Standards
Board (FASB) on 10 October 2008 and by the
Office of the Chief Accountant of the US Securities
and Exchange Commission (SEC) and FASB staff on
30 September 2008.
The report of the panel is a summary of the
meetings of experts who are users, preparers and
auditors of financial statements, as well as regulators
and others. The panel identifies practices that
experts use for measuring the fair value of financial
instruments when markets become inactive and
practices for fair value disclosures in such situations.
The report provides information and guidance
about the processes used and judgments made
when measuring and disclosing fair value.
The IASB has also used the work of the panel to
address issues of disclosure, an area identified by
the Financial Stability Forum (FSF) along with fair
FRC'S BOYLE REPORTS ON LESSONS OF CREDIT CRISIS
Paul Boyle, chief executive of the Financial
Reporting Council, used a recent Mansion House
speech to note that the current financial difficulties
have raised questions about the use of governance
and financial reporting standards rather than the
standards themselves. He argued that the
standards set out in the Combined Code on
Corporate Governance, for which the FRC is
responsible, remain comprehensive and
appropriately principles-based.
Boyle said: “The Code states that the role of a
company’s board is ‘to provide entrepreneurial
leadership of the company within a framework of
prudent and effective controls which enables risk to
be assessed and managed.’ We expect that
directors of banks and other financial institutions are
already reviewing their governance and risk
management practices. We, therefore, believe that
recent difficulties in the financial sector do not
require a generalised tightening of governance
standards across the corporate sector. The focus
should be on whether the existing standards have
been observed in practice.”
He insisted that accounting had held up well under
extreme stress: “There have been criticisms and
those will have to be carefully considered, but the
number of criticisms that the accounts of financial
institutions have understated the losses arising from
the credit market problems is closely matched by the
number of criticisms that they have overstated the
losses.”
He also acknowledged questions about whether
accounting techniques kept up with innovation:
“There has been of great deal of heat generated by
the debate on the appropriateness of fair value
accounting. Notwithstanding the recent efforts of
the IASB and FASB, questions remain about
differences between various IFRS and US GAAP
requirements relating to fair value accounting.
“There is a wide range of views about the merits of
different accounting methods, and judgments have
to be made as to which methods best meet the
needs of the constituencies that have to apply
them, audit them and make decisions based on
them. The FRC believes the most appropriate
standards will be developed if standard-setters are
able to exercise independent judgment, relying on
skills and experience. We support the IASB in its role
as the setter of accounting standards to be used in
this international financial centre and we welcome
its recent announcements that it will continue to
seek globally acceptable solutions to the accounting
challenges of the day.”
On the performance of auditors, Boyle said it
was important not to judge auditors against
objectives which it is not their role to pursue:
“Suggestions, for example, that auditors should
have intervened to encourage their financial
services clients to constrain the rate of
innovation and expansion of their businesses
seem to be based on a fundamental
misunderstanding of the relative roles of auditing
on the one hand and, on the other, corporate
governance and financial services supervision.
That said, the work of auditors is coming under
much greater scrutiny and, in our role as
independent regulators, we are requiring
auditors to demonstrate to a much greater
extent that their judgments are defensible.”
value measurement and off balance sheet
accounting.
The feedback from the panel was incorporated in the
preparation of the exposure draft proposing
improvements to IFRS 7 Financial Instruments:
Disclosures, published on 15 October 2008, and will be
used in the development of the forthcoming standard
on fair value measurement. The IASB expects to
publish an exposure draft of that standard in 2009.
The guidance can be downloaded from
www.iasb.org/expert-advisory-panel. A summary of
the IASB response to the credit crisis is available via
www.iasb.org/credit+crisis
FRC AIRS AUDIT QUALITY
FRAMEWORK FEEDBACK
The FRC has published feedback on the Audit
Quality Framework, which was published in
February 2008. The FRC intends the Framework
to assist:
● companies in evaluating audit proposals;
● audit committees in undertaking annual
assessments of the effectiveness of
external audits;
● all stakeholders in evaluating the policies
and actions taken by audit firms to ensure
that high quality audits are performed,
whether in the UK or overseas; and
● regulators when undertaking and
reporting on their monitoring of the audit
profession.
Recognising that audit quality is a dynamic
concept and that the drivers and indicators of
audit quality may change over time, the FRC
stated that it will periodically update the
Framework in light of comments received.
There were 11 responses. Ten of the respondents
welcomed the FRC’s efforts in facilitating
communication between auditors, audit
committees, investors and shareholders and gave
general support. Three said it was too soon to
comment on the practical application of the
Framework. These respondents, however, shared
the view of others that the Framework should be
re-visited to ensure its relevancy and workability.
The ICAEW's credit crunch support pages can
be found in the business topics section at
www.icaew.com
m
FS FOCUS November 2008
05
RESTORING CONFIDENCE
Kevin Pratt reports from the 4 Conversations event,
held at Chartered Accountants’ Hall in October
LEAD ARTICLE
When the financial services faculty was
established at the beginning of 2007 it was
with the express purpose of inspiring
confidence in the sector. Even then it was a
major undertaking. Now, towards the end of
2008, given the crisis, upheaval and
continuing uncertainty across all financial
markets, restoring confidence has become a
monumental ambition. It has also become
an ever more important and urgent task.
Society needs a functioning and effective
financial services market, and the market can
only work if those who use it have
confidence in its efficiency and integrity.
The faculty conceived the 4 Conversations
gathering many months ago, long before
the depth and breadth of the credit and
liquidity crisis became fully apparent. Events
no-one could have predicted have since
occurred on what seems like a daily basis.
Solid reference points have melted away.
CONVERSATION 1
Providers: are they trusted enough?
Chairman: Jonathan Bloomer, Partner,
Cerberus European Capital Advisors
Dick Parkhouse of Co-operative Financial
Services focused on the importance of
ethical culture in financial services, pointing
out that his institution is an industrial and
provident society, which means it works on
democratic principles and in the interests of
its members: “It is built on an ethos of
mutual self-help and cooperation. If you
juxtapose that to the competitive economic
climate that banks operate in, where you try
and beat the hell out of each other, you
have to think that there might be a better
way of doing things.”
He also stressed the importance of customer
satisfaction: “It is very important to us. We
do not just talk about it; it really is an area of
investment.” He suggested that a stronger
ethical standpoint might enable banks to
win back consumer confidence.
Lord David Lipsey, chairman of the Financial
Services Consumer Panel, said he does not
Assumptions have been destroyed. Sources
of comfort and refuge have been obliterated.
Little wonder levels of anticipation were so
high for the Conference held at Chartered
Accountants’ Hall on 15 October. The event
even merited mention on BBC radio earlier
in the morning.
Michael Izza, chief executive of the Institute of
Chartered Accountants, welcomed guests by
reiterating the astonishing change in context
in which the event was taking place: “I do not
think any of us could have envisaged the
extent to which the current global crisis was
going to develop when we planned this event
earlier this year. What is clear, without stating
the obvious, is that we are operating in very
challenging times. It has become a daily
occurrence to hear of the demise or part
nationalisation of established financial
institutions. Investor and consumer confidence
has been significantly undermined.
believe there is a complete war between the
financial services industry and consumers,
but that it is important to have “a small, still
voice saying: ‘Have you given adequate
weight to the voice of consumers?’” He said
past surveys showed a lack of confidence
among consumers, and that this will now
have deteriorated further: “Unless we come
through this episode with consumers
retaining confidence, there will not be a
financial services sector, certainly not on the
scale that we have seen before.”
One way to boost confidence, said Lord
Lipsey, would be “to intensify efforts to
provide products that consumers want,
ethically sold; to treat customers fairly, in the
jargon of the FSA; and ultimately confidence
will depend on that. Once confidence is lost,
it takes a hell of a time to get back.”
Eric Anstee, a former chief executive of
the ICAEW and now a non-executive director
of various financial institutions pointed out
that financial institutions have traditionally
relied on their heritage and past
achievements to engender trust, but that
recent events have deprived them of this
resource: “In the past that product has
always been sold on historic promotion.
“One of the most important factors
in helping restore confidence and stability in
these troubled times is clear public action by
policy-makers, including strong political
leadership, as well as swift action, where
necessary, to stem contagion in the financial
markets. However, there is also a pressing
need to restore and maintain confidence in
the longer term, and our focus is on those
longer-term issues.”
The four themes of the event were:
responsible consumers; responsible
providers; better information; and better
regulation. Mr Izza said that they must be
considered together in the quest to restore
confidence: “All parties must recognise their
individual and shared responsibilities in the
financial system, whether policy-makers,
product-providers, consumers, regulators or
providers of financial and non-financial
information.”
If you look at any product you can see
how it has performed. The question now is
how trust will be rebuilt for the future
because the past is going to be no
reflection of what could happen to those
products in the future. This should ensure
that providers start to look for much more
transparency in terms of the way they sell
product. You will start to see a lot more
simplicity come back into products and,
therefore, we hopefully will not get the
same issues around mis-selling.” But Mr
Anstee stressed that the market should not
become over-cautious: “While rebuilding
trust providers must continue to look for
product innovation. Providers still need
to look at product innovation and do it in
such a way that it is simple and transparent
for the consumer.
Steve Round, chairman of the
Big Issue Foundation, said care should be
taken not to rush into knee-jerk reactions to
the current crisis: “We have to engage with
consumers, bankers and legislators and
regulators, but we should not come in with
some ill-judged legislation. We have to work
together because if bad regulation and
FS FOCUS November 2008
➞
07
LEAD ARTICLE
legislation comes in it will not generally help
the consumer.”
He said one solution might be to increase
financial literacy through work in schools and
also in adult society wherever a need was
CONVERSATION 2
Consumers: should they know better?
Chairman: John Tiner, former chief
executive, Financial Services Authority
The theme of consumer understanding was
explored in depth in Conversation 2. John
Tiner opened the debate by saying the
people working in the industry must look to
their own levels of understanding: “It is all
very well to talk about consumer education,
but perhaps the people who work in the
industry simply do not know about their
products, about finance, about customer
care and the like.”
Mike Hanson, chief executive of the Vernon
Building Society, said a relatively small
organisation such as his is obliged to take its
customers needs into account: “In a local
society and small organisation you are very
close to the front line, both in terms of what
your customers are doing, but also to the
consequences of your own actions – this is
what I call the ‘fear factor’. Human fear is a
very strong driving influence. How we
behave and how much responsibility we take
is directly linked to that. Exposure to fear is
sometimes healthy.”
He also called for a sense of perspective in
discussions about mortgages: “Although we
constantly refer to mortgage lending being
the problem, I feel it is unsecured credit lines
that are causing the issue. On average in the
lending industry the amount of the total
mortgage book in arrears by more than
three months is 1.5%. That means 98.5% of
the mortgage lending in the UK is not in
arrears. Do we have a sub-prime crisis? I am
not trivialising it because for the people at
that sharp end it is painful and it is getting
worse, and bills are forcing people into
08 FS FOCUS November 2008
identified. Jonathan Bloomer concurred:
“The Government target is that by about
age 16 children can recognise different
bank notes and different coins. That is
so pathetic, it does not bear contemplation.
If, by the time children are leaving school
at 16 or 17, going out into the workplace,
they cannot understand current accounts,
credit cards, loans and mortgages, we have
got a problem. It will be a generation before
we start to get that through to our
customers.”
arrears. However, I still think the major
problem is unsecured lending on a credit
card and the ease with which that is done.”
recipient the competence to make financial
decisions. Information without knowledge is
simply data, as is knowledge without
understanding. So no matter how detailed
the information available, this position will
not improve unless it is matched by a
concerted effort to develop consumer
education in schools, in the workplace,
and also in retirement. There is no doubt
that we have to deal with it from the cradle
to the grave.”
Mr Hanson also reminded the audience that
Government largesse regarding guarantees
for deposits will in fact be funded by the
remaining solvent institutions.
Chris Pond, director of financial capability at
the FSA, said the regulator has a statutory
responsibility to promote financial capability
– and that it is a huge task: “We have a
situation where people do not have a basic
understanding of financial products. On the
whole the British population is not bad at
budgeting and making ends meet on a
weekly or monthly basis, but it is absolutely
hopeless at planning ahead and thinking to
the future, which is why we have such a
challenge particularly in the pensions field
and retirement planning.”
He outlined a range of FSA educations
initiatives designed to reach 10 million
people over five years. He said this work is
funded by the industry but that the
investment will be worthwhile: “If you want
to improve people’s confidence in financial
services, then you have to give them a better
understanding of those services. If they do
not understand a product they are going to
run a mile before going anywhere near it;
and therefore if you want to build a
sustainable customer base, it is sensible that
people fully understand what is on offer.”
Paul Willans, chief executive of Mazars
Financial Planning, asked whether, given
the amount of available information,
consumers should be better informed and
more empowered to take control of their
own financial futures: “Unfortunately, this is
far from reality, as access to information is
not quite the same as understanding it, and
understanding does not necessarily give the
He also argued that advisers must recognise
their own responsibilities: “We need to
ensure that those who offer their services as
financial guides are honest in both their
motives and their actions, and that they are
totally devoid of any conflict of interest when
engaging with their clients or customers.
Furthermore, those who provide information
must do so with integrity and objectivity.
Recent events have illustrated only too
painfully that reward does not come without
risk, and people need to be informed of the
risks they are taking, and whether those
rewards are attainable or not.”
John Husband, personal finance editor at the
Daily Mirror, agreed that adult financial
literacy in this country is poor: “I have
been in the business for 42 years, and one of
the first articles I wrote for a national
newspaper was how to access information
and learn and understand money. Forty
years later there has been only very
slow progress. I meet graduates all the time
who do not understand how to use
percentages, and the public generally still
struggle with them. When it comes to
getting financial products such as
mortgages, people do not really understand
how they work. Until we get a situation
where people have the financial literacy to
understand what they are buying, we are
going to be in dead trouble.”
LEAD ARTICLE
CONVERSATION 3
Information: does it clarify or confuse?
Chairman: Christopher Allsopp CBE, director,
Oxford Institute for Energy Studies
The chairman began by exploring the notion
that consumers need more information: “I
have been struck by the idea that everybody
should know an awful lot more about finance
in order to live their lives properly. I think one
of the luxuries that people have is not having
to know too much about finance, so that
they can get on with their lives. But that
raises the whole aspect of trust. Can one
afford not to know about these things?
“One of the things which has happened,
and which will reverberate through financial
services, is that now everybody wants to
know about business models, about exactly
how these products are structured. It is not
very long ago when, if you got a mortgage
or a life insurance policy, you just trusted the
system to protect you. We are losing that,
and the big question is how to get it back.”
Mr Allsopp also argued that the situation
would not be resolved simply through the
provision of more information: “My simple
example is this: there was a time when the
Federal Reserve in the States used to publish
weekly money supply figures. There was no
doubt that it just served simply to confuse
everybody, and they took a sensible decision
not to collect the data any more, and the
world is better off for it.”
Chris Jones, UK head of financial services at
PwC, outlined the type of information
CONVERSATION 4
Regulation: solution or problem?
Chairman: Mark Rhys, chairman, Financial
Services Faculty and partner, Deloitte
Bob Wigley, senior vice president and
chairman, EMEA, at Merrill Lynch, said
regulation had failed to prevent the
development systemic risk on this occasion.
But he was hopeful that better regulation
needed by banks in the current crisis: “For
the system to function you need more than
just historical information. But I am not sure
it is about having a lot of forward looking
information, because what is inhibiting the
banking sector at the moment is actually the
lack of real-time information. Bankers have
been looking for information to help their
day to day operations.”
Trevor Matthews, chief executive of Friends
Provident, said that responses to previous
crises had not solved fundamental problems:
“The information that is produced is
bewildering. We have had mis-selling
problems in different territories from time to
time. The inevitable reaction from the
regulators has been more regulation of the
sales process and of the product literature. If
you step back and say, ‘Did that work?’ you
cannot really say ‘Yes’. There is a variable
annuity in the United States that has a
disclosure document that is 500 pages long.
Even a sophisticated individual investor
would be at a loss to make use of that
information.” He said the FSA’s Retail
Distribution Review has the potential to
improve matters: “Disclosure is one thing,
but we need to increase the professionalism
and standards at the point of sale.”
Barbara Ridpath, head of the newlyestablished International Centre for Financial
Regulation, said the financial services sector
as a whole needs to improve the way it faces
the outside world: “One of the issues is that
we tend to talk to each other in narrow deep
silos. We can talk about accounting till the
cows come home, but can you talk about it
in a way that the guy outside can
will result from this crisis: “The global nature
of the credit and liquidity and solvency
issues in the banking industry have caused
central banks, national treasuries and
regulators to reassess their respective roles
in, and the need for more proactivity
around, maintaining financial stability.
“The interaction of legislation, accounting
rules and regulations covering markets,
products, investors and participants clearly
did not prevent the creation of off-balance
understand it? How many people who are
not chartered accountants can understand
what you do? In the same way that people
who are not lawyers cannot understand
what lawyers do, how many people who are
not bankers can understand what bankers
do in an increasingly complex world?
“We need to do a lot more talking to each
other across those silos in a language that is
simple enough for us can understand each
other, because the problem with information
is that we are all practitioners at an expert
level, talking to each other about what is
genuine esoterica for the guy in the street.”
If we overload with information, she said, we
will have obfuscation, not clarification.
Blaise Ganguin of Standard & Poor’s, the
rating agency, said care must be exercised
when using any type of information. He
argued that, with much-maligned credit
ratings, it is essential to remember what
purpose the ratings are designed to serve:
“The problem is whether people understand
what credit ratings are. They speak simply of
the willingness and capacity of an entity or
an insurer to pay their financial obligations in
a timely fashion. Ultimately, it looks like they
generally work well. High ratings tend to
default less than lower ratings – you would
expect so much. But also actually ratings
also show a tremendous amount of stability.
For example, the higher the ratings, the
more stable they tend to be over the years.
Does that mean that it is the ultimate truth?
No, it is not. It is an opinion. Ratings are not
there to prevent a default; they are simply an
opinion on creditworthiness.”
sheet vehicles that arbitraged the system,
did not prevent weaknesses in disclosure or
misunderstandings about the meaning of
the ratings of structured products versus, for
example, corporate ratings. Geographic
variances in accounting treatment permitted
different institutions to deal differently with
the same stresses, when arguably a more
consistent global approach would have
been preferable.
FS FOCUS November 2008
➞
09
LEAD ARTICLE
“International co-operation was clearly
inadequate and that has been increasingly
addressed in resolving the crisis, but in the
longer term there need to be more enduring
solutions to that problem, either by
embedding colleges of supervisors or
ultimately, I suspect, the creation of new
institutions, or merging existing institutions.
Overall, the current crisis is an opportunity to
learn from all these issues and, to some
extent, reinvent regulation on a more
consistent basis globally, with a view to
creating some of the critical things that
should underlie the system, such as
transparency, robustness and ultimately
financial stability.
Arnoud Vossen, secretary general of CEBS,
said his work was focussed on transparency:
“In our opinion, when you look at the
quantitative disclosures, about 80% of banks
in our sample have adequate disclosures. The
quality of disclosures depends on the
business model and on the valuation
techniques used and the disclosure of
valuation techniques. We see there is still
quite some room for improvement here. The
next stage will be to assess the end of year
figures. Then, in a year's time, we hope that
we will have seen adequate disclosures.”
Janet Williamson of the Trades Union
Congress said that the UK's six million trade
union members are very much in the
frontline of the current financial crisis: “We
have a lot of members in the finance sector
who are feeling very insecure, and some of
whom are facing the loss of their jobs. We
also have members right across the
economy, all of whom are going to be
feeling, in some way or other, the effect of
the financial turmoil. So we have a very
strong interest in trying to learn the lessons
that we can from the situation that we are
in, and to get things right for the future.
“There is a real issue about there being
sufficient regulation in place to ensure that
people who are vulnerable, in terms of
facing the loss of their homes and so on, are
being preyed upon by loan sharks and
unscrupulous financial practitioners. It is not
at all clear that we have sufficient financial
assistance programmes in place, nor that
10 FS FOCUS November 2008
that loan sector is sufficiently regulated. The
whole area needs to be looked at as a matter
of urgency, so that the people who are
facing the brunt of this crisis, through no
fault of their own, are given some protection
and that the price they pay is, as best it can
be, limited.”
Ms Williamson said the distance between the
financial services sector and its customers
had become too wide: “Financial activity has
become too far removed from its essential
purpose, which is basically channelling
investments into the real economy,
channelling money from investors to real
companies and real people who need that
money. There has been over complexity and
over leverage which now has come tumbling
down, and I think there is a degree of
sorting out of the sector that needs to take
place.”
Paul Boyle, chief executive of the Financial
Reporting Council, outlined the problem
faced by any regulator: “You are accused
always, no matter where we are in the
business cycle, of being out of phase in the
regulatory cycle. So when things are going
well, when business is booming, when
people are making a lot of money, the cry
goes up that the regulators are getting in the
way - there is too much regulation, and we
are interfering with the proper functioning of
innovative entrepreneurs. As soon as
something goes wrong, people say you were
asleep at the wheel and not doing your job
properly.”
He argued that care must be taken not to
over-regulate in response to the current
crisis: “One of the things that we must
watch for, as we come out of this cycle, is
that we do not end up amplifying the
regulatory cycle in the way that the business
cycle seems to have been amplified in recent
years. There will be a need for some
changes, but we must not overdo those
changes because, to some extent, business
cycles are self correcting.”
Mr Boyle said it is vital for regulators to
retain their independence: “We need to
balance independence and involvement. We
absolutely need to be involved with the
industries that we regulate, because if we do
not understand what is going on then we
have no chance of doing our jobs properly.
But we also need to preserve our
independence, because if we get too
involved and too close with the industry,
then you will have regulatory capture, and
we will not be able to do our jobs properly.”
John Tattersall, a partner at PwC and
chairman of the faculty's risk and regulation
committee, said regulation was a prerequisite of inspiring confidence in the
financial services industry: “I believe
fundamentally in principles based supervision
and in risk-focus regulation, but if you are
going to go down that route, it has to be
backed up by very effective supervision. I
distinguish supervision from regulation.
Regulation is about the making of
regulations, which are then followed to a
greater or lesser degree, partially depending
on the enforcement. Supervision is about
engagement with firms. The real failure over
the recent months and maybe years has
been a failure on the part of financial services
supervisors to provide an effective challenge
to business models, and indeed, to some
extent, to governance models and to the
culture in some financial services firms.”
Kevin Pratt is editor of FSFocus
SPECIAL FEATURE
GOING BOLDLY…
PWC BECOMES FIRST FULL CORPORATE MEMBER OF THE FACULTY
Kevin Pratt asks Chris Jones why his firm has thrown its weight behind the faculty
“Financial services is a priority industry for
UK plc and the health of the profession is
intertwined with the health of the clients
we serve,” he says. “It’s only natural that
we should wish to contribute our
knowledge and experience to thoughtleadership activity that will strengthen the
sector as a whole.
“There are many issues that need our
urgent attention, but all of them lead to a
common question: how do we restore and
inspire confidence in financial services? To
find the answer we need to engage in
debate and get the issues into the open.”
As the ICAEW’s financial services faculty
Jones: leadership
brings responsibilities notches up its first two years of existence,
it has received a powerful boost with the
recruitment of PwC as its first corporate
member. The move means the firm’s
partners and staff can now enjoy the
benefits of membership and gain access to
the faculty’s services.
Driving force behind the move at PwC is
Chris Jones, UK head of financial services:
“These are pivotal times for our sector,
and it is essential that organisations get
involved in the forums that help shape
opinion,” he says. “We have seen some
seismic changes in recent months, and
more may lie ahead. This is the time to
stand up and be counted.
“As a firm we aspire to be the clear market
leader, and that brings with it certain
responsibilities,” he adds. “If you want to
be the leader, you have to be prepared to
be the first. We’re the first corporate
member of the faculty, and we expect
others to follow.”
Jones is convinced the market as a whole
benefits from the faculty’s activity:
The beauty of the forum, he argues, is its
ability to bring together a range of people
representing all stakeholders: “An event
such as the 4 Conversations conference in
October brought together professional
firms, banks, insurers, credit rating
agencies, regulators, standard-setters,
financial advisers, consumer groups
and the trades union movement.
That’s a broad parish, and you’ll rarely get
such a rich mixture under one roof,” says
Jones. “You need a body such as the
faculty to provide neutral ground where
debate can flourish.”
“There is fierce competition between the
Big 4 firms and between all firms, and that
is how it should be. But there are
important issues that are common to all of
us – fair value accounting is a case in
point. Developing a consensus is desirable
for the market as a whole.”
Jones is also enthusiastic about the
potential of faculty membership to benefit
PwC staff: “One of the characteristics of
the firm is that we want staff and partners
to achieve personal recognition in the
market. It’s about the development of
individuals, not just the development of
the practice. As effective members of the
faculty, staff will enhance their CPD activity
and boost their professional development.
They’ll improve their understanding of the
wider market context, which in turn will
reflect in the quality of their performance.
It’s a win-win situation.”
PwC’s financial services operation boasts some
2,500 staff and 175 partners – and morale is
important: “We want our people to have a
sense of pride in working for the firm,” says
Jones. “Part of that pride comes from seeing
PwC taking a prominent role on the major
stages. And if individuals are aware that they
can also get involved, all the better.”
But doesn’t entering into debate on such a
public platform mean PwC is at risk of
giving away its State secrets?
“We’re not afraid to have a point of view,”
says Jones. “It’s what clients expect. There
are areas of commercial sensitivity, but
there are many others where we are
happy to put our heads above the
parapet. If we want to influence
developments, we have to participate fully
and honestly.
Kevin Pratt is editor of FSFocus
“We’re also living in an organic, fastmoving market where opinions and
attitudes are constantly being formed and
refined,” he says. “We don’t want to
retreat behind our castle walls and pull up
the drawbridge. We want to be out there
listening to others and giving our twopenneth-worth at the same time. It’s a
two-way process.
FS FOCUS November 2008 11
RISK & REGULATION
TIDES OF CHANGE?
NEW THINKING ON MANAGING LIQUIDITY RISK
Ian Clark, Richard Barfield and Katie Brannigan assess recently-published liquidity risk guidance
Commission on Liquidity Risk
Management, September 2008 – was
written in response to a formal Request
for Advice to provide the European
Commission with a clear understanding
of banking supervision of liquidity risk in
the EU, and shortcomings identified by
CEBS that would require a common
approach by national supervisors.
CEBS makes two important observations
in relation to the current regulations
and good practice:
One consequence of the continuing
liquidity crisis has been a flurry of
liquidity risk publications over the
summer. These papers from regulatory
and industry bodies provide high level
standards and good practice guidance
but as always, the devil is in the detail.
Following our review of the Basel
Committee on Banking Supervision
report to the Basel committee in the
October edition of FSFocus, we look
here at the other two key reports
published in summer 2008 by the
Institute of International Finance (IIF)
and the Committee of European
Banking Supervisors (CEBS).
There has been close coordination
between the authors of all three reports,
as well as with other bodies such as
Basel Committee on Banking
Supervision, the European Banking
Federation, and rating agencies. CEBS
and the IIF have slightly differing
objectives, and this is reflected in the
content of the reports.
Recommendations, July 2008 – is based
on an earlier (March 2007) IIF report,
Principles of Liquidity Risk Management,
which sets out 44 best practice
recommendations. The 2008 report is
broader and more extensive, but the
findings and recommendations one year
on remain broadly the same.
The report is the most extensive of all
three in the guidance that it provides. It
provides a comprehensive, practical and
detailed set of standards for banks to
apply in developing liquidity risk
management practices. For once,
industry best practice is congruent with
the views of supervisors and standard
setters such as the Basel Committee.
The IIF paper is ideal for a bank wishing
to benchmark its liquidity risk
management policies and practices
against a well-articulated and
demanding set of standards. This
comprehensive report is unlikely to
conflict with local or international
supervisory standards and provides a
high hurdle of best practice.
Institute of International Finance (IIF)
CEBS
This report – Final report of the
Committee on Market Best Practices:
Principles of Conduct and Best Practice
12 FS FOCUS November 2008
The report – Second Part of CEBS’
Technical Advice to the European
● Directive contains an explicit
requirement for institutions to
have policies and processes for the
measurement and management of
their net funding position, and
contingency plans to deal with
liquidity crises. However, the
Directive is broadly silent about
liquidity risk management;
● most EU banking supervisors
follow the principles set out in the
Basel Committee’s Sound Practices
for Liquidity Risk Management
(2000).
CEBS emphasises the need to reconsider
the definition of liquidity and liquidity
risk, together with their interaction with
other risks. The body of the report
explores this interaction in over 14
pages – much more extensively than
the other reports. In our view the
perfect storm caused by the interaction
between credit, market and liquidity risk
lies at the heart of the current crisis.
A further issue raised in the CEBS report
is the importance of considering the
participation of banks in payment and
settlement systems, especially intraday.
These are very dependent upon collateral
deposited with the central bank or
clearing house, and in a crisis there may
be significant constraints on movement
of liquidity between institutions, and
particularly cross-border, when liquidity is
managed on a group basis.
CEBS recommends that the Commission
RISK & REGULATION
should not take action in isolation from
national regulators and the industry. In
line with this principle, it has ensured
that its advice to the Commission is
consistent with that of BCBS to the
Basel committee and IIF industry group.
Recent events have shown that, in
extreme circumstance, government will
influence central banks to take action
necessary to stabilise markets and to
protect depositors. In particular, we
have seen definitions of acceptable
collateral and depositor protection
frameworks develop on the hoof as
market developments unfold. This
makes it essential for firms to keep up
with developing legislation while
dealing with the unrelenting pressure of
challenging market conditions.
Common themes
Market developments such as the
increasing reliance of large institutions
on market funding, the increasing use
of complex financial instruments, and
the globalisation of financial markets,
have created significant new challenges
in liquidity risk management. A key
driver of these developments has been
the emergence of the ‘originate-todistribute’ model, which must be
assessed carefully from a liquidity point
of view, including related off-balance
sheet commitments and the potential
for implicit liquidity support.
Behavioural assumptions for relatively
new investors in complex products, or
even for retail depositors, also need to
be challenged, especially in times of
stress. In addition, increased crossborder and cross-currency flows raise
the prospect that liquidity disruptions
could be transmitted across different
markets and institutions, thus increasing
the need for commonality and
interdependence of liquidity frameworks
in different jurisdictions.
The interaction between funding and
market illiquidity is key to how systemic
financial crises play out. Due to the
increased use of repo funding markets,
the availability and regular use of high
quality collateral has become a major
component of institutions’ funding
structures, requiring effective, accurate
and comprehensive monitoring of
unencumbered assets.
Finally, European institutions, even those
operating within the euro zone, have to
deal with a variety of payment and
settlement systems with different
features (e.g. gross vs. net, deferred vs.
real-time). This makes intraday liquidity
risk management particularly
challenging, especially when
maintaining an active position in FX
markets.
A checklist for sound liquidity risk
management?
The market developments described
above, together with the 2007-2008
market turmoil, highlight the need for
credit institutions and investment firms
to have adequate liquidity risk
management systems for both normal
and stressed times, and to maintain
adequate liquidity buffers. The three
reports that we have reviewed could
provide the basis for a useful checklist to
assess liquidity risk management.
The primary responsibility for liquidity
risk management rests with the
institution’s Board of Directors. The
infrastructure to discharge these
responsibilities includes:
strategy and risk tolerance on an
informed basis, matching them with the
institution’s funding profile and
reflecting them in the institution’s
organisation structure.
Management should also reassure itself
that it has a clear view of all liquidity
risks, including the vulnerabilities
implicit in the institution’s maturity
transformation and its exposure to
funding concentration risk. It should
ensure that a complete appraisal of all
sources of liquidity risk, particularly
contingent risk, is conducted through
stress tests and is reflected in liquidity
policies, including setting adequate
liquidity buffers and defining
contingency funding plans.
In view of the strategic role of secured
funding in stressed times, particular
attention should be paid to collateral
management. Institutions should also
have a good command of the
implications of their participation in
payment and settlement systems,
especially intraday.
Ian Clark, Richard Barfield and Katie
Brannigan are senior consultants at
PricewaterhouseCoopers
● liquidity risk management requires
robust internal governance;
● adequate tools to identify,
measure, monitor, and manage
liquidity risk;
● stress tests and contingency
funding plans; and a carefully
defined communication strategy
tailored to stakeholder audiences.
Senior management must be able to
define an institution’s liquidity risk
FS FOCUS November 2008 13
RISK & REGULATION
A RACE AGAINST THE CLOCK
PREPARING FOR THE FSA’S DECEMBER TCF DEADLINE
Simon Godsave outlines actions that will ensure compliance with a key area of FSA policy
The FSA’s fundamental Treating
Customers Fairly (TCF) initiative gained
momentum in 2004 and it has come to
dominate our retail agendas ever since.
The FSA has become increasingly
demanding of what it expects each firm
to live by: what fairness means, what
standards should apply, what measures
and monitoring should be deployed,
and what level of under-performance is
acceptable.
Let us examine what the FSA has
concluded so far:
● In July 2006, the FSA set a
deadline for “all firms to be at
least implementing TCF in a
substantial part of their business
by the end of March 2007”.
● In May 2007, the FSA reported
that an “encouraging number of
firms successfully met the March
2007 deadline” but also that it
was “disappointed that a sizeable
number of firms failed to meet our
March deadline”.
14 FS FOCUS November 2008
● The FSA then set further deadlines:
“by end December 2008, firms are
expected to be able to
demonstrate they are consistently
treating their customers fairly” and
“by March 2008, firms are
expected to have appropriate
management information or
measures in place to test whether
they are treating their customers
fairly”.
● In its June 2008 TCF progress
report, the FSA stated that only
13% of the sample of firms it had
assessed against the March
deadline had actually done so,
and it concluded that 20% of
firms in that sample were
incapable of meeting the
December deadline.
These do not appear to be the
promising signs of an initiative heading
for success. What is going on? What is
going wrong? There are several factors
at play, of varying significance to
different firms:
● some firms are finding that it is
not quick and easy to build the
new TCF analytical and evidential
framework that the FSA appears
to expect;
● firms generally do not know
precisely what the FSA expects;
and
● we all have businesses to run and
it is not surprising that some firms
have been more able to find the
time, attention, and resources for
TCF activities than others.
The March deadline was badged as
“interim” and the FSA has always made
it clear that the December deadline is
the key goal for us all this year. The FSA
has recently indicated that it intends to
assess a sample of relationship-managed
firms between January and June 2009
and publish results against the
December deadline in September 2009.
So how are we likely to fare as an
industry?
I believe that the FSA will see continued
RISK & REGULATION
emphasis and good progress from many
firms, but that it will also remain
frustrated in 2009 that a significant
minority of firms will be lagging and will
not have met the December deadline. I
draw attention to two aspects that are
fundamental to the industry’s (and the
FSA’s) TCF success or failure:
● There is scant information in the
FSA’s TCF progress report. The lack
of specificity and certainty gives ~
rise to the risk of a differing and
unreasonably harsh assessment by
the FSA following the end of this
year. We must have greater clarity
from the FSA.
● December is not far away. As
noted previously, the FSA has
concluded that 20% of firms in its
sample are not capable of meeting
the December deadline, and in
practice it is likely that other firms
will fail to meet the deadline as
well. The industry must step up its
momentum on TCF.
But are more customers being treated
fairly (and are fewer customers being
treated unfairly)? One concern for 2008
is that some firms are being distracted
from treating their customers fairly as a
consequence of their efforts to avoid
failing the December deadline (e.g. in
the areas of culture, governance,
management information, and
evidencing). In theory, this should not
happen as the delivery of fair outcomes
is integral to the December deadline.
The FSA has increasingly been
communicating examples of both good
and bad TCF practices, as a way of
conveying its expectations and
encouraging firms to sit up and review
their own similar or equivalent
approaches. Supervisory attention on
TCF matters has also noticeably
increased and that will ensure the FSA
keeps the pressure on firms over the
medium term.
It is difficult to say yet whether, in
respect of fairness, products,
communications, sales practices
and servicing processes have
actually improved generally across ~
the industry. It is clear that unfair
products and practices are being
removed, which must surely be a good
thing. The FSA’s six TCF consumer
outcomes are now very familiar to most
firms and it is our effective reference to
these outcomes that will help us
improve and sustain the lot of our
customers over time.
While the FSA is entitled to take
action on firms who have not
made an effort to take TCF seriously,
it should take care not to discourage
those firms who have made an
effort to raise their TCF game but who
simply need more time or support to
comply fully. If the FSA pushes
TCF too far (e.g. if it is overly harsh in
assessing firms against the December
deadline) and if it is overly vigorous in
acting on some non-compliant firms,
there could be a tendency for firms
(and their shareholders) to either
look to focus their future business plans
outside the UK (in more benign
regulatory environments) or be tempted
to move regulatory operations
elsewhere within the EEA and passport
into the UK.
The FSA, as the host state regulator in
such circumstances, would have less
conduct of business and TCF-oriented
regulatory jurisdiction over a firm as this
would largely be the responsibility of
the new home state regulator. The FSA
could try to impose additional
supervisory oversight by reference to
‘the general good’, but I do not believe
that we want a future where good firms
cannot trust the UK’s own regulatory
environment.
Meeting the deadline
To meet the December deadline, the
FSA says firms will have to:
● demonstrate that senior
management has instilled a culture
within the firm whereby they
understand what the fair treatment
of customers means; where they
expect their staff to achieve this at
all times; and where (a relatively
small number of) errors are
promptly found by firms, put right
and learned from;
● be appropriately and accurately
measuring performance against all
customer fairness issues materially
relevant to their business, and be
acting on the results;
● be demonstrating through those
measures that they are delivering
fair outcomes; and
● have no serious failings – whether
seen through management
information or known to the FSA
directly, including in areas of
particular regulatory interest
previously publicised by the FSA.
Simon Godsave is the Compliance
Officer for Zurich Financial Services'
UK Life business unit
I am hopeful the industry can raise its
TCF game and that the FSA can make
TCF expectations clearer and more
precise, but there is much to do and
limited time to do it.
FS FOCUS November 2008
15
FINANCIAL PLANNING
THE TIME OF YOUR LIFE
SHAPING INVESTMENT STRATEGY TO MATCH RISK PROFILES
David Dunn reports on the rise of lifecycle investing
Lifestyle investing has rapidly become
the most popular investment choice in
the US. The evidence is compelling:
according to official figures, funds using
this approach held $8bn in assets in
20001. By the end of 2007, assets had
reached $197bn and continue to
increase steadily2.
It’s not difficult to see why this
approach is so popular. Major studies
have identified asset allocation as the
driving force behind efficient investment
performance.
The concept is simplicity itself: it aims to
avoid the twin risks of excessive caution
early in life and excessive risk taking
later in life. The premise is that by
taking certain ‘knowns’ – such as an
investor’s time horizon and the historical
performance of various asset classes – it
is possible to construct an investment
portfolio that, based on past
performance, may have a better chance
of reaching a specific financial goal.
Naturally, past performance does not
guarantee future results, but lifecycle
investment theory suggests that
investors can potentially increase their
16 FS FOCUS November 2008
chances of success through wise asset
allocation initially and then by continual
rebalancing of those assets as the end
date draws near.
Lifecycle investing applies in practice
what professional investors know as
Modern Portfolio Theory – the notion,
pioneered in 1952 by Harry Markowitz
that there is a specific mix of assets
whose inherent risks and returns should
be most likely to deliver the best results
over a given time frame for the amount
of risk taken. Markowitz coined the term
“efficient frontier” to describe these
optimal asset mixes.
The efficient frontier provides a good
starting point for building an investment
portfolio: balancing the trade-off
between the risks and potential returns
of various asset classes. However, it
remains a two-dimensional look at
portfolio construction. Integrating an
investor’s time horizon gives a richer,
three-dimensional sense – a feeling for
whether the risk an investor is assuming
is appropriate for his or her stage of the
lifecycle.
Incorporating a commitment to monitor
and regularly rebalance a portfolio takes
the strategy up one more notch, from
static to dynamic lifecycle investing. This
is where the strongest link can be
forged between portfolio theory and
real-life investing – because investing for
the future is a dynamic process, one
that changes as a person’s time horizon
and goals change.
But lifecycle investing isn’t new, so why
the dramatic surge of interest in the US
and are there parallels with the UK?
There are two reasons behind the
increase in the popularity of these
schemes. First, left to their own devices
people are making poor asset allocation
choices. This means either younger
investors are heavily invested in cash or
other secure but low yielding assets or
older investors are holding substantial
amounts in equities or other volatile
assets just before retirement. Both
groups are taking considerable ‘risks’.
Our research suggests that, under
average or normal circumstances, the
young investor who opts for cash will
have to save twice as much as someone
the same age who opts for equities to
FINANCIAL PLANNING
end up with the same amount of money.
Equally, being over-exposed to equities at
older ages can be just as perilous. A severe
downturn in markets could devastate
savings built up over many years.
This situation exists in the UK. Fidelity
research earlier this year revealed that
over 40% of under 35s have no equities
in their retirement savings while almost
25% of those over 55 have more than
half their retirement savings in equities3.
The second reason for the popularity of
these funds is that they have ‘come of
age’. The process is much more
advanced than earlier iterations which
were heavy handed and clunky.
An efficient lifecycle investment process
requires a number of critical decisions:
First, what is the purpose of the
investment? This will help define the
start and end points. For example, if it’s
to pay off a mortgage the end point may
be to end up in cash. If it’s to buy an
annuity moving the assets into bonds
will reduce the volatility of the portfolio
relative to annuity prices. If it’s to
provide a retirement income directly
from the investment then it will still be
appropriate to hold some exposure to
equities at the point at which an income
is about to be taken.
Next, it’s important to identify which
type and number of asset classes to
employ in the process. There is a
growing trend to develop multi asset
class lifestyle portfolios with an
increasing number of asset classes
including property, private equity,
commodities and leveraged debt
though the scope for increased
diversification is not infinite.
Having established the start and end
dates and the assets to be used it is
important to consider how the assets
will migrate from more growth
oriented assets to more secure assets
(the shape of the transition) and at what
speed the conversion will take place (the
‘decay period’).
How to take a portfolio from being fully
invested in equities to a lower risk
position over the course of many years is
one of the biggest challenges in
managing a lifecycle fund and is also the
area where most progress has been
made. Early incarnations of lifecycle
investing adjusted the share exposure
through a purely linear process in equal
amounts year by year. The flaw with this
approach is that it can work against
younger investors by redeeming equities
too early. Another fairly basic technique
still employed by many lifecycle fund
managers is the ‘step down’ approach,
adjusting holdings each year or every
few years. This approach can leave
investors vulnerable to any large market
plunge on or around the day the
adjustment is made.
The latest lifecycle funds smooth the
transition from one asset class to another
by selling small amounts on a monthly
or more frequent basis to eradicate the
risks associated with selling significant
levels of equities on a single day.
What is more, the options for the ‘flight
path’ trajectory have increased from a
strictly linear pattern. It can be
exponential or logarithmic, for example.
A logarithmic approach means a higher
allocation to equities is maintained for
longer than a linear approach allows.
The accelerated movement from equities
to more secure investments under a
logarithmic process as the target date
nears recognises that the risk of holding
equities rises disproportionately to the
potential rewards.
manager should be closely analysed.
Style consistency helps to maintain the
integrity of the roll down process.
The most important part of the portfolio
construction is to understand how each
underlying fund works in relation to the
others. The involvement of a dedicated
manager ensures that attention is paid to
how the allocation mix is affected by
market movements, by changes in the
portfolios of the underlying funds and by
each portfolio’s cash flow.
When it comes to making the most of
retirement savings, making the right
investment decisions is key. Lifecycle
investment strategies can help investors
improve their chances of reaching their
goals and better manage the ups and
downs caused by market volatility.
NOTES:
1 The rise of funds that develop with the
investor, Financial Times, 12.02.07
2 Stress-free Investing: Lifecycle Mutual
Funds, Anders Bylund, 30.08.08
3 Fidelity Retirement Institute: Improving
Britain’s Retirement Prospects, 2007
David Dunn is head of Retirement
Planning at Fidelity Investments
Finally, most early iterations of lifecycle
investing were automated. Nowadays
modern lifecycle funds are actively
managed. For example, selection of the
underlying funds is important. The funds
should have a meaningful track record.
The overall style of the fund and the
FS FOCUS November 2008
17
FINANCIAL PLANNING
FAR AND WIDE
DIVERSIFICATION PROTECTS INVESTMENT PORTFOLIOS
Michael Wood explains the importance of spreading exposures in adverse markets
TEN LARGEST MONTHLY FTSE-100 FALLS
1
2
3
4
5
6
7
8
9
10
Month
Year
% Fall in month
October
March
September
November
September
July
October
November
September
September
1987
1974
1981
1974
2008
1966
2008
1973
1974
2002
26.51
20.33
16.36
14.73
14.28
13.43
12.98
12.69
12.01
11.76
In the scheme of long-term investing,
October’s stock market fall (up to 21
October) of 12.98% is the seventh-largest
fall, as recorded on a monthly basis by the
FTSE All Share Index since February 1955.
The 10 deepest falls are shown in the
accompanying table.
Recent financial history offers abundant
evidence of the resilience of financial
markets. Capitalism works, has worked
and will continue to work, with or without
Lehman Brothers, HBOS or Merrill Lynch.
The global economy is now wholly, with
the exception of North Korea and Cuba,
based on a capital market philosophy.
However, by reading the machinations
of the financial press, one would be
forgiven for believing that this is the
end of capitalism and that we are all
doomed. But remember, journalists
have to sell newspapers and, in this
respect, an exciting story with heroes
and villans is much more effective than
a calm realistic approach.
So why is investment diversification
relevant to our times? Typical core equityholding funds held by many clients are
designed to ensure investors remain
highly diversified. For example, if an
investor had an investment of £200,000,
split equally between a representative UK
core fund and an international equivalent,
he might find himself invested in the
following horror companies:
18 FS FOCUS November 2008
●
●
In the UK fund, HBOS and
Bradford & Bingley;
In the international fund, AIG,
Lehman Brothers, Freddie Mac and
Fannie Mae and Merrill Lynch.
However, because the two funds are highly
diversified, these companies will only
represent perhaps 2% of the UK holding
and 1% of the international holding. If we
assume that all the previously mentioned
companies become worthless, then the
total loss on the investment of £200,000
would be less than £3,000. (Remember
that, for the purpose of this example, only
the losses on these companies have been
taken into account.)
For investors with concentrated share
positions, (i.e. a limited number of shares
in their portfolios), as with employees with
share options, these events can inflict
potentially irreparable financial damage.
As all market-watchers know, markets
fluctuate through economic cycles,
overstating gains and losses. But the
average long-term market return for
investing in global economic activity will
be achieved.
Because markets are highly sensitive to
confidence, gains lead to bubbles (over
confidence) and losses lead to recessions
(lack of confidence), but these are an
integral part of a free market capitalist
system so are to be expected rather than
feared. The uncertainty of their timing is
the unsettling part of being an investor.
Unfortunately, when a bubble over-inflates
the resulting recession is a greater shock.
The current recession is the reaction to
over-inflated asset prices fuelled by easy
credit and the belief that asset prices can
only go up. The chief culprit was
residential property. The house market
boom created the false belief that here
was a one-way ticket to personal wealth
and happiness. We could sit at home and
the increase in its value would be more
than we could earn by going out to work.
The banks lent ever-increasing amounts of
money on the assumption that house
prices could only continue to rise. This
became an unsustainable scenario.
An increase in asset prices is only a
change in price, just as with a commodity
such as gold or oil, and so does not
indicate an increase in a nation’s
productivity. We are now witnessing a
return to economics that requires the
creation of “cash flow”. The good news,
although painful, is that the quicker the
recession bites, the quicker the recovery
can begin.
Michael Wood is an independent
financial adviser
AUDIT & REPORTING
AND SO TO EMBED...
GETTING TO GRIPS WITH MCEV
Danny Clark explains the thinking behind new guidance on market-consistent embedded values
comprise the present value of future profits
from existing business (sometimes referred
to as the value of the future profits of inforce business (VIF)) with an adjusted net
asset amount, which represents the
accumulated retained profits from prior
periods. An embedded value differs from an
appraisal value of the business because it
excludes the value of any business that may
be written in the future. That is, it excludes
any goodwill in the company.
Weaknesses with traditional embedded value
methodologies became apparent over time.
These related mainly to the lack of
consistency between the approaches
adopted by companies in terms of
methodologies, disclosures and assumptions,
including the increasing need to place a
more accurate value on the guarantees and
options embedded within policies in light of
high-profile failures such as Equitable Life.
In addition, the rate used to discount cash
flows was set in a very subjective way and it
was not always clear that it reflected fully the
various risks in the contracts.
At a time when fair values are being criticised
from a number of different quarters and even
being blamed for exacerbating the effects of
the financial crisis, life insurers have agreed on
a new financial reporting framework that
embraces market-consistent principles.
In June 2008, the CFO Forum (a high-level
discussion group formed and attended by
the Chief Financial Officers of major
European listed, and some non-listed,
insurance companies) published its
guidelines on market-consistent embedded
values (MCEV). This guidance will be binding
on all CFO Forum members for periods
ending on or after 31 December 2009,
although non-member companies may also
choose to apply the principles. Some
companies may choose to early adopt and
prepare MCEV information for 2008. Aviva,
for example, has stated that it aims to report
under the MCEV Principles for 2008.
Embedded value reporting is well-established in
the UK and is used widely by larger European
life insurers. It has had a somewhat chequered
history though, largely due to the historical lack
of detailed rules or guidance. Not surprisingly,
this lack of guidance led to considerable
diversity in how companies prepared their
reports. However, the CFO Forum has played
an invaluable role over the last five years in
codifying the approach to embedded value
reporting, firstly through the publication of the
European Embedded Value (EEV) principles in
2004, guidance on disclosures in 2005 and
now the MCEV Principles.
MCEV reports do not replace the
International Financial Reporting Standards
financial statements of the companies, but
are published as supplementary financial
information, complete with their own review
report from an audit or actuarial firm. They
are used to help shareholders and analysts
analyse the performance of the company.
What is embedded value?
Embedded value techniques are used as a
way of placing a value on a life insurance
company for shareholders and analysts. They
Finally, these traditional methodologies were
somewhat divergent from modern financial
economics. The risk premium on asset
returns was capitalised implicitly in a
traditional embedded value because the risk
discount rate for liabilities was based on an
asset rate that was not adjusted for all the
risks associated with the assets.
As a consequence, embedded value profits
could be generated by switching from lower
yielding government bonds into higher
yielding corporate bonds, ignoring the fact
that the new investments paid higher returns
because they were more risky.
This led to calls for the standardisation of
methodologies and for clearer guidance as
to the calculation of these values.
In May 2004, the CFO Forum launched the
12 European Embedded Value (EEV)
principles, which were adopted by CFO
Forum members in their 2005 reporting.
These brought greater comparability between
FS FOCUS November 2008 19
➞
AUDIT & REPORTING
companies, introduced a greater focus on the
drivers of embedded value profit and on the
value of new business written in the year and
gave companies a much clearer reporting
framework (especially with the publication of
the EEV principles on disclosures and
sensitivities in October 2005).
In particular, they addressed the concern
that traditional embedded values did not
allow for liabilities associated with options
and guarantees. However, they continued to
permit a wide range of practices and drew
criticism from some users that it was difficult
to understand how the embedded value had
been calculated.
Although some companies prepared their
embedded value reports using a ‘bottom-up’
approach, which made significant use of
market-consistent assumptions, other
companies used a ‘real world’ approach that
was similar in many regards to a more
traditional embedded value calculation .
Guidance on MCEV
The CFO Forum recognised a need for
guidance on producing reliable and sound
embedded value reports that were more
comparable from company to company. In
developing this guidance, the CFO Forum
aimed to ensure that embedded value
reporting was calibrated to a market
valuation of the cash flows, particularly in
relation to financial assumptions.
They decided that disclosures should make
explicit some of the assumptions that were
previously implicit including, for example,
the allowance for non-hedgeable risks (that
is, risks for which financial instruments with
the same cash flows are not available).
● The use of market-consistent financial
assumptions in valuing future profits,
including using a risk-free rate to
project future investment income and
discount liability cash flows;
● An explicit allowance for
non-hedgeable risks;
● An allowance for the frictional costs of
required capital;
● The way in which financial options
and guarantees are valued; and
● An upgrading of some disclosure
requirements.
Market-consistent financial
assumptions
Under market-consistent methodology, the
value of assets is not dependent on their
expected returns. Therefore, the investment
return is set equal to the risk-free rate, which
is also used to discount liability cash flows.
This represents a significant change from
traditional methodologies that take credit
implicitly for future investment returns in
excess of the risk-free rate.
In reality, investments may out-perform riskfree assets and therefore any ‘extra’
investment return that emerges is shown as
an investment variance within the analysis of
the embedded value profits.
The CFO Forum prescribes the use of swap
yield curves as the risk-free rate wherever
possible. In recent months, swap rates have
diverged significantly from government
bond rates and therefore this assumption is
now looking rather questionable.
Allowance for non-hedgeable risks
The main aim of MCEV is to produce a more
objective calculation of embedded value.
Assets and liabilities are valued consistently
with market prices and market-observable
assumptions where possible.
Under traditional embedded value
techniques, the allowance for risks such as
operational risk and insurance risk was
included in the risk discount rate. Under
MCEV, these risks are valued explicitly. In
addition, financial risks that cannot be hedged
– for example, where there are liability cash
flows that extend beyond the duration of
swap yield curves – must be valued explicitly.
The main areas of change from EEV relate to:
The principles do not provide much guidance
Key principles of MCEV
20 FS FOCUS November 2008
on the valuation of these non-hedgeable risks
and this is perhaps an area where additional
guidance could be provided in future. Some
companies may use a direct method where
the cost of non-hedgeable risk is estimated
based on management’s expectations of
operational risk capital required over a
specified time period. Alternatively, some
companies are using a market cost of capital
approach, similar to the approach required
under the Solvency II proposals.
Allowance for the frictional cost of
required capital
This represents the costs that a
shareholder in a life company incurs from
investing his capital through the life
company rather than directly in the assets
in which the life company invests. These
costs may arise in two areas:
● Additional tax costs;
● Investment management expenses
from holding required capital.
Financial options and guarantees
Under EEV, the intrinsic value of options and
guarantees in products was implicitly
included in the VIF. This approach did not
allow for the volatility of the conditions that
affect the value of these guarantees in the
future. Therefore, the concept of the time
value of the options and guarantees was
introduced. Most companies used an optionpricing formula approach to cost these, for
example, the Black-Scholes formula.
Under the new MCEV Principles, there is
more of a drive for companies to use a full
stochastic model to value options and
guarantees. By doing this they can reflect
not only the time value of the guarantees,
but also other effects, such as the
asymmetric nature of some of the risks
inherent in insurance companies for
example, ‘burn-through costs’, which arise
because shareholders are only entitled to 10
percent of surplus, but must meet 100
percent of any deficit in a with-profits fund.
Additionally, the MCEV Principles
recommend that companies should allow for
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AUDIT & REPORTING
what is known as dynamic policyholder
behaviour. This is the effect on shareholder
value from policyholder actions. For
example, if bonus rates on products are
reduced, this is likely to lead to increased
lapse rates. Stochastic techniques can help in
modelling these effects.
Disclosures
The MCEV Principles have extended the
disclosure requirements significantly. For
example, they require an analysis of the
whole group’s MCEV, an analysis of
movements in the free surplus and a
standardised presentation of MCEV earnings.
This is a significant step forward and is likely
to be helpful to users who need to compare
the results of life companies.
Issues and challenges
Although the MCEV Principles have
improved significantly certain aspects of
existing embedded value reporting and
improved the transparency of the reports as
a result, there are still a number of areas that
may be of concern to preparers and users.
Losses on writing annuity business
An important area, particularly for UK
companies, is annuity business. With the
move to MCEV, the initial liability under
these contracts is likely to increase
considerably because the liability must be
discounted at a risk-free rate. Under EEV, the
liabilities were discounted using a rate based
on expected returns from the corporate
bonds that are typically used to support
these contracts. This will affect all business
that generates profits from investment
earnings, in addition to annuity business.
Some in the industry are concerned about
how to address this. Indeed, embedded
value reporting was initially introduced in
part, to show the value that management
had added to a life company – showing
initial losses on what management consider
to be profitable business is somewhat
counter-intuitive, even if it is consistent with
modern financial economics.
A deferral of profits is not usually an
attractive proposition and raises the question
of whether companies will find annuity
business less attractive to write. It is
important to recognise that the cash flows
under the contracts remain the same and
therefore their economic value has not
changed. The profits will emerge over time
as the earnings on the assets are realised
over the lifetime of the annuities.
Market implied volatilities
One aspect of the move to MCEV is the use
of financial assumptions that are consistent
with the market. A consequence of this is
using market-derived volatility assumptions
in stochastic models. Under EEV, long-term
estimates were produced for these volatilities
based on historical data. Some companies
may now experience a considerable increase
in the value of their options and guarantees
as they move to using market-consistent
volatility assumptions.
What is the future for embedded
value reporting?
MCEV provides a useful comparative tool,
enabling investors to compare net worth and
movements in net worth and hence it should
improve the usefulness of insurers’ financial
information. It is not however the universal
panacea for life company financial reporting.
Should the market be worried about the use
of market-consistent information? Fair values
have been criticised heavily from all angles as
the effects of the credit crisis have been felt
by more and more companies this year.
However, market-consistent approaches
appear to be here to stay in one form or
another, as there is a strong argument that
referencing financial assumptions to
something that is observable and objective is
better than the alternative which is to rely on
management’s own estimates of these data.
MCEV will present considerable challenges
for companies who have traditionally
presented an income statement on an EEV
basis since results are likely to be dominated
by the effects of market movements in the
period and it is difficult to communicate the
value added by spread-based products such
as annuities. These challenges are magnified
in the current turbulent market conditions.
Some companies are likely to publish results
not only on an MCEV basis, but also on a
traditional embedded value basis, particularly
where earnings rely on annuities and other
spread-based products. The publication of
embedded value information over and above
what is required by the Principles can often
be helpful to explain a company’s position
and results.
It may also lead to confusion, however,
particularly if different companies adopt
different approaches to similar matters.
In addition, for a present value calculation,
embedded values provide very little
information about the timing of emergence of
future cash flows, which is something that is
important to many shareholders and analysts.
Danny Clark is a Director in KPMG’s
Financial Services Technical Advisory
practice
The Chief Financial Officers Forum
has more information on this topic:
www.cfoforum.nl/eev.html
The opposite is probably true for nonfinancial assumptions such as those for
insurance risks, where management has the
most relevant information – this fact is
properly reflected in the MCEV principles.
FS FOCUS November 2008 21
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VIEWPOINT
A NEW PRESIDENT FOR A NEW ERA?
Tom Elliott assesses the possible impact of Barack Obama's victory in the US elections
The 44th President of the United States faces
difficult challenges in dealing with the fallout
of the credit crunch. But with the right tools
in place to promote growth, Barack Obama
will have the opportunity to lead the US to a
brighter future. When he is sworn in on 20
January 2009 he will face some tough
challenges. Both Senator Obama and his
rival, Senator John McCain, campaigned on
“Change” platforms, but it became
increasingly apparent that the winning
candidate would face significant economic
and budgetary constraints in trying to
implement his plans.
Following the events of September, which
led to a redrawing of the map of the global
financial system, the new administration will
find itself the caretaker of a budget deficit
that analysts believe could spiral to $1 trillion
in 2009 (source: Bloomberg) and an
economy in a recession. However, as well as
being handed some knotty problems,
Senator Obama has also been given some of
the tools to solve them. The Troubled Asset
Relief Program (TARP), approved by
Congress in October, ringfenced $700 billion
to support the financial system, with the
scope for these funds to be spent as the new
administration deems necessary.
Meanwhile, the Federal Reserve has
consistently acted quickly to support growth,
taking interest rates down from 5.25% to
1.00% in a little over a year and injecting
massive amounts of capital into markets.
Responses to the crisis have come much
more rapidly than after the crash of 1929 or
in the Savings and Loan crisis of the 1980s.
The recapitalisation of the banks has already
contributed to the beginning of an easing of
money market conditions, and while it will
take time before confidence returns, we
appear to be moving out of the period of
extreme uncertainty into a recessionary
environment. The challenge will be how we
manage through the recession and the
severity (length and depth) of the recession.
So what needs to change before economic
growth returns and what can the new
president do to support it? A key factor
22 FS FOCUS November 2008
needed for the economy to pick up is a
bottom to the housing market falls that have
seen prices tumble more than 16% in a year
(S&P/Case-Schiller home-price index. Source:
Bloomberg). Once house prices stabilise,
there will be greater clarity over the value of
assets on bank balance sheets, and we can
expect this to feed through into a
resumption of lending.
One of the biggest challenges for Senator
Obama will be to find ways to bring stability
to the housing market. With interest rates at
1%, there is limited scope to stimulate
growth through monetary policy. Many
commentators are calling for a fiscal stimulus
package to address the problems in the
housing market and also to keep Americans
in work. Democrats in the House of
Representatives have gained the support of
Federal Reserve chairman Ben Bernanke for a
package that would include assistance to
those at risk of losing their homes, as well as
grants for small businesses and the
unemployed.
The election of a Democratic president with
a Democratic majority in the House of
Representatives will enable the House to
move quickly with an aggressive agenda.
Items that may be included in the House
agenda are a $300 billion stimulus package,
an alternative energy fund and a timeline for
the withdrawal of troops from Iraq.
Anecdotally, and perhaps counterintuitively,
history may be on the side of the new
president: the US equity market has
historically delivered stronger returns under
Democratic rather than Republican
presidents, with the difference most marked
in the first year after the election.
The current picture is challenging and there
may be further bad news along the way, but
it appears that a recessionary scenario is
largely priced in to equity markets, with the
S&P 500 discounting a 30-40% drop in
earnings in this cycle. This scenario may play
out, but should not come as too much of a
shock to markets. Indeed, investors may
soon start to anticipate economic recovery
and be tempted back into the market,
particularly as volatility reduces and prices
stabilise.
Lower volatility may also see the return of
M&A activity as companies snap up rivals at
bargain prices, and this should provide
further support to equities.
With valuations depressed and prices at
multi-year lows, long-term investors who
believe the economy will pick up in 2009
may see this as an interesting entry point.
Indeed, ultimate contrarian Warren Buffett
recently announced that he was buying US
equities, pointing to the resilience of the US
market over the long term and stating that
“bad news is an investor’s best friend. It lets
you buy a slice of America’s future at a
marked-down price.”
A recovery for the economy should lead to a
rebound in earnings as economic activity,
corporate investment and consumer
demand increase, boosting equity
performance. The end of cheap credit could
bode well for a more stable economic
system during the tenure of the new
president, and should mean that future
equity market performance will be built on
solid foundations.
Tom Elliott is a Global Strategist at
JP Morgan Asset Management
Any forecasts or opinions expressed
are those held by JPMorgan Asset
Management and are subject to
change. The views expressed are
not to be taken as advice or
recommendation to sell or
buy shares.
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MARKET MOVES
BUPA APPOINTS NEW
FINANCE DIRECTOR
Healthcare specialist Bupa International
has appointed Wayne Close to the role
of finance director, with responsibilities
across the organisation’s global
operations.
A Bupa veteran of 14 years, Close has
gained extensive experience across
many areas of the business, working in
senior financial positions in Bupa
Hospitals, Bupa UK Health Insurance
and within the organisation’s
international divisions. His most recent
role was as development director,
international businesses. He spent four
years in Saudi Arabia as chief financial
officer, then chief operating officer.
Aon Limited, the insurance broker and risk adviser, has
appointed Pauline Colvin as its chief risk officer. She has
previously been chief risk officer for Skandia, group risk
director at Royal & SunAlliance and director of risk,
compliance and internal audit at Pearl Assurance.
She has also worked as a financial controller and, early in
her career, worked as an auditor at Coopers & Lybrand.
David Mead, Aon’s chief operating officer, commented:
“Ensuring we have the right processes in place to truly
embed effective risk management as an integral part of our
firm’s culture is vital. Not only does such an approach
ensure we conform to FSA regulations and guidelines, it
also enables us to be more effective at implementing our
UK growth strategy through the use of Enterprise Risk
Management disciplines. We’re fortunate to have someone
of Pauline’s calibre and experience coming aboard.”
Keith Biddlestone, managing director of
Bupa International, said: “Wayne brings
a wealth of international experience. He
will play a key role in our ambitious
growth plans.”
ELSIGOOD BOOSTS PLANNING
AT COOPER PARRY
PWC APPOINTS BAUER TO INSURANCE ROLE
Jonathan Elsigood has
been made director at
Midlands-based
practice Cooper Parry.
PricewaterhouseCoopers has made
Achim Bauer a partner in its European
insurance practice. He will focus
particularly on the UK and German
markets.
Bauer has over 25 years’ experience in
the banking and insurance sector acting
both in an executive capacity in a
number of leading financial institutions
across Europe and in an advisory
capacity for a wide spectrum of
European financial services companies.
Ian Dilks, PwC partner and global
insurance leader, said: “Achim’s
appointment comes at a particularly
pertinent time for the industry. Many of
the world’s leading insurance groups are
headquartered in Europe. A combination
of current market turmoil and of new
regulation is likely to result in
considerable changes within the industry.
Achim’s depth of experience and advisory
expertise will supplement ouradvisory
capabilities across Europe and will enable
us to better support our clients.”
HARRIS LIPMAN EXPANDS
TO MEET DEMAND
North London practice Harris Lipman
has announced a number of recruits.
Goburdhun, who will also carry out
audit and accountancy assignments.
Michael Bernstein has joined the
practice as a partner. He joins from his
own practice having previously worked
for Baker Rooke, BDO Stoy Hayward. His
portfolio will be managed by Anita
The firm has also appointed Nilesh
Pabari, ex of Baker Tilly, as audit and
accounts manager, Timothy Gunn as
accounts senior and Payal Somani as
semi-senior accountant.
f
da
COLVIN TACKLES
RISK AT AON
Having spent 20 years
at PricewaterhouseCoopers, Elsigood’s
new role will focus on
personal financial
planning advice: “I
provide advice across a
broad range covering
personal tax advice,
investment planning,
pensions and
protection planning. In
many respects, I see
my role as helping
clients formulate an overall strategy for their wealth,
knitting together the various elements of tax, investments,
pensions etc.
“This is a very important step in the process of ensuring
clients receive excellent financial planning advice that is
fee-based, independent and impartial. It is also often
overlooked in the process of providing the more specific
advice clients require.”
FS FOCUS November 2008
23
CONFIDENCE IS VITAL
TO FINANCIAL SERVICES.
Inspiring confidence in financial services
The ICAEW financial services faculty is taking a leading role in debating issues affecting
trust in the sector. The inspiring confidence in financial services campaign examines the
relationships and information flows between providers, consumers and regulators to
develop new insights and ideas.
Read our issue papers at:
www.icaew.com/fsfinspiringconfidence
Inspiring confidence in financial services
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