Chris Harvey

Managing Partner

Global Financial Services Industry Practice

Global Financial Services

Harnessing the forces of change

The forces of change

2

COMPLIANCE CAPITAL

CUSTOMERS COMPETITION

New Regulation

FATCAIFRS

Liquidity

Basel IIISolvency II

New Entrants

Consolidation

Emerging Financial CentersTrust & Reputation

Buying Behavior

New Product Demand

Consumer Protection

Diminished short-term funding

Cross-Sector

AML

The forces of change

3

COMPLIANCE CAPITAL

CUSTOMERS COMPETITION

• Operating models

• Risk management

• Governance

• M&A

• Product development

• Talent

• Strategy

• Finance transformation

Forces of change impacting decisions in all areas of business, e.g.:

Forces of Change

• Lack of trust between governments

and financial institutions

• lobbying & influence continues

• threat of regulatory arbitrage remains

• Still uncertain regulatory environment

• highly politicized process

• inconsistent approach between

countries

• operational details remain vague

• Sovereign states pursuing tax revenue

• increased reporting requirements

• threat of significant penalties

Compliance

4

Foreign Account Tax Compliance Act (FATCA)

• Requires institutions to identify and document all US account holders

• Failure to comply = 30% withholding tax on US-source income and sales proceeds

• Applies to all payments made after December 31, 2012

Impact of Change

• Negative impact of resisting change

• could lead to more penalties

• spotlight on sensitive areas, e.g.

executive compensation

• Compliance ‘flexibility’’ is now critical

• compliance a process not an event

• product development a moving target

• extra cost of compliance

• FSIs facing conflicting regulations

• no ‘one size fits all’ fix across borders

• significant downside risk

Compliance

5

JP Morgan Chase estimates that

the US Dodd-Frank financial

legislation will cost the bank

almost $1 billion in lost revenue.

Harnessing Change

• Scenario planning on ‘tipping-points’

• what triggers a move in location

• what triggers a product exit

• alternative compensation plans

• Develop agile compliance solutions

• scalable/flexible data collection

• greater training/compensation for

compliance function

• Balance compliance risk & reward

• anticipate and budget for penalties

• quantify competitive advantage of

flexible compliance function

Compliance

6

What will be your focus on regulatory compliance as you prepare for the recovery?

Forces of Change

• Definitions of capital have changed

• stricter Tier 1 definition

• minimum common equity levels

increased

• Capital is no longer a ‘commodity’

• cost of capital has increased

• decreased use of short-term funding

• true value of liquidity now recognized

• New capital standards introduced

• Basel III for banks

• Solvency II for insurers

Capital

“Analysts have predicted that if all

the proposed regulations were

enacted it would require banks to

add an additional $221billion in

capital.”

The New York Times

7

Impact of Change

• Stable sources of funding now vital

• diversified capital sources favored

• new liquidity ratios now mandated

• Has made some products unprofitable

• products relying mis-match funding

have largely disappeared

• increased cost of capital has erased

the margins on other products

• Greater care in deploying capital

• targeted use to ensure risk-adjusted

return on capital is maximized

Capital

8

What will be your institution’s focus regarding LIQUIDITY?

Harnessing Change

• Target liquidity creating business

• higher cash flow businesses attractive

• diversify into retail-style areas of the

industry to boost liquidity

• Focus on capital efficient products

• identify products most capital efficient

• target market leadership in these

products; exit non-efficient products

• Improve measurement of capital use

• use data analytics and modeling to

better understand capital performance

• data-mine historical data for insight

Capital

9

What will be your institution’s focus regarding CAPITAL?

Forces of Change

• Loss of trust with institutions

• remain ‘suspicious’ of institutions

• threat of customer mobility remains

• Economically damaged

• fewer big ticket financial transactions

• need to ‘catch-up’ retirement

investment plans

• More educated about risk

• more scrutiny on financial products

• flight to quality

Customers

10

0%

5%

10%

15%

20%

25%

30%

6.7%

19.0%

22.6%23.2%

28.5%

What do you anticipate will be the most pronounced change in CUSTOMER’S behavior?

Impact of Change

• Customers ‘stickiness’ reduced

• increased willingness to change

providers

• Reduction in fees

• fewer mortgage transactions,

insurance policies, etc.

• customers more price sensitive

• Products need to withstand scrutiny

• clearer value proposition within each

product offering

• improved risk management to identify

higher risk customers

Customers

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Percentage of customer indicating they will not switch banks this year

J.D. Power and Associates 2010 U.S. Retail Banking Satisfaction Study

Harnessing Change

• Rebuild trust & reputation

• promote economically constructive

activities (e.g. increased lending, etc.)

• educate employees on the value and

importance of corporate reputation

• Fight to preserve margins

• extend efficiency efforts

• target less-price sensitive segments

• Focus on quality

• exist lower quality products

• focus on individual customer risk

• leverage brands

Customers

12

What key steps will your institution focus on in order to rebuild TRUST & REPUTATION

Other

Introducing customer charters

Clarifying disclosure information

Issuing additional disclosure information

PR campaigns to educate the public

Re-aligning values in corporate culture

Making employees aware of reputation issues

0% 10% 20% 30% 40%

2.7%

5.9%

12.3%

12.9%

15.2%

22.0%

28.9%

13

Forces of Change

• Emerging market players

• growing brand presence and

sophistication of local providers

• regional ambitions of national

providers

• New entrants

• non-traditional providers leveraging

their service expertise (e.g. Tesco)

• entry dependent on attitude of local

regulators (e.g. Europe vs USA)

• Consolidation

• ‘bargain’-driven acquisitions

• acquisitions for capital scale

Competition

What positive opportunities have emerged from the financial crisis and economic downturn?

Impact of Change

• Erosion of experience advantage

• ‘western’ providers cannot rely simply

on superior industry experience

• Improving the customer experience

• traditional providers need to improve

service responsiveness

• ‘Dumb-bell’ shaped sectors

• larger leading institutions

• fragmentation and specialization at

lower end

Competition

14

2007 45

2010 28

Number of global financial institutions >$50bn market capitalization

15

Harnessing Change

• Boosting emerging market operations

• investment to take emerging market

operations to the next level

• defensive tactics in strategically

important regions

• Return to service innovation

• leverage service technologies

• recruitment of market facing talent

• focus on service training

• Strategic acquisition/divestments

• decide which end of the market to

focus on

• target acquisitions/focus on PMI

Competition

What will be your institutions focus regarding TECHNOLOGY?

Harnessing Change

• Develop flexible compliance solutions

• Balance compliance risk & reward

• Scenario planning on ‘tipping-points’

Conclusion

• Focus on capital efficient products

• Improve measurement of capital use

• Target liquidity creating business

• Fight to preserve margins

• Focus on quality

• Rebuild trust & reputation

• Return to service innovation

• Strategic acquisition/divestments

• Boosting emerging market operations

Forces of Change

COMPLIANCE

CAPITAL

CUSTOMERS

COMPETITION

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