Summer? the Struggle with Corruption for the Economy That Could Be King, Page 12

Securities & INVESTMENT june 2011

REthe members’ magazine of theVIEW chartered institute for securities & investment cisi.org/s&ir Indian summer? The struggle with corruption for the economy that could be king, page 12

Christopher Adams What the Standard & Poor’s downgrade means for US prospects, p11

Gabriel Bernardino The head of Europe’s insurance and pensions regulator on Frankfurt and family, p18

Vickers’ world The devil in the detail of the Independent Commission on Banking’s interim report, p20

Securities & Investment june 2011 REVIEW Editor Hugo Cox Senior Designer Pip Atkinson 18 Art Director Steven Gibbon 12 Publisher David Poulton Agency Managing Editor Molly Bennett Production Director John Faulkner Managing Director Claire Oldfield Chief Executive Martin MacConnol Advertising Sales Yanina Stachura +44 (0)20 7907 4803 [email protected] 16 Cover illustration Stuart Briers Published on behalf of the Chartered Institute for Securities & Investment by Wardour, Walmar House, 296 Regent Street, London W1B 3AW Telephone: +44 (0)20 7016 2555 Fax: +44 (0)20 7907 4820 www.wardour.co.uk ISSN: 1357-7069

Communications Editor, Chartered Institute for Securities & Investment Richard Mitchell 8 Eastcheap, London EC3M 1AE Telephone: +44 (0)20 7645 0749 Contents Email: [email protected]

Editorial panel Features Members’ features Regulars Nick Seaward, Institute of Education 12 cover story: 22 cpd: measuring 5 city view Chartered FCSI, Chairman Suren Chellappah FCSI Sanford C Bernstein honest growth the impact Better consumer protection Moorad Choudhry FCSI Royal Bank of Scotland Tamsin Brown asks whether Impact investing, still in its must not muddle the principle Simon Culhane, Chartered Institute for Chartered FCSI Securities & Investment recent efforts to combat infancy, is a sector to look out of ‘buyer beware’ Scott Dobbie FCSI(Hon) Deutsche Bank corruption in India may for, says Ritchie Macdonald Matthew Glass, CME Clearing Europe provide the catalyst for the Chartered FCSI 6 upfront Mike Gould FCSI Russell Investments country’s regional ascendancy 24 margin for error News and views from Paul Harris, JP Morgan Chase Following an undetected Chartered FCSI members of the Chartered reporting mistake, should a Victoria Hoskins, Barclays Wealth 16 swimming together Institute for Securities & Chartered FCSI firm of stockbrokers own up Paul Loughlin, Rathbone Investment What is causing the Investment (CISI), including Chartered MCSI Management increasing correlation of or keep the money? our regular back story by Robert Merrifield FCSI Savoy Investment Management global stock markets? James Clay ‘Mudlark’ Harris 26 need to read Richard Mitchell Chartered Institute for Gavin investigates Securities & Investment Catch up with this Mark Otto, Chartered FCSI New Europe Advisers 11 first person Frank Reardon, JM Finn month’s essential reading Chartered FCSI 20 splitting up Christopher Adams on what Patricia Robertson, Westport Global Tamsin Brown looks at the the Standard & Poor’s debt Chartered FCSI 27 diary Jeremy Robinson, Charles Stanley potential impact of the CISI events and new downgrade means for the US Chartered MCSI Independent Commission Hamish Rowan-Hamilton Veridicus Ltd member admissions Markus Ruetimann FCSI Schroder Investment on Banking’s interim report 18 profile: Management 30 people: window on gabriel bernardino Nimrod Schwarzmann FCSI RBS Global Markets Arjuna Sittampalam, Sage & Hermes the past The Chairman of the European Chartered MCSI Andrew Bradford ACSI Insurance and Occupational Nigel Sydenham, C. Hoare & Co Chartered MCSI on writing a compelling Pensions Authority (EIOPA) Alan Yarrow, Chartered Institute for Chartered FCSI(Hon) Securities & Investment family memoir talks to Hugo Cox

Average audited circulation: 17,558 for period July '09 — June '10 © The Chartered Institute for Securities & Investment (CISI). All rights reserved. Reproduction in whole or part prohibited without prior permission of the CISI. The CISI and Wardour accept no responsibility for the views expressed by contributors to the Securities & Investment Review; or for unsolicited manuscripts, photographs or illustrations; or for errors in articles or advertisements in the Securities & Investment Review. The views expressed in the Securities & Investment Review are not necessarily those held by the CISI or its members.

city view Buyer beware

cisi opinion The FSA is right to push for better consumer protection, but this should not mean making the buyer exempt from responsibility for their purchase launching a far-reaching discussion pensions, mortgage endowments, mortgages, products are FSA-approved and insured, paper (DP), Product Intervention DP11/1, current accounts and, most recently, payment a view that a lot of people already hold. in January, FSA Chairman Lord Turner protection insurance (PPI), together with a Many consumers may find even a called for a radical rethink of consumer raft of payments for the failure of firms or simple financial product hard to understand, protection in the UK. This included products, or for providing unsuitable advice. but this does not mean that the concept of proposals to consider fee caps and ban The cash costs are enormous: for example, ‘caveat emptor’ or ‘buyer beware’ should non-advised sales and some financial pension misselling cost £11.8bn and PPI not apply to any financial services products products. Although the CISI welcomes the compensation is estimated at £9bn, which in the same way as it applies to all others. openness with which the FSA has initiated dwarfs the £195m cost of the split capital Nor should we seek to prevent ‘non-advised debate in an area of such importance to our investment trust saga and the £247m cost of sales’, denying individuals the right to make members, the suggested transition to a more the recent Keydata debacle. It their own decisions – and mistakes. As the intrusive and interventionist regulatory is, however, impossible to quantify the cost regulatory framework evolves, the FSA environment brings with it challenges to the industry of business lost from the and its successor, the Financial Conduct and responsibilities that may prove hard resulting lack of confidence in the sector. Authority, must ensure that consumers’ for both the industry and the regulator to rights are matched by a need to meet. Responses to the DP by take responsibility for their actions. leading trade bodies across insurance (the There are concerns that More prominent risk warnings and Association of British Insurers), banking more effective promotion of existing (the British Bankers’ Association) and greater intervention will risk consumer educational resources on private client investment (the Association stifling innovation, impairing the internet, rather than a general of Private Client Investment Managers dumbing down of products, must and Stockbrokers) have now highlighted competition and reducing be the way forward. a number of commercial concerns. The The industry is already undergoing message to the FSA is that a more balanced consumer choice significant turmoil as it prepares to approach to consumer protection is implement the requirements of the required that reflects the diversity of the Clearly, it is in the interests of all industry RDR at the end of 2012. Introducing yet more UK’s retail financial services industry. For members to reduce misselling, which is, in significant change before this new regime example, there are concerns that, while the part, why the FSA introduced the Retail has become established is not without risk, regulator’s insistence on a more rigorous Distribution Review (RDR). especially since it comes at a time when product development and product lifecycle However, the FSA already has significant the industry is struggling with the higher management process will help to increase powers to regulate the UK retail financial costs associated with increased regulatory consumer confidence, greater intervention services industry and must be wary of intervention and with the continued aftermath will risk stifling innovation, impairing extending its powers further or setting of the credit crisis. While implementing competition and reducing consumer choice. objectives that it will not be able to achieve. many of the themes discussed in the paper Over the past two decades, the If the regulator is able to pre-approve all would improve consumer outcomes, any financial services industry has been hit by products, ban products or prohibit certain approach must reflect the industry’s capacity a succession of compensation costs. These features, it will inevitably lead retail clients to cope with further change, be balanced and costs have been associated with misselling of to believe that all retail financial services be carefully executed.

5 Upfront News and views from the CISI

islamic finance News in brief

Certificate success More than 70 candidates who have passed one of the CISI’s Certificate exams attended a recent reception to celebrate their success. The event, at Pewterers’ Hall in the City of London, was hosted by the CISI From left, Lina Gharib, and Brian Winterflood FCSI(Hon), representative of the Banque Life President, Winterflood du Liban, Stéphane Attali, Securities. The Certificate ESA Dean and Director General, and Ruth Martin, achievers were particularly CISI Managing Director from the wholesale sector.

Under pressure? The S&IR will next month include Arabic IFQ launched an article about the working culture in financial services and we want An Arabic version of the ground-breaking Ruth said: “The IFQ was designed to to hear your opinions. Islamic Finance Qualification (IFQ) has fulfil the market requirement to provide an Are the demands placed on been launched. international benchmark in Islamic finance individuals by employers reasonable Developed by the CISI and education and aimed at existing and new employees, as or do they face a lifestyle that is training institute Ecole Supérieure des Affaires well as individuals seeking a career in the too pressurised? How does the (ESA), with support from the Banque du sector. The launch of the Arabic version of the industry rate in offering flexible Liban, the central bank of Lebanon, the IFQ IFQ is the next stage in the evolution of this working opportunities to workers? is the first benchmark qualification to cover important qualification.” Email Richard Mitchell at Islamic finance from both a technical and a Stéphane Attali, ESA’s Dean and Director [email protected] Sharia perspective. General, said: “Our mission was, and remains The launch of the Arabic IFQ syllabus, today, to contribute to the development of the workbook and exam took place at ESA’s region’s business landscape through top-level campus in Beirut. Candidates will be able academic and executive education. This first to take the Arabic IFQ internationally via Arabic edition of the IFQ will be one of the computer based testing. Since the English- key elements that enables us successfully language version of the IFQ was introduced to achieve our mission and export it across in 2007, more than 1,800 exams have been Lebanese borders.” sat. Over 1,000 of these were taken outside Candidates with queries regarding the the UK, in countries including Lebanon, the syllabus, training or exam for the Arabic IFQ UAE and Singapore. should contact [email protected] Guests at the launch included Mr Raed H Charafeddine, First Vice-governor of the Banque du Liban and Chairman of the For further information, turn to the Need to Advisory Council for Islamic Finance, and CISI Read guide to CISI publications on page 26 or visit the Managing Director Ruth Martin. Qualifications section at cisi.org

rdr Additional exam sittings The CISI is holding extra sittings of its RDR-compliant, the deadline for which is dealing in securities, advising on and dealing qualification of choice for advisers who need 31 December 2012. The qualification will, in derivatives and advising on packaged to comply with the requirements of the Retail however, continue to be offered after June products. It is also an appropriate qualification Distribution Review (RDR). To help meet next year. for the non-RDR activity of managing industry demand, the Institute will run sittings The latest sitting, in March 2011, saw a investments. On completion of the PCIAM, for the Certificate in Private Client Investment record number of candidates, more than advisers need only to complete a qualification Advice & Management (PCIAM) in June, 400, take the exam. There have been more gap fill to comply with the qualification September and November 2011, as well as than 500 bookings for this month’s sitting. element of the RDR. January, March, May and June 2012. PCIAM is on the FSA’s list of appropriate The June 2012 sitting is the last qualifications for RDR purposes, covering the For full information about PCIAM dates, the eligibility recommended for those who need to become range of relevant activities: advising on and criteria and qualification gap fill, visitcisi.org/pciam11

6 June 2011 cisi.org

The number of articles already viewed via the new CISI publications app. The app, available at cisi.org/app, allows eligible members to download 5,157 the S&IR, Regulatory Update and Investment Management Review ➳ letters events

Postbag an educational charity that delivers T&C conference Letters to the S&IR can be sent by post to Richard apprenticeships and training to young people. “The ideal opportunity Mitchell, Communications Editor, Chartered Since the beginning of last year, the CISI for individuals working Institute for Securities & Investment, 8 Eastcheap, London EC3M 1AE, has recruited nine apprentices, three of whom in training and or to [email protected] have now been permanently employed by the competence (T&C) Institute. These learners have played an integral to ensure that they Dear S&IR, role at the CISI, covering jobs in areas including fully understand the The Milburn Report, published in 2009, membership, operations, customer relationship changing environment stated that there is an urgent need within the management and IT. in which they and their professional sector to raise the aspirations of We hope the CISI will continue to experience Gary Teper MCSI firms operate and to young people and to break the glass ceiling, the benefits apprentices can bring and would benchmark good practice.” which is a barrier for many. encourage other employers to follow the That’s the verdict of Gary Teper MCSI, By supporting the Government’s Institute’s lead. The results of a survey among Director, Charles Stanley, on the CISI T&C Apprenticeships programme, the CISI has taken employers who employ apprentices show it Conference 2011. With T&C continuing to great steps to redress this and to open access to is a worthwhile step. Some 88% believe that move up the regulatory agenda, the event the financial services industry to young people apprenticeships lead to a more motivated and will analyse the growing requirements for who may not have made it through normal satisfied workforce, while 83% rely on this firms in this area. recruitment practices. recruitment avenue to provide skilled workers The conference, in London on 12 July, The Apprenticeships scheme offers young for the future. boasts a line-up of expert speakers from people the opportunity to study towards To find out how to take on an apprentice in the world of T&C, including Katharine nationally accredited qualifications while they England, call the Apprenticeships programme Leaman, Manager, Professional Standards learn and participate in the workplace. The on 08000 150 600 or visit apprenticeships.org.uk Policy, FSA; Bruce Herrington ACSI, Senior programme provides employers with loyal and Alternatively, employers in the London area Competency Manager, Brewin Dolphin; highly motivated employees and funding is can contact Skills for Growth on 020 8317 0165. Ian Howatson, Head of Learning and available to employers to train apprentices. Development, Towry. The CISI has developed a fantastic Ashley McCaul, partnership with Skills for Growth, Chief Executive, Skills for Growth, London For full agenda and booking details visit cisi.org/tcconference2011.

middle east regions Bahrain launch New Jersey President In collaboration with the professional financial Politician Ben Shenton, Chartered FCSI Central Bank of Bahrain advisers provide to their has been appointed President of the CISI (CBB), the Bahrain Institute clients,” said Khalid Hamad, branch in Jersey. of Banking and Finance CBB Executive Director, Ben is a director and equity holder of (BIBF) has launched a Banking Supervision. BIBF TEAM Asset Management in St Helier, Financial Advice Programme Director Garry Muriwai where he manages investment portfolios (FAP). Successful candidates added that the programme for private clients. He has more than will go on to become will help to strengthen 30 years’ experience in the financial members of the CISI. Bahrain’s position as an Ben Shenton, services industry. Khalid Rashid Al Zayani, It is the first customised “international centre for Chartered FCSI Since 2005, he has served as a Senator President of the CISI programme in Bahrain financial services”. to the States of Jersey, the parliament Advisory Council in endorsed by the CBB as Khalid Rashid Al Zayani, of his home island. Currently, he is Chairman of its Public Bahrain. (Photo courtesy of Bahrain Banker the minimum mandatory President of the CISI Accounts Committee, which monitors government spending. magazine) qualification for entry- Advisory Council in Bahrain, In addition, he is Vice President of the Channel Islands level financial advisers in said: “Improving Co-operative Society, one of the biggest local employers and the Kingdom. It is aimed the professional skills of retailers in the Channel Islands. at individuals who have those who work in banks He said: “My involvement with the Institute goes back over either recently joined, or and other financial firms ten years and, during that time, I’ve witnessed a strong desire are aspiring to enter, the is a key factor in maintaining to push forward improvement in professional standards. My financial advice sector. confidence in the system. aim will be to expand further the CISI membership in Jersey, “This is an important Membership of a global which is already more than 850-strong, and ensure that the development in the CBB’s professional body will Institute continues to develop its services. stated objective of improving give young Bahrainis a “My political role keeps me informed of relevant industry the level of knowledge solid foundation for changes and there cannot be many politicians in office today and understanding that their careers.” who hold an exam pass in integrity!”

7 news review

select benefits asia Further discounts Sri Lanka What do website design and childcare have in common? They are just two areas in which CISI members can secure Advisory Council savings through the Institute’s Select Benefits scheme. The CISI has announced the members of its National Advisory Council (NAC) for Sri Lanka. Chaired by Nihal Fonseka, General Manager/Director and Chief Executive, DFCC Bank and A 30% discount on published design Chairman of the Colombo Stock Exchange, the NAC will support the expansion of the CISI prices is available from SiteWizard.co.uk, within Sri Lanka. It will maintain and develop the Institute’s membership, establish a market for a low-cost website and ecommerce the Institute’s qualifications and offer CPD events, contributing to the growth of capacity in Sri solution provider. For example, a five- Lanka’s financial services sector. page professionally designed website In March, the CISI opened an office in Colombo to provide financial qualifications to that would normally cost £599.95 is students and industry professionals and serve as an administrative hub for the Middle East and reduced to £419.97. The amounts quoted South East Asia. are minus VAT. There is no contract and Nihil Fonseka said: “As more and more people in Sri Lanka start to invest in stocks and other SiteWizard.co.uk offers a 30-day money- securities, it is important that there are enough qualified people to provide them with sound back guarantee together with a best- advice. The entry of the CISI is very welcome in this context.” price promise. Other NAC members are: Nandika Buddhipala, Chief Financial Officer, Commercial Bank of Ceylon; Childcare vouchers offer eligible Channa De Silva, Managing Director, LR Global Lanka working parents the opportunity to save AssetManagement; Ajith Devasurendra, Managing as much as £933* each per year on Director/CEO, Taprobane Group; Dr Hareendra Dissa registered childcare costs for children up Bandara, Director, Financial Services Academy, Securities to the age of 16. Vouchers are offered to and Exchange Commission of Sri Lanka; Indrajith Fernando, you through your employer and, as a CISI Managing Director/CEO, Bartleet Transcapital; member, you receive a preferential rate S. Jayavarman, CEO, National Asset Management; Madu for your company. This deal is provided Ratnayake, Vice President and General Manager, Virtusa through Computershare Voucher Corporation, and board member of Sri Lanka Association for Services, the UK’s largest dedicated Software and Services Companies (SLASSCOM). provider of childcare vouchers. Nihil Fonseka

events

For more information on how to obtain these AGM date announced deals and other savings, visit cisi.org/memberlogin This year’s Annual General *Terms and conditions apply. See website for further 11,924 Meeting (AGM) will be held at the details. Subject to individual circumstances. The number of attendees at 272 CISI CISI, 8 Eastcheap, London EC3M CISI Select Benefits is managed on behalf of the CISI by professional and social events in 1AE, on Thursday 22 September, Parliament Hill Ltd of 127 Cheapside, London, EC2V 6BT. the UK in 2010/11 commencing at 10.30am. The closing date for nominations online for Board membership is Friday 8 July 2011. A member (MCSI) or BEST OF THE BLOGS Fellow (FCSI) of the Institute may prospectmagazine.co.uk/2011/05/is-faith-in- ft.com be nominated for elected vacancies 1 india-misplaced/ 3 Writing in the FT’s comment and analysis section (India: on the Board. Board members “India is as close to collapse as it is to success,” warns Writing is on the wall), James Lamont and James Fontanella- retiring by rotation may stand for Harjeet Johal. Manufacturing faces unrelenting pressure Khan report a swell of concern at India’s corruption problem. re-election and the Board itself may from China, India’s services sector looks transient and its K.P. Singh, Chairman of India’s largest property firm, says the also sponsor candidates for any agricultural sector is “so badly managed that it fluctuates sector is “plagued with archaic laws” and UK Prime Minister vacancies arising. violently between sustainability and Malthusian disaster David Cameron shocked Indian lawmakers in February by within a season”. Not to mention “a subsidy culture and hinting that the days of the ‘licence Raj’ were not over, in a endemic corruption that infects every level of India’s letter to his Indian counterpart Manmohan Singh. A nomination form, which includes an bureaucracy, from postman to president”. India may have CISI in the blogs explanation of the requirements for the election the swagger of a superhero, but it is closer to the “archetypal finextra.com/community of candidates to the CISI Board of Directors, banana republic, barely in control of basic functions”. In last month’s S&IR, the City View column noted the is available on the CISI website. Alternatively, economist.com/blogs/ information overload compliance departments face at the a hard copy of the nomination form is available, 2 freeexchange/2011/04/india_outpaces_china hands of the FSA. Steve Dance, of RiskCentric in Cambridge on request, from Linda Raven. Email If India used the same measure of GDP as China, its (Information overload), commended the research: “It puts [email protected] or telephone 2010 growth rate would be higher than China’s, saysThe some firm data against all of the anecdotal evidence.” +44 (0)20 7645 0603. Economist. India currently deducts taxes and subsidies The Chairman, Alan Yarrow, would before calculating its GDP number; China does not. See page 12 for a full discussion of India’s growth and be happy to speak to any potential nominee Because Indian taxes increased disproportionately last year, corruption story. or sponsor before a formal application is the Indian figure is depressed; using the China formula, made. He can be contacted by emailing and matching the time period, India grew by 10.4% to Do you have a blog recommendation? [email protected] or telephoning China’s 10.3%. Please send it to the Editor: [email protected] +44 (0)20 7645 0603.

8 June 2011 cisi.org

➳ CLAY ‘MUDLARK’ HARRIS Back story on Michael Johnson of BNY Mellon

Michael Johnson was a pioneer, people would be throwing jobs at me.” When BNY merged with Mellon having been among the first band of But he applied for market research and Financial Corporation, its experience recruits when the Bank of New York other positions without success. was used as a template for the decided to move its corporate actions He worked for six months in transfer of many of Mellon’s functions processing to Manchester in 2006. In Co-operative Bank’s local call to Manchester. The respective five years, that greenfield operation – centre in Skelmersdale, but found it companies’ legacy custody platforms now part of the merged BNY Mellon monotonous. “I didn’t just want the still operate discretely, side by side, Michael Johnson – has grown from 50 to 1,100 people at system to decide for me what to try to although the ultimate goal is to two city-centre sites. sell to the customers.” develop a unified system. Vice President, BNY Mellon Michael – at 27, a Vice President His break came when BNY began Michael became a Section Manager and Group Manager – attributes his recruiting in Manchester as part of its and is now Group Manager for the Do you have a progress both to the opportunity of plan to create a new operation capable legacy BNY Corporate Actions team, back office story? being in at the start and to BNY Mellon of supporting continuing global growth. with responsibility for the UK, Irish mudlarklives@ helping him to discover an aptitude The first three months involved and five continental European markets. hotmail.co.uk for management and to develop the classroom-based learning, since most He completed his CISI Diploma last necessary skills. recruits were starting from scratch year. “It was pretty full on but brilliant. At Liverpool University, in his in the industry. “It’s such a young I loved every minute of it.” BNY hometown, he had first studied workforce, with a lot of people straight Mellon paid for classroom learning business economics and computer out of university.” They gained hands- sessions run by BPP. science, but he soon dropped the latter on experience on one function at a time, Michael also takes part in the subject as he refined his goals. always shadowed by experienced staff bank’s management development “I always knew I wanted to do in London. programme, which includes team something related to business,” Michael became a Deputy Analyst projects such as organising a day’s visit Michael says. “I struggled with on the mandatory events side of by a school party and taking over a macroeconomics. It just seemed corporate actions. After a year, charity shop to increase its takings. so vast. I really needed something he was promoted to Analyst and “I’ve progressed a lot further than tangible to be coming out at the end achieved his CISI Investment I thought I would. I probably would of it. I took a shine to market research Administration Qualification, have ended up somewhere in banking – at that time. After graduating I was now also known as the Investment maybe in a branch – but I’ve been very under the impression that, with my 2:1, Operations Certificate. lucky here in terms of opportunity.” Illustration: Luke Illustration: Wilson Luke

cpd survey CISI email Strong support for bulletin internship pay Advice and guidance on a range of CPD topics will be An overwhelming 97% of financial of responsibility given to the intern. given to members in a new CISI email bulletin. services players believe that employers Rewarding talent should start here.” The bi-monthly bulletin is being launched by the should pay interns, according to a survey But supporting unpaid internships, a Institute as CPD becomes more important than ever by the CISI. contributor said: “A properly supervised for members. Respondents to the survey, conducted and varied internship in a real business Chartered Members and Fellows of the Institute on the CISI website, were asked to is worth more than the corresponding must complete at least 35 hours of CPD annually to choose from four options about the level time on a first degree course, for which retain their status. Additionally, the implementation of financial support that firms should the student will pay substantial fees and of the RDR will require compulsory CPD for retail provide for interns. More than half – living costs.” investment advisers. The CISI wants to ensure that 56% – said that remuneration should Under a new social mobility strategy, members undertaking CPD feel confident that the consist of out-of-pocket expenses and the Government aims to reverse a content being logged will meet the required criteria. modest pay; 28% said that modest pay culture of unpaid internships, which, Pivotal to how members demonstrate compliance was appropriate, while 13% favoured the it says, favours young people from will be their CISI CPD log. With this in mind, the payment of expenses only. Only 3% felt more affluent and well-connected Institute will, in its bulletin, provide information in that internships should be unpaid. backgrounds. Firms will be asked to areas including the suitability of CPD, logging activities Comments from respondents pay interns or face the risk of a legal and audit advice. Hints and tips will help members included: “Unpaid internships are challenge under the national minimum to get the most from their log and avoid any mishaps exploitative and should be banned” wage legislation. that could affect their end-of-year CPD result. and “certain students can ill afford to More than 800 people took part in take low/unpaid work as they have to the survey. Further information will appear at cisi.org/cpd and in editions of the CPD provide for themselves.” Another said: bulletin, the first of which will be sent by email this month. “In finance, in particular, there is a lot To take part in the latest CISI survey, visit cisi.org

9 10 aids to helpcandidates prepare for their exams. elearning products, which are interactive revision The S&IR’s QuickQuizfeatures questionsfrom CISI or visitcisi.org Client Services on+44(0)207645 0680 To order CISI elearningproducts, pleasecall knowledge Test industry your quick quiz June 2011 June2011 Reuters, thedesignated calculation agent, on is calculated. each ofthetencurrenciesinwhich LIBOR up ofthelargest, most active banks in submissions fromapanel, which ismade end product ofacalculation basedupon the Londonmarket. lowest actual cost ofunsecuredfundingin now indexed It toLIBOR. represents the ofswaps ofloansare $350trn and$10trn Independent research indicates that about Who usesLIBOR health ofthefinancialmarkets. as akey economicindicator forthe exchanges andisincreasingly employed world’s major futuresandoptions of interest rate contracts onmany ofthe It isusedasthebasisforsettlement benchmark forshort-term interest rates. and isrecognisedtoday astheprimary across theworld’s financialmarkets Rate, orLIBOR. lending –theLondonInter BankOffered of theglobal benchmark forinterbank has seenincreasedinterest inthecalculation investigation andpossible reform.This year has beensubject torenewed scrutiny, early 2007, almost every aspectofthesystem Since theglobal financialcrisisbeganin LIBOR Ask the experts... Why theLondon Inter BankOffered Rate matters andhow itiscalculated Answers are onpage 29. The calculation is undertaken by Thomson The individual rates LIBOR arethe has beenwidelyLIBOR adopted newsreview

cisi.org

Illustration: Cameron Law quartiles), thencalculates themeanof lowest fournumbers (the topandbottom Reuters discardsthehighest fourandthe values foraparticularcurrency, Thomson trimming. For instance, if16banks submit discards thefurthest outlying numbers –the receives andreviews allsubmissions and trimmed arithmetic mean.Thomson Reuters other data vendors. market, viaThomson Reuters andnine generated, thedata isreleasedtothe and allofthebenchmarks have been the calculation engine. Oncethisiscomplete the submitted rates beforesendingthemto barrage ofautomated andmanual tests on publication. Thomson Reuters a thenruns they submit; theycanonly do soafterfinal Banks cannotseeoneanother’s rates as directly totheteamat Thomson Reuters. for theday into theapplication, which links the currencydealer) inputs thebank’s rates 11.20am, anindividual at each bank(typically every businessday, between 11.10amand desk ofevery contributor LIBOR bank. On applicationA LIBOR isinstalled at thecash How itiscalculated receiving thesubmissions. daily rates, usually within onehourof submitted by panelbanks andcreates the (BBA). Thomson Reuters audits thedata behalf oftheBritish Bankers’ Association The simple calculation isknown asa A) Q1 To whom shouldanemployee report any suspiciousmoney launderingtransactions? A) Q2 WhichONEofthefollowing isacharacteristic commonly associated withhedge funds? D) A) which ofthefollowing? Q4 Inaslowing economy, thepublicsector netcashrequirement willmostlikely reflect D) investments willnotbecharged CGT government spendsmore thanthebudget anticipated the government receives more from taxandotherrevenues thanitspends A) Q3 WhichONEofthefollowing statements may beregarded asataxadvantage for ISAs? of assets D) involves substantialperformance-related fees more thanit receives from taxes and otherrevenues Detailsofincome received oninvestments mustbeincludedontaxreturns Asurplus,asthegovernment receives more taxthanthe budget anticipated Compliance Officer B) They are oneofthemostheavily regulated investment sectors Tax-free income isless attractive to higherrate taxpayers Serious Organised CrimeAgency Investment entrylevels are comparatively low BankofEnglandC)Money LaunderingReporting Officer

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B) [email protected] Their cost structure typically A shortfall, as the C) Ashortfall, asthe B) Gains made on Gainsmadeon B) A surplus, as Asurplus,as

first person Buried Treasuries Structural weakness, not the prospect of actual default, is the risk signalled by Standard & Poor’s recent downgrading of US debt

why anyone would be Lehman Brothers look a squall. shocked by a credit rating The spike in borrowing costs The spike in borrowing agency warning of a US debt would probably tip the US and costs would probably tip the downgrade is a mystery. After much of Europe back into all, what could a single analyst recession. The rest of the world US and much of Europe back at Standard & Poor’s (S&P) tell would go down with them. into recession us about the world’s deepest and There is a one-in- most liquid bond market that three chance that S&P, based on we did not know already? past form, will follow through Hathaway investors: “The That America has with a downgrade in the next United States is not going to a huge fiscal deficit and may two years. But in this case, past have a debt crisis as long as we struggle ultimately to pay the form may not be a good guide. keep issuing our debts in our bill is hardly a surprise. Ever Don’t get me wrong: for all the own currency … The only thing since the banks were bailed out, official optimism in the White we have to worry about is the market bears have been House, there is every risk that printing press and inflation.” predicting that the next leg of US politicians may fail to agree But that’s hardly a the financial crisis will be the on how to tackle the US public comforting prospect. The threat failure of sovereign borrowers. debt. But there is a long way to of higher interest rates would Witness the rescues of Greece, go before America becomes the remain – making debt no Ireland and Portugal. Why not next Greece. Firstly, more attractive. And, the US? But S&P’s investors know that, in a risky while a bond market decision to downgrade the world, there are still few Armageddon might be long-term US debt outlook alternatives to US debt. That avoided, the risks seen from stable to negative, which is probably the reason why in holding other emphasised the political bickering Democrats and countries’ debt would problems in Washington of Republicans have got away with only grow. One reaching a deal to cut the US it so far, and why Treasuries consequence of that deficit, still had the capacity have barely flickered since the would be to make it to shock. The S&P warning. Secondly, the harder for the UK and reverberations – gold has risen warning could actually have others to weather their to fresh nominal records and a beneficial effect if it brings own heavy dose of the dollar has plumbed about agreement on the path austerity. three-year lows – continue to to fiscal retrenchment. The So, should we be be felt weeks after equity agency’s decision to put the worried by the rating markets and US Treasuries had UK’s triple-A rating on negative agencies? Not by themselves absorbed the news. outlook in May 2009 led to S&P’s warning per Whether we should be worried tough decisions on tax increases se: that’s an opinion, is an interesting question. and spending cuts by the shared by others and Certainly, the coalition Government. The based on publicly financial consequences of warning was later lifted. available data. More America losing its triple-A Thirdly, even if S&P concerning is what status could be severe. An does act, investors must still the rating agencies actual default would be come to their own judgment might not be catastrophic. A Treasury bond about the likelihood of an actual picking up. That, market crisis, in which the default. While there are and the prospect ultimate ‘safe’ asset was judged institutions that can hold only of a return to to be about as risk-free as a punt triple A-rated debt and that 70s-style on a Grand National outsider, might be compelled to sell their inflation.n does not bear thinking about. Treasury holdings, Washington Global interest rates would leap would probably inflate its way Christopher sharply and the ensuing out rather than renege on its Adams is the financial turmoil would, in debt. As Warren Financial Times’ retrospect, make the collapse of Buffett recently told Berkshire markets editor Photo: Johanna Ward Photo: Johanna

11 on the face of it, India’s prospects Western companies are attracted to a study by Transparency International, look sparkling. Its $1.5trn (£919bn) country known for its entrepreneurial a non-governmental anti-corruption economy is expected to grow at a rate flair, evident in the success of home- organisation. A $39bn (£24bn) telecoms close to 8% over the next two years, grown businesses such as conglomerate scandal, in which kickbacks allowed according to the International Monetary Tata Group, which now generates 57% of mobile phone licences to be sold at a Fund (IMF). HSBC forecasts that, by its revenues overseas. fraction of their actual value, was a 2050, it will have become the world’s particularly striking example. In a report third-biggest economy. Whereas Indian appeal published in March, KPMG warned many other emerging markets rely on The Indian Government has that the series of high-level corruptions a booming export economy to meet progressively relaxed investment caps and scams over the past two years demand in the developed world, India’s for foreign companies. The result is that, was threatening to derail the country’s growth is being driven by its domestic between 2003 and 2010, the number of credibility and economic boom. Its market, which accounted for 57% of foreign direct investment (FDI) projects survey of Indian corporates found that GDP last year. “This helped increased by 7% a year, on average, more than two-thirds of respondents insulate it from the global slowdown led by US firms (see table on page 14). believe that India can achieve more and provides long-term incentives for For English-speaking investors, there than the targeted 9% GDP growth if foreign investment to tap into India’s is the added bonus that they share a corruption is controlled. It is expanding middle class,” says Deepak language with most Indian business hard to measure how much corruption Lalwani, OBE, Chartered FCSI and people. But India has a has affected overseas companies’ and Founder Director of London-based corruption problem. Last year, 54% governments’ plans to invest in India India consultancy Lalcap. of Indians paid a bribe, according to a – negative publicity over last year’s Honest growth A history of corruption has damaged India’s image and arguably hit foreign investment flows. But the Indian Government is at last taking steps to clean up the problem and overseas investors should note the country’s economic fundamentals, which look strong next to those of China, says Tamsin Brown

12 June 2011 cisi.org

cover story

Commonwealth Games did not help – an independent ombudsman as part but foreign investment flows have been of the bill who will follow through falling recently following the boom of on accusations of corruption against A KPMG survey found that two- the last decade. FDI into India dropped public officials and be able to initiate by 25%, to $18.3bn (£11.2bn), between prosecutions against them,” he says. thirds of Indian corporates believe April 2010 and February 2011. The sum “I think that is an important move that India can achieve more than is dwarfed by the $105.7bn (£64.8bn) that ahead.” Government work was invested into China via FDI in 2010. is matched by local initiatives. Last its targeted 9% GDP growth if Foreign institutional investors in India year, Indian non-profit governance also appear to have been shaken. They organisation Janaagraha created a corruption is controlled pulled $2bn (£1.2bn) out of the markets in website where people can report how January and February, despite investing much they paid for a bribe, where and $29bn (£17.8bn) last year. for what. In the six months since its launch, Ipaidabribe.com has logged more Debt and GDP Fighting corruption than 250,000 hits and members of the The public outcry over corruption public have filed 5,000 reports detailing At the heart of India’s Government investment is its pledge has been mounting and the Indian the bribes they have paid. Making to spend $1trn on infrastructure in the five years from March Government has started to take steps to the market for bribery transparent in 2012. Can it afford this? Philip Poole, Global Head of Macro tackle the problem. An anti-corruption this way is already having an effect on and Investment Strategy at HSBC Global Asset Management, bill, first conceived in 1972, looks likely Government departments. Janaagraha thinks not. He estimates that the current Government debt-to- finally to make its way through the figures reported that Bangalore’s Road GDP ratio is about 76%. In China, where there is less need for Indian parliament later this year after Transport Organisation, which is a 96-hour hunger strike by 72-year- responsible for issuing drivers’ licences infrastructure investment, the IMF estimated debt-to-GDP ratio old activist Anna Hazare forced the and vehicle registrations, had the to be 22% in 2010. issue into the media spotlight. Graham second-highest number of bribes of all But how accurate is China’s figure, which is based on Ward, CBE, Vice Chairman of the UK bodies in the city. In response, the head data from the Government in Beijing? Victor Shih, Professor India Business Council and member of the organisation committed publicly of Political Science at Northwestern University, evaluated of the CISI International Committee, to reduce the practice. 8,000 local Chinese Government borrowing transactions says that the bill will give overseas Elsewhere, the Government has made that go largely unreported in the Government figures used investors tangible evidence that the significant strides in paring back India’s to calculate the debt-to-GDP ratio. Shih claims that the Indian Government intends to tackle infamous bureaucratic system. actual ratio for 2011 will be nearer to 96%. Inaccuracy in

Illustration: Illustration: Stuart Briers corruption. “They are going to appoint Foreign companies already in a ➳ reporting is a problem in China; in the February issue of the S&IR, our feature on China, ‘All fall down’, noted that informal securitisation was rife, despite being banned by the Government. It said that 40% of banks’ privately placed investment products go unrecorded in official figures and that lax definitions of non-performing assets grossly underestimate the banking sector’s exposure to bad loans.

13 cover story

state-owned State Bank of India and by a record 9% in May, opposition party its dozen or so ‘regional daughters’. supporters blocked roads and rail lines. Leading foreign investors in India 2010 But, unlike the Bank of China, which The Indian Government has said that, Total foreign direct investment projects by country has been an unashamed instrument in the short term, at least, reducing of Beijing’s economic policy, Bank of inflation is a higher priority than 225 India subsidiaries operate relatively spurring economic growth. independently. “While these are state- But the fundamentals of India’s economy 200 owned and commercially run, the bank are strong, especially if the Government has not been subject to the kind of proves committed to its ambitious targets 175 policy-driven lending of the state-owned for infrastructure spending. India is less Chinese banks, so balance sheets are advanced along the path of economic 150 healthier,” says Jan Randolph, Director reform than China, so it has further to 125 of Sovereign Risk at IHS Global Insight. go. China’s economic reforms began in 1978, initiated by the then Premier Deng 100 People power Xiaoping, and opened up the country to India’s more fundamental advantage the outside world. India did not start its 75 is demographic. Half of the 1.2 billion reforms until 1991, when Prime Minister people living in India are less than 25 Singh, then Finance Minister, took 50 years old. In China, the one-child policy steps to liberalise the economy. Lalwani means that the country’s population points out that the first $1trn (£612m) 25 is getting older, raising the spectre of of GDP took India 60 years to achieve; 0 labour shortages and a big bill to support he suggests that it will achieve the next its large number of retirees. The latest $1trn in less than seven years. China UK US Italy UAE Chinese census results, released in took 50 years to achieve its $1trn and less China Japan France April, showed that less than one-sixth of than four years to achieve the second. Germany

Switzerland the population was under 14, down from Lalwani concludes: “China Source: fDi Intelligence, May 2011 a quarter ten years ago. The number of is ten years ahead on the economic Chinese aged over 60 increased by about superhighway. I think that this decade joint venture with an Indian firm may 48 million, reaching 13.3% – up more will be for India what the last decade now inject fresh capital into the sector than 3% from ten years ago. was for China.” without having to get prior approval India’s economic growth is driven by from their Indian partners, and it is domestic demand, which should make now quicker for foreign firms to set up it more sustainable. India’s figure of Foreign investment a company in India. The Government is 57% compares favourably with that of also making inroads into much-needed 35% in China. Domestic demand will in India infrastructure investment. Economists only strengthen in future as India’s There are still a few sectors in which estimate that poor infrastructure in middle class expands. The McKinsey foreign company investment is limited the country shaves between 1% and Global Institute predicts that it will grow or banned. Banking, telecoms and 2% from GDP growth; Prime Minister to 583 million by 2025, about 12 times Manmohan Singh has said that India the size it was in 2005. A aviation all have a 74% cap on foreign needs to spend $1trn on this over the corruption problem deeply embedded direct investment (FDI). Newspapers five years from March 2012 (see the box in society certainly presents challenges and insurance have a 26% limit. Atomic on page 13 for a discussion of whether to India’s emergence as a superpower. energy, lottery gaming, betting and real this is affordable). These And a bulging youth population could estate are closed to overseas investors, reforms place India on an increasingly turn from an asset into a hindrance if as is multi-brand retail, meaning that strong footing compared with China, there is not enough work to go round. the likes of Tesco cannot set up shop. the other regional powerhouse, against Inflation is certainly a risk: in May, the This stems from fears that competition which it is often measured. Its banks’ Reserve Bank of India raised interest balance sheets appear to be in better rates for the ninth time since March from international players would affect shape. About half of India’s lending 2010 after inflation climbed to 9%. After the local small retailers and hit jobs. and deposit taking is dominated by the state-run oil refiners raised petrol prices The US is still the biggest FDI investor but its share of investment has fallen sharply, according to Ernst & Young. It puts this down partly to US opposition to outsourcing amid pressure to keep jobs at home. Meanwhile, the UK’s investment in FDI projects is concentrated in business services, manufacturing, and sales, marketing and support. Investment from Asia Pacific has been increasing. China moved from the 16th biggest investor in India in 2009 to equal seventh in 2010, in terms of numbers of projects (see table).

14 June 2011 cisi.org

Swimming togetheR The growing popularity of index investing and the greater influence of high-frequency trading is causing increasing correlation between stocks. James Gavin investigates its causes and effects

it appears that investors are day, the crash would not have happened,” that everything tends to go up or down in increasingly moving as one. In 2010, global says Jeffrey Wurgler, Finance Professor tandem,” he explains. Index stock markets saw correlations between at New York University. But inclusion also increases volatility. Poorly stocks hit historic highs, as macro-economic there is more to correlation than HFTs. The performing stocks ‘fall out’ of the index factors – namely sentiment about the growth of exchange-traded funds (ETFs) and when their total market cap becomes smaller direction of the global economy – gained than the next-largest company. sway over micro-economic factors, such This triggers automatic selling as the relative merits of individual stocks. The danger presented by of vast number of shares in the A recent study by J.P. Morgan company by index-tracking funds, into US stock markets shows that, while, in correlation is exacerbated by driving down the share price. Big 2005, so-called ‘market returns’ – the wider price swings in leading stocks in a direction of the market – were responsible the fact that it increases at times sector – those large enough to be for less than 30% of stock price takings, in of major market upheaval, in the index – tend to affect prices 2010 they were responsible for 60% of stock of related smaller firms, which price profits. The report notes that 70% of when investors most need makes matters worse. the price performance of an average S&P Even active fund managers now 500 company in the industrials sector is diversification to work use ETFs to get core exposure to a caused by the S&P 500 direction; only benchmark. “Investors are using 30% of performance is stock- or even sector- indexing is driving longer-term correlation. indices as building blocks and, as a result, specific (the table opposite illustrates this With ETFs now a $1trn global industry, the market swings are exacerbated – everything research further). buying and selling of the constituents of is going in the same direction,” says Lindsay indices tracked by these funds has caused Tomlinson, Chairman of the National Frequency effect stock prices to move more closely together. Association of Pension Funds. High-frequency trading firms (HFTs) seem Wurgler last year published to play a role in the increasing correlation of a paper for the US National Bureau of Cost of correlation stocks over the short term. The ‘flash crash’ Economic Research that demonstrated Extreme levels of correlation have a last May was a startling manifestation of how including stocks in indices makes number of implications for equity investors. this phenomenon. On that day, an unusually them move in tandem with other index “Correlation basically defines how well large trading order, placed via an automated members, regardless of differences in their diversification works,” says Nicholas Colas, algorithm, caused the Dow Jones index to earnings or relative valuations. Chief Market Strategist at ConvergEx Group. lose and then regain 9.2% of its value within “Before ETFs and other index-replicating “Implicit in diversification is that a series of minutes. A subsequent report from the US investments, many investors judged stocks assets that are not correlated will provide regulator concluded that rapid buying and more individually: on a given day, some either the same return for lower risk or a selling among HFTs was instrumental to the would go up and others down. When higher return for the same amount of risk. initial drop. “If everyone traded investors invest indiscriminately in an ETF, It’s the mathematics of how two assets once a day instead of thousands of times a the buying and selling pressure means move relative to the performance and risk

16 June 2011 cisi.org

correlation

Proportion of S&P index stock returns that can be 5 years ago attributed to market returns (by sector and market cap) Today

70%

60%

50%

40%

30%

20%

10%

0% Mid Mid Mid Mid Mid Large Large Large Large Large Small Small Small Small Small Energy Top 100 Top Financials Industrials Technology Source: J. P. Morgan Equity Derivatives Strategy

of a portfolio of securities.” So more attractive, entrenching their effects when correlation increases, diversification on correlation. Both retail and institutional The fees question becomes harder to achieve. This deters investment advisers have embraced ETFs Active fund managers use ETFs to give basic investors: risk appetite reduces if they in increasing numbers as an alternative to feel that they can’t manage risk by putting actively managed funds. Stephen exposure to the benchmark, as an alternative to money to work in diversified assets. “[Rising Einchcomb, Head of Equity Derivatives holding cash and as a way of getting into specific correlation] reduces capital growth and Strategy at RBS, concludes: “This trend has sectors or markets quickly and at low cost. capital formation because it makes owning tended to reinforce some of the patterns But traditional pooled funds are far more risk assets riskier,” continues Colas. “The that have already been identified. It simply expensive than ETFs. While there is a trading basic idea of diversification is that if I own a re-emphasises the whole trading pattern that fee to trade in and out of an ETF, many firms lot of US stocks, I’ll also buy some European was pushing up correlation.” waive brokerage commissions on them, and stocks to get a steady return.” the management fee is typically less than 0.5%, This danger is exacerbated by the fact that Role of central banks correlation increases at times of major The effect of ETFs and HFTs on increasing compared with 1.5% or more for mutual funds. market upheaval, when investors most correlation has been further aggravated by So, if managers are shunting a large slug need diversification to work. “Where a widespread low-interest rate environment of their assets into passive funds, how can things go wrong is at the point when you provided by developed markets’ central they justify their high management fees? It all want diversification to benefit you – that’s banks since the financial crisis. depends on how the ETF is being used, says when correlation seems to jump so you “Capital markets are deep, broad and global, Lindsay Tomlinson, Chairman of the National don’t get the protection from diversification so you need something with a lot of push Association of Pension Funds and one of the that you thought you’d be getting,” says behind it if you want to explain a lot of these pioneers of index investing. “If an active manager Tomlinson. “That’s more of a long-term correlations,” says Colas. “Most investors issue for the industry than one caused point to the directed and consistent policy just sits there with 50% of the client’s money in a by the impact of HFTs.” of central banks since the financial crisis to UK index-tracking ETF, then I’d say it’s not really keep interest rates low, keep the liquidity fair to charge a fee on top of that.” Vicious cycle taps on and encourage people to buy risk But the vast majority of fund managers will use Greater correlation also makes it harder for assets by giving very little return for non- the ETF as an asset allocation vehicle, benefiting firms to raise capital for expansion. Asset risk assets.” With Treasury from the low cost, breadth of exposure and owners are more reluctant to plough money yields remaining low in the US, and high- liquidity provided by this route. “Given that the into capital markets if they think that, quality European bonds also offering modest greatest value-add is in asset allocation, rather whatever they choose, price moves will have yields, safety-oriented investors are getting little to do with the specific characteristics little for their money. This pushes investors than stock selection, it’s not unreasonable to of the individual stock or sector that they into risk assets in a uniform fashion. As long charge an active management fee on top of what have selected. If it is getting as the macro backdrop, ETFs and HFTs are is effectively the stock selection fee built into the harder for investors to pick individual stocks all driving greater correlation, investors will ETF,” concludes Tomlinson. and bonds, then index funds become even continue to move together.

17 EIOPA The European Insurance and Occupational Pensions Authority is the European Union institution responsible for regulation of the insurance and occupational pensions sector. It was formed in January from the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). It is one of three new European watchdogs that underpin a revamped European financial supervision framework, which also comprises the European Banking Authority and the European Securities and Markets Authority. EIOPA’s Board of Supervisors is made up of senior regulators from member states – FSA CEO Hector Sants represents the UK – and is run by a six-person management board that includes Sants. EIOPA is an independent advisory body to the European Parliament and the Council of the European Union. Its core responsibilities are to support the stability of the financial system, transparency of markets and financial products, as well as the protection of insurance policyholders, pension scheme members and beneficiaries. Bernardino has strong ideas about the principles that guide the work of the new institution and has committed himself to creating a particular structure for the new body. “I want to create a governance structure that delivers independence, transparency and consistency in our work,” he says. “Independence is crucial: we want to be able to take in opinions from throughout the industry but also to be independent of individual national regulators.” Fit for CV snapshot

2010 – Chairman of European Insurance and Occupational Pensions Authority (EIOPA) 2009 – Chairman of Committee of European Insurance and Occupational Pensions purpose Supervisors (CEIOPS) 2007 – General Director of Development and The Chairman of the new European Institutional Relations at Instituto de Seguros de Portugal (ISP) Insurance and Occupational Pensions 2005 – Member of the Portuguese delegation for Authority has regulation in his blood. the European Insurance and Occupational Hugo Cox meets Gabriel Bernardino, the Pensions Committee man who will steer the European insurance 2000 – Director of Development at ISP and pension industry through challenging 1996 – Manager of supervisory teams at ISP new regulatory requirements 1989 – BSc Mathematics from the Universidade Nova de Lisboa, Portugal

18 June 2011 cisi.org

purpose Fitfor

Photo: Axel Hess the sectorsinfinancialcrisis,”heexplains. associations oftheword ‘securitisation’, following theroleof “For that towork, we must get beyond thecurrent diabolic and insurance-linked securitisation willplay apivotal role. be spread throughout heexplains, societywillbecrucial, world,” hesays. The instruments that willallow therisk to of environmental change andhuman enterprise onour important resourcesaswe work tomanage the impact by which societydistributes risk willbeamongourmost comparability than we arenow.” the way theBritish firms do. But we can get much closer to way Germanfirms do things may betotally different from these activities absolutely,” says Bernardino. “Certainly, the or explain’ basis. “I’m notsaying it’s possible tocompare rather willoperate ona‘comply which willnotbebinding, but for guidelines forbest practice, These willprovide thebasis key characteristics such asrisk. can get commonindicators for type ofinformation, regulators every insurer submits thesame supervisor inEurope. Because is reliant ontheinformation theyget fromtheindustry.” so important? “Because theway supervisors do theirjob the beginningofourconversation. Why isconvergence and convergent implementation ofregulation,” hesays at and Occupational Pensions Authority (EIOPA). of theEuropean regulatory regime, theEuropean Insurance and pensionsregulator toChairmanofonethethreepillars gone fromaroleinactuarial support at Portugal’s insurance is thoroughly fitting. In 22 years, Gabriel Bernardinohas for amanwho isevery inch thecareerregulator, thisheritage the principles ofrisk management while still at school. But manypeoplewho couldboastthere aren’t apassionfor precursor ofEIOPA] in2006.” Insurance andOccupational Pensions Supervisors [the I becamemoreinvolved intheCommittee ofEuropean “I was able tocontinue thisthroughout my career, until I have always beenpassionate about teaching,” hesays. Seguros de Portugal. “Besides thispassionfor investigation, during hisfirst job at the Portuguese regulator Instituto de could bringtosociety”–andhewas able tocultivate it theoretical potential ofwhat mutualisation andrisk-sharing was still studying –“Ifoundmyself very attracted tothe Bernardino’s interest inthesequestions started when he Early interest need toconnectagain with thereality ofrisk.” with it moretransparently andinmoredetail. But people disappear isunrealistic,” hesays. “What we cando isdeal unconnected with theindustry. we “Thinking canmake risk seem to have followed the financial crisis on the part of people But Bernardinoismindfuloftheexcessive expectations that in Europe, while ensuring adequate consumer protection. the development ofasingle market ininsurance services requirements forinsurance firms,intendedfacilitate to Solvency II.This istheupdated setofEUregulatory At theheartofhisjob isthehuge task ofimplementing to rely on. helping toequip anindustry that we willallincreasingly have on insurers derives fromapersonalconviction that heis energy forthechallenge ofenforcinganew regulatory regime job from straightforward was far manwho forthefamily of theopportunity inFrankfurt, thedecision to take thenew Solvency IIdefines commontemplates for every “Our roleisvery clear here:toachieve consistent “Ifeelthat, infuture, themechanisms Definitely, my answer isno” Solvency IItopensionfunds? “Are we going toapply Despite thescale Bernardino’s

innovate ordrive down pricesforconsumers. by anexcessive compliance burden arenolonger able to throwing thebaby outwith thebathwater, asfirmshobbled released tothemby theFSA. This, went theargument, risks funds? Definitely, my answer isno,” henotes. and greater transparency–rather thanacross theboard. limited tospecificareas–risk management, internal controls requirement. But its application topensionfundswillbe regime forpensionfunds,andSolvency IImeetsthat says Bernardino, thereisaneedtointroduce arisk-based request for EIOPA toadvise themonthematter. Certainly, to theindustry, following theEuropean Commission’s to pensionfundsissomethingthat isofconsiderable interest The extent towhich theSolvency IIrequirements willapply Pension funds with risks true thanthose ofits predecessor.” here. The requirements ofSolvency IIaremuch betterlinked competitive,” hesays. “We have made important progress firms should befocusingonthesethings tobecomemore focus ongood governance andbetterways todeal with risk: challenge exists forcompanies. But Solvency IIrequirements business. “Certainly, whenever you have new regulation, this it willsupport the betterandmoreeffective oftheir running the information burden is onethat firms should embrace, as the risks. This, henotes,soonbecomesoverwhelming and simply about providing themwith moreinformation about those who buy insurance andpensionproducts isnot protection. But developing amorerobust regimetoprotect implementation ofSolvency II;andtoimprove consumer independent andwell-governed regulator; tooversee the current rolein2009. They were tocreate anaccountable, Bernardino sethimselfthreetasks when hetookup his Smart protection about themove.” very difficult. My wifeandIhad tothinklongandhard and she realisedshe would beaway fromherfriendswas daughter’s when face Itoldherwe would move toFrankfurt ones here,” hesays. “Seeingtheexpressiononmy young issues inthesedecisionsthemost arebyimportant far involved ‘small’ aseriesofintense discussions.“The family explains that thedecision touproot fromLisbon hisfamily had up tothenspent allhislifeinnative Portugal. He that results intheindustry beingoverburdened,” hesays. as toindividuals. We can’t have aone-way relationship “Regulators have thesameresponsibilities tocompanies Bernardino accepts therisks ofoverloading firmsinthis way. laws across member states.” happening, such asthe wide variance insocialandlabour on removing theobstacles that currently prevent thisfrom and allow thisindustry todevelop,” hesays. focusis “The want toimprove thecross-border provision ofpensions the limited, haphazard offerings that now exist. “We do operates effectively onaninternational scale, rather than The priority forpensionfundsistodevelop anindustry that “Are we going toapply Solvency IItopension But, inthecaseofSolvency II,hebelieves that profile: gabrielbernardinoprofile: increasing quantity ofinformation of UK companies now given face the strain that compliance departments View piecelast month notedthe for companies. The S&IR’s City the sameargument couldbemade information.” is notmore, butmorestreamlined, counterproductive: answer “The Surely

19 Splitting up

The Independent Commission challenges and complexity in implementing the and private banking divisions could wind up on Banking has suggested ICB’s recommendations,” says a KPMG report. being split between the retail and wholesale As the dust settles and bank executives sift arms, depending on what type of service the that banks ring-fence their retail through the detail of the 208-page document, customer is buying from the bank. operations, raising fundamental they are discovering that it is long on questions questions about the relationship and short on answers. Profit warning The report says little about the commercial between the investment banks A blurred boundary viability of ring-fencing for banking groups, but it and the costs of retail banking. The Commission was intentionally vague is hard to imagine a version that will not damage Tamsin Brown finds that many regarding exactly where the boundary separating profitability. At the publication a bank’s retail operations from its wholesale or are still to be answered investment banking arm will fall. Retail deposit- taking is the only service that will definitely fall Summary of the interim banks breathed a sigh of relief when inside the ring-fence, but many other services report of the Independent the Independent Commission on Banking look destined to follow it. “‘Retail (ICB) published its interim report in April. Sir banking’ is taken to mean broadly the provision Commission on Banking John Vickers’ Commission stopped short of of deposit-taking, payment and lending • Large UK banks should “ring-fence” their recommending a full break-up of retail and services to individuals and small and medium retail operations from their investment investment banking operations in favour of enterprises,” says the ICB report. As Figure 1 and wholesale banking activities to proposals to ring-fence assets in the retail demonstrates, wealth management advice and protect depositors. But it stopped short of bank. The retail arm would be required to investment products, as well as mortgages, carry additional levels of the safest, most loss- are leading candidates for hiving off into the recommending a full separation of retail and absorbing Tier 1 capital (see box, right, for a retail bank. With the details still investment banking operations. summary of the report’s proposals). The news unclear and representations ongoing, bankers • Core Tier 1 capital in the ring-fenced retail was solace to investors, too: shares in Barclays are reluctant to comment publicly on what the bank should be at least 10%. Capital and Royal Bank of Scotland gained close to 3% on separation might mean. Even harder to gauge is requirements for investment banks would the day of the report’s publication. the impact the changes will have on those sectors not have to exceed international standards, But all is far from clear. “Banks face major that use investment banks to help package currently 7%. services and products for their clients, such as • Banks should be allowed to move capital investment managers, private client stockbrokers Proportion of total assets between their businesses, provided their of UK banks within a and fund managers. If the banking groups face increased costs for running their retail divisions, capital ratios don’t dip below minimum levels. retail ring-fence this could influence the price and variety of • Lloyds Banking Group should sell services they offer. But they may just as easily cut “substantially” more than the 600 loose their retail banks and continue business branches it has been told to offload by 55% as usual, or find a way to absorb the costs that the European Commission. 30% doesn’t pass them on to this small subset of their • Banks should make switching current clients. These secondary effects are hypothetical accounts quicker and more efficient 15% and none of the representatives of these sectors approached by the S&IR was prepared to for customers. • The new Financial Conduct Authority should Outside Maybe in Must be in speculate. The impact on private ring-fence ring-fence ring-fence wealth divisions of the banks will be more have a clear primary duty to promote direct but highly complex. Sources close to the effective competition. Source: Company accounts 2009, ICB estimates Commission suggest that wealth management

20 June 2011 cisi.org

vickers report

of the report, ICB Commissioner Bill Winters insisted: “In the structure we’re proposing, Figure 1: What counts as retail banking? the retail bank and the investment bank … can Activities that must be Activities that may take Activities that must not operate under the same group, with all of those in ring-fence place in ring-fence take place in ring-fence cross-selling and customer service synergies Retail deposit-taking Current accounts* Trading that have existed historically.” But the detail of the report brings this into question. Savings accounts* Debt and equity underwriting Buried down on page 193, annex 7 discusses how Investment products Client hedging services/risk management separation might work in practice. Among the rules that “might” apply because of the retail Wealth management advice Securitisation structuring, distribution and trading ring-fence is the following: “The retail subsidiary Consumer loans M&A and restructuring advice and finance must have access to operational services that will Business loans Proprietary trading continue in the event of insolvency of the rest of the group.” This would compromise economies Mortgages of scale around transaction processing, IT and Credit cards other operations. “If you had to have Trade finance a separate payments platform, what does that mean in terms of shared services such as the Project finance technology department? What does it means in * Except where these involve retail deposit-taking, for example in the case of personal current accounts. terms of costs? The report is pretty silent on that,” Source: ICB interim report observes Giles Williams, Partner on KPMG’s Regulatory Services Panel. also unclear. The report’s executive summary for retail banks to 10%, in line with the ICB says that banks would “retain significant proposal – and there is no indication that it will Constraints on wholesale funding? freedom to transfer capital”. But in annex 7, – European banks selling into the UK, such as More problematic is the following section of it moots the idea that the bank will require Santander, will be at a considerable advantage. the report, which floats the idea of “imposing regulatory approval for transfers of capital Vickers will hope that Michael Ellam, Managing further constraints on the level of wholesale out of its retail subsidiary. Can banks really Director of the UK Treasury’s International and funding allowed in the retail bank”. This would remain nimble enough to be competitive if Finance Directorate, will be able to effect fair have serious implications if the retail bank they have to check with the regulator every play in Brussels: the top UK official was recently were limited in how far it could use wholesale time they move capital between the retail appointed to the chair of the EU’s Financial markets to fund investment products and and investment banking arms? Services Committee. mortgages. If the result is that the size of a UK Uncertainty also reigns over the implications retail bank becomes determined by the volume of separation on the competitiveness of UK What happens next? of retail deposits it attracts, the range and cost retail banks. Vickers’ Commission seems keen Banks and other interested parties have until of mortgage products seems likely to suffer. to provide reassurance that UK banks with big 4 July to respond to the interim proposals and The next issue is counterparty risk. foreign operations will not be disadvantaged. higher costs will be on their list of grievances. The KPMG report notes that, if the investment “Given that a purpose of structural reform is The increased capital ratio suggested by the bank is treated as a third party, as required in the ICB report alone – 10% core Tier ICB report, the retail arm will have to spread its 1 capital, rather than the 7% wholesale exposure across a range of providers to Worryingly, the report floats the currently required by Basel III – limit counterparty risk and meet large-exposure will make retail banking more limits. “The retail bank could offset idea of “imposing further expensive to fund. the risk in a similar way as building societies Who will meet these costs? already do, for example by using hedging constraints on the level of wholesale Shareholders are already under instruments such as interest-rate swaps,” notes funding allowed in the retail bank” pressure: J.P. Morgan estimates Andrew Gray, UK Banking Leader at PwC. But return on equity for the major hedging fixed-rate mortgage exposure in this way global banks will be 10% this year, would be more complicated and more expensive, to limit the risk to both the UK taxpayer and compared with about 13% before Basel III. The at least initially, if multiple counterparties were economy, there do not seem to be advantages UK banks, which face a bill of billions of pounds made obligatory. On the flip side, to imposing limitations on the worldwide for missold payment protection insurance after the segregation of the retail bank would seem activities of banking groups headquartered they abandoned an appeal in the courts, are to benefit investors, by encouraging an open- in the UK,” says the report. So, for firms such in no position to drop customer service levels architecture model where the retail bank is less as HSBC and Standard Chartered, it sounds to save money. The alternative is incentivised to sell products packaged by the as if the retail requirements will not extend to increase retail banking costs. “What might investment bank. “It starts to do away with the to foreign subsidiaries. But what this do to ‘free’ current accounts?” wonders concept of the tied adviser,” notes Alasdair Steele, about foreign banks with operations in the UK? Williams. “Will we end up all paying, say, £5 a Corporate Partner at law firm Nabarro. Currently, European passporting rules allow month?” Chancellor George Osborne is under EU banks to operate as ‘branches’ in the UK no obligations to follow the proposals of the final Regulatory capital without submitting to UK rules (as long as they report – to be published in September. But the The question of how free banks will be to move comply with their own domestic regulations). If end of free retail banking would hardly be a vote funds between wholesale and retail arms is the EU does not hike the capital requirements winner. Many questions still to answer, then.

21 Measuring the impact Impact investing, still in its infancy, is a sector to look out for, says Ritchie Macdonald

in a recent market report, J.P. Morgan predicted that impact investing could become a $1trn sector of the investment market within the next ten years. For those ‘in the know’, this was not really a big surprise, but the sector is not yet widely understood. Part of the difficulty is that the term ‘impact investing’ covers a spectrum of investments that deliver positive social and environmental benefits, as well as a financial return. The only common trait all impact investments must have is one of intent. They must all set out to address social or environmental problems. However, both the significance of the impact and the level of financial return can vary tremendously from one investment to the next. In the short term, impact investing may be defined by what it is not. As the new kid on the block, it has to fit into an already crowded universe of social investment jargon. That universe reflects a series of tests that are applied to investments in order to classify them in this space. The same fund may pass some tests and fail others. As a result, it could be described as ‘ethical’ but not ‘green’, and ‘socially responsible’ but not ‘sustainable’.

Socially responsible investing For many years, the investment industry has offered what are termed ‘socially responsible investments’. Socially responsible investing tends to come in three styles: • Screening – excluding businesses whose activities are considered harmful or specifically seeking out those whose activities are considered beneficial to society or the environment. • Engagement – using shareholder influence to change potentially harmful or unethical practices. • Community investment – more common in the US than the UK, these are investments to help underprivileged or financially excluded elements of society. In the UK, screening is most commonly used in a negative way, in order to eliminate certain industries or companies that are considered harmful. Typically, tobacco, alcohol, armaments and animal-testing industries are excluded, along with individual companies with bad records for exploiting developing world labour or causing excessive pollution. Over time, this so-called negative screening (screening out the worst offenders) has been supplemented by

22 June 2011 cisi.org

Illustration: Gary Neill two objectives areinterdependent. that reach equilibrium, perhaps because the The key istobeable tospotbusinessmodels financial targets; otherswill do theopposite. benefits that theyaim to deliver andmiss will focusheavily onthesocialorenvironmental offers bothgood andbad opportunities. Some Like any sectorofthemarket, impact investing opportunity? What isthe impact investment or environmental impact. future, not necessarily toensure apositive social checks aredone topredictafinancially viable or risk anecologicaldisaster. However, these find thoseresourcesexhausted morerapidly husband natural resourcesresponsibly may criteria. For example, abusiness that does not these environmental, socialandgovernance appears tobeagood deal oflogictoapplying likely toprosperthanonethat does not.There applying propergovernance processesismore society (particularly within its supply chain) and regard ofits environmental impact, its effecton sustainability isthat abusinesstakingdue environmental investments. when it comestodescribing socialand wonder thereisanissue with terminology you expecttoseetheminsuch anindex? No may befine, companies,well-run but would Richemont, owner ofAlfredDunhill? These corporate responsibility standards –asis companies that meetglobally recognised to measure objectively theperformanceof Index –whichin theFTSE4Good isdesigned diligence. are very much focusedonfinancial due In theprinciples fact, behindsustainability guarantee any specificbenefitsinthisarea. actions butsustainable investments do not environment andtheconsequences ofyour Sustainability implies acareforthe What about sustainable investments? if thereisany involvement at all. screen. However, somefundswillbeexcluded activity, acompany willnotget through the profits orrevenues are derived fromaharmful ofthumbthere isarule that, ifmorethan10%of if amorelenient approach isapplied. Generally, be ‘dark green’ (stringent criteria) or‘light green’ criteria applied todo thescreening, theycould screened outorin.Basedonthestrength ofthe as ‘green’ or‘ethical’ depending onwhat is socially responsible fundsarealsodescribed to gainanunderstanding ofthesefunds.Many (depending onyour point ofview) isimportant but theywould bethebest-behaved ones. your moneyinto orminingconglomerates, oil This still meansthat you might beputting positive screening(selecting thebest ofbreed). This interdependence applies foranumber of the intent implicit within impact investing. non-polluting technologyandcomeclose to invest inbusinessesdeveloping oroperating in theclean andrenewable energysector. They with themedfundsnow available, particularly Positive screeningiscontinually developing, Didyou know that RioTinto is Again, orjargon terminology The assumption behind

to becomefamiliar. investing isasectorwith which we willallneed 50% accurate with its market prediction,impact developed. for diversified, alternative portfoliostobe ‘alternative investments’, offerstheopportunity with that thefact many willbeconsidered the diverse nature oftheseindustries, coupled social orfinancialbenefits accrue. However, a needtobuildbusinessinfrastructurebefore This comeswith theterritory, asthereisoften impact investments arelong-term investments. market. Naturally, asubstantial proportion of management arejust afew within agrowing and agriculture, clean energyandwaste social housing, developing-world finance wide setofindustries. Sustainable forestry, Impact investing, however, encompasses a Growing choice sub-Saharan Africa. a commonthemeamongtelecomscompanies in to thesocialbenefitsthey deliver. This hasbeen market, thereby linkingtheirfinancial success processes sothat theyareaccessible tothat marketsBOP must adapt theirproducts and J. P. Morgan. Businesses that seeksuccess in who earnlessthan$3,000 ayear, according to thefourbillionpeoplearoundglobe (BOP): ofthepyramid’ the‘base businesses serving Management TruestoneInvestmentImpact Marketingat Directoris Macdonald Ritchie 12% 18% 24% 30% Source: Courtesy of J.P. Morgan Research, Copyright 2010 reported, gross annualinternalrateofreturn oryield,inUSdollars. Vertical bars:Rangeofexpectedreturns forimpactinvestment Horizontal bars:Averagedrealised returns forbenchmark. by instrumentandregion Average return expectations 0% 6% market high yield market highyield Benchmark corporate debt 11% Developed Developed continuing professionaldevelopment continuing Impact 0-5% If J.P. Morgan isonly Benchmark corporate debt 9% Emerging markets markets 8-12% Impact Benchmark market venture Developed Developed 28% capital

15-20% Impact

Emerging market

venture capital Benchmark 10% 12-15% Impact 23 When a company miscalculates how much it should pay in order to meet its share of an FSA-imposed industry levy, it faces a difficult choice. Should it keep quiet and save money, or speak up and save its reputation? Margin for error

hugh is chief Executive of Sargasso discretionary management activities in order vastly higher contribution that she has just Stockbrokers, which provides discretionary to determine their individual contributions mentioned to him. Later that day, Rosemary, management services in the UK to nearly to the compensation claim arising from the accompanied by the Finance Director, shows 10,000 high net worth retail investors. Macadamia insolvency. Hugh was not made the figures to Hugh. The Finance Director Although earnings from Sargasso’s various aware of this return, which was completed by confirms that the higher figure appears to activities are growing, helped by successful a manager within the compliance department be the right one. At this point, capital raising last year in which a number and which declared annual eligible income Hugh wonders what he should do and asks of the senior executives (including Hugh) from discretionary management activities of Rosemary whether there is anything that she participated, the firm’s costs seem always to £4.2m. As a result of the return, can think of to improve the situation. She rise at a faster pace. Hugh is concerned that Sargasso has received an invoice from the suggests that, at this stage, as the FSA appears the firm’s required regulatory capital cushion FSA for £86,000 as its contribution to the to have accepted Sargasso’s earlier figures, a is proving only just sufficient to cope with the levy. This amount far exceeds any FSA fees pragmatic solution is to pay the invoice, wait extra business and frequently worries about or levies in previous years and Hugh is until challenged and, at that point, offer to how to balance the apparently conflicting astounded by the invoice. Accordingly, he review the figures submitted and pay up as capital requirements of the regulator and summons Rosemary to ask for an explanation necessary. Although firms are required to the dividend expectations of shareholders. and to check that the invoice is correct. make annual returns of their finances to the This challenging environment In response, Rosemary tells Hugh FSA, Rosemary says that she is unaware of is affecting everyone in the sector. Last that the figures that were reported to the how much liaison there is among the various year, a competitor firm, Macadamia, FSA were calculated based upon an example departments involved. It is conceivable, became insolvent with liabilities to its UK provided by the regulator. However, because therefore, that it may be some time, if at all, customers of about £100m, which it is unable her manager used the wrong formula, the before Sargasso’s error is discovered. This to meet. It is the role of the UK Financial amount was significantly below the correct may never happen and, even if it does, it will one. As a result, the true have provided Sargasso with some useful compensation figure might, breathing space while it determines how in fact, be as much as ten to resolve the matter. The fact that the company is perceived times higher. Hugh is staggered that such Temporary solution either to be unable to calculate its own an error could have been Hugh considers what Rosemary suggests, financial position or to have withheld made and that the figures saying that he is quite attracted to this course had been returned to the of action, and asks the Finance Director for information deliberately may FSA without the knowledge his opinion. The Finance Director, possibly of any senior executive. At encouraged by Hugh’s reaction, says that he undermine its reputation the same time, he wonders is sure that anyone else in a similar situation how Sargasso can cope would do the same thing. He adds that he does with a cash demand of such not consider this to be anything other than a Services Compensation Scheme (FSCS) an unexpectedly large amount, fuming that way of temporarily dealing with what might to compensate investors who lost money it is typical of the regulator to assume that otherwise be a serious cash flow problem from Macadamia’s activities. It does this everyone has a spare £1m or so waiting for for Sargasso, which would be in nobody’s by imposing a special levy on the industry, this type of event. He enquires whether what interest. Although he is aware that firms may including on Sargasso. Last he has now been told is any more accurate have access to a special loan facility to meet spring, while Rosemary, Sargasso’s Head of than the original figures supplied to the FSA. levy demands of this nature, he points out Compliance, was on annual leave, the firm, After the initial shock wears off, that to seek to obtain nearly £1m through this along with others in the sector, received a fee Hugh asks Rosemary urgently to produce route might shine a rather unwelcome light on tariff request sent by the FSA on behalf of the data used to calculate the figures already Sargasso’s finances. In any event, it will have the FSCS. The purpose of the request was to reported to the FSA, compared with those a similar impact on Sargasso’s capital position seek information about firms’ income from that she has used to suggest the potentially as paying the money itself, which would cause

24 June 2011 cisi.org

grey matters

further problems. Finally, he says that if Sargasso acts as Rosemary suggests, it will have more time to carry out a thorough review of its operations and, if necessary, raise further capital. This would help it not only to support its increased operations but also to resolve the issue of the true figure required for the FSA levy on a correctly calculated basis. That must surely be desirable. In response, Hugh says that he understands the Finance Director’s point of view and accepts that if Sargasso does not have to pay the higher amount of the FSA levy immediately, it will make life easier in the short term. However, while he recognises that this course might be superficially attractive, he believes that it would actually make life much more difficult all round.

Future consequences Sargasso may find itself in a position whereby, in order to raise further capital, it needs to invite people to invest in the business or even persuade customers to entrust the firm with their investments. In this situation, the fact that the company is perceived either to be unable to calculate its own financial position or to have withheld information deliberately may undermine its reputation, with an equally drastic outcome. It would be better for Sargasso to seek to control the process by reporting the revised, and presumably now correct, figure to the FSA. The firm should explain the impact that this unexpected levy demand was having on its capital position but that steps were being taken to improve the position in a controlled manner, hopefully with the support of the board and shareholders. At the same time, Hugh would be able to brief board members and seek their support in a positive and open manner, rather than keeping the true situation from them until he had no option other than to go to them as an emergency. Hugh concludes by saying that he feels that, for all the discomfort that it may cause, this is a case where it is vital for the firm to demonstrate its values by being open and honest about the situation, rather than taking the superficially attractive option of keeping quiet and hoping that matters will turn out satisfactorily.

What’s your view on this dilemma? Email Richard Mitchell at [email protected]

25 books

NEW WORKBOOK NEW WORKBOOK EDITION Need Islamic Finance Introduction to Qualification in Arabic Securities & Investment The Islamic Finance Qualification (IFQ) has been A new edition (covering exams from to Read developed in conjunction with Ecole Supérieure 1 July 2011 to 30 June 2012) of the des Affaires in Beirut, one of the leading business CISI’s Introduction to Securities & The latest publications schools in the Middle East. It is a ground-breaking Investment workbook provides an ideal and study aids qualification that covers Islamic finance from both a introduction to the world of financial supporting CISI technical and a Sharia perspective, providing the first services. Topics include the economic international benchmark in the area of Islamic finance. This qualification environment and the participants qualifications will assure regulators, employers and consumers that candidates and in the financial services industry, asset classes, derivatives, employers can perform their roles according to Islamic banking (Sharia) equities, bonds, investment funds, investment wrappers and requirements. An Arabic version of the IFQ workbook covers: the financial services regulatory environment. • the general principles • takaful This workbook will fulfil the syllabus requirements of both: of Islamic finance • financial statements in Islamic banks • the Introduction to Investment Award • Islamic contracts • governance in Islamic institutions. • the Investment Operations Certificate (IOC), also known as • Islamic banking activities the Investment Administration Qualification (IAQ), unit 1. • Islamic investment funds • sukuk Price: £75 Price: £75

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THREE NEW WORKBOOKS ONlINE TOOl External specialists Wealth Professional Refresher CISI workbooks and elearning products are key Management The CISI’s Professional Refresher elearning revision tools for those taking Institute exams. The CISI’s Wealth tool keeps you up to date with regulatory The Institute is looking for writers and Management qualification issues and changes, and helps you to maintain reviewers of CISI questions, and also authors is the first career pathway compliance and demonstrate continuing for its workbooks. It especially wants to hear from question writers and reviewers for its to be launched as part of learning. The product now consists of more elearning products. the Institute’s new Masters than 30 modules, including: If you are interested in any of these areas, Programme (CISIM). • anti-money laundering please email [email protected] with The CISIM (Wealth • corporate actions your CV or call +44(0)20 7645 0750. Management) has allowed the CISI to blend aspects • investment principles and risk The Institute is also searching for specialists in from existing Diploma modules into a package that • market abuse derivatives to write questions for its level 4 Derivatives exam. While technical expertise in offers wealth management firms and practitioners a • professional taxation the subject matter is required, training will be dedicated professional qualification. The programme • training and provided in question writing for multiple- comprises three units: competence choice exams. A modest fee will be paid for • Applied Wealth Management • the UK regulatory each question supplied. • Portfolio Construction Theory in Wealth Management structure. To register your interest, please contact Iain • Financial Markets. Worman on +44(0)20 7645 0609 or download the application form available via: Workbooks for each of these three units are out now. Price: Free for all CISI members (excluding http://www.sii.org.uk/SII/WEB5/sii_files/Qualifications/ student members), otherwise £150 per user. External%20Specialists/ES_Application.pdf Price: £150 each Visit cisi.org/refresher for further information

26 June 2011 cisi.org

Diary events to attend over the coming months ➳ Conferences Professional Courses Venue: London unless otherwise stated Tuesday 14 June 2011 CISI Annual Conference 2011 Tomorrow’s World: Risk, Regulation, Reputation & Revolution 16 june Operational Risk: Taking it to the Next Level £495.00 glaziers’ hall, London 22 june Training Competence and Managing Expertise in a Regulated Environment £495.00 the CISI’s sixth annual flagship conference will provide a platform to hear success strategies and predictions for the future from industry experts and to discuss 28/29 june Understanding Regulation and Compliance £895.00 them with peers. 5 july Mastering Communication Skills in Financial Services £495.00 Confirmed speakers include: 12 july Pensions & Retirement Planning* £495.00 13/14 july Derivatives* (Birmingham) £895.00 19 july Anti-Money Laundering and Terrorist Financing Introductory Workshop £495.00 21 july Pensions & Retirement Planning* (Manchester) £495.00 2/3 august Derivatives* £895.00 16 august Investment Principles & Risk (PCIAM)* (half day) £295.00 16 august Robert Barnes Remco Lenterman Ruth Lea Investment Principles & Risk (IAC)* £495.00 Chartered FCSI, Managing Director, economic Adviser, Managing Director, IMC Financial Markets Arbuthnot Banking 16/17 august Investment Principles & Risk (LSE)* £895.00 UBS Investment Bank group *This event fulfils the requirements for qualifications top-up to fill gaps between existing CISI exams and the new Retail Distribution Review exam standards • Mark hoban MP, Financial Secretary to the treasury • Sheila Nicoll, Director of Conduct Policy, FSA • Kee-Meng tan, Managing Director, electronic Market Making, Knight Capital europe Member and Fellow discounts • Khalid Rashid Al Zayani, Chairman, Al Baraka Islamic Bank • talal Al Zain, Chief executive officer, Mumtalakat and Chairman, gulf Air Professional courses discount: Fellows 35%; Members 30%; • Professor Michael Mainelli, Chartered FCSI, Chairman, Z/Yen group Associates: 20%. • Mark Cooke, Barclays Wealth Chief Risk officer, Managing Director, Barclays Wealth Extra professional courses discount: make two bookings together and get a 10% Tuesday 12 July 2011 Training & Competence 2011 discount; three bookings together, a 15% discount; four or more bookings together, Embedding T & C best practice a 20% discount. America Square Conference Centre, London Sponsored by 7city Learning, BPP, eukleia training and Kaplan Financial To book: cisi.org [email protected] +44 (0)20 7645 0680

Regional Events CISI members can attend either of these CISI conferences for just 15 june Politics v Economic Drivers in Asset Management £200 (non-members £400). For further details, visit cisi.org, call Birmingham & West Midlands +44 (0)20 7645 0680 or email [email protected] tBC 23 june AGM ConFEREnCE SPonSoRShIP Guernsey To consider taking up one of the sponsorship or exhibition Collins Stewart, hirzel house, Smith Street, St Peter Port, guernsey opportunities at a conference, please contact Hannah Steele, 7 july Annual Dinner on +44 (0)20 7645 0648 or email [email protected] Yorkshire Mint hotel, granary Wharf, 2 Wharf Approach, Leeds (guest speaker: former MP Lembit opik) London CPD Events 12 july Regulatory Update Yorkshire 16 june The New Face of Financial Services Regulation: Cosmopolitan hotel, 2 Lower Briggate, Leeds What Will It Mean in Practice? 13 july Regulatory Update olswang, 90 high holborn, WC1 Yorkshire 20 june Clearing Services for Global Markets tBC SWIFt, the Corn exchange, 55 Mark Lane, eC3 28 july Annual Dinner 22 june The Foreign Account Tax Compliance Act (FATCA) – Your East Anglia Obligations Under the New US Tax Regime Norwich Cathedral Refectory, the Close, Norwich grant thornton, 30 Finsbury Square, eC2 3 august Golf Day 29 june Selecting the Right ETF Manchester & District BlackRock, Murray house, 1 Royal Mint Court, eC3 hale golf Course, Rappax Road hale, Altrincham To book: To book: cisi.org/onlinebooking [email protected] +44 (0)20 7645 0680 cisi.org/onlinebooking [email protected] +44 (0)20 7645 0652

27 diary

training Professional interest forums

Directors’ forum Calling all corporate changes name financiers The CISI training directors’ forum has Did you know suitable for you, you might want changed its name – it is now called the that, as a CISI to check out the forum’s annual training & competence interest group. The member, you black tie dinner, which will be new name has been introduced to make can sign up held on 28 September this year. clear the focus of the group on training and for free to the A key feature of the forum competence and the broader nature of its mailing list is that all events are planned membership. However, the group itself will of the CISI’s by members for members, Sandra Jacobs not change in any way. Clive Garston corporate with ten committee members Four times a year, the group will meet finance meeting regularly to plan events. in central London to consider issues linked to training, professional interest forum Committee elections are held in competence and HR, including regulatory and legislative (PIF)? Forum members meet March each year. developments. Members will discuss how they are six times a year to network over The newest addition to the approaching these areas within their own organisations. lunch in London and discuss committee, Clive Garston CF Discussions will be held under the Chatham House rule, topical issues in a confidential FCSI, said: “I’ve attended with a chance to network and exchange ideas with colleagues, setting while earning CPD. meetings of the forum since including representatives from the top 50 investment banks Recent meetings have included its inception, finding them that deal with implementation of training. a regulatory update and a most informative and an The group will continue to be of interest predominantly to Q&A session with Brian opportunity to meet others those in a senior training role. Winterflood FCSI(Hon), Life involved in corporate finance. Anyone involved in matters related to learning and President of Winterflood When a vacancy came up on the development, organisational development or training and Securities. Attendees commented committee, I decided that competence may find it relevant. Those working in significant that the events were both I would like to assist the forum influence functions, compliance, risk, HR or the approved “informative and current” and in its development.” persons regime can also benefit. “very entertaining”. Forthcoming To join the 230 members sessions include an economics already signed up to the mailing Key features include: debate and a discussion about list of the corporate finance • attendance counts towards the CISI CPD scheme opportunities in clean technology. PIF, please email • you can invite colleagues and business associates to meetings If lunchtime seminars aren’t [email protected] • events are open to both CISI members and non-members, subject to availability. There are seven PIFs, covering compliance, corporate Sandra Jacobs, who chairs the group, said: “The new name, finance, Islamic finance, IT, operations, risk and wealth training & competence interest group, reflects exactly what management. this group is all about. As such, anyone who has an interest in training and competence at all levels and in all fields of the Forthcoming meetings include: financial services industry is welcome to attend.” Corporate Finance Forum Operations Forum Next meeting Date: 16 June Date: 29 June Date: 14 July Topic: Crisis Economics – Topic: Consolidation of MTFs What Failed? What Needs and Clearing Houses Time: 12 noon–2pm (a light lunch is served) to Change? Speaker: Steve Giles, Consultant, Sg2, Financial Risk IT Forum Management Training Islamic Finance Forum Date: 30 June Topic: The Bribery Act 2010 – A Practical Guide Date: 21 June Topic: Migrations of In-house Venue: CISI, 8 Eastcheap EC3 Topic: Islamic Funding for All Solutions from One Core Platform to Another To book on the event, or if you have any questions, Risk Forum please contact Claire Parish at [email protected] Date: 23 June More information can be found More information can be found at cisi.org/tcigroup Topic: Investment Horizons at cisi.org/pifs

Membership admissions and upgrades MCSI Alexander Forbes Baker Tilly Bestinvest British Arab C. Hoare & Co 1OAK Capital Oliver Marsland Andrea Douglas Jeannette Cottrell Commercial Bank Robert Inglis Rebecca Boscott AmTrust Europe Ian Radford Blenheim Luma Zitani Church House Adam & Co David Lingwood Anne Thomas Michael Underdown Brown Shipley Investments Simon Murphy Aon Hewitt Bank J. Safra Brewin Dolphin Alycia Mooney James Mahon Aerion Christopher Goodeve- Roy Clinton William Bancroft CGR Close John Etchells Ballard Bank of America Merrill Robert Bramham Graeme Snape James Barton AFEX Asha Phillip Lynch Syed Hossain Charles Stanley Sam Vaughan-Jones Fatima Alibhai Subothini Vellasamy Thomas Ball Naomi Lindsey Toby Carpenter CMC Markets Celina Maria Trevisan Ashburton Daniel Coene Stephen Martin Harvey Rawlings James Hales Afghan United Bank Tristan Hanson Nicholas Mir Donna Neilson CheckRisk Compliance South West Feroz Faruque Aston Stephen Nicholas Nicholas Bullman Patricia Francis Albany Trustees Martin Wilson David Thomas Fiona Carter Connaught Geoffry Freeman Lydia Wilmshurst Michael Davies

28 June 2011 cisi.org

diary

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Answers to the quiz from page 10. Question: 1:C, 2:B, 3:B, 4:D

29 people

Andrew Bradford as a baby with his parents Window on

...and a few years later the past Andrew Bradford ACSI is a CISI workbook author but his latest writing project has nothing to do with financial services. Lora Benson reports

author and has used his writing skills as an external specialist for the Chartered An extract from Institute for Securities & Investment (CISI). He has written both the IT in Investment Live Eels and Grand Pianos Operations and Asset Servicing CISI study aids. Live Eels and Grand Pianos Kathy was a talented came about after Andrew was attracted by a needlewoman. She competition run by a theatre in Edmonton, left school at 14 and north London, where he grew up. The theatre worked as a tailoress wanted to dramatise stories about local life and until she married. Andrew wrote a play about his parents, called Her first job lasted The Window, which won the contest and was one year, as did her staged. It inspired him to develop the story. second job and then for his first foray Andrew attended creative-writing classes to her third. When she into non-technical help him with the project, realising that the was sacked for the writing, Andrew skills needed to produce the book were quite third time she asked Bradford did not different from those required in his technical her employer why she have to struggle for a writing. “In technical writing you was being dismissed, and she was told that the compelling story. In aim to be clear and unambiguous, and give boss had found out that due to her disability, a book entitled Live the reader all they need to know as soon as the employer would have to pay extra Andrew Bradford Eels and Grand Pianos, possible. In memoir writing the technique is to national insurance contributions, backdated ACSI Andrew tells the tale of keep the reader wondering why something is to the day that she started. his parents, Charlie and Kathy, who were both like it is – you need an element of suspense and severely disabled by polio as young children, surprise.” His greatest challenge National Insurance in the 1930s was a highlighting the courage they showed in in writing the book was that neither of his payment made by the employer to the adversity. Andrew says: “I regard parents were alive to provide information. His Government to provide compensation for its it not only as a family memoir but also as a father died in 1979, aged 73, and his mother employees in the event of an industrial injury, valuable contribution to the social history passed away in 1995, aged 83. But through and no doubt some government actuary had of the 20th century. My parents dealt with a speaking to older family members and friends, decided that disabled workers were a higher society that alternated between hostility and he pieced together a comprehensive picture of risk and had to pay higher contributions. prejudice to their difference and kindness their lives. The book took about Kathy’s employer said that he couldn’t afford towards their situation. “They three years for Andrew to complete, with to pay that. Somebody else could do the job defied convention by finding work – dad a family photo being used as the theme for more cheaply. She had to go. She therefore for many years in factories and mum as a each chapter. The offbeat title harks back to came to an arrangement that she would seamstress – marrying and raising me. My Andrew’s upbringing. He recalls: “When I reimburse the firm for the extra national parents were also tireless campaigners for the was a small boy, my mother used to take me insurance stamp. She did this for rights of those with disabilities. shopping in Edmonton in her hand-propelled ten years until the start of World War II, and “In the 1940s, the idea of seriously disabled tricycle. Two things on sale were live eels and she recorded all the payments she made in people having a family was so unusual that grand pianos – you can’t buy either of them a series of notebooks. In 1938 she attended my birth was reported in the national press. there now!” Andrew has now well one of the first meetings of what became I wanted younger generations to understand and truly embraced creative writing and is the British Polio Fellowship, a self-help how difficult life was for anyone with developing a collection of short stories, some organisation for people with her disability. disabilities in that era.” Andrew fictional and some a personal memoir. A few years later the Polio Fellowship has worked in financial services since 1976, submitted these notebooks as evidence to the when he became a bond settlement clerk at To request a copy of the book and read Beveridge Commission, and the national Merrill Lynch. For the past five years, he has some of Andrew’s short stories, visit insurance rules were changed. been an independent consultant and technical andrewbradfordauthor.com

30 June 2011 cisi.org