Clear impact of recession
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Risk Management |
Dec 2006 |
Jun 2007 |
Dec 2007 |
Jun 2008 |
Dec 2008 |
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|
|
|
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New vacancies |
85 |
198 |
127 |
77 |
53 |
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Closing vacancies |
95 |
117 |
77 |
72 |
37 |
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Candidates registering |
124 |
195 |
249 |
241 |
257 |
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Defensive registrations |
5% |
4% |
8% |
17% |
25% |
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Overall salary increase |
21% |
24% |
21% |
16% |
15% |
The recession and contraction in the financial services industry have now decisively shown up in our survey data.
- New vacancies sharply down
The number of new vacancies registered for the whole of 2008 stands at 130. This is a significant fall when compared with the 325 new vacancies registered in 2007. Although not clear from the statistics, there was a sharp drop in the number of vacancies in the final quarter of 2008. How much of this was due to the recession and how much was due to the usual cyclical pattern will not become clear until the first quarter of 2009. However, the scale of the decline was certainly higher than would normally be attributed to any seasonal affects. This would imply that the recruitment market is still deteriorating. The multiple vacancies banks had during 2007 and even in early 2008 have gone. The risk management recruitment market for the first time in many years contracted during 2008.
- Very few external appointments
A significant reduction in external vacancies is perhaps not surprising. Recruiting whilst announcing redundancies is insensitive and not appropriate if there are people internally who are capable of undertaking the role. Not surprisingly, any vacancies in risk management are now becoming popular destinations for front office and otherwise potentially redundant staff.
- Defensive registrations now 25%
Candidate registrations have been steadily increasing during the last two years and reached a high in the second half of 2008. It is clear that this is being driven by defensive registrations where candidates have either been made redundant or fear redundancy. Candidates registering for career progression fell in the second half of 2008. It is a characteristic of the market that those who are in secure positions are likely to stay with their existing employer rather than finding themselves in a “last in, first out” situation.
- Average salary increases continue downward trend
The average salary increase achieved by changing job fell back to 15%. While this may appear high, it reflects a continuation of a downward trend from a peak of 24% in Quarter 2 of 2007. The figure is an average and is being influenced by two conflicting pressures. First, those who are accepting lower offers as a result of unemployment or insecurity. Secondly, it also reflects the bargaining position of those who in the current recruitment market are in secure employment and require a significant financial inducement to take the risk of changing employer in the current market. Overall the increase in the number of candidates in the recruitment market and the fall in the number of vacancies is exercising downward pressure on salaries. Even the best candidates are becoming more realistic in their expectations.
Market commentary
It would be no understatement to say that 2008 was an unprecedented year for the financial services industry and particularly the banking sector. It went beyond the most pessimistic forecasts. Nobody anticipated that financial institutions such as Bear Stearns and Lehman Brothers would no longer exist and many others including AIG, Citigroup and Royal Bank of Scotland would only exist because of state support. The scale of the losses, and it would certainly be an optimist who believed they are over, were staggering.
It is abundantly clear that the executive management of these institutions took risks that were incompatible with the interests of their shareholders. Corporate governance in general and risk management in particular appears to have taken a pro management bias and the interests of shareholders and the wider economy relegated to those of short term incentives. The political and consequent regulatory response to these developments will no doubt be far reaching. Business will go on, but certainly not as before.
Not surprisingly, as businesses have disappeared, merged and rationalized, the number of people employed in the banking sector is falling and will continue to do so. The heavy concentrations of risk management staff employed by the investment banks have certainly been casualties. Redundancies and recruitment freezes have become common.
However, the financial services industry is not just the investment banks. The insurance, investment management, corporate and retail sectors fared rather better with some areas enjoying employment and recruitment levels consistent with previous years. Unfortunately, takeovers such as HBOS by Lloyds TSB immediately freeze recruitment and will ultimately lead to job losses in risk management.
For all the travails of the banking sector there were some “winners” along with the losers including those risk departments that have come under pressure with increasing workloads and no mandate to recruit externally.
Aside from job losses that have arisen due to insolvency, there have generally been no sweeping redundancies within risk management. Exceptions were in leveraged finance and securitisation, and some foreign investment banks have downsized UK based risk teams. For example, Credit Suisse made a number of their risk managers redundant in their UK operations and moved their work to Zurich. They were not alone. JPMorgan had previously gone through a similar process.
However, some smaller specialist international banks have benefited from the crisis. Independent banks or subsidiaries of parent banks with strong balance sheets and liquidity have taken the opportunity to move into new areas and this has led to new positions in risk management.
In private banking, recruitment has held up both on and offshore. Switzerland remains the centre of private banking and appears to have been isolated from the global downturn together with other traditional private banking locations such as the Channel Islands. During 2008, there was a steady migration of operational risk managers from investment banking into the private banking sector.
The insurance sector consistently recruited throughout 2008 and the number of risk managers employed in the sector marginally increased. The emergence of Solvency II created a steady stream of work. The London markets, the large corporate insurers and the consumer insurance businesses have all needed to prepare for it. Risk managers in the insurance sector have a broad range of skills, usually focused on the commercial aspects of their respective businesses. Solvency II experience remains at a premium, as does economic capital experience.
The consultancies also recruited during 2008. Opportunities have been created for them by the need to get right the policies, models and systems in place to deal with the changing conditions. The Big 4 risk management practices have benefited from increased demand for their services and they continued to recruit in 2008. Work was focused on convergence projects undertaken by market and credit risk departments and requires strong analytical, quantitative and project management skills.
As the recession has spread, another growth area has been in corporate recoveries and debt restructuring. Workout bankers are required in the current economic climate. There is demand for specialists with large, cross border restructuring and insolvency experience. Whilst in many banks the focus is on using internal resources where possible, due to the specialist nature of the work, external recruitment is being sanctioned.
2008 has without doubt been a difficult time for risk managers who have found themselves in the recruitment market. The usual seasonal surge in recruitment did not materialise and was replaced by a raft of job cuts and redundancies. The number of redundant risk managers grew throughout the year as the number of new vacancies failed to keep up with the numbers entering the recruitment market. Many experienced the frustration of completing a rigorous and lengthy selection process only to be informed that the role no longer existed. In many institutions the approval to recruit is currently being made at a higher executive level than previously.
An interesting development has been for some in-house HR resources to focus on sourcing external candidates. This makes sense in those areas where there is a generally high level of turnover, but not in a niche area such as risk management, particularly when only high quality candidates are sought. They are not usually found by searching job boards. In-house HR teams have been burdened with processing large volumes of external candidates only to be told to engage an external recruiter when no suitable candidates have been identified.
What will certainly be on the agenda in 2009 is that risk management and the recruitment market will have to respond to a new regulatory environment. The regulation that went before, including Basel and Sarbanes Oxley, demonstrably failed. While making management in some way financially responsible for their losses would make a lot of regulation redundant, traditional methods of regulation will no doubt be strengthened, expanded and enforced.
There are some early signs as to what shape this will take:
Part of the Chancellor’s November Pre-Budget Report focused on the tightening of regulation in the UK. The FSA will be expected to play a major role in the restoration and enhancement of the UK's financial stability. The FSA's remit and powers will be extended and their clients in the financial industry will have to ensure that they have adequate resources in terms of risk and compliance personnel to ensure they meet the FSA’s requirements. The Report talked of the role a strong and effective system of outcome-focused, principles-based regulation has to play in restoring stability and creating a framework for change. The Chancellor has asked Lord Turner, the Chairman of the FSA, to make recommendations for reforming UK and international approaches to regulation, to ensure the future stability of the UK banking system. The FSA’s review is due to be published in March 2009 and will address the following issues:
- The FSA’s supervisory approach, processes and resources
- UK and international policies relating to: capital adequacy; liquidity; valuation and accounting; rating agencies, derivatives markets and incentive structures
- The institutional coverage of prudential regulation
- Cross-border cooperation and coordination analysis and implications of macro trends in the financial system
This indicates a step change in the level of regulation currently in place in the UK. The changes in the regulatory environment will increase the workload of risk and compliance departments, leading to an increased demand for staff.
The Basel Committee’s strategy
On November 20th 2008, The Basel Committee announced a comprehensive strategy to address the fundamental weaknesses revealed by the financial markets crisis related to the regulation, supervision and risk management of internationally-active banks. Nout Wellink, Chairman of the Basel Committee, said "the Basel Committee's work programme is well advanced and provides practical responses to the financial stability concerns raised by policy makers related to the banking sector."
Mr Wellink added that "the primary objective of the Committee's strategy is to strengthen capital buffers and help contain leverage in the banking system arising from both on- and off-balance sheet activities." It will also promote stronger risk management and governance practices to limit risk concentrations at banks. "Ultimately, our goal is to help ensure that the banking sector serves its traditional role as a shock absorber to the financial system, rather than an amplifier of risk between the financial sector and the real economy," Mr Wellink said.
The Basel Committee strategy will involve:
- strengthening the risk capture of the Basel II framework (in particular for trading book and off-balance sheet exposures)
- enhancing the quality of Tier 1 capital
- building additional shock absorbers into the capital framework
- evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks to help contain leverage in the banking system
- strengthening supervisory frameworks to assess funding liquidity at cross-border banks
- leveraging Basel II to strengthen risk management and governance practices at banks
- strengthening counterparty credit risk capital, risk management and disclosure at banks;
- Promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles.
We can expect to see proposals on a number of these topics issued for public consultation in early 2009. The other topics will be addressed over the course of 2009.
Both these developments will require substantial input from risk management departments and help underpin demand for risk managers during 2009. There is a consensus that risk management needs to be more influential in the executive decision making process.
Analysis by sector
Operational Risk
The banking sector generally and the investment banks specifically, employ large numbers of operational risk managers. The number of people employed by the banks in operational risk management grew strongly in the period up to 2007. However, in the final quarter of 2007 the number of vacancies decreased. In the first quarter of 2008, although many banks nominally retained vacancies, it was clear that they were not actively being filled by external candidates. As events developed during 2008 and the news deteriorated, recruitment across all areas of investment banking, including operational risk, were put on hold. Many of the freezes put in place still remain at the end of 2008.
There were pockets of activity in the retail and commercial banking sector. Two of the top five retail banks were particularly active throughout 2008 recruiting good quality operational risk staff both at group and divisional level. The investment management and wealth sectors also provided a number of operational risk opportunities. Unfortunately these teams and the potential number of vacancies are much smaller than in the banks.
Other areas of the financial services market that faired better include the insurance sector. Solvency II has continued to drive demand for operational risk staff. Many vacancies have focused on the capital calculation requirement of Solvency II. Moreover, several global insurance groups have been building operational risk teams. In an effort to establish functions that provide real value to the businesses, new positions at group level have been created around risk data analysis and validation as well as those tasked with embedding the operational risk framework more effectively.
International opportunities for operational risk professionals were more abundant in 2008. Demand was particularly high in the Middle East as local banks sought to develop advanced operational risk frameworks akin to those found in the UK and United States. South East Asia, particularly Singapore and Hong Kong, has also been an attractive location for operational risk professionals to relocate to.
It is difficult to predict what will happen to the operational risk market in 2009. Whilst economic developments have the potential to have a profound effect, much will depend on the new laws and regulations that are expected.
Credit Risk
In the lead up to 2008 there was unprecedented growth in the credit market. Globally governments provided the monetary conditions that allowed this to happen and the banks and other financial institutions exploited it. A whole debt securitisation industry developed. This growth involved a huge increase in the number of credit risk managers. Systematic failures in assessing the credit risk related to US sub-prime backed securities led to large scale asset write-downs and the contraction in the debt markets and subsequent credit crunch.
The effect of this was first felt by the investment banks. Redundancies and recruitment freezes started early in 2008 when candidate registrations spiked. There was only very limited recruitment from the investment banks throughout 2008 and a seemingly steady stream of redundancies.
Demand from retail, commercial and corporate banking held up in the first half of 2008 and into the third quarter. Most activity focused on the SME to mid corporate sector. There was strong demand for junior to mid level retail credit analysts, specifically with scorecard development, monitoring and reporting experience across the entire sector. There was also steady demand for candidates with experience of commercial and corporate analysis.
The effect of the credit crunch became more pronounced by September with the effective collapse of many financial institutions and widespread government intervention. As elsewhere in risk, recruitment freezes, delayed decision making and the withdrawal of vacancies at various stages of the recruitment process became the norm. However, at the end of 2008 there was a burst of activity. Those managers with a remit to hire attempted to recruit candidates with the requisite technical skills before the vacancies were either pulled or filled with an internal candidate.
Demand is currently coming from those areas of credit risk management driven by regulatory requirements such as Basel II. These areas are still facing shortages of experienced candidates due to the specific technical demands of these roles. Demand exists across the banking industry as well as from the regulator and, despite the recent developments in the industry, banks still need to have the relevant models in place if they are to achieve A-IRB status.
There is also an increase in the demand for candidates with experience of restructuring, workout and recoveries. Many banks are growing their teams through the redeployment of staff from leveraged portfolio roles or corporate finance. However, there has been a growing demand in the external markets for experienced, often qualified, individuals from a practice background to take up these positions. Credit professionals who have been through a recession are also reinventing themselves as workout specialists and there are options in the boutique advisory firms and asset managers for the best candidates.
The outlook for the credit risk management market is unclear. Overall a flat market in 2009 with few vacancies might be the best that can be expected. The exception is likely to be for those with experience of debt restructuring either from an advisory, principle investments, workouts or insolvency background. They will find their skills in high demand.
Market Risk
There is little doubt that some of the activities and certainly the risks that investments banks undertake in the future will be significantly different. Market risk management, whether or not culpable for the present crisis, will also change. What is emerging from the crisis is a greater level of reliance on market risk. This change will impact on both the techniques employed and the skills market risk practitioners will require.
Market risk recruitment was certainly affected by the events of 2008 and suffered from the same recruitment freezes and patterns of redundancies that occurred in other areas.
In spite of this, there was a steady demand for market risk expertise in 2008 and we expect this to continue into 2009. What is clear is that both the type of people and the work they undertake is changing. Technical brilliance is no longer the only priority. Commercial and strong influencing skills have become vital and the challenge will be to find people who have both. Many market risk managers will need to focus on training and mentoring junior analysts to create risk specialists with the new required skill set.
A number of energy trading houses, hedge funds and asset managers recruited in 2008, with some asset managers planning to establish market risk functions in 2009. Despite investment banks having been through the most significant and dramatic changes, the majority that survived either recruited in 2008 or indicated that they will be recruiting in 2009.
One of the most active sectors has been the market risk advisory divisions of consultancies where recruitment has been buoyant throughout 2008. This is set to continue in 2009. Following bank mergers, departmental restructuring and the integration of many credit and market risk functions, specialists with experience in convergence risk have grown in demand. Consultancies in the Middle East have also been actively recruiting. Those with quantitative, modeling and Basel II backgrounds are particularly sought after. There has also been a demand for Heads of Risk with a Market Risk background, particularly for banks and investment houses in the Middle East.
The move to integrate risk functions, notably market risk with credit risk but also market with credit and liquidity risk, and in some cases operational risk, will continue in 2009. There will be a heavier focus on adopting a more coordinated approach to external risk management by identifying a common set of risk factors. Such integration will lead to recruits needing more varied risk management experience.
One of the alleged flaws within market risk has been a top heavy focus on financial engineering and not enough emphasis on the basic elements of market risk. Failures occurred because senior managers and board directors were making business decisions based on unreliable or inaccurate information or simply because they chose to ignore their market risk managers. Many agree there has been too much emphasis placed on complex abstract mathematical models and too little focus on practical commercial analysis. Whilst the role of the Quantitative Analyst will not disappear, there is likely to be a shift to a “back to basics” approach with an increase in limits, controls and human intervention. Some US and European banks have even transferred the more complex areas of market risk back to their headquarters outside the UK.
2009 will see redefined market risk reporting lines with the function itself becoming a more influential and “recognized” entity, potentially reporting directly in to the CEO as well as the CRO. CROs will also be pushing for increased board level representation.
Having been accused of asking too few questions and protesting that they are ignored or not taken seriously, market risk managers should have a more receptive audience going forward. However, if this change is to materialise, market risk managers must have a voice, not just a technical mind and a ‘yes or no’ mentality. They must have greater powers of influence, business acumen and the necessary interpersonal skills.
The role of market risk is clearly being reassessed. In 2009, although the recession will dampen demand and further redundancies are likely, it will be underpinned by these fundamental changes and the critical role of the function.
Interim staff
The market for interim risk managers shrank during 2008 as SOX and Basel II related work came to an end. As companies have announced redundancies, internal candidates have been preferred and only work that is business critical has gone out to external contractors. Rates have reduced and contracts have become shorter with deadlines more tightly kept to. Unfortunately the contract market is becoming even more competitive, as redundant risk managers swell the ranks of potential contractors. Many established contractors are now actively seeking permanent positions.
Fixed term contracts are becoming more fashionable than daily or hourly rates. There are advantages to both contractors and employers. For the contractor, it represents guaranteed work for a set period. For the employer, it is usually more cost effective.
In 2009, it is likely that more contract work will become available. Regulatory changes will most likely prompt companies to use contractors and particularly those with extensive experience of working on risk programmes such as: Basel II, Solvency II, MiFID and SOX.
Summary / predictions
In last year’s report, we predicted that the outcome for 2008 would be finely balanced. Maybe the damage to the financial system caused by the credit crunch would be contained. If not then it had a danger of feeding back into the financial services industry in the form of lower demand for the industry’s services. We predicted that the prospects for the employment of risk managers would be more closely tied to developments in the wider economy than many might otherwise like to believe.
Unfortunately, the damage has crossed into the wider economy and is creating more turmoil than even the most pessimistic of predictions. It is clearly not simply a local UK problem but is affecting the global economy, making any solutions more difficult.
The total number of people employed in the UK financial services industry will fall during 2009 and some businesses that currently exist will not exist at the end of 2009. Within this context there is little doubt that the number of risk managers employed in the industry will also fall. A rise in unemployment of 1 million is not going to leave the risk management profession unaffected.
However, on a more positive note, financial services is a core industry that demonstrably cannot be allowed to fail. Risk management is a vital part of the industry and this will be further endorsed by whatever regulation is rolled out during the coming year. This should underpin employment in risk management and ensure that any rise in unemployment is limited. It is going to be a tough recruitment market, but there will be a market. |
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