INCREASE IN DEFENSIVE REGISTRATIONS
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Risk Management |
Jun 2007 |
Dec 2007 |
Jun 2008 |
Dec 2008 |
Jun 2009 |
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|
|
|
|
|
|
New vacancies |
198 |
127 |
77 |
53 |
56 |
|
Closing vacancies |
117 |
77 |
72 |
37 |
39 |
|
Candidates registering |
195 |
249 |
241 |
257 |
320 |
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Defensive registrations |
4% |
8% |
17% |
25% |
37% |
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Overall salary increase |
24% |
21% |
16% |
15% |
7% |
- The number of new vacancies was slightly up on the previous six months, due to a marginal increase in new vacancies in the second quarter of 2009. New vacancies remain at a very low level.
- The closing number of vacancies also marginally increased against the previous six months. However, they are still 45% down against the corresponding period in 2008.
- The number of candidates registering is still increasing and reflects the high number of defensive registrations, which are up 48%. Redundancy or the fear of redundancy remains a major factor in the risk management recruitment market.
- Salary increases, for those people moving jobs, fell to 7%, the lowest figure ever recorded in risk management. It represents the lack of bargaining power candidates currently have in the recruitment market.
MARKET COMMENTARY
The global economy is in recession and the path to sustainable growth remains uncertain. Whilst green shoots may have been spotted, the financial crisis has a long way to go before we have a clear view of what the future holds. Employment is a lagging indicator and for many it will no doubt feel like a recession until unemployment starts to fall.
The raw statistics in terms of vacancy creation and number of candidates being forced into the recruitment market remain daunting. Vacancy levels are at multi year lows. Redundancies will continue as the financial services industry consolidates and adapts to a smaller economy and more limited business environment.
In the present market, for those who have been made redundant, the major obstacle in finding another job is not simply competition from other risk professionals, but the lack of vacancies.
However, those companies with vacancies are not necessarily finding it easy to fill them. This is partly due to inflated expectations. There is a recession and, not unreasonably, Heads of Department, after years of candidate shortages, believe they now have the opportunity to recruit their ideal candidates.
They are also working in a corporate environment where any external recruitment is being conducted on a highly selective basis. The authority to recruit externally has to go through higher levels of ratification and is required to demonstrate to a wider audience that they are recruiting people who almost precisely meet the requirements of the job specification.
Whilst there is competition, it is heavily made up of people who are being forced through redundancy, or its threat, into the recruitment market. Their interest is simply to secure another position. Understandably, many good risk managers believe it is too risky to change job and are staying with their existing employer. This view is a triumph of perception over reality. Unlike last year, when changing jobs was considered safe, any potential damage to a company’s business prospects are already clearly visible.
Potential positives
There has been a marginal increase in activity levels during the second quarter of 2009. Whilst we would be reluctant to predict any immediate improvement, it is unlikely that the market will deteriorate further.
Many risk management departments are reporting staff shortages. With the growing importance of effective risk management, the point will be reached when external recruitment becomes a necessity.
Further regulation, designed to ensure that the misplaced risks that were taken in the financial services industry cannot readily be repeated, is also likely to boost the risk management recruitment market. Although better regulation will not necessarily prevent a future crisis, the financial services industry is now under intense pressure to improve its risk management. The FSA will be granted wider powers and more effective governance, and greater risk management will be required within the financial services industry.
Redundancies have continued to flow in risk management in 2009 and there will be more to come. However, some banks were perhaps too quick to cut staff and there is evidence that they are pulling back from otherwise planned redundancies.
Areas of demand include:
- Basel II related roles and an increase in Solvency II positions which will continue, particularly as Pillar II takes shape.
- Within credit risk, workout and corporate recovery specialists are in demand.
- Within operational risk there is particular demand for Lloyds and London insurance market expertise.
- Demand in market risk includes quantitative market risk, analytics and methodology, risk control and multi-disciplined market risk management.
Whilst inadequate risk management is cited as a major cause of the financial crisis, it was not simply that management failed to be informed or understand the risks they were taking. They no doubt often knew but took the risks anyway. It is now recognised that risk management should be part of a strategic partnership and key to decision making processes.
The overreliance on models is also being questioned. Whilst models will remain an important tool in risk management, they need to be used intelligently and their margin for error appreciated and understood.
Recent news has focussed on the stress tests that regulators in the US and UK have conducted. In the US, the tests are part of the Capital Assistance Program. Whilst the tests give regulators a broader understanding of a bank’s risk profile and allow regulators to pinpoint how much capital they need, some argue they obscure broader problems and the more fundamental risks that could potentially further damage the financial sector.
Whilst the integration of market and credit risk has become old news, there are now moves to integrate market, credit, operational and liquidity risk. How this might be achieved differs from one financial institution to another. It depends on their size, business spread and historic legacy.
However, there is no doubt that there is a shift towards integrating risk management. This will require a more holistic approach to risk management, with risk managers needing to understand and be experienced in market, credit, operational and liquidity risk. A problem with this approach and centralisation is bringing everything together on to a single platform. This is a potentially huge undertaking.
CANDIDATE AVAILABILITY
Operational risk
Candidate availability in operational risk is generally high. However, within investment banking there is a shortage of candidates with Solvency II operational risk experience. Within the insurance, life and pensions sector, the demand for operational risk measurement / modelling skills is also proving hard to satisfy.
Credit risk
New candidate registrations have fallen significantly in credit risk. However, as a result of the high number of defensive registrations in the latter half of 2008, the pool of available candidates remains large. Whilst there will no doubt be further redundancies, these are unlikely to be large scale. Whereas many employers have been able to recruit internally from redeployments, this is unlikely to extend throughout 2009 and into 2010. We expect the pool to start shrinking. Currently there are large numbers of credit risk analysts available, but shortages of those with experience of Basel ll quants, MI and Reporting experience. Work out and recovery specialists are in particularly short supply.
Market risk
There are a large number of market risk candidates available, especially those with traditional market risk skills. Whilst there is still a steady flow of new candidate registrations the numbers in the second quarter began to tail off. There are shortages of specialists with specific skills, especially those who have quantitative market risk experience combined with credit and other risk disciplines.
ANALYSIS BY SECTOR
Here are some observations and conclusions by market sector:
Operational Risk
Although many operational risk departments continue to report high workloads, there has been little appetite to recruit externally and demand for operational risk managers has continued at historically low levels during the first six months of 2009. What limited demand there is, is for mid level managers.
- Within investment banking, whilst there are widespread recruitment freezes, more advanced capital markets businesses have been using operational risk frameworks to good effect. Those risk departments that receive a better rating are able to lower the Capital Calculation requirement under Pillar II and can be seen to add value by reducing costs. This is helping make the case for more operational risk resources to be made available.
The Madoff scandal is prompting recruitment within capital markets and particularly within brokerages. It has not been the only fraud and a number of brokerages are making efforts to combat fraud by enhancing their operational risk departments.
- In retail banking, there has only been limited recruitment and redundancies remain widespread within group, divisional and local risk teams.
- In response to significantly lower revenues, activity within the investment management and wealth sectors has been subdued. Many groups have sought at best to maintain numbers in their operational risk departments. However, there has been cost cutting and a number of Heads of Operational Risk have been made redundant as previously independent operational risk and compliance departments have merged. What limited recruitment there has been has centred on smaller asset management companies who have historically been under resourced. They have been looking to embed more robust and effective operational risk practices.
- In the insurance sector there have been far fewer redundancies and more recruitment. Solvency II in particular is stimulating demand within the Lloyds and London Insurance Markets.
Under Solvency II, insurers and reinsurers are required to account for all the types of risk they are exposed to and to manage those risks effectively and transparently. As Pillar II of Solvency II takes shape, we expect operational risk recruitment to increase much as it did with Pillar II of the Basel accord. Operational risk will now be explicitly included within "all types of risk" for the first time under the new directive. There will also be a new type of role created for “group supervisor”, which will provide risk management oversight across borders for EU insurance groups. Many Lloyds members will have to establish or enhance their risk capabilities to Solvency II minimum standards.
In the rest of the insurance market, in the general insurance and life / pensions sectors, there has been both limited recruitment and redundancies. Solvency II vacancies have been more likely to be filled internally as otherwise surplus staff are reassigned.
Credit Risk
After the unprecedented growth in credit which preceded and no doubt contributed to the credit crunch, the banks, having been stabilised, are now rather more focussed on recovering what they have previously lent rather than providing further credit.
- Not surprisingly, the greatest demand is for credit risk managers with workout and corporate recovery experience. Forecasts suggest further difficulties for corporate and retail borrowers. Should impairment charges reduce equity to levels that trigger technical loan defaults, this will only serve to continue the economic decline. Banks will be looking to increase the size of their workout and recoveries teams throughout the remainder of 2009. To date this growth has come primarily from internal redeployment, but is more likely to become externally focused as the year progresses.
- Counterparty risk analysts and risk reporting departments are under considerable pressure given the current market conditions. However, whilst overstretched departments are still struggling to get the necessary approval to recruit externally, there will be latent demand for candidates with these skills. Demand is still emerging for Basel II related roles as well as from the FSA and the Bank of England.
- There has been steady demand for FI / NBFI counterparty credit managers from broker dealers, particularly those candidates with experience of analysing hedge funds. This is not unsurprising given the heightened risk of counterparty failure.
- Lending is set to remain subdued for the rest of 2009. Consequently, demand for credit analysts will be limited.
Market Risk
Any increase in demand from market risk that we anticipated at the start of 2009 has yet to materialise in full. It is clear that many companies remain subject to recruitment freezes. Those that are able to recruit are being highly selective or even waiting for the outcome of new regulations to shape their view of the ideal market risk manager.
- Within investment banking, recruitment is subdued. Some market risk management functions are selecting traders with specialist product knowledge and familiarity with in-house trading strategies over established risk managers.
- Reduced revenues within investment management has resulted in widespread cost containment. Most plans to recruit market risk functions have been put on hold.
- The insurance sector is more buoyant with demand from the sector especially for market risk managers with actuarial experience.
- Demand from the consultancies underwent a mini surge at the start of 2009 for senior level technical market risk and quant specialists. Some had announced plans to double their risk advisory functions within two years. Not surprisingly, this was met by huge interest and a great deal of selectivity by the consultancies concerned.
Some of the issues that are in the process of affecting the market risk recruitment market include the Basel II measure of trading losses. This change will be implemented in 2010. In response, market risk managers will need to become more multidisciplinary with experience not only of credit risk, but also operational and liquidity risk. These rule changes will demand an even deeper understanding of the issues involved in market and credit risk as well as “stressed” market risk.
There is increasing regulatory pressure to set tighter market and liquidity reporting standards. Despite budgetary constraints, this will require more control staff to be recruited - accountants and product controllers, as well as risk analysts.
A problem for some banks has been an overreliance on VaR as the single measure of risk. However, there is increased focus on stress testing to supplement VaR. This has been highlighted by regulators in the US. With a bigger focus on VaR, stress testing, updating risk frameworks and economic capital, market risk managers will have to become more specialised and thorough in their approach.
Whilst risk models are being scrutinised and quantitative analysts have had to go “back to basics”, their role, along with model validators, has not been made redundant. There is however, a push for more “human interaction” between functions and for information and data to be communicated in a “non-quant” manner. This requires stronger communication skills. To date there have been a number of quantitative and model focused hires this year including market risk model developers to support new products and work with changes enforced by the FSA.
Interim Staff
Demand for interim staff, the usual retreat for those who have been made redundant, has fallen significantly. Not surprisingly, with increased numbers of candidates entering the market as a result of redundancy, the competition for generic risk management vacancies is at an all time high and rates have suffered.
Whilst retail banking and insurance have experienced modest demand, investment banking has been particularly low. Demand has centred on business as usual roles such as maternity cover and project-focused roles. The majority of the project-focused roles have been for assistance with RCSAs and the implementation of Solvency II.
Reassuringly, the number of risk departments making enquires about the availability of interim staff is increasing. Whilst enquiries are not yet translating into readily available budgets and active recruitment, it is indicative that the need to recruit additional staff is being recognised.
Provided they can “hit the ground running” and have adequate technical skills, interim recruitment usually involves flexibility around a candidate’s experience and skills. In the current market, risk management departments are looking for very close matches and recruitment processes are taking longer, more akin to permanent recruitment. Only business critical roles are generally receiving approval.
There are grounds for optimism in the latter half of 2009. Increased regulation and a move towards imbedding a stronger risk culture will no doubt create demand. However, there will be further redundancies to swell the number of potential contractors. No doubt budgets will remain under pressure, as will the rates available to contractors.
SUMMARY / PREDICTIONS
Given the unprecedented contraction in the UK economy, far fewer jobs have been lost in risk than might otherwise have been anticipated. That said, the fall in demand for risk management professionals has been acute.
It is likely that there will be further redundancies as the financial services sector consolidates and any rebound in the economy will take time to filter through to employment.
In our view, the risk recruitment market is at or possibly past its nadir. It is quite possible that in the next six months risk recruitment will gather momentum. There are a number of positive developments and a new outlook for the overall function and responsibility of risk management. It is in the process of becoming a recognised and more influential presence within corporate decision making.
However, it is necessary to appreciate the unprecedented fiscal and monetary stimulus applied not only to the UK economy but others around the world. The cost of this has not even begun to be recognised or met and the way ahead remains uncertain.
Other sections
To view further sections of this report, please visit:
- Executive summary
- Risk Management – salaries
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