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Interim Market Report 2011 - Risk Management Market Commentary

As we reported earlier this year, the reforming zeal that was evident in the aftermath of the financial crisis has now dissipated. Reforming the governance and regulation of the banks and wider financial services industry is no longer a coordinated global crusade and does not enjoy the political focus it did. It has increasingly settled into regional and national initiatives. The crisis in this respect may ultimately have been a terrible waste. However, in both the UK and EU, regulators are acting against a backdrop of a simmering sovereign debt crisis and a banking system that remains fragile. The financial services industry is a significant part of the UK economy and as in most other countries, in spite of the need to reduce the threat posed by their banks, there is little appetite to undermine their competitiveness.

At a national level the Independent Commission on Banking led by Sir John Vickers delivered its interim report to the public in April. It baulked at the formal separation of retail and investment banking, despite recognising that a state guarantee for retail banking provides cheap funding for the universal bank’s investment or ‘casino’ banking activities. In essence the plan is to impose a 10% tier one capital ratio on systematically important lenders and to ring fence retail banking away from investment banking. The government has seemingly accepted these interim proposals and the attempt to gain greater financial stability without fully separating retail and investment banking. Given the banks are in the process of rebuilding their capital bases this should not be too draconian or undermine London as a global financial centre. However, as with Basel III and so much regulation, the devil is in the detail. There are so many grey areas including what might be regarded as capital and what is considered a retail or investment banking activity.

The new regulatory structure for the UK is emerging. In April the FSA announced an internal reorganisation to help it evolve into its new structure. The Supervision and Risk business units have been replaced with a Prudential Business Unit, which as the Prudential Regulatory Authority (PRA) will become a subsidiary of the Bank of England. It will be responsible for ensuring that individual banks comply with capital adequacy requirements, have sufficient liquidity and spread their risks. A Conduct of Business Unit will become the FSA’s renamed Financial Conduct Authority, which will focus on consumer protection and market regulation. The Financial Policy Committee has also recently had its first meeting. As part of the Bank of England it will sit alongside the Monetary Policy Committee and is tasked with advising on the actions needed to keep the whole banking system safe. It is planned to have the power to control the supply of credit and to stop asset bubbles developing.

The banks have already been warned that they will be scrutinised more intensely following the introduction of the PRA. This is a move away from simply regulating structures, activities and compliance with procedures. Its incoming head, Hector Sants, has stated that their judgements would no longer be taken on trust and the PRA will be far more likely to challenge their decisions. The regulator will take its own view formed from its direct analysis of the issues which affect the safety and soundness of a bank. The regulator will have the power to modify business plans. The FSA is already searching for excessive risk taking with the introduction of Business Model Assessments (BMAs). It is part of the regulator’s move to implement forward looking judgements.

Aside from the banks, the wider financial services industry is also being scrutinized for the risks taken. The insurance industry has Solvency II to contend with, which has created a whole new market for risk management skills in the insurance sector.

The drive to increase the number of risk managers employed in the financial services sector is coming to an end. Demand is now primarily driven by the need to replace risk managers in existing positions rather than recruit additional resources. However, against an unprecedented rise in the number of risk managers employed by the financial services industry, the future for risk management practitioners remains positive.

Analysis by sector


Despite a strong start to the year and considering the huge recovery during 2010, demand for risk managers has fallen back during the first six months of 2011. The growth in the number of risk managers employed in the banking sector has ended. The vast majority of vacancies are now simply filling existing positions. It is apparent that some banks have looked to cut their overall headcounts. Whilst these redundancies have had no material impact on risk management, concerns about economic recovery and business volumes, particularly in areas such as securities trading, has caused confidence to dip.

Corporate Banking


The banking reforms currently proposed and seemingly endorsed by the government to ring fence the investment banking activities of the large utility banks is likely to leave their associated corporate loan activities similarly ring fenced. These activities are closely associated with investment banking and funding them will become more expensive. It would most likely also become more difficult to provide hedging facilities for interest rate and currency fluctuations. Given the increased capital banks are required to hold against their loan portfolios, corporate banks have reduced their lending. This has resulted in a reduction of roles in counterparty credit compared to this time last year. There has been an increase in demand for candidates with portfolio risk management experience, impairment forecasting and reporting and risk weighted asset (RWA) calculation. There have also been a number of credit quality assurance and audit roles.

Liquidity/AML risk

By the start of 2011, demand for liquidity risk managers had fallen back. The majority of UK and foreign banks operating in the UK had established liquidity risk teams capable of meeting the basic FSA requirements during the course of the previous two years. Whilst it was still common for larger banks to have multiple vacancies, this is no longer the case. As with all recruitment markets, as they mature, a natural turnover of staff begins as people potentially look to capitalise on the skills they have developed with a new employer. This is evident now in liquidity risk where the majority of vacancies are to fill established positions. Given that the initial rush to establish liquidity risk teams is over, recruitment has become more selective with specific skills now frequently sought. As these skills remain rare, candidates can command significant premiums and it has not been uncommon for salary increases of up to 50% being achieved by the very best candidates. Whilst this is good for those who achieve these increases, it can a have a detrimental affect when others set it as an unrealistic benchmark for the skills and experience they have. Whilst overall demand in liquidity risk staff has fallen, an exception is liquidity reporting. Most banks are still recruiting heavily in this area in order to meet the reporting requirements laid out by the FSA. Those banks who are not currently able to source sufficient permanent staff have been falling back on the contract market, where £600 p/day would seem to be the current rate.

Outside of liquidity risk, the first half of 2011 has also been characterised by an increasing demand for risk managers with interest rate risk on the Banking Book (IRRBB) experience. The UK’s largest retail banks and building societies (where IRR is most prevalent) are all in the process of building their capability in this area and we expect the demand to continue into the second half of the year. This demand is being compounded by several banks who are in the process of implementing new ALM systems. As a result, candidates with experience of implementing ALM Systems (particularly QRM or Bancware which are the two most common systems) are especially sought after on either a contract or permanent basis. We anticipate continued demand for ALM risk managers throughout the remainder of 2011, as banks look to consolidate the work they have done since 2009.

Operational Risk

Demand for operational risk managers within corporate banking has remained consistent in the first six months of 2011. Global payments initiatives remain a source of demand. Barclays have led the way, relocating a considerable part of their payment operations back to Europe and installing market leading payments software. The volume of payments across the leading European banks has made the recruitment of quality risk and corporate governance staff an imperative. The majority of vacancies have been more senior and in the £80,000 - £120,000 salary range. Despite strong interest, these roles require specialist skill sets, including the ability to operate at a global strategic level. This is a rare quality and does not come without its pressures. A current issue surrounding operational risk recruitment within corporate banking is the uncertainty surrounding the sector. It might not have the best “longevity factor” right now for established operational risk managers.

Retail Banking

The retail banking industry in the UK is going through a period of considerable change. There are a number of applications to the FSA for start up banks. Lloyds Banking Group and RBS are selling off branches and new entrants are setting up both high street and web based operations. The sub prime mortgage market, so heavily reliant on money market funding, no longer exists and it is difficult for individuals and small businesses to access credit through the banks. The proposal to ring fence the retail banks is likely to result in an increase in the cost of providing basic services such as current accounts and small business loans.


The retail sector, based largely outside of London, has provided steady demand for credit risk expertise. Candidates with a strong understanding of scorecard and model development, implementation, stress testing and validation, currently have a number of options open to them. In addition to these technical roles, there have been several opportunities for candidates with strong process, controls and policy experience. Given the new entrants into the retail banking market, there is likely to be solid demand for credit risk experience for the remainder of 2011 and beyond.

Operational Risk

The number of vacancies for operational risk managers in retail banking rose sharply during the first half of 2011. Unfortunately the rate of the recruitment has not kept pace and this has resulted in a build up of outstanding vacancies. This is seemingly due to two factors. First, the remote nature of their retail operations on a national and occasionally international level. Secondly, finding candidates to commit to significant travel requirements often associated with these roles. The major UK and European banking groups will often require operational risk managers to make themselves available to regularly travel between regional centres.

Demand for operational risk has been at all levels from analyst and associate through to director level. It is apparent that there is currently a greater emphasis on filling senior positions internally.

Government support to “ring fence” retail banking has met with some surprise and anxiety, although it is still too early to predict the impact on operational risk recruitment.

Investment Banking & Capital Markets


Investment banks have continued to recruit credit risk managers with demand across reporting and counterparty analysis. Demand for counterparty analysis experience, whilst not excessive, has included risk managers with hedge funds, banking, emerging markets, corporates, TMT and commodities experience. Candidates are expected to have experience of both derivatives and loan products as well as a thorough understanding of the underlying security documentation. Notable areas of demand have been in emerging markets with several banks seeking Russian speakers, as well as demand for candidates with commodities experience. There have also been several roles in analytics teams, where there has been a focus on exposure analysis and reporting, portfolio risk, Counterparty Valuation Adjustment (CVA) and modelling.

Market Risk

There is currently substantial demand for market risk expertise with seemingly the majority of the tier 1 investment banks actively looking to fill vacancies at AVP – SVP levels. There is a severe shortage of candidates with the necessary skills and investment banks are actively competing against each other to secure their services. As a consequence, salaries are rising. The majority of these new roles are in risk management rather than risk reporting. The requirements usually come with a particular emphasis on a specific asset class or experience, such as rates, credit or equities. What makes recruitment more problematic is that the investment banks are not only looking for rare technical skills, which usually come with strong academic achievement in mathematics or science, but they also require candidates to have excellent communication skills and the ability to interact with and commercially challenge the front office.

Operational Risk

Demand for operational risk managers started the year slowly but has picked up as 2011 has progressed, with vacancies coming through on a regular basis. The universal requirements for operational risk managers working in investment banking remains sound knowledge of the business, relevant financial product knowledge, together with good communication skills and commercial awareness. It is becoming increasingly common for operational risk managers to move through risk management and into business management roles. Candidate availability, particularly when compared with other areas of risk management is good. However, operational risk like all areas of risk and corporate governance is becoming increasingly specialised. Investment banks are invariably looking for specific skills and will not put candidates through their recruitment processes if they do not have them. These skills are not exclusively in risk management. They are increasingly interested in thorough knowledge and experience of their product lines and the ability to communicate with and challenge the business. The career development route from internal audit into operation risk is becoming well trodden with many internal auditors with capital markets experience enjoying the change in focus from internal audit to risk.

Insurance (General, Life, Lloyd’s Market)

The high level of demand for risk managers during 2010 has continued into 2011. Solvency II is driving much of this demand. As the timetable to adopt the Directive gathers pace, insurance groups have been looking to recruit additional risk management expertise.

There has been consistent demand for operational and enterprise risk managers. This has come from larger general insurers, life assurers and major Lloyd’s syndicates and is a result of their division of principles based analysis and management of existing internal models. Such a sophisticated approach is often unnecessary with the lower levels of risk that smaller Lloyd’s syndicates are exposed to. Demand for financial risk managers has been lower and reflects their smaller teams and overlap with actuarial. More quantitative skill sets such as FRM remain in high demand as a result of their business critical impact on the internal model.

Lloyd’s Market

Recruitment within the Lloyd’s market has been very active. We have seen demand at all levels from “Head of” to Analyst and encompassing both permanent and contract staff. Given the current severe shortages of candidates with relevant industry related experience, employers have had to compromise on the candidates they hire. They are actively considering candidates with audit or compliance experience who can demonstrate the ability to make the transition into risk management. The smaller and often more embryonic corporate governance structures within the Lloyd’s market requires candidates to have excellent stakeholder management and networking skills.

Life Assurance

A common characteristic is for many life assurance groups to employ the bulk of their risk management teams away from London. As a result they are often unable to recruit the same level of specialist skills that is available to London based general and Lloyd’s insurance groups. This puts them at a significant disadvantage when recruiting at associate or senior associate level, where the bulk of current demand is coming from. Risk managers at the formative stages of their career more commonly opt to work in London where salaries remain higher. Given the shortage of candidates with ideal skill sets, life assurance groups are currently needing to compromise. Candidates with relevant internal audit experience are often preferred.

General Insurance

Team building at associate and senior associate level is currently common in the general insurance sector. In the first half of 2011 there has been little demand at manager and senior manager levels. This may be the result of the investment general insurance groups have been making to retain their senior risk management staff. This has included salary increases, promotions and bonuses. We do not anticipate this pattern changing during the remainder of 2011.

Asset/ Wealth Management

This sector covers traditional asset and wealth managers, private banking, alternative investment industry (hedge funds) and private equity. As might be expected from such a diverse sector, so far this year there has been a wide range of vacancies encompassing credit, market and operational risk. Whilst a relatively small sector when compared to banking, the variety and specialist nature of many of the roles in risk management make it an interesting and attractive sector to work in.

The majority of opportunities are London based, although there has been some drift towards Zurich and Geneva. Whilst operational risk managers are employed throughout the sector, credit roles are concentrated in private banking and market/portfolio risk roles in the alternative investment industry.

Credit Risk

Vacancies in credit risk have been limited during the first half of 2011 and have been primarily driven by the larger wealth management groups. These have been focused on credit analysis, portfolio reporting, analytics and sanctioning. Given the diverse nature of the sector’s products, candidates may come from residential mortgage, commercial banking, asset finance or investment banking backgrounds. Write downs, bad debts and workouts are still an issue, but less so than immediately after the recession. As a result there has been a slowdown in demand for workout and recoveries experience. As the global economy continues to expand and the potential client base expands with it, we anticipate the demand for credit risk managers from private banks and wealth managers will grow.

Market & Portfolio Risk

The majority of demand from the sector has been to fill vacancies for existing positions. However, with the alternative investment sector becoming the subject of regulation within the EU, companies based in London have either strengthened their risk departments or have looked to relocate. This has resulted in some companies relocating to Switzerland. However, the extent of the drift away from London in risk management terms has not been dramatic and has been substantially countered by start ups. The number of risk managers employed in the sector has not fallen.

There are two distinct types of roles within the sector: reporting and risk management. Whilst most companies operating within the sector have historically required their risk managers to simply report risk, they are now increasingly looking for risk managers to add value. They are expanding the responsibilities to incorporate active risk management and even Front Office risk structuring into the roles.

Operational Risk

During the first half of 2011 there was a strong rebound in demand for operational risk managers within the sector. This demand has encompassed vacancies from associate through to ‘Head of’ roles. It is particularly welcome in a sector, where unlike other sectors, demand had not seemingly recovered from the financial crisis. There are currently a high number of good quality operational risk professionals in the market and demand appears to be particularly focused on candidates with alternative investment experience.

Contract Market

Demand from the contract market was strong and wide ranging at the start of 2011. Candidate shortages remain a feature of the market, as contractors are frequently re-engaged as their contracts come to an end. They are also being tied into longer notice periods than have been the historic norm.

Within credit risk during the last six months there has been a notable upturn in the demand for interim credit risk analysts with specific commodities experience from specialist brokerage houses. The current volatility in the commodity markets are well publicised and many investment banks have been bolstering their credit teams. Commodity trading firms have been an obvious source of candidates, thus creating demand for contractors. In retail banking, SAS skills remain in high demand as data migration and credit risk systems integration work continues.

There has been strong demand for contractors with liquidity risk reporting experience, particularly those with BIPRU12 and GENPRU experience for the purposes of UKFSA reporting under the new liquidity calculation rules (047/048). Contractors with economic capital and regulatory capital planning and assessment skills have also been in demand, and will continue to be to assist with the capital adequacy requirements of Basel II/III. As Basel III approaches, contractors with relevant regulatory experience remain in demand. This demand will increase in the next six months together with the rates that contractors with the relevant experience can achieve.

Contract operational risk managers started the year in high demand, driven largely by Solvency II. However, the high cost of contractors resulted in many companies electing to recruit permanently or seconding people internally. Many contracts arose from permanent positions not being filled and were holding, rather than project based roles. There were also a number of risk contract roles focussing on development and implementation of frameworks. Risk candidates with good product knowledge remain popular.

More generally the demand for contractors fell back in the second quarter and currently remains relatively subdued. Demand appears more focused on more junior and therefore cheaper contractors. However, candidates with composite risk management sets encompassing credit, liquidity, market and operational risk or any combination remain popular, especially with smaller companies that do not have the critical mass to support individual functions.

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