Archives For Banks

Rosemary Hilary

By Rosemary Hilary FCCA, audit director, TSB

When I started my career I knew I wanted to have a respected qualification that would give me flexibility and choices.  As I was naturally attracted to the world of accountancy, ACCA seemed the number one choice for me.

I developed my early career in insurance (management accounting) and industry (financial accounting) and then I joined a commercial bank first as Internal Auditor then as Treasury Accountant.  From there I joined the Bank of England and that led to a fascinating period in financial services regulation, in a number of senior roles, transitioning to the Financial Services Authority and, briefly, the Financial Conduct Authority. In my last seven years at the FSA/FCA I was the Director of Internal Audit. My ACCA qualification provided an excellent foundation on which to develop the skills required for Internal Audit.

But in 2013, after working through the effects of the financial crisis, I decided it was time to return to my private sector roots in banking.

I joined the executive team at TSB, as Director of Internal Audit, in October 2013. Once again my ACCA qualification was a key factor that qualified me for the role and, on a day-to-day basis, I still draw on the skills and knowledge that I learned during my accountancy training.

TSB is a new challenger bank for Britain, but with a traditional and trusted brand and the capabilities of an established organisation. This sense of continuity and history is central to the new Bank’s culture – TSB is benefiting from the trust and reputation it built up over its long history and also setting out its own agenda as a straightforward and transparent bank pioneering a return to local banking for Britain. We still have a sense of the old TSB community and the essence of its values, but the new TSB provides an exciting opportunity to have a hard think about strategy and shape our role as a challenger bank.

I am now building up the Internal Audit function to the size and scale that we need for our operation in future. I’m doubling the size of the team to 40 internal auditors and will also bring in specialists when necessary. Apart from sheer intellectual ability, I am looking for the team to have the core skills that I feel I developed as part of my ACCA training. Top of the list is good communications skills. You must be able to write down findings clearly and be impactful when talking to colleagues.  Next is good stakeholder management – knowing how to convey messages as a ‘critical friend’ and with gravitas and ‘clout’ and the ability to inspire respect from colleagues across the organisation, including the Board of Directors. Internal Audit gives you a great, 360-degree view of the business-constantly taking the pulse of the organisation.

In addition to my work at TSB I also feel privileged to have been selected, four years ago, to be on the board of Shelter, the national homelessness charity.  As a member of its Audit, Risk and Finance Committee, my ACCA qualification provides the underlying skills and knowledge that I need.


Nicola Horlick

By Nicola Horlick, CEO of Money&Co

SMEs are increasingly going online for something they are not getting from the banks: finance.

Online crowdfunding platforms, which allow businesses to pitch directly to investors, are emerging as a smarter way for SMEs to get the finance they need. Lenders looking for a better rate of interest are ready to compete to fund the most credit-worthy ideas. This means that businesses are more likely to succeed in getting a loan via a crowdfunding platform – and at a more favourable rate.

It’s no wonder that many SMEs are putting their faith in the crowd. Although small and medium enterprises account for 99.9% of all private sector businesses in the UK and 48.1% of private sector turnover, many businesses are struggling to access finance.

Lending to SMEs has been falling since the financial crisis. Bank of England statistics show that lending has been down approximately 3% each month compared to 2012. As banks struggle to do enough to finance UK SMEs, many have found an alternative source of finance in crowdfunding.

While banks are failing to serve an important segment of the UK economy, the crowdfunding market is burgeoning. In three years, the peer-to-peer crowdfunding market has trebled and it could be worth over £1 billion by 2016.  The sector could eventually account for £12.3 billion worth of business loans per year, according to a study by innovation charity Nesta. Clearly peer-to-peer and person-to business lending – the model on which Money&Co’s is based – has the potential to significantly boost the UK economy.

Next year, the appeal of crowdfunding will only increase. In April, the FCA will begin to regulate crowdfunding businesses, providing protections to both lenders and borrowers. Under the key proposals for loan-based crowdfunding platforms, platforms will have to ensure among other things that they talk clearly and accurately about the potential risks and rewards. The regulator will also keep a close eye on the kind of back-up plans the platforms have in place to ensure lenders are protected.

Crowdfunding can provide lenders and borrowers with more control, as well as acting to undermine the restrictive dominance of high street banks. As the economy begins to grow again, crowdfunding can inject further confidence in growth with the necessary funding.

Emmanouil (Manos) Schizas

By Manos Schizas, senior economic analyst, ACCA

Basel III is the global framework governing the regulation of bank capital, liquidity and leverage, agreed in the aftermath of the global financial crisis of 2008–9. Its provisions will, for the coming years, determine the banks’ cost of capital and therefore the cost and supply of credit to businesses globally. In Europe, it is implemented through the regulatory package known as CRD IV, which sets out the following:

  • A new set of minimum capital requirements, much higher than those previously in place, aiming to ensure that financial institutions can remain solvent and able to support the real economy under adverse economic and market conditions.
  • A maximum leverage ratio that aims to ensure that fluctuations in asset values cannot easily wipe out financial institutions’ capital.
  • A set of liquidity requirements that aim to ensure that financial institutions can service their short-term liabilities even if some of their assets become illiquid or distressed or if access to interbank and wholesale credit markets is constrained.
  • A risk-based approach which weighs riskier assets more heavily than safe ones for the purposes of capital requirements and less liquid assets (or less secure sources of funding) more heavily for the purposes of liquidity requirements. Banks can use standard weights developed by regulators or apply their own, as long as they are based on substantial in-house historical data.
  • Provisions for a dual capital buffer that aim to rein in the supply of credit in boom times and achieve higher capitalisation under adverse economic conditions.

Suspiciously familiar

From the point of view of the accountancy profession, risk-weighted assets (RWA) work in a manner similar to taxable income. In principle, the rules create an obligation for regulated parties roughly proportionate to some systemic ‘footprint.’ More income, more tax liabilities; more risk, more capital requirements.

But in practice such systems always create incentives for regulated parties to swap activities that create a regulatory footprint for activities that, for whatever reason, do not.

In a recent working paper, OECD economist Patrick Slovik showed that, between 1991 and 2008, RWAs fell from 66% to 33% of major systemic banks’ total assets. The fall was very steady, and much of it was down to the falling share of loans. The most extreme example was Deutsche Bank – where loans made up 85% of total assets in 1990, but only 17% in 2005. On paper, banks were safer. In reality – well, we know what happened next.

No place for the little guy?

Who could blame banks for transforming themselves away from SME lending? In 2010, Capgemini calculated that small business loans (which are naturally riskier than loans to large corporates or government bonds), were responsible for 27% of the net income of major European retail banks, but 46% of their risk-weighted assets (and thus the associated capital charges). Indeed, in the more competitive banking sectors, most small business banking is not really profitable.

This is driving a wedge between two things that used to be synonymous – lenders’ appetite for SME loans as a product and investors’ appetite for SME credit as an asset class. While the former is flagging, the latter is still healthy – in surveys, banks seem confident of their ability to sell off portfolios of SME loans and even retail investors are piling into SME credit through peer-to-peer and crowd lending platforms. In the medium term, the best means of bridging this gap may be the mass securitisation of SME loans.

Jumping without looking?

The Basel Committee admitted from the outset that the impact of Basel III on SMEs might be disproportionate. Yet for two years there was no official impact assessment for the sector – so we called for one. To their credit, the European institutions responded with the Commission’s assessment in December 2011 and the European Banking Authority’s (EBA) assessment of SME risk weights in October 2012. Both missed the point.

The Commission assumed that the impact of CRD IV would be felt through higher interest rates or credit rationing, and were reassured when their models pointed to small effects. This ignores the resulting long-term changes to banks’ business models that should worry us more.

Likewise, the EBA assumed that the purpose of capital and liquidity regulation is to manage risk to individual institutions. They were reassured when their calculations showed that SMEs were riskier than large corporates. Yet the purpose of such rules should be to manage systemic risk – the kind that banks expose others to without internalising. By that measure, a AA-rated government bond posted as collateral is riskier than any small business loan will ever be.

It’s too late now for a wholesale review of Basel III or CRD IV. But perhaps the Basel Committee should use the relative quiet of the next six or so years to start preparing a Plan B.

This article was originally featured in Ziarul Financiar banking supplement, June 2013

board appeal

By John Davies, head of technical, ACCA

Trust is one of the fundamental elements of the landscape in which the professions operate and is seen as one of the key qualities that professionals can bring to the business world.

Clients go to accountants, lawyers and doctors because they want expert, specialist advice that addresses the particular problem they have; they are prepared to pay for that advice because they trust the adviser to give them good advice which best suits their needs. Businesses employ professionals for similar reasons.

Governments for their part realise that the economic and social needs of society benefit from the services provided by professional advisers and have long been prepared to allow the activities of those advisers to be regulated in accordance with professional norms.

Today, we are facing a crisis in this fundamental element of trust. Simply put, politicians and the general public are questioning whether business and the professions can be depended on to run their affairs in the interests of consumers and society in general.

Auditors have been criticised from many quarters for being too close to their clients and for failing, as a result, to act competently and objectively. It has been argued that the rules on fair value accounting, which deal with the way that investments are measured and reported, are framed in a way which gives a misleading picture of the health of the reporting company. Insolvency practitioners are often accused of being complicit in the winding up of businesses that could be saved. And the prevailing economic climate has seen a material increase in the incidence of in-house fraud, and an accompanying concern about how accurately frauds and other forms of financial crime have been reflected in companies’ accounts, with, by consequence, questions about just how ‘true and fair’ some financial statements actually are.

The current concerns actually spread much wider than the professions themselves. The series of collapses in the banking sector in 2008-9 has led to exhaustive re-examinations of how the major banks are run: the UK’s Commission on Banking Standards has concluded, this month, that one issue (among many) that needs in future to be addressed is the process by which individuals are appointed to senior positions in the industry: there needs to be much greater emphasis on ensuring that the individuals in those positions are not only technically competent but can be relied upon to act in a prudent and responsible fashion. The public sector has seen a series of governance-related scandals that have revealed not only gross failures of operational effectiveness but a worrying determination on the part of management to cover them up and to prevent public-spirited individuals from divulging information about them.

This key issue of trust was the centrepiece of the 2013 meeting of the chairs of ACCA’s global forums, the group of expert bodies that advise ACCA on its technical and research work. The meeting considered just how widespread the problem was, how justified the criticisms were, and how the professions might respond so as to re-establish a relationship of trust with clients, employers, governments and wider society.

To help in the discussion of this topic, the meeting heard a presentation from Lawrence Evans, the president of the consultancy firm Edelman-Berland, which produces the Global Trust Barometer, the leading global study of trust and reputation.

Mr Evans drew out a number of key findings from his firm’s latest survey. They confirmed not only that the problem of trust was widespread but that, for all the scandals and the criticisms made of the business world by politicians, people still actually trust business more than they do politicians.

He stressed that the way forward for business was for it to make a strong commitment to transparency. There was a strong correlation, he claimed, between trust and transparency, and the more open and forthcoming businesses were, the greater the likelihood that stakeholder trust would follow. He also reported a strong link between trust in an entity and consumer attitudes towards it – the stronger the degree of trust, the more positive consumer behaviour was likely to be, and vice-versa. Another relevant finding from his survey, one that is encouraging in the context of the issue of trust in the professions, was that people generally placed more trust in the word of subject experts within a business than they do in CEOs.

Mr Evans’ findings suggest that, for all the important problems that the accountancy profession is currently having to wrestle with, accountants are still, potentially, a strong force for good. His contention that transparency offers the way to stakeholder trust is a message that needs to be heeded by businesses of all kinds, in both the private and public sectors, and one which reaffirms the strategic importance of accountancy. Transparency is, after all, what accountancy should be all about – the presentation of information which reveals an accurate picture of the business health of an entity – and a combination of technical competence and a commitment to openness, both qualities that ACCA actively encourages in its members, appears to be the formula which can lead directly to enhanced business effectiveness.

Accounting standards

aksaroya —  18 March 2013 — Leave a comment

By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think tank

the city

UK politicians spent considerable time in January holding hearings on tax, audit and accounting under the auspices of the Parliamentary Commission on Banking Standards.

Having advocated electrifying the ring-fence between retail and investment banking, the PCBS has galloped onto a wide range of other subjects. Now this joint body of both houses of parliament has got to accounting standards.

Comments have been gathered via a questionnaire, published on 4 December with a 21 December deadline. Genuine users of accounts had to scramble to meet even the informal extension to early January – here I will declare an interest as I chair the financial reporting and analysis committee of the CFO Society of the UK.

It was very important that we did respond. The questions betrayed some preconceptions: ‘What was the role of accounting standards and reliance on fair value principles in the banking crisis’? ‘Fair value principles’ seem an odd way to describe an accounting model for financial instruments that is a hybrid between fair or current market value and amortised cost.

Another underlying assumption seemed to be that marking to market, or to model, would not give a ‘true and fair’ view of the value of a trading instrument. Leaving aside the point that fundamental valuation techniques rely on models, neither cost nor stale prices would be relevant for derivatives and many asset-backed securities.

The running on this issue has been made by corporate governance experts from respected UK instutions, all ‘long-term’ shareholders. They have produced a Concerns with IFRS in the EU paper that champions prudence over neutrality in the accounting, and suggests the EU should resist International Financial Reporitng Standards (IFRS), which they view as tainted by US influence.

Users of accounts who disagree must make themselves heard.

There is no contradicition between neutrality and a true and fair view – both tell it how it is in a cyclical and volatile world. Yes, judgements must be made, but why aim for something a bit worse than your best estimate?

Prudence should be located in management’s business decisions and in the judgement applied by boards, investors and regulators. But all should start with data that is as unbiased as possible. Auditors should indeed curb optimisim but pessimism is no panacea.

If the real problem is banks’ ability to absorb losses, then building up equity capital – as is happening – is the best solution. In the run up to the cirism bank balance sheets showed assets ballooning and equity suppressed. Failures of corporate governance, prudential supervision and investor oversight were far more importanct than any accounting weakness.

IFRS is not perfect. It develops in response to abuse and poor practice. IFRS 9 addresses concerns on fair value measurement and will switch the loan-loss model to expected losses, so why delay endorsement in the EU?

What is the alterantive to IFRS? A return to UK GAAP? Surely it would now have a standard for financial instruments that chimed with US GAAP. International standards are not only what the G20 wants, but users of accounts want. As for an EU version of IFRS, variation so far has been for the dubious reason of placating preparers.

Accounting standards are an odd scapegoat for the financial  crisis. Accounts provide evidence that can be used with other information – from stress test results to environmental risks – to form a picture of a company and its prospects. It is what is done with the information that matters, and long-term investors are in the best position to take a dispassionate, or a prudent view.

This article first appeared in Accounting and Business, UK edition, February 2013