Bravo Douglas Flint. The rant by HSBC’s chairman in the group’s interim statement yesterday against the onslaught of incoherent and globally ill-fitting banking regulation with its extra-territorial tentacles and political interference made for fabulous reading,
It was the clearest and most articulate narrative I’ve seen to-date from a senior figure in global banking of the massive operational and human capital challenges facing banks in dealing with compliance with wacky rules – not to mention the intimidation behind the intent – and the impact they’re having in deflecting banks’ attention and detracting from the task of serving customers.
The fact Flint stuck his neck out speaks volumes. Where are David Walker, John Peace or Philip Hampton, his UK counterparts respectively at Barclays, Standard Chartered and RBS? Or bank chairmen beyond the UK?
Beyond anything else, Flint’s comments are the best argument ever for why chairmen and chief executive roles in banking need to be separate. On the basis that CEOs focus on business and operational aspects of a given business, it should be left to the chairmen to deal with business environmental, political and softer issues. And be combative where they feel the need.
What’s interesting in this case, of course, is that as well as the chairmanship of HSBC, Flint is also chairman of the Institute of International Finance, the lobby group representing 500 financial institutions which has been silent and frankly annoyingly irrelevant in this entire debate. In both guises, Flint’s comments should carry weight with the public policy figures he not so obliquely criticises.
Doing business
His timing was spot-on, at a time when banks are drowning under a ton of operational drudgery and attempting to fight political battles neither of their making nor their solving. I think we all painfully remember former Barclays CEO Bob Diamond attempting to tell UK lawmakers at a Treasury Select Committee hearing back in 2011 that the period of remorse and apology for banks needed to be over and that banks needed to be allowed to concentrate on doing business.
…don’t give up on the fight to split chairmen and CEOs, be it at Goldman Sachs, Morgan Stanley or JP Morgan.
That exchange even today makes me cringe. His comments were very poorly judged. It was the wrong time and definitely the wrong place, particularly from a man who had been dubbed by former UK Business Secretary Peter Mandelson – by dint of his compensation – as “the unacceptable face of banking”. No matter that for many people Mandelson was the unacceptable face of so many things, including politics. In summary, Diamond’s comments were crass and ended in disaster.
To be clear, Flint wasn’t asking for an end to banker bashing, his comments were far more objective. Policymakers should pay attention. Compliance and operational risk management costs have gone through the roof; these areas are among the few that are growing. I make no apologies for reproducing an excerpt of his comments here, but check this out:
- “The demands now being placed on the human capital of the firm and on our operational and systems capabilities are unprecedented. The cumulative workload arising from a regulatory reform programme that is unfortunately increasingly fragmented, often extra-territorial, still evolving and still adding definition is hugely consumptive of resources that would otherwise be customer facing.
- “Add to this recent obligations to perform highly granular multiple stress tests which are inconsistent in definition and scenarios between major jurisdictions and so require considerable duplication of effort; recently announced significant wholesale market practice and competition reviews in the UK; re-organising the financial, operational and structural framework of the Group to respond to evolving thinking on cross-border resolution protocols; and, finally, planning what will be a multi-year project to separate and establish the ring-fenced bank in the UK, and the dimension of the execution risk is obvious.
- “…there is extremely limited spare capacity. Prioritisation, which is clearly critical, will require support and guidance from public policy and regulatory bodies, particularly in the UK, regarding the juxtaposition of the recently announced competition review and preparation for the creation of the ring-fenced bank. Equally important is delivery of the stated intention of the Financial Stability Board and the G20 to seek to draw a close on fresh regulatory initiatives by the end of this year.
- “… We face growing fatigue within critical functions as well as increased market competition for trained staff from other financial institutions facing similar resource challenges. This is adding to cost pressures both from increased salaries as market rates increase, and from investment in training and systems support to improve productivity. This underscores the importance of finalising the regulatory reform agenda in the near term.
- “… no-one in our industry can fail to be aware of the heightened expectations of society regarding the role of banks in supporting economic activity; nor can they be unaware of the potential penalties for failing to live up to these expectations, particularly regarding conduct issues or breach of trust. Greater focus on conduct and financial crime risks at all levels of the firm globally is clearly the right response to past shortcomings. There is, however, an observable and growing danger of disproportionate risk aversion creeping into decision-making in our businesses as individuals, facing uncertainty as to what may be criticised with hindsight and perceiving a zero tolerance of error, seek to protect themselves and the firm from future censure.
- “We can address this behaviour through training and leadership, but we also need clarity from public policy and regulatory bodies over their expectations in this regard. Unwarranted risk aversion threatens to restrict access to the formal financial system to many who could benefit from it and risks unwinding parts of the eco-system of networks and relationships that support global trade and investment”.
In short, he makes a clear case that the regulatory pendulum has swung too far and the lack of co-ordination is close to a deal-breaker. As I’ve written many times before, lawmakers have not just tried to solve for the last crisis; they’ve sought vengeance. I’ve given speeches in public calling for an end to the regulatory inanity. But I can say what I like until I’m blue in the face; at the end of the day, I’m not the chairman of one of the world’s biggest banks.
Even to the extent that banks have separated their chairman and CEO roles, if Flint’s counterparts were to take a leaf out of his book, I genuinely believe their collective actions would wield some influence. And that’s beyond their more ex-officio roles scrutinising CEO performance and acting as a bridge-cum-buffer to other stakeholders.
Bank chairmen, where they are separate, have been silent for years. It’s about time they stood up and were counted.
To bank chairmen, I say: carry on the fight. To bank shareholders, I say: don’t give up on the fight to split chairmen and CEOs, be it at Goldman Sachs, Morgan Stanley or JP Morgan. They’re different jobs.
Flint has put down a marker. The industry shouldn’t let it pass unheeded.
