By Lucie Pychova, Senior Risk Consultant at Ambition
Before the financial world came tumbling down around us. Before Lehman Brothers collapsed and before mortgage backed securities were deemed anything other than a licence to print money, risk was seen by many as a necessary evil. Something which was required by financial institutions but ultimately got in the way of business and the opportunity to make money.
Hindsight is a wonderful thing and looking back knowing what damage was caused by the financial crisis it feels absurd to think that institutions around the world were viewing risk with anything other than the upmost importance. It also seems unthinkable that businesses might still have a blasé attitude towards managing their exposure to risk, but regulators are correct to have taken action in order to try and prevent another meltdown like the one experienced in 2008 and 2009.
Across the financial world updates to regulatory policy were entirely necessary in order to help prevent a repeat of the flippancy towards risk that was so fundamental in leading to the global economic crisis. Regulatory frameworks such as Basel II and Solvency II are the key regulatory updates affecting the financial sector and both have had and will continue to have an impact on employment in the risk arena. And the regulatory function has increasingly taken more of the spotlight as bigger institutions create separate departments or commission consultancies to help meet the regulatory change deadlines.
While institutions based in the EU have broadly implemented the updates to Basel II and await confirmation of Basel III, the Solvency II requirements for insurance companies operating in the European Union have been scheduled to come into effect at the start of 2013. In order to get to a state of readiness for both sets of regulatory change, businesses have had to ensure their internal processes and procedures are fully compliant. This has caused a shift in the focus for many risk teams and individual risk professionals and some risk managers have gained additional training on the new regulations in order to best utilise their expertise.
According to recent research from the Institute of Risk Management (IRM), senior risk professionals in the insurance sector now dedicate almost 50% of their working day to Solvency II while 18 months ago the same risk professionals spent less than 20% of their time on Solvency work. This is a pattern mirrored by many risk professionals across the financial sector in the build up to updating their procedures in accordance with Basel II and will no doubt happen again when the Basel III deadline (currently proposed for 2019) draws closer.
All Financial Services institutions are finding it difficult to meet these deadlines and risk being fined by the regulators. This puts even more pressure on them to hire skilled risk professionals into this space. New types of risk specialism have also emerged such as liquidity risk and new teams created within institutions which are purely focused on legal, capital and risk.“Change the Business – to – Run the Business”, has become a new trend in the post crisis world and has certainly led to a new breed of risk managers.
Regulatory changes not only impact on the proportion of time teams dedicate to updating the way risk management is embedded across their businesses, it is also having a fundamental impact on the shape of the risk job market. The IRM has also found that regulatory change is driving demand for risk skills with 44% of risk professionals expecting their teams to grow over the next 12 months. On average, risk teams are now nearly four times as large as they were before the economic downturn and many members of these teams have been focussed exclusively on implementing changes to the regulatory and reporting framework in time for the relevant deadline.
And the growth in these teams is a permanent fixture. While some risk professionals are hired on a daily rate, their contracts are being extended and a high number are being secured by businesses by hiring them from temporary or interim contracts to a permanent positions.
Solvency II is having a similar impact on the jobs market to that of Basel II when the regulatory framework and capital requirements for banks were last updated. Anyone with experience of implementing a new regulatory framework combined with the people skills needed to roll-out the changes across an entire business is enjoying all the benefits that come with being in high demand. More so then ever before, skill requirements and job descriptions include demands for analysts with personality and backbone to be able to deliver and stand by their findings and be able to constructively challenge the ideas of the revenue generating individuals of the business.
Average salaries for permanent staff have increased and because of the project nature of the work involved in updating processes and procedures to fit a new framework, risk interims with the relevant skills are able to command very attractive day-rates. As was the case with Basel II, as the deadline for regulatory compliance draws closer the demand for skilled staff will grow and will lead to an increase in a trend we’ve already begun to see of staff being offered large retention bonuses and pay in order not to lose them to higher bidders elsewhere in the market.
Every firm is looking to upgrade and poach from their competitors and inevitably this has lead to upward pressure on salaries. Businesses have to offer an uplift on an uplift. Across the risk market, salaries are generally rising between 10%-30% and any new employer would need to offer an improvement on that.
There are some concerns that the boom the risk profession is enjoying at the moment is somewhat of a bubble and once the Solvency II deadline passes there will be a shift in the supply and demand of staff. This is unlikely in the long-term, as we have seen with the Basel guideline updates, revisions and measures to make frameworks stronger are regularly made and consensus among many risk professionals is that Solvency II will also need revising. According to the IRM, many risk professionals believe Solvency II will fail to achieve its goals because it is overly conservative and leaves many concerns of the insurance industry unaddressed – a ripe candidate for future updates it would seem. There will be a need to upgrade and keep in line with the ongoing changes and many feel that implementing a “one size fits all” policy across the whole financial sector and geographic area is a little naïve.
As we have seen in the banking sector with the impending Basel III implementation there is scope for further updates to be made to the risk requirements across the insurance sector in the future and implementation of these changes will require the same skills that are in such high demand at the moment.
Key to the rise of the risk professional is the lack of suitable candidates qualified to help hit the regulatory deadlines. This skills gap has pushed up the salaries and benefits of the professionals with the right skills. Candidates with experience of implementing regulatory change have seen their market value increase significantly and according to the IRM three in five senior risk professionals have witnessed a rise in their remuneration over the last twelve months. Two in three professionals also expect their bonuses and pay packets to rise in the next year with overall, packages expected to rise between 10 – 25%. The banking sector has led the way on remunerating risk professionals appropriately and it’s likely that the insurance sector will follow suit by introducing more strategic retention packages comprising shares, cash and deferred bonuses to ensure they hold on to their top talent.
Not only have the changes to financial regulation had an impact on the wallets and purses of risk professionals there has also been a significant shift in the recognition of risk and risk professionals at board level. Whether down to regulatory necessity or not boards have changed their attitude towards risk and now have a much better understanding of its challenges. Compared to five years ago, risk has climbed well up the executive board agenda and many across the sector anticipate there will be a surge in the number of risk professionals being promoted to board positions. Historically, risk was represented on the board by directors of finance but this has had to change as the regulatory updates become more complex and risk reporting has had to become more widely embedded across the departments of financial institutions.
Boards are now beginning to recognise the value of highly skilled risk professionals.As a result, top-flight risk experts with excellent communication and technical skills are being offered large increases in salaries and their worth is only going to increase the closer we get to regulatory deadlines and further updates are made to current frameworks. We may be a while away from seeing chief risk officers making the jump to CEO positions but it is a significant step in risk’s growing importance and influence.
The risk profession and business’ attitude towards it have evolved significantly as a result of the economic downturn. Effective risk management is no longer seen as a weight around the neck of business, but as an important tool in steering a company towards success. The characteristics of an effective risk manager have evolved too and being able to communicate the importance of risk and implement updates to procedures and processes across an entire business not only requires extensive technical knowledge but strong people skills too. Being able to achieve buy-in from departments that have not necessarily had a great deal of exposure to risk in the past is as vital a skill today as technical knowledge and it’s these skills combined which are making strong risk professionals so sought after in the current market.
Risk professionals have moved away from being the internal policeman figure to a much more commercial versatile individual. With more and more exposure to front-to-back processes within financial institutions risk managers are seen as effective contributors to the profitability and success of the institution they work in. And with risk unlikely to slip back down the financial world’s hierarchy of importance this could be just the start of the risk profession’s rise in the world of finance.
|
