There’s nowhere left to hide in the modern world for financial services, thanks to the pace of technology, according to Labour peer and former UK Minister of State for Trade, Investment and Small Business Mervyn Davies at the Leasing Foundation’s Innovation in Finance lecture on 14 May.
"There’s nowhere to hide for bankers, nowhere to hide for politicians and there’s nowhere to hide if people decide to show information," Davies told the audience, hosted at law firm Berwin Leighton Paisner’s office in London.
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"It’s more difficult to run a financial institution; to govern a country – the rules in the world have completely changed. I think we are in one of the most profound periods of change for financial services," he said.
Davies said he thought financial services are in one of the "most exciting, threatening and unbelievable times", and that he was relieved not to be responsible for a bank in the current time of digital, technological and political disruption.
"The reality is that the financial crisis resulted in the state realising, and society realising, that banks were too big for the countries and nobody, including the regulators, the board and, inevitably, the investors had any concept of how big RBS was and what the implications were if it went bust," he said.
Davies said that it is difficult to innovate in financial services when the regulator, emboldened by the public reaction to the financial crisis, is driving competitiveness out of the market.
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By GlobalData"Mistakes were made but there is now no boundary in terms of attacks on the [financial services] industry," he said.
The audience of leasing industry professionals heard Davies raise concerns about the government’s approach to the industry, characterising its intervention as "profound". He emphasised that it could affect the UK’s competitiveness in the global market and London’s financial centre status.
"As a result of the financial crisis, no politician likes financial institutions," said Davies. "The government is now intervening and it is freezing the industry. There’s a feeling that it has a mandate because of what happened.
"If the government continues to intervene, London is not going to be the major financial centre it is today."
Worldwide innovation
"I think worldwide we are going to see more innovation, young products, technology companies helping the unbanked," said Davies.
"There are still a large number of people in the UK who do not have bank accounts. It’s unbelievable, but it is the reality.
"I think the unbanked are hugely attractive, but they are not going to go to a traditional bank, or a bank with branches. The West is burdened with these huge institutions which have these branch networks, but it’s not the same in Asia or other parts of the world."
The rise of shadow banking and boutique specialism
Non-bank financial and shadow banking were described by Davies as the process of the banking industry breaking up, from the old model of huge incorporated banks with many functions and a big balance sheet which governments do not want anymore, to smaller boutique specialist models.
The global banking system is changing, with big institutions like Citi Group, JP Morgan and HSBC pulling out of certain countries and local banks getting stronger.
"There’s an emergence of incredibly big and powerful local and regional banks. There are going to be very few big global banks in the near future," said Davies.
He suggested that big organisations have to think of a different business model, as returns on equity fall.
"If you’re running a big institution, you have a year or two to decide what you’re going to do with it. Your return on equity, which was 15-20%, now stands at 8%. At that rate, you’re not going to create a lot of shareholder value in the next decade. Every bank is now going to think about its business model and what it is going to shed," he said.
Davies, who is also the chairman of US-based private equity firm Corsair Capital, revealed that the company has recently been approached to buy several bank divisions.
"In the last two weeks, we had more opportunities to buy divisions of banks than we had in the last 15-20 years," he said.
The audience heard that they shouldn’t be concerned about the shadow banking system. Davies said that despite the fact that it is more difficult to regulate, higher involvement of its members could result in less significant economic effects from organisation failures.
He said: "We shouldn’t be panicking or worrying about shadow banking, it is a dismantlement of the whole industry. Buyers of these assets, like the GE portfolio, are going to be private individuals, high net worth families, and private equity firms from around the world. If people lose money it won’t be a big deal because it is investors’ money, so it’s not going to bring countries down.
"I think what we are seeing is good. The banks were taking too much leverage on their balance sheet and we have learned that they can’t cope with it. The reality is that the industry is becoming more of a utility and the shadow banking explosion is just going one way."
Talent attraction and retention
The need to attract talented individuals, specifically from the younger generation, has been mentioned several times by UK leasing industry professionals. Davies believes that talent retention and attraction is a key issue for the financial services industry as a whole.
"A challenge for the financial services industry is retaining talent, the quality is going down. The talented would rather work in other industries," he said.
Davies argued that innovation has never been so important, and that innovation in financial services means tapping into young people.
"If you’re running a team, I think you’ve got to tap into a new generation of thinking and a new generation of technology. Because if you don’t, your business will not be around in 10 years.
"The pace of change is so fundamentally fast now that you need to keep up; you have to reach out to the youngsters," he added.
Gender diversity is also a challenge for the financial services industry, as Davies believes that a better gender mix in companies’ executive positions will benefit both the industry and the economy.
"Four years ago, 21% of Britain’s top 100 firms had never had a woman on their board. Michael Porter, the famous economist, came to the UK and we asked him to do a review of the UK economy. He found that one of the top five areas that needed fixing was liberating women in the workforce.
"I think we are making great strides in terms of diversity, but the [gender balance] of boards for executive committees is still appalling," he said.
