Global pressures increasingly the agenda

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Financial services organisations are becoming increasingly global in their reach and ambitions. With the growth in scale of global operations comes just not the promise of reward, but a step change in the sophistication of ensuing risks and challenges.

Friday, September 30th 2005, 6:50AM

Financial services organisations are becoming increasingly global in their reach and ambitions. With the growth in scale of global operations comes just not the promise of reward, but a step change in the sophistication of ensuing risks and challenges.

“Financial services companies are facing up to the challenges raised by changes in the broader business environment, the economy, the regulatory framework and the forces of globalisation. Companies are having to assess the many risks and uncertainties this environment poses against a continually evolving regulatory background," KPMG Financial Services Group chairman Andrew Dinsdale says.

"Looking at the broader picture, the balance of economic power is shifting dramatically with the emergence of the high growth Chinese and Indian economies, and the implication of an increase in demand for Western goods and services.

"Things are changing in the developed markets as well with a debate of the merits and growth rates inherent to contrasting economic models. Further flux is introduced by the consolidation plays within market blocs and pressures within the capital markets.

All this in turn has significant implications for financial services companies and highlights the continued need for effective risk management, systems and people.”

A KPMG highlights four key areas of focus and offers predictions for the prospects for each:

• Growth and business development – The financial services industry is characterised by fewer, bigger companies. These ‘majors’ have been rewarded for their scale and are now arguably too big to fail. Those that have successfully maintained their returns on capital and P:E ratios have been rewarded by the capital markets through strong share prices. Dinsdale adds “The ‘majors’ will continue to expand to the detriment of smaller regional players. They won’t have it all their own way though. Smaller companies will be able to compete effectively by concentrating on specific geographic or product areas or by specialising in delivering services to specific customer segments.”
• Efficiency and cost management - Established offshoring locations will have to move up the value chain as they become more expensive relative to less developed locations. With this wider range of sourcing options the trends towards outsourcing will continue to grow. Dinsdale comments “Despite recent successes in the area of process re-engineering and restructuring there is still significant scope for further improvements. Very few global companies have made the necessary investment in truly global business operating models because of the sheer cost involved. However, such investment and shared services between competitors will become necessary for companies if they wish to compete effectively in an environment of diminishing margins”.
• Risk and capital management – Financial services companies will continue to develop more sophisticated tolls and techniques to manage and mitigate risk while maximizing the return on capital. Mr Dinsdale notes “Reform will be driven not only by regulatory developments, such as Basel and Solvency II, but by the recognition that a greater understanding of the business will result in better strategic planning and decision making.”
• Governance and reporting – In addition to regulators, shareholders and customers will continue to demand greater levels of transparency and corporate governance. Mr Dinsdale remarks “IFRS will provide a new standard of external reporting and there continues to be a desire to get the standard right first time. It provides a great opportunity for financial organisations to significantly change both their internal management information and external reporting infrastructure in order to improve the quality of corporate governance”.

Frontiers in Finance examines a whole range of specific instances where the changing economic patterns of the global market are providing financial services companies with challenges and opportunities.

Areas looked at in detail include:

• The rush by the private banking sector to build market presence in Asia-Pacific
• The risk-return conundrum for banks in their quest for performance improvements
• The challenges of internet security, and
• How risk management exercises can drive process efficiencies and add business value.

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