ICAEW. Inspiring confidence in financial services

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1 ICAEW Inspiring confidence in financial services A thought leadership initiative Business with CONFIDENCE icaew.com/fsfinspiringconfidence

2 Inspiring confidence in financial services A thought leadership initiative Confidence is vital to financial services. The Inspiring Confidence in Financial Services initiative will take a leading role in debating global issues affecting confidence in the financial services sector. It seeks new insights and ideas by asking questions about financial service providers, consumers and regulators, how they relate to each other and the information flows between them. The aim is to encourage new thinking that helps to promote stable and efficient markets, to support the interests of retail consumers and to sustain wider economic development. Challenges in financial services Financial services are beset by perennial problems linked to confidence. Trust is fundamental to the financial services industry and there is generally a high level of confidence in its stability. However, given the impact that the industry and its products have on society and individuals, particularly when something goes wrong, confidence in providers can be fragile. It is easily undermined by any suggestion of, for example, financial difficulties or mis-selling. Scandals can also erode trust in business practices across the industry. These and other challenges mean that there is seemingly endless debate about financial services and their regulation. However, attempts to address these issues tend to happen at times of crisis when too often the focus is on defending established and predictable positions or attributing blame. In the face of questions about trust there is a natural competitive urge amongst providers to differentiate themselves as being more trustworthy than their competitors or to act together to shift blame to regulators or consumers. This is likely to reduce rather than restore confidence. Moreover, in the wake of scandals, it is understandable that consumer interests compete for attention in seeking compensation and redress. Regulators also compete. For example, vigorous transatlantic debate is underway about the merits or otherwise of regulating through principles or rules, and on the advantages and disadvantages of different regulatory approaches. But such debate can damage confidence if it glosses over wider differences between financial markets and the deeper objectives of regulation and if it complicates the process of promoting international agreement and cross-border business. As for information, some of the most intractable and divisive accounting and reporting questions arise in financial services. Information is plentiful but it can be difficult for different users to extract and understand what is most important for them. Whilst it is not easy to explain complex products, transactions, risks and uncertainties, good information is vital to the functioning of the financial services industry. More might be expected of an industry and its advisers who between them command a huge concentration of skills in advanced mathematical modelling, risk management and measurement techniques. Different users may need different information for different management, financial reporting, regulatory and consumer selling purposes. By failing to acknowledge this, proponents of competing alternatives can undermine trust in all information. A way forward Confidence underpins financial services but its achievement is a complex joint undertaking that calls for collective responsibility and co-operation. It depends upon the commercial success and financial security of providers, their efficiency, their ability to cost and price their products and services, and their responsible interaction with consumers and regulators. There is also a strong public interest in ensuring that consumers are suitably protected and financial markets are stable. For example, it is in the long-term interests of everyone that the population as a whole saves enough during their working lives to provide an adequate pension. Regulation of financial services is necessary to ensure that public interest objectives are met and to address the different levels of information, skills and power across the supply chain between providers and consumers. At the same time, it is important to allow the industry to operate effectively and efficiently, as inefficiencies ultimately increase the cost of, or reduce the returns from, financial products. Competition is vital to the success of financial services but trust and confidence in financial services depend on co-operation. There is a need to draw all stakeholders together, consider different points of view and advance objective and impartial ideas that address challenges to achieving trust and building confidence. This is where ICAEW and its new Financial Services Faculty can make a difference. The Faculty is in a unique position to bring together financial service providers, consumers, regulators, investors and other interested parties and enable

3 Confidence is vital to financial services. The Inspiring Confidence in Financial Services initiative examines the relationships and information flows between providers, consumers and regulators to develop new insights and ideas. them to share differing perspectives. ICAEW Financial Services Faculty thought leadership initiative, Inspiring Confidence in Financial Services, will explore industry issues and make evidence-based contributions that command authority and respect. The role of the ICAEW Financial Services Faculty ICAEW has an enviable reputation for its thought leadership work. It has successfully advanced thinking on a wide range of subjects including financial and business reporting, corporate governance, corporate responsibility and sustainability, business and professional ethics, audit quality and assurance services. Our ideas are presented internationally to governments, regulators, standard-setters, business, investors and opinion formers and there is extensive engagement with leading academic researchers and institutions. Our thought leadership work involves evidence gathering, forensic analysis and the development of practical policy proposals and professional guidance aimed at improving how markets work. As a professional body and through our members, ICAEW is expert in analysing, interpreting and applying regulation and our work has authority because it incorporates balanced objectives, intellectual rigour and real-world experience. ICAEW is required by its Royal Charter to act in the public interest and integrity and objectivity are at the core of our qualifications and our members learning and professional development. ICAEW is able to reflect widely varying perspectives and objectives. Our more than 136,000 members work in a wide range of influential roles and with all types of organisations across the world. This breadth and reach underpin ICAEW s power to convene, bringing together all relevant stakeholders to discuss matters of common interest and identify how we can add value. Information, risk and financial management are at the heart of both the financial services industry and the accountancy profession and the largest concentration of ICAEW s members in business is in financial services. Drawing on our members expertise in all parts of the sector, the faculty will have the ability and independence to ask difficult questions and come up with challenging answers. Four strands of thought leadership in financial services Responsible providers, responsible consumers, better regulation and better information are interrelated and it is not possible to address one without impacting another. For example: l Banks, insurers and investment managers operate as commercial businesses yet have strong public interest responsibilities as they perform important functions for the wider economy. l Even if the best possible information is delivered by responsible providers in a well-regulated market, consumers may be ill-equipped to understand and take responsibility for their choices. l Regulations must keep up to date and ahead of the latest developments without stifling them or being so complex that they are not understood. l Different users need different information but without a shared understanding of how information needs differ amongst providers, consumers and regulators, diversity can be confusing and arouse suspicion.

4 Four strands of thought leadership in financial services Responsible providers Responsible consumers Better regulation Better information The financial services sector is highly competitive, innovative and fast-moving, with a constant demand for new products in new areas that are subject to uncertain risks. It faces ever-increasing investor pressure to meet expectations, talent is at a premium and the resulting levels of returns and remuneration bring their own dangers. Issues facing financial service providers: l Integrity is vital to inspiring confidence but is not well defined or understood across the financial services industry. l Independence can provide an effective defence against conflicts of interest, particularly where reliance is placed on the opinions of experts whether they be financial advisers, analysts, ratings agencies or professional actuaries and auditors but there is no shared understanding of how to achieve and maintain it. l The complexity of the industry and its products creates difficulties but these are often not well understood other than by specialists. l Providers face the challenge of selling their products effectively but without exerting unfair pressure on consumers or denigrating competitors. l The industry continues to grow but there are concerns about the skills and qualities required of entrants to the workforce and how these should be maintained. Consumers ultimately must make their own financial decisions about how and when to spend, save, borrow, insure and invest. However, one of the features of the financial services industry is information asymmetry: providers know more about their products than consumers. Given the complexity of financial services, information asymmetry is unavoidable but there are ways of reducing it. There are also clear social benefits in building a more financially aware and engaged population, capable of taking responsibility for their long- and short-term financial decisions. Achieving this will not be easy and calls for careful thought. Issues relating to consumers: l Overall levels of financial literacy and engagement with financial services providers are seen as low. l Society increasingly expects individuals to take personal responsibility for their financial security. l People are generally seen as not investing enough in long-term savings. l There are high levels of consumer debt, particularly amongst those on low incomes. Our responsible consumers theme will address these and other topics. Experience from the ICAEW project Boosting financial capability in schools will contribute to this theme. Regulators must balance the political objective of consumer protection with the macroeconomic need for financial stability and open, efficient markets. There are sometimes tensions and conflicts between these objectives and it is difficult to assess in advance the costs and benefits of new regulation. However, there are also often alternatives to regulation for achieving a desired outcome. We are interested in identifying the context and conditions for better regulation. In particular, building the capabilities of providers and consumers and improving information quality can reduce the need for additional regulation. Issues relating to regulators: l Regulation should be considered in a wider context, taking into account the potential of nonregulatory measures. l Because the industry is constantly evolving and regulation needs to be kept up to date, there is a tension between maintaining sufficient flexibility to allow proper innovation and sufficient rigour to provide effective discipline. l Regulation is increasingly set internationally and needs to be responsive to the business models of global businesses. l Although regulation can add significantly to the costs of doing business and so damage returns to investors and consumers of financial services, regulatory impact analysis is still at an early stage of development. Information flows are the lifeblood of the relationships between providers, consumers and regulators. We can help, not only because we are experts in measurement and reporting, but also because we are committed to opening up discussion. The concerns of those who use information should be listened to and those who provide information need to explain the complexities involved. Issues relating to the provision of information: l Information users differ in their needs and levels of sophistication. l Information must be able to address and explain high levels of uncertainty and risk relating to long time horizons. l Aspects of the financial services industry are difficult to understand and can appear opaque. l Attempts to provide greater transparency and better explanations can fail either because of fears over commercial sensitivity or because they so increase the volume of information that nobody can see the wood for the trees. Our better information theme will explore these and other topics. Our first issues paper on this theme Measurement in financial services was issued in April 2008 and our report, Audit of banks: lessons from the crisis, was issued in June Our responsible providers theme will explore these and other topics. Our better regulation theme will explore these and other topics.

5 Anticipated benefits There are strong reasons for supporting a genuinely inclusive and objective approach to the challenges of confidence and trust that are endemic to financial services. In essence, it can deliver a win-win-win solution for providers, consumers and regulators. By working together to build confidence and trust, providers, consumers and regulators can focus their competitive efforts on areas where they will be more fruitful. For example: l Providers can concentrate on product innovation and quality of service. l Consumers can make discerning decisions to purchase, save, borrow, insure and invest. l Regulators can focus on the cost-effectiveness and risk-sensitivity of regulation. l Providers, consumers, regulators and investors can push for relevant and reliable information that is cost-effective and tailored to their specific needs. Making a contribution The financial services industry is recognised for its dynamism, innovation and influence on the global economy. The need to incentivise and attract capital, talent and customers in highly competitive markets calls for commercial flair and focus. Yet because those markets also rely on public confidence and trust, there is a need for responsible service provision and consumer behaviour and high standards of regulation and information. Their achievement requires a recognition that all market participants are interdependent and need to work together. Through its Inspiring Confidence in Financial Services initiative the ICAEW Financial Services Faculty is seeking to make its contribution to an important public endeavour. If you are interested in discussing our ideas or contributing to Inspiring Confidence in Financial Services, please contact: Iain Coke Head of the Financial Services Faculty Chartered Accountants Hall Morgate Place London EC2R 6EA UK iain.coke@icaew.com

6 ICAEW is a founder member of the Global Accounting Alliance, which represents around 775,000 of the world s leading professional accountants in over 165 countries around the globe, to promote quality services, share information and collaborate on important international issues. ICAEW is a professional membership organisation, supporting over 136,000 chartered accountants around the world. Through our technical knowledge, skills and expertise, we provide insight and leadership to the global accountancy and finance profession. Our members provide financial knowledge and guidance based on the highest professional, technical and ethical standards. We develop and support individuals, organisations and communities to help them achieve long-term, sustainable economic value. Because of us, people can do business with confidence. Financial Services Faculty ICAEW Chartered Accountants Hall Moorgate Place London EC2R 6EA UK T +44 (0) E financialservices@icaew.com icaew.com/fsfinspiringconfidence ICAEW TECPLN /11