Risk Controls

The financial services industry remains a source of great pride north of the border, contributing some 20% of Scottish GDP. Yet the recent passing into foreign ownership of some key players, and concerns over the effects of devolution, have caused mild ripples in the sector’s normally calm waters.

Grant Baird is executive director of Scottish Financial Enterprise, the representative body for the Scottish financial services industry. He notes that banks, life offices and independent fund managers have all experienced mixed results in recent years.

‘The banks have done brilliantly,’ Baird says. ‘They look better than the London clearing banks in terms of innovations, profits and growth.’ For example, the Bank of Scotland has established distribution links with Sainsbury, while The Royal Bank of Scotland has done the same with Tesco.

Baird believes the Scottish Life offices suffered some problems a couple of years ago, but the larger ones are now ‘taking on business like there’s no tomorrow’, he says.

It is the independent fund managers who have experienced most upset.

‘There are relatively few of them but they are big players,’ Baird says.

‘There have been lots of revolving doors, people leaving. We are a small community up here so that creates headlines.’

Changes in ownership have also furrowed some brows. Scottish Mutual was taken over by Abbey National and #15bn of funds went south. Scottish Equitable has been bought up by Dutch group Aegon and Scottish Amicable snapped up by Prudential.

But Baird believes that the community shouldn’t panic. What matters is whether the organisations retain autonomy over business decisions. He offers up Clydesdale Bank, now owned by the Bank of Australia, as a good example of local decision-making independence. Scottish Equitable, ‘one of our most focused life offices’, has benefited from the backing provided by Aegon, he believes.

Baird is pleased that devolution will not result in separate regulation for Scotland. ‘We argued for the UK regulatory regime to remain uniform throughout the UK,’ he says. The Scottish financial industry is generally confident about its regulatory record.

‘There are very few Scottish organisations who have been singled out for attention by the regulators,’ says Gordon McMurray, principal consultant in regulatory services for KPMG. ‘Good compliance is seen as key to the firms’ success.’ He believes Scotland fares well because the quality of compliance officers is high. Often they have grown within their firm and developed a wider knowledge than their counterparts in London who tend to specialise and move more frequently.

Regulation provides considerable opportunities for accountancy firms.

Clients are routinely seeking third-party reviews of their internal controls as part of their risk management process. ‘In Scotland we are in the middle of a bench-marking project looking at how they handle compliance risk,’ says McMurray.

For example, the project looks at how clients staff their compliance functions, the experience levels and seniority of staff, and the impact which business issues have on their efficiency. ‘There is also growth from people asking us to come in and review procedures before regulatory visits,’ McMurray says.

And KPMG is setting up a monitoring service for clients who have delegated some activities to third parties, such as fund administrators or custodians.

The firm will monitor performance to check for on-going regulatory compliance.

One murky pool which Scotland hasn’t avoided is pensions mis-selling.

All the attention has so far been focused on the higher risk profile cases but those only make up perhaps one third of the total. Now the insurance companies are under pressure to deal with non-priority cases.

‘Most Scottish life insurance companies haven’t devoted much in resources to that,’ says Eamonn Rice, partner who leads the UK insurance compliance practice for Price Waterhouse. ‘That’s causing concern. Non-priority cases are becoming a priority.’

The financial services industry in general is looking closely to see whether it is achieving compliance in a cost-effective manner. Companies are targeting risk areas, based on a risk-assessment. ‘They are moving away from a check-list approach,’ says Rice. ‘That’s a change that has picked up momentum in the last 12 months.’

Rice believes audit firms are well-placed. ‘Auditing techniques rely on risk assessment,’ he says. ‘The approach methodology is already developed and we have tailored that to deal with compliance with regulations. We are developing global software which will help clients do just that.’

There is plenty of debate in the industry about the need to maintain the reputation of Scotland’s financial organisations as strong, high-quality institutions. As Alastair Barbour, partner in charge of the financial sector group for KPMG in Scotland, points out: ‘The financial sector in Scotland, while based here, essentially gets its business from outside Scotland.’