At the Balmoral Hotel, in Edinburgh, an audience drawn from the Scottish business community gathered early to hear an esteemed panel of financial services professionals pronounce their thoughts on the lessons learnt from the financial crisis.
The third Broadgate Mainland/Scottish Investment Operations Breakfast Briefing, was opened with a pertinent observation from the event’s chairman Harry Morgan, Adam & Co, that what hadn’t been learnt was “prudence, moderation and balance” and that these must be set in stone if we are to move forward, restoring trust and confidence from a wary public.
Colin McLean, SVM Asset Management, spoke of the need to improve client consent mechanisms and clients’ understanding of risk. Drawing an analogy with the medical profession, he pointed out that a patient would only consent to an operation once they have full understanding of the risk. To this end, Colin McLean wants to see higher ethical and professional standards introduced, and importantly, ones that are “genuinely effective”.
A theme referred to by a number of panellists was the issue of risk, investor psychology and how behavioural issues influence sellers. John Moore, Brewin Dolphin, believes that investors still don’t understand risk, but that this is understandable when the financial services industry sells “commercially useless” products. He also proffered that shareholders have found their voice again demanding greater levels of information on key issues such as executive pay and pensions. In short, investors have a right to know what is happening in the companies in which they invest. If there is a healthy tension between investors and the company then Mr Moore believes that “this is usually beneficial to the business and investors”.
For Keith Skeoch, Standard Life Investments, the “lessons of the global crisis will rumble on for many years to come”. The crisis was borne of a systemic failure and this failure is embedded in the modern financial system which is primarily led by incentives. This behaviour leads to unintended consequences and no quick fix can be found until the industry restores some trust and credibility.
He advises the financial services industry to get closer to the client problem of understanding risk, but also to seek to influence the real opinion formers in power. Through this dual approach he believes the industry can change society’s current poor opinion. The industry has to articulate the positive effects with simple clear messages; capital markets are important because they influence the return generated for individuals’ retirements and they create wealth which can be transferred to their children through inheritance.
For the private equity view, Shaun Middleton of Dunedin Capital Partners, quoted the parable of the tortoise and the hare, with the clear message that we should get back to basics. “Prudence is good” he said and incentives should be aligned to tangibles achieved at the point of realising a profit and not through unrealistic valuations of yet-to-be realised gains.
Harry Morgan eloquently summarised the panel’s discussion reflecting that the mood was one of retrospection with many ramifications to come. He highlighted the panellists’ agreement on the point that risk management and the concept of losing money is something the public needs to be educated on, with the obvious disconnection between public and the financial services industry a major barrier to success in the future.
While the banks came in for ritual criticism, the panel was keen to broaden the debate beyond simply blaming the banks. The dislocation between the eternal quest for yield in a low inflation environment, coupled with unrealistic expectations for returns that still haven’t adjusted to reflect real returns, is an issue for another debate.
At the end we were left with another sobering thought – is there another imminent financial crisis – eurozone?
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