Historically the Front Office areas of Investment Banking and Markets drove the majority of the most important recruiting processes, with Back Office recruiting in areas such as Risk, Compliance, Technology and Audit playing second fiddle. With the advent of increased regulation, tighter controls and a driver for greater efficiency, this trend has been reversed. In addition, the skills required to manage revenue-generating businesses have changed significantly. JD Haspel is a leading Financial Services executive search firm with an impressive assignment track record in Corporate and Investment Banking, Commercial and Retail Banking, Hedge Fund Management and related Corporate Centre and Infrastructure functions. Its consultants discuss how search activity within Financial Services has changed across the Front Office and the Back Office of organisations...


1

New challenges

2

The changing shape of Front Office

3

Taken to account

4

Look ahead

James: An increasing frustration faced by business managers is the size of indirect costs that are allocated to their business which they have little or no control over. With increased regulation at a local, regional and global level, there has been an increase in hiring across many of the control functions to ensure banks can meet the new demands. This has driven up costs which in turn are allocated back to the Front Office leaving management in a catch 22 situation.

Jon: Within the Front Office this increase in fixed costs means the business lines have to work ever harder just to stand still. They no longer have the ability or flexibility to run their businesses in the way they see fit due to the regulatory agenda that is being set for them.

On a practical basis that means businesses must focus on efficiency and cost, as it’s the only way to achieve the return on equity that they’re looking for. If you can’t grow revenue you shrink the part of the cost base you have direct control over instead, which is invariably headcount. This is clearly in stark contrast to some of the support functions.

We are also seeing changes to business models, particularly amongst the large, commercial banks. There is an ever increasing focus on “distribution” driven by the need to manage the balance sheet and risk weighted assets ever more efficiently. The flip side is that this drives growth on the buy-side.

James:As part of the drive in global regulation, stress testing has emerged as one of the hottest topics now facing banks. Stress tests have become increasingly challenging with significant time and resource needed to ensure that banks come up to par. Governments and regulators cannot afford a repeat of the financial crisis of seven years ago where they were compelled to bail out certain firms. With planned ring-fencing rules, banks in the UK will need to demonstrate that their retail banking business can still operate in a crisis even if their corporate and investment banking operations suffer.

Jon: Firms have taken various different approaches to restructuring the Front Office, and particularly global markets businesses. Some cut aggressively early while others looked to ride out the storm and now find themselves facing up to the inevitable. A lot of businesses are being run significantly more efficiently with team sizes reduced by up to 40%.

James: Another important change over the last few years is that non-producing line managers run the risk of being axed. All layers of management are now expected to have regular client interaction and attributable stream of revenue. Gone are the days where layers of professional managers can escape the attentions of those above them who are looking for cost savings.

Jon: There are pockets of activity everywhere but generally speaking little or no growth. Hiring is targeted to specifically address a need, such as a replacement or to initiate coverage of a sector deemed to be particularly active. It’s patchy depending on the bank and there’s no clear trend. We are also seeing a major skill shortage at the mid-levels as banks struggle to stop the drain of talent to the buy-side and other industries. Within Markets businesses we have seen a notable shift in hiring patterns. Many business leaders believe that the most important hires they’ll make this year will be within technology, governance or business management, highlighting the increased influence of support functions within the banking operating model.

Andrew: One of the frustrations the public had following the financial crisis was that no one was held accountable. New regulations now require senior banking professionals to sign personal attestations, ensuring there is much clearer responsibility. It is now no longer acceptable for the head of a business to plead that he/she was unaware or not in a position to identify and manage misconduct. The impending Senior Managers Regime will go one step further to clarifying who is ultimately answerable. The regulators have been coercing banks to move elements of risk management that have traditionally sat with the 2nd line of defence into the Front Office. This has led to a shift of oversight and control into teams sitting in the 1st line of defence.

An added consequence of new regulation is that candidates, who might once have considered taking on an approved person role either in the business or in a traditional control function such as compliance, are now taking into account their own personal liability. Many people fear that if something happens on their watch, even if they are innocent, that it will be career limiting or have personal financial repercussions for many years to come. There has been a noticeable knock-on effect to some of the hiring process we have managed for clients in the past 12 months. Candidates who once would have happily taken on a traditional CF10, CF11 or CF10a position are now less keen, especially if they are moving to a new organisation where they are unclear on what sins of the past they might be inheriting.

James: The priority in the next few years is upskilling business leaders in the Front Office, to ensure they have the tools to manage a profitable and compliant operation. The best will be multi-taskers who can keep an eye on the revenues, an eye on costs, and an eye on the current and future regulatory demands. Many of these skills will need honing.

Tim: In infrastructure we expect to see an increase in technology hiring and continued upgrading across the three lines of defence.

  1. The first line is the control professionals working in the business line, who ensure compliance is followed from the beginning.
  2. The second will be compliance, market and operational risk professionals who oversee the activities of the first line, ensuring the necessary levels of control are in place.
  3. Third is internal audit who will keep checks on the second line of defence.

With the increasing importance of the digital era, several banks have created the role of Chief Innovation Officer, who is tasked with driving greater efficiency across the bank by using technology applications or processes created by others. In addition to keeping abreast of the disruptive technology market, the innovation officer is responsible for arranging joint ventures with third party firms rather than designing their own applications from scratch, and at times making strategic investment decisions to try and back the next winner.

There has been and will continue to be a reduction in headcount in retail banking as more customers are using digital platforms to do their personal banking. With commercial, corporate and investment banking managers looking at ways of creating digital solutions too, there could eventually further reductions in headcount in these parts of the bank. We are not currently facing a financial technology revolution, but there is an increasing appetite for one to happen. Banks must ensure they are part of it.

About JD Haspel

Founded in 2006, JD Haspel is a leading financial services executive search firm with an assignment track record in corporate and investment banking, commercial and retail banking, traditional and alternative asset management, private equity, insurance and related corporate centre and infrastructure functions. The firm has long standing client relationships developed through many years of high quality and consistent execution.

JD Haspel