In the last issue of Future Banking, Rod James spoke to Lloyds Bank’s Alison Hewitt about the regulatory challenges ahead and how the bank is poised to meet them. Six months later, they speak again to discuss the progress made.
The past few years have been a challenge for everyone in banking, not least the compliance function. Regulation, enforced by various national and international bodies, has been accumulating relentlessly, yet the minutiae of these policies are often undefined. Banks know what they have to prepare for, but they don't have enough detailed information to put in place an exact plan of action, or to know how much this action will cost.
Still, compliance officers across the financial services industry have been busy responding as best they can. In the previous issue of Future Banking, Alison Hewitt, chief compliance officer of Lloyds Bank, spoke about how her plans to reform the organisation's risk function were progressing. She had just been honoured by Thomson Reuters with its Chief Compliance Officer of the Year award, in light of her ongoing efforts to bring compliance into the heart of the organisation. For Lloyds, this task has been especially difficult.
Lloyds' 'One best way'
In 2008, Lloyds bought floundering Scottish group HBOS in a deal that turned out to be far more toxic than either party could have imagined. In February 2009, it transpired that HBOS had made £10bn in losses, well above the level gleaned through initial due diligence. This, coupled with the need to recoup £20bn in state aid and set aside £3.57bn to compensate customers that were missold payment protection insurance, could have made the restructuring job seem insurmountable; however, speak to Hewitt now and that's not the impression you get.
"The level of regulatory change has certainly not diminished," she says. "But our position is much more settled in terms of what we need to do as an organisation. A big part of this is around regulatory reporting, which we are going to have to provide a lot more of, to a wider number of bodies. We are investing in systems to ensure we can do that as efficiently as possible and that we are gathering the right data to meet those requirements."
As the rules have become clearer, so has the question of cost, which has been made much more manageable by an aggressive streamlining process. Lloyds has greatly reduced the size of its portfolio, shedding £30.7bn of non-core assets from its balance sheet during the first nine months of 2012. Hewitt's team has simultaneously simplified the bank's structure, giving a much clearer picture of each department's liabilities.
The simplification process was known in-house as 'One best way'. Its aim was to bring down walls between different departments, reducing the chances of process duplication and allowing for a centralised view of risk from across divisions. Many of the bank's risk functions have been pushed together, leading to a consistency of approach that in turn drives efficiency and cost savings.
"We are in a position to avoid some of the duplication and overlap that might have occurred in a less efficient structure," Hewitt explains. "We can manage our cost position more effectively because there is a clear line of sight between the risk function and the business. We now have one set of data that effectively meets risk and business requirements alike."
Right people, right place at the heart of Lloyds
Last time we spoke, Hewitt emphasised her desire to implant members of the risk team in operational arms of the business. This would be the basis for a more holistic approach to risk management, based not so much on whether a process was followed correctly, but more on whether the outcome was the right one. The physical presence of the risk department would provide support and challenge the behaviour of the bank's employees.
"I think that having the right people in the right place has combined well with the restructuring," Hewitt says. "I think it has created consistency across the organisation and led to incremental increases in transparency, which in turn leads to much more effective risk management. We are not the perfect article, but removing all these barriers was the right thing to do."
Banking reforms and harmonisation
Although Lloyds Banking Group's business is very UK-focused, Hewitt's team still has to account for changes taking place in the US. Wholesale banking makes up 20-25% of the company's business, covering everything from start-ups through to multinationals. The Dodd-Frank Wall Street reforms, in particular, are sure to have an impact on this part of the organisation, although it will affect its UK rivals with greater wholesale presence.
"We are watching the development of Dodd-Frank very closely," Hewitt says. "It has been a very drawn-out process and still isn't fully settled. But we are looking at aspects of the bill, such as the registration requirements we will have to meet, which will have an effect in both the US and the UK. We are as committed as anyone to this. At the same time, we are first and foremost a UK retail and commercial retail bank, so are in a strong position."
At the same time, in Europe, banks are gearing up for Common Reporting, the European Commission directive that aims to build a more harmonised framework for financial reporting. Based on a common set of formats, the directive will cover five areas: capital adequacy, group solvency, credit and counterparty risk, operational risk and market risk. The newly formed European Banking Authority (EBA) has set a compliance date of 1 January 2013, though this looks increasingly unrealistic.
"We are on track and have been active in lobbying and speaking to regulators to ensure this as far as possible," Hewitt says. "We are producing one consistent set of information to give to all our regulators, which obviously required us to make changes to our systems. As the EBA comes on stream, and other European authorities and US regulators increase their requirements, we'd certainly hope to see greater harmonisation across the globe in terms of what those different groups require."
Regarding this relationship between banks and the regulators, Hewitt is pleased at the sense of common purpose. This should make the push for greater global harmonisation much easier.
"We all have different views about certain aspects of regulation," she explains. When you are talking about things like reporting, your views may be affected by the systems you've already got in place and the gaps that you see. But the general message about consistency of
approach, asking for information once not many times in different formats... these are all shared concerns. We all want to reduce the cost of compliance by making things as efficient as possible."
Lloyds Banking Group aims high
Looking ahead, it's more of the same for Lloyds Banking Group. The organisation is aiming to reduce risk across the board and is trying especially hard to address concerns that affect the customer-facing side of the business.
"We are being very proactive in setting ambitious targets for ourselves in certain areas, with complaints being a very good example," Hewitt says. "We've moved aggressively to bring the number of complaints down.
"The business is managed to a risk appetite set by our board. These appetites cover credit, market and liquidity risk, right through to conduct risk. We also set targets for things like managing complaints effectively and how to reduce these numbers over time. There are almost too many to mention."