How much change can you handle?
Royal Bank of Scotland CEO Stephen Hester will not be accepting the one million pound bonus that drew criticism from the British public and politicians, the bank recently announced. Rob Mellor from PwC UK said in a statement that it is easy for politicians to attack banks on remunerations and bonuses without offering real solutions. He was one of the panellists at a PwC conference held in Luxembourg on the Alternative Investment Industry.
Before the bank’s announcement, the British Labour Party said it would force a vote in the House of Commons calling for Hester to be stripped of his bonus. “It seems very easy for politicians to attack banks. Politicians have to understand that the financial sector is a global and competitive industry”. These were the words of Rob Mellow from PwC UK on the political rhetoric surrounding financial sector regulation. He added that political decision makers have to understand the industry more deeply because they currently only get the sound bites of legislation.
Regarding alternative investments such as private equity, hedge funds or real estate, Mr Mellow’s U.S. colleague Will Taggart insisted that regulators and politicians need to be educated on the subject. “For a long time, the alternative investment sector has worked like an entrepreneurial industry with a couple of individuals that did not like to share things. Those days are over. But there is still a lot of misunderstanding and lack of understanding. Education is vital because politicians are making decisions that have a long term impact.”
The financial transaction tax was another political issue brought up at the round table where challenges in a rapidly changing world were discussed. French President Nicolas Sarkozy announced his plan to implement a unilateral financial transaction tax of 0.1%. Mr Sarkozy, who trails Socialist rival François Hollande in polls for Aprils' presidential election, said he wanted to "create a shockwave" with the move. In a clear and unequivocal statement, Rob Mellow said that the UK was against this tax, but not against some form of action.
He wondered how decision makers can talk about growth of the European economy when they are in favour of a financial transaction tax that will cost the European economy up to 2% of GDP. He heard the story that the European Commission was asked to rewrite their impact assessment.
At the same time, he urged people to voice concerns about this financial transaction tax. “I am surprised at the lack of criticism by jurisdictions like Luxembourg and Ireland, which are two major fund centres. We know that the fund industry will also be affected by this tax.” The round table moderator, John Parkhouse of PwC Luxembourg, quoted American President Obama’s words to Sarkozy at a G20 meeting: “This transaction tax is really a good idea, but we are not going to do it.
Mike Greenstein of PwC US spoke about regulation, trust and confidence. “The major impact on the industry may be the cumulative impact of regulation. This will be potentially disruptive to markets, corporations and to business models and their structures.” He added that regulation is the new price of entry for a credible member of the capital market. Besides, in order to be credible you would need a credible regulator.
His American colleague, Mike Taggart, underlined that the industry, clients included, have become more conservative. According to him, it is not only about minimising tax but also risk, “tax needs to be involved from beginning to end, because there is pressure from legislators, regulators and investors. Risk tolerance has dropped. The financial structures they are working with are not as complex as they were in the past.”
At the end of the debate, the three panellists were asked to make a prediction on how the alternative investment industry would develop in the years to come. Will Taggart predicted that this sector would grow significantly:” There will also be more convergence. For instance, hedge fund managers will be setting up regulated products”. Mike Greenstein from the United States insisted that financial centres have to promote further governance and Rob Mellow from the UK predicted constant pressure regarding fees, resulting in higher costs for managers. CW