Klaus Woeste is KPMG's head of people and change advisory for the financial services sector at the firm and is busy advising financial services firms on how to adapt for the future. We held a Q&A session with Klaus about the changes going on in financial services and why some front office investment bankers ought to consider a move into control functions soon.
Q: Apart from the ever-increasing number of investment banking layoffs, what are the big trends in financial services people change now?
A: It’s all about changing culture and behaviors at the moment. All the events of the last 18 months will have implications for everyone in banking.
Q: Are you referring to the many recent scandals? Isn’t this just about rethinking the way Libor’s calculated, implementing Chinese walls and hiring some more compliance staff?
A: Yes – everyone. This will affect everyone, top to bottom, front to back office – and this includes all traders, all salespeople, all managers. But it’s about more than Libor. There’s a mid- to long-term change taking place in the way the industry works. All the controls, issues and problems are driving a lot of banks to fundamentally review their operating models. They need to start looking at the way they manage risk and drive different behaviors from the top down on an enterprise level to ensure that they’re avoiding reputational, commercial and regulatory damage that has affected quite a lot of organizations in the recent past. At the same time, we see a big cost challenge coming, with all major banks aiming to take out a further large chunk of their cost base over the next three years.
Q: That sounds bad, but it also sounds like it could be good for risk jobs. What do you see happening to headcount?
A: Overall headcount in the banking world is definitely going down.
However, some of the jobs that are being cut in the U.S., the UK and Continental Europe are going to reappear in off-shore locations. At the same time, big cuts in the front office will be offset to some degree by additional hiring for control functions.
Q: So, how far do you think we are through banks’ headcount cuts so far?
A: Unfortunately, there’s still quite a long way to go. For example, most of the top tier global banks have each given themselves cost cutting targets of between $2.38 billion and $3.97 billion in the mid-term.
There’s a strategic cost-cutting agenda going on and at the moment most banks haven’t realized all of their aims. These are long-term, strategic cost reduction targets which will have a huge impact on the way they do business, for example, the mix of on- and off-shore resources. At the moment, a lot of the cuts we’re seeing are purely tactical – there’s been a reduction in income, and some products are just not being sold anymore and banks are reacting to this.
Q: Are you sure banks are going to cut a lot more people? Can’t they take cost out elsewhere?
A: The easiest way to cut costs is on the OPEX side, and in banking, OPEX is all about people.
What this means is that in the long term, if you work somewhere in trading or sales, you need to be prepared that whatever you do right now might not exist in the future.
Q: What should people in the front office be doing in reaction to this?
A: You need to ask yourself some searching questions. The first one is, “Is my job at risk?” The second is, “If I lose my job, will hedge fund X take me on?”
The honest answer for many is probably that yes, your job is at risk, and no, they won’t, as there not enough of them.
If that’s the case, you need to start thinking about your other options. First, you need to get over the psychological hurdle that what you always wanted to do and have done for the past few years is no longer an option. If you really want to stay in banking, a position in a control function is probably going to be a good option. Remuneration is going to be different, but for some flexible people it’s going to be quite attractive.
Q: One investment bank said it doubled its risk staff in the investment bank in recent years. Is this going to happen again?
A: No. Investment banks may have doubled the number of risk professionals they employ in recent years, and there possibly will be another spike in risk employment over the next few years, but I don’t think we’re in for big additional increases in the long term.
Right now, banks are being pressured to give assurances that they're managing their risks correctly and are adequately responding to the regulatory change agenda. Once this assurance has been made, they are likely to start looking at making the middle and back office functions more cost effective – and that will most likely have headcount impact.
Q: So, if you want to move into a risk and control job, you need to do that now?