Compensation and Market trends Interim reports 2015 - Risk Management

Stable government positive for recruitment

Against expectations, post election, the UK not only has a government, but a stable one. This is a positive development for those looking to participate in the risk recruitment market. Another positive is a growing and increasingly profitable financial services sector. However, the cost of regulation is a major concern to the industry and one that has the potential to damage it’s international competitiveness.

Election a watershed moment?

The election does in this respect potentially mark a watershed moment for corporate governance within the financial services industry. The banks, having engaged in reckless risk taking in the run up to the financial crisis and having been bailed out, were discovered to have subsequently engaged in market rigging and customer abuse, resulting in further scandal and fines. Given the level of fines and costly regulation to make them “safe”, banks have operated in an environment that has been anything but normal.

Individual responsibility to be extended

The government’s response, the Fair and Effective Markets Review (possibly in recognition that “bank bashing” had gone too far) is a mix of rigorous rules and sanctions concerning the accountability of senior bank executives, together with a collaborative code of conduct that will be overseen by a panel of market practitioners. Banks now need to properly manage their businesses and keep within the rules, aware that the chancellor has spoken of a new settlement to end the cycle of fines, regulation and taxes. A further proposal and one that will interest corporate governance practitioners, is that rules on individual responsibility should extend to the wider industry and include asset managers, brokers and hedge funds. Managers will potentially be fined or banned should failings result from the absence of proper controls. Clearly none of this is bad for corporate governance and will ensure that risk management budgets are properly resourced.

Salary pressures in check

Whilst chief risk officers are currently benefiting financially from their enhanced status, does this make for a more widespread boom in the salary and compensation paid to risk managers? Our survey suggests not. Although there are pockets where salary pressures are acute, they are by no means universal. Whilst the average salary increase achieved by risk managers staying with their employer has risen from 6% to 7%, the salary increases achieved by risk managers changing job has actually fallen from 20% to 19%. Many risk managers having worked in environments where costs have been aggressively managed and salaries kept in check, enter the recruitment market with realistic expectations. Bonuses have also fallen, possibly reflecting the curtailment of the bonus culture in the banking sector.

Given this, a slightly surprising trend in risk management, and one shared amongst all areas of corporate governance, is that increasing numbers of risk managers believe they are adequately compensated. The percentage reporting they are satisfied has risen from 51% in 2013 to 57% in our latest survey.

 

VACANCIES

Vacancy generation stable

At the start of 2015 we reported that vacancy generation was consistently strong across risk management. A growing economy and rising levels of employment was feeding confidence. Six months on, after two years of strong vacancy growth, demand, albeit at a high level, has stabilised.

Most vacancies are generated not by an increase in the number of risk managers employed, but by the movement of risk managers between employers. During 2014 there was a period of catch up as more risk managers changed job. They had postponed looking for a new position when economies and confidence were badly hit by the Euro crisis in 2011. That period of catch up is now substantially complete.

Given this, demand is currently evenly distributed across banking, insurance and asset management but with a notable up tick in-demand from retail banks. More junior credit risk managers are sought in corporate and investment banking and more senior operational risk managers in higher level, business facing positions. In-demand experience includes retail credit risk across both portfolio management and decision sciences, market risk analysts, 1st and 2nd line defence roles and risk managers with change experience particularly around banking regulation.

 

Rate of placements

Companies are realistic

To provide a better insight into the dynamics of the risk recruitment market, this graph plots the rate at which placements have been made across the last four years. The graph demonstrates the rate at which candidates are being offered jobs which are then accepted.

In spite of the rate of placements significantly improving in the second half of 2014, at the start of 2015, 57% of risk departments reported that risk managers were hard to recruit. Currently both vacancy generation and the rate at which vacancies are being filled are stable. In our experience companies are currently serious about filling their vacancies and risk managers are serious about changing jobs. The interminable recruitment processes of two years ago are firmly in the past. If vacancies are currently going unfilled it is usually as a result of candidate shortages. This is particularly so in the perennially undersupplied retail credit risk market and change management where many risk managers prefer to work on a contract basis. Whilst few companies are looking to compromise on the standards they require, most are realistic. They recognise that highly marketable risk managers, and particularly more junior ones, can attract multiple offers and frequently receive counter offers from their existing employer. If they are going to recruit they may need to consider alternatives to their ideal candidate.

 

Market participants realistic

The new government appears to appreciate how vital the financial services industry is to the UK’s economy. The Fair and Effective Markets Review hopefully sets the scene for a more collaborative approach to regulation. Critics of the UK economy question its lack of productivity growth. If that is the case, they possibly need to look no further than the financial services industry. The huge increase in the employment of risk managers and other corporate governance staff deemed necessary to make the industry safe, has on the face of it, done little to improve its productivity.

Regulatory initiatives

None the less, going forward, there are still regulatory and governance initiatives that are or are going to impact the risk recruitment market. Whilst some banks have already adopted IFRS 9, many have not and will require additional headcount, particularly for Basel A-IRB model developers. The Fundamental Review of the Trading Book (FRTB) is another area where demand is anticipated, as banks seek to conduct and  submit the results of their Quantitative Impact Studies (QIS) to the regulators. The PRA’s Supervisory Statement SS14/13 focus on the Advanced Measurement Approach is creating demand which far outstrips the supply of operational risk capital modelers.

New opportunities for risk managers

The development of financial crime and first line of defence roles is creating new positions for operational risk managers. As financial crime functions grow, they have a strong interest in developing operational risk frameworks. This is resulting in operational risk managers migrating into financial crime/fraud. Further, the widespread deployment of the three lines of defence model in operational risk is creating positions particularly in the first line of defence. Significant numbers of risk managers are being deployed across business lines, operations, technology and corporate functions, including HR.

Risk managers generally realistic

Given the welcome stability of the risk recruitment market, there is a measure of realism amongst its participants. This is perhaps evidenced by the fall in the average salary increase achieved by risk managers changing job. Companies broadly recognise that in some areas of risk there are genuine shortages. In response they either have to take a more practical approach to the skills and experience they are seeking or they need to increase the salary they are prepared to offer. For candidates, changing job is not usually about salary but career development. Clearly for some chief risk officers and those with ‘in-demand’ technical skills and the desired interpersonal skills who are under no pressure to move, significant salary increases can be achieved.

Most risk managers understand it is a competitive market and have realistic expectations. As our survey confirms, a relatively high proportion (over 16%) of risk managers report they did not receive a salary increase in the last year and many moved for occasionally less, the same or frequently quite modest salary increases. The caricature of rampantly greedy investment bankers is not one demonstrated by the realities of the risk recruitment market.

Shortages of more junior candidates

As a broad generalisation there are currently shortages of junior candidates who are able to achieve proportionately larger salary increases in the recruitment market. More senior positions generally attract higher numbers of more experienced and suitably qualified candidates. As a consequence companies are not always under pressure to offer significant salary increases. Given the diverse nature of the market and the requent need for risk managers to develop new skills and experience, there are always likely to be pockets of acute candidate shortage and oversupply. For risk managers looking to the future and their career development, they should as far as possible look to ensure their skills remain current and in short supply.

Women becoming better represented?

An interesting finding, common to other areas of corporate governance is the current and future gender make up of risk management. Whilst the percentage of respondents to our survey who were women rose from 17% to 21% in 2015, when analysed, 13% of women responding to our survey had worked in risk management for less than 2 years against only 4% of men. In fact, broadly the same number of men and women responded that they had worked in risk management for less than two years. Clearly, if that trend was extrapolated into the future, the current male bias in the profession may be in the process of a substantial shift towards greater female representation.

 

FINANCIAL RISK

Within corporate and investment banking there are currently consistent levels of demand across both credit and market risk from analyst – VP level and less demand at director and MD  levels. Candidate availability reflects this with a pool of senior candidates who can struggle to find suitable roles and a shortage of candidates with indemand 2-6 years experience. Demand is substantially regulatory driven: either through a specific need to build out departments to ensure adequate business coverage or in response to specific regulatory requirements around risk measurement and disclosure. We anticipate that IFRS 9 and FRTB will continue to drive recruitment in both credit and market risk.

There is sustained demand within retail banking across the UK. These are usually highly technical roles and candidates are often in short supply. Growth is being driven by some of the larger banks, as they focus on building on their success in retail banking, as well as established banks looking to divest significant portions of their business. There is further demand from newly or recently established challenger banks looking to compete with the established order or provide alternatives such as peer to peer lending. They are all competing for broadly similar pools of expertise: those with an understanding of credit risk analysis and portfolio management or an understanding of operational or capital/ regulatory models.

Within insurance there is a steady demand from companies operating in the Lloyd’s market for risk managers with credit risk analysis experience. This is being driven by the banks, as they look to the insurance market to distribute credit risk, and by Solvency II as companies look to diversify their portfolios to reduce their regulatory capital requirements. This is resulting in a modest migration of risk managers from the banking to the insurance sector as bankers take the opportunity to apply their skills in a different industry.

Within asset management there is steady demand for financial risk analysts to cover portfolios across different asset classes although predominately in fixed income and equities. Candidates usually possess a combination of skills, both quantitative and qualitative, and often specialise in a particular asset class. Although candidate availability is generally good, risk managers with multi-asset class experience are at a  premium. Within some companies these roles are administrative and report focused, in others, risk managers work much more closely with portfolio managers.

 

BUSINESS RISK

The banking sector continues to dominate demand for operational risk managers and is being led by both UK and international banks seeking to fill vacancies in first and second line of defence roles. Demand in first line of defence roles include those for Conformance Officers, Business Risk Control, Operational Risk Managers and Governance & Risk Managers. These all require traditional operational risk skill sets, including designing and implementing risk frameworks; establishing and reporting on key risk indicators; conducting risk control self assessments; improving processes and establishing controls.

The key requirements in second line roles are for risk managers with the technical ability to build, implement and/ or enhance risk frameworks coupled with the regulatory knowledge and the skills to communicate effectively with executive management and regulators. There is significant demand and an acute shortage of candidates from analyst through to senior manager level with Operational Risk Capital Modelling experience.

Outside of banking, demand for operational risk expertise from the insurance sector has picked up. The impact of Solvency II will ultimately have broad implications for the business risk recruitment market. The Regulator has stated that the implementation of the Directive in 2016 will be one of its main focuses. In a PRA statement in June Solvency II: regulatory reporting, internal model outputs the PRA set out expectations of how insurers should identify and manage all risks to which their business could be exposed over the long and short term. This will most likely only increase the already strong demand for operational risk managers. In fact the PRA is struggling to recruit the same risk managers the insurance sector needs to fulfil the requirements of Solvency II. Outside of Solvency II risk managers with strong operational risk framework experience are currently in demand.

The funds and wealth management sectors are providing a steady flow of business risk vacancies. There have already been a number of senior level moves in 2015 within asset management. However, more generally there is a heavy bias towards risk managers who are good generalists and are in the £70-90,000 range. In February 2015 the FCA released the paper TR15/1: Asset management companies and the risk of market abuse. Aimed at asset management companies and trade bodies representing asset management firms the paper presents the FCA findings from the thematic review of how asset management firms control the risk of committing market abuse. The FCA expects those companies who did not effectively manage the risk of market abuse to make improvements to their practices. This will be a recruitment driver for risk and compliance functions in the asset management sector.

A more recent development and one that will no doubt grow is the increase in demand from industry and commerce for business risk managers. The telecoms sector has been particularly active.

 

THE CONTRACT MARKET

Overall demand for contractors has remained strong. Operational risk contractors are currently in demand across the market and particularly so from the insurance sector. This is largely as a result of regulatory pressure to ensure key measures are set within Solvency II; focusing on ‘own risk and solvency assessment’ (ORSA).

There is relatively lower demand for credit and market risk contractors, particularly for BAU positions where opportunities have been limited. However, project and change management programmes have resulted in numerous roles for risk contractors to support the implementation of new processes, systems and model developments.

More generally risk departments are looking for contractors to help implement new regulatory requirements and fill gaps in permanent headcount. A more recent development has been the growth in demand for risk contractors within commerce and industry which reflects the increasing interest in permanent recruits, for example from the telecoms sector. Rates however are seemingly lower than in the financial services sector. As in other areas of corporate governance, whereas companies were confident in securing the services of their preferred contractors on the basis of fixed term prorate salaries. Businesses are now having to revert to day rates which remain far more popular with contractors.

Our survey suggests that contractors working in the risk management are positive. The vast majority had found their current contract within less than three months. Whilst 18% of respondents to our survey were not working, the majority have been looking for less than three months, and confidence levels are generally high. However, for some it is taking them longer to secure a new contract than in 2014. Only 6% of contractors working had accepted a reduction in their previous rate, 77% expressed satisfaction with their current rate and over 94% overall satisfaction with their contract.

Looking forward we anticipate that demand will remain strong in the risk management contract market through to the end of 2015 and most likely beyond.

 

This Mid-Year Report includes a significantly expanded section on salaries and compensation, designed to give a much fuller picture of overall remuneration packages.

Most risk managers are keen to know their market worth. This is not always easy to address. Two otherwise similar risk managers may enter the recruitment market and accept materially different salaries. We provide this caveat because we are aware that the risk management recruitment market is sufficiently diverse that it defies simple categorisation. However, risk managers and their employers want guidance and this is what we attempt to provide.

As recruitment consultants we are involved in the negotiations that take place between employers and prospective employees. We are aware that whilst salary is usually the most important consideration, a number of other factors go to make up total remuneration. In addition to the data we gather from the placements we make and the recruitment work we do, including contact with risk and human resources departments about salary and other benefits, we have also conducted a Compensation Survey to provide specific detail on all different types of remuneration within risk management.

The Survey was of risk managers registered with Barclay Simpson and was conducted in June 2015. It generated several hundred responses.

 

To read the full report, follow the link here.