Risk - 2017 Salary Guide and Market Report
Welcome to Barclay Simpson’s 2017 Risk Management Market Report - Barclay Simpson has been producing corporate governance market reports since 1990. They produce two reports each year. This one, summarizing and analysing recruitment trends in the risk recruitment market, is supplemented by an employer survey.
Brexit, so far so good?
Our market report in July was released immediately after the vote to leave the EU. At the time, possibly rashly, we predicted that by the time our 2017 report became available, the consequences of that decision would be better known. Unfortunately, six months later, what might practically be achieved in exit negotiations is no clearer.
This report focuses on employment. Whilst the anticipated Brexit inspired recession has not occurred, the UK is about to start negotiations to leave the EU, an action that even those who support Brexit recognise will do short term damage to the economy. Given this, from our perspective as recruitment consultants, the key to a successful Brexit will be to avoid any serious self-inflicted economic damage.
What is the main threat to jobs?
Nobody should doubt, particularly those looking to negotiate Brexit on behalf of the UK, the value of the financial services industry to the UK. The largest fifty financial services groups contributed over £70billion in taxes in 2016 and the industry as a whole exported £20 billion of services to the EU. However, whilst much is made of other European cities preparing to purloin business away from the City, it is hardly a risk-free option given that London has a critical mass, talent pool and infrastructure that is to be found nowhere, other than in New York. A move towards deregulation and lower costs in New York is possibly a bigger threat to London than either Paris or Frankfurt. Clearly it will be some time before the consequences of Brexit is known. What we do know is that it clearly has the potential to cost jobs not only in the City, but also in support functions around the UK.
In the meantime, the financial services industry in the UK is undergoing a period of technological disruption. It is possible that the number of people working in the industry is more likely to fall, not as a result of Brexit, but as the industry recognises the opportunities created by technology and the looming threat to the existing establishment from Fintech and a whole myriad of innovative start up financial services companies. London has the expertise, entrepreneurial attitudes, collaborative institutions, savvy investors and even regulators committed to competition and innovation that all help contribute to a unique ecosystem. For risk managers, this revolution is creating significant opportunities.
Technology is also creating threats to existing risk jobs. For example, straight through processing and the automation of trade lifecycles is serving to reduce the number of risk managers needed as companies look to reduce costs.
Positive response to survey
Given all of this, our survey makes more positive reading than we might have anticipated six months ago. Recruitment budgets have not collapsed, risk departments continue to report they are as under-resourced as ever and their recruitment plans for 2017 remain bullish. Whilst it could all change very quickly, the recruitment market is currently positive, with risk departments even reporting they are finding it easier to recruit.
Headwinds in 2017
Economic growth and particularly employment have been far stronger post Brexit than all but a few predicted. However, it is likely the economy will be facing some steady headwinds in 2017. Rising inflation could also have some interesting consequences for risk management salaries.
Shift in vacancies away from more traditional sources
Six months ago, the anticipated recovery in demand that a vote to stay in the EU was supposed to create, did not materialise. The immediate uncertainty caused by Brexit resulted in a short hiatus where the value option of doing nothing was taken by both candidates and clients. Fortunately, with economic Armageddon avoided, the risk recruitment market recovered and, in the final quarter of 2016, benefited from a period of catch up as otherwise postponed recruitment was undertaken.
Possibly the most striking trend, not only in risk recruitment, but also the corporate governance recruitment market more generally, has been the displacement of demand away from top tier retail, corporate & investment banks and into the wider financial services industry. Many of these banks continue to rationalise as they shrink their costs.
Within banking, the fall in vacancies is particularly notable in transactional risk roles such as market and credit risk. Trading volumes are down and there is a reduced appetite for holding long term debt assets. However, new roles and demand have been created in response to regulatory pressure. Fundamental Review of the Trading Book (FRTB), IFRS 9 and BCBS 239 are all boosting demand, as is Structural Reform, also referred to as Ring Fencing. Banks with more than £25 billion of deposits are required to hive off their consumer-facing business from riskier investment banking activities by 2019.
Ring Fencing did much to reshape banking in 2016, with major banks carving out different business entities to comply with regulatory pressure while attempting to ensure efficiencies on a macro scale. For example, in 2016, a major Tier 1 bank announced six new business entities. The effect of this was to create duplicates of senior risk roles for different business units, requiring risk managers to ‘double hat’ by holding multiple positions. The bank also recruited three new Chief Risk Officers.
More generally, vacancies are characterised by their more junior nature across credit, market and operational risk, with fewer senior roles. This reflects a desire to control costs by promoting internally and backfilling more junior vacancies.
Rate of placements increasing
To provide a better insight into the dynamics of the recruitment market, this graph plots the rate at which placements have been made across the last four years. It reflects the rate at which candidates are accepting offers of employment.
We reported in 2016 that the rate of placements had slowed, as recruiters became more cautious. This was evidenced by interminable recruitment processes and was not helped by the number of more junior vacancies, for which where there are invariably fewer potential candidates. Whilst still slow by recent standards, the rate of placements has increased. However, whilst in-demand risk managers with strong quantitative and technical skills remain in short supply, risk managers are more generally available. They are also being realistic about what they can potentially achieve in the recruitment market.
The rate of placements is also currently being helped by a higher proportion of companies actively looking to fill the vacancies they have. The explanation is to be found in the shift in demand away from well-established banks, to smaller, often more outwardly entrepreneurial groups. If a bank already employs a hundred risk managers, they can simply delay recruiting. Smaller, often rapidly growing groups, go to the recruitment market because they need to recruit. This is reflected in their recruitment processes, which are usually streamlined and effective. They are also more likely to be seeking generalists to join a small team. Both the broader nature of the role and benefits package can potentially be moulded around their preferred recruit.
These companies are more likely to treat potential recruits and even their recruitment representatives as prospective customers, which in part is reflected in their higher offer acceptance rates. Many established, larger financial services groups simply fail to communicate effectively between the ultimate decision maker and the candidate they might otherwise wish to recruit. Recruitment consultants are often excluded from a process they could facilitate and add value to, whilst smaller entrepreneurial groups benefit from rarely having such inhibitions.
Conclusions from employer survey
It is encouraging that the number of risk departments reporting to have found it easier to recruit increased during the course of 2016. It is therefore a little surprising that, despite a marginal increase in the number of departments reporting higher budgets, departments are still reporting they are under-resourced. The consequences of Brexit are yet to come.
Departments remain under-resourced
- 66% of risk departments believe their department is not "sufficiently resourced for the demands that are made upon it" (up from 55% in 2015)
Pressures on recruitment budgets easing slightly
Increase from 21% in 2015 to 25% in 2016 of departments reporting that their recruitment budget has increased
- However, 27% report a decrease, up from 23% in 2015
- Increases remain more likely in asset management and insurance than in banking where decreases are rising
Further slowdown in recruitment activity
- 59% of risk departments have recruited or attempted to recruit in the last 6 months, down from 62% in 2015 and 69% in 2014
- Asset management groups are most likely to have recruited
Recruitment becoming less of a challenge
- 54% of departments report they are finding it difficult to recruit (69% in 2015)
- 41% of departments report good candidates are hard to find (50% in 2015)
Salary expectations becoming less reasonable
- 75% of departments (69% in 2015) report candidate salary expectations to be either excessive or more than expected
- 25% consider salary expectations to be reasonable (31% in 2015)
Use of external resources has moderated
- 17% of departments report they routinely use external resources (down from 18% in 2015)
- 39% report only very limited use (up from 30% in 2015)
Risk departments becoming more likely to recruit internally
- 33% (30% in 2015) of risk departments used internal recruitment as their principal source of recruitment
- At 39%, external preferred suppliers remain the principal source
Replacement and business growth to be main recruitment drivers in 2017
- 38% of risk departments report replacement recruitment will be their key driver
- A further 38% said that business growth and development will be their main driver
Demand set to continue in 2017
- Only 16% (17% in 2015) of departments report they are unlikely to recruit in 2017
Brexit yet to have a meaningful impact on recruitment
- Only 19% of risk departments report Brexit is influencing the work they undertake
- Only 16% of departments report they are likely to require additional resource as a result of Brexit
Given Brexit, the results of our survey reveal a surprisingly buoyant recruitment market. Encouragingly, and a finding that is positive for future demand, 66% of risk departments reported they are insufficiently resourced. 25% of departments (against 21% in 2016) report their recruitment budgets have increased and 59% (against 62% in 2015) reported they have recruited or attempted to recruit in the last six months. Recruitment intentions remain broadly consistent with 2016, which is a better outcome than we might have expected six months ago.
What’s currently driving the risk recruitment market?
There are two main recruitment drivers:
1. A rapidly evolving industry
The financial services industry in the UK is undergoing a period of rapid evolution. The regulatory environment that developed in response to the financial crisis and the cost it imposes, are leading to structural changes in the industry. Key banks such as Credit Suisse and Deutsche have both targeted the reduction of capital consumption in global markets and the disposal of assets. Countering this is the emergence of new providers in almost all sectors of the industry. These range from Fintech companies that offer personal loans, mortgages, payments and remittances, commercial lending, foreign exchange, asset based finance, digital banks and more. There is also the emergence and rapid growth of challenger banks and new mortgage providers, some of which have expanded their retail presence, while others have a model of lending through a network of intermediaries. There has also been significant growth in direct lending funds to accommodate companies requiring more complex financing products.
The impact of this is becoming apparent in the risk management recruitment market. It is displacing demand away from the traditional providers of financial services and into the alternative finance sector. For example, Fintech is creating opportunities for credit and operational risk managers and, likewise, the challenger banks are replicating the services offered by traditional retail banks. Risk jobs that are being made redundant in the major UK banks are effectively being replaced in often fast developing start-ups.
Risk jobs are also being displaced in an attempt simply to reduce costs.
Alongside regulatory capital constraints, a period of sustained low interest rates is also impacting bank profitability. This has led to a reduced appetite for banks to hold long-term, high risk corporate debt assets such as leveraged loans. As a result, new funds have emerged and the continued growth in direct lending, both from the alternative investment asset managers and the insurance sector as they target the market for corporate debt, is allowing credit risk managers working in banking to move to the buy side.
Clearly these types of seismic changes are seen as an opportunity to some and a threat to others. As recruitment consultants, it is refreshing to be involved in a dynamic and rapidly evolving market.
2. Regulatory developments
Whilst it did not appear as a significant recruitment driver in our survey, we are aware how frequently regulation appears in job descriptions and shapes the work that risk managers undertake. Huge numbers of risk managers are employed to meet the regulatory demands placed on the financial services industry.
However, the regulatory high water mark may have been reached. While some in the City consider Brexit and the transfer of a material part of the industry to the Eurozone a threat, how likely is it to happen, given the human capital, costs and additional uncertainties involved? A less published threat to those who make their living out of corporate governance is the potential for deregulation in the United States. That would clearly make New York a more attractive option for the type of high value jobs for which London is a magnet.
The political determination that there must not be a re-run of the financial crisis has put the cost of regulation ahead of the need for the industry to be competitive. Should that no longer be, given the value of the industry to the UK economy, competitiveness may once again become a factor in framing regulation. The copper-bottomed nature of the industry’s regulation and the jobs that go with them would potentially be at stake. There are many things that go around in circles and overzealous regulation is potentially one of them.
However, notwithstanding future developments, back in the here and now, regulation continues to be a major factor in the risk management recruitment market.
More recent and current regulations include FRTB. It is loosely defined as a set of proposals by BCBS as a framework for the next generation of market risk regulatory capital rules for internationally active banks. It could be seen as the prospective successor to Basel III (some are already referring to it as Basel IV). This has created demand for risk managers with market risk measurement experience who are able to accurately interpret market risk exposures that will be used to calculate regulatory capital requirements.
IFRS 9 is a regulation that focuses on the classification and measurement of financial instruments, impairment of financial assets and hedge accounting. From a risk perspective, this has led to demand for risk managers with Credit Risk Analytics / Modelling backgrounds who have a deep understanding of Default Modelling and Calculation.
BCBS 239 is the Basel Committee on Banking Supervision regulation number 239. This relates to the principles of risk data aggregation and reporting. Its aim is to strengthen banks’ risk data aggregation capabilities and internal risk reporting practices, in turn, enhancing the risk management and decision making processes. This is creating opportunities for risk managers with strong data and analytics experience, as well as change management skills, as new systems and processes have to be designed to capture performance data and ensure it is fit for purpose.
In asset management, MiFID II is the regulatory framework for investment intermediaries. The changes are set to take effect from January 2018 and will have a huge impact on fund and wealth managers dealing with retail investors. A key facet of MiFID II is the protection of investors. There will be a requirement for investment portfolios to meet suitability requirements based on an investor’s profile and investment mandate. In response, we will see demand from asset managers needing to implement a range of measures to ensure that risk is properly managed and, moreover, that the investments made on behalf of clients are appropriate. There is a crossover with compliance, as some Investment Risk Managers take on responsibility for conducting suitability tests alongside thematic reviews of portfolios.
Although early in the process, our survey asked risk departments if Brexit was already influencing the work they undertook, or was likely to impact on the resources their departments required. Whilst contingency planning is being undertaken should there be a worst case scenario and the UK has no special access to the Single Market or bilateral agreements in place, we are not surprised by the modest impact on the recruitment market reported thus far. However, passporting has helped underpin the growth of London as Europe’s financial centre and helped financial services become our biggest export market. It is impossible to predict either the outcome of Brexit negotiations or their real world implications for the financial services industry. It could, for example, ultimately result in a leaner, less regulated but far more dynamic industry. However, unless Brexit resulted in a wholesale haemorrhaging of the industry and a collapse in confidence, change is likely to result in opportunities for those risk managers who are prepared to embrace them.
Brexit may bring into focus the reliance UK risk management departments place on European recruits. Notwithstanding their much-needed expertise, the language skills they bring to the UK are not commonly held by risk management professionals.
Relocation away from London
Whilst London remains a magnet, intensifying cost pressures are also drawing risk jobs away from the capital. Historically, European nearshoring has served to reduce costs through the relocation of less technical roles. In 2016, Wroclaw in Poland saw a huge increase in demand for quantitative risk managers, with some major banks and even an insurance group looking to establish regional quant teams.
Within the UK, there has been a migration of middle office teams to Birmingham and Bournemouth. Notwithstanding the challenge of recruiting risk managers in these locations, it has the effect of producing a pool of high calibre risk managers not interested in relocating away from London.
Soft and broader skillsets
Risk managers looking to secure offers of employment increasingly need to be able to demonstrate that senior management will buy into them. Whilst regulatory fines imposed have fallen to their lowest level since the financial crisis, the fall also reflects a shift towards punishing individuals. 14 of the 23 fines in 2016 were handed to individuals. Regulatory bite is also not simply about fines, but the powers of the regulator to investigate and debar people.
Given this, as regulatory pressures increase on operational management, the ability to deliver potentially controversial messages in a constructive manner has become increasingly valuable. We suggest that risk managers looking to enter the recruitment market build their internal network and be able to demonstrate their ability to deliver such messages and the impact they can have.
In the current recruitment market, there is a growing demand for broader skill sets that can be transferred across a number of areas. Risk management candidates who have both soft skills and broad technical skills, plus a settled CV, is a combination that businesses will buy into.
Prospective employers are becoming wary of recruits they believe will not stay. Some risk managers have been promiscuous, moving regularly simply to increase their salary. Our advice in 2017 is to be aware that prospective employers are becoming far less likely to accept potential recruits with multiple job moves.
Business risk, or what is often known as operational risk, permeates the financial services industry. Whilst operational risk managers are firmly embedded in the 2nd line of defence risk departments, they are increasingly migrating into 1st line front office roles and 3rd line of defence roles.
Demand for business risk managers in banking has been driven by a need to enhance operational risk and risk appetite frameworks. Managers with Operational Risk Self-Assessment experience have been in particular demand. A number of new roles are being created in Enterprise Risk Management functions with responsibility for providing management with an aggregated view of all risks faced.
The Senior Managers and Certification Regime (SMCR) came into effect in March 2016. In response, there have been instances of Chief Risk Officers from smaller international banks seeking to change employers. The regulation emphasises conduct, culture and individual accountability. Senior Risk Managers in subsidiaries of international banks, where overseas executive management do not necessarily appreciate the regulatory responsibilities they are under, can be concerned. Given the emphasis on individual responsibility, it is perhaps not surprising some wish to move to an environment where their initiatives to improve the culture of risk will be supported by senior management.
Within asset management, as in banking, there is a trend towards recruiting at more junior levels. During the last six months of 2016, the sector actively recruited both new and replacement roles. Skills in demand included risk reporting, ICAAP, risk assessments, risk stress testing, scenario analysis and advising on risk controls; building, implementing and rolling out operational risk frameworks.
The insurance sector is stable and has largely avoided the restructurings, redundancies and regulations evident in other areas of the risk recruitment market. As a result, the volume of roles and general availability of candidates has been lower. Solvency II came into effect on 1st January 2016 and not without criticism. There is now less demand for risk managers to implement Solvency II. However, there has been demand from the Lloyd’s market for operational risk managers with the technical skills to work on capital calculation and Solvency II related activities alongside their more traditional roles. More generally, demand has been steady from both the Lloyd’s market and the general and life insurance markets.
As an aside, Legal & General launched ‘Legal and General Homes’, a construction company that will build Modular houses. The move towards construction has thrown up an interesting scenario as Health and Safety Risk becomes a major risk for the insurer. This has led to the creation of new roles within operational risk that look at Health and Safety within construction and manufacturing. This is quite a departure from the usual risks an insurance company would face.
The majority of financial risk managers are employed across the retail, corporate and investment banking sectors. Within banking, there have been few newly created opportunities for credit and market risk managers at Director level during the second half of 2016 with demand concentrated at AVP or VP level. Vacancies have been primarily to replace credit and market risk managers in both analysis and reporting roles, quantitative analytics and model validation. Newly created roles in banking have largely been regulatory driven, either directly as part of a drive to implement new regulations or indirectly to address gaps created by new processes.
In 2012, the UK government set up the British Business Bank with an initial £1bn of government funding, aiming to stimulate lending to the UK SME market. Whilst not a direct provider of SME loans themselves, the BBB works with a range of institutions, either as a guarantor or investor. They have placed funds with a couple of the larger peer-to-peer platforms as well as a number of direct lending funds. Alongside the aim of providing finance to small businesses in the UK, this has aided the development and growth of the alternative finance sector. Fintechs, Direct Lenders, Challenger Banks and niche mortgage providers have been largest source of newly created roles for Credit Risk Managers in 2016.
Many of these companies are competing with their counterparts in the larger retail and commercial banks for the best candidates. Demand for candidates with scorecard development or portfolio management skills remained consistent throughout the year. Candidate shortages were the norm and the better candidates could pick and choose which roles to go for.
Demand from the insurance sector for credit analysts from the Lloyd’s market that we anticipated at the start of the year was not sustained during the second half of 2016.
Within asset management there have been a number of newly created roles in investment risk across the asset and fund management sectors. The skills required have varied, depending on the nature of the business and the sophistication of the risk management approach. Some asset managers have sought to recruit highly technical risk managers with a more quantitative, model driven approach and knowledge of risk systems such as Barra and RiskMetrics combined with skills in VBA and Excel. However, fund managers that sell to retail investors who invest via SIPP’s and ISA’s have recruited risk managers able to conduct suitability studies to ensure investments are appropriate and in line with the client’s mandate. In both cases, product and asset class knowledge, as well as an understanding of portfolio construction, is required.
Liquidity Risk, after undergoing several years of sustained growth, has reached a state of maturity whereby most teams have now been built. As a result, the liquidity risk market in 2016 was subdued when compared with previous years.
The contract market
Our survey indicated that demand for contactors marginally declined in 2016. However, we expect this to recover in 2017.
Most recently, demand has been notable from multinational corporate banks, consumer finance companies, Fintech and payments companies and Challenger Banks. Quantitative Analysts, Credit Risk Analysts and Managers, Credit Risk Modellers, Stress Testing Analysts, IFRS9 Modellers and Hedge Fund Credit Risk Analysts have all been in demand. Also, notably, Heads of Risk to take up interim positions within smaller groups and start-ups.
In terms of candidate availability, contractors with generalist banking operational risk experience are readily available. However, whilst the contract market might superficially appear buoyant, there is a real shortage of contractors with the type of skillsets most often required. For example, those with a deep understanding of designing and implementing Operational Risk Frameworks combined with other skills such as ICAAP, Stress Testing and Credit Risk. Skilled modellers or Quants with 5-10 years’ experience are also scarce.
Consumer Credit Finance is growing and, as it grows, so does exposure to the regulator and the demand for experienced risk managers. A number of challenger banks are looking to grow their risk functions and Fintech groups have ambitious global growth plans. They often look to bring in interim experienced risk managers to ensure proper corporate governance is put in place.
As Brexit negotiations start, it is likely that companies will become more open to using contractors, particularly should the post Brexit landscape remain uncertain.
We reported in our main Salary Guide and Compensation Survey six months ago that the average salary increase achieved by risk managers changing jobs was 17%, a decrease from the 19% achieved in 2015. However, for those staying with their employer the average salary increase was 8%, up from 7% in 2015.
Our survey appears to support our own observations that salary pressures are easing in the risk recruitment market. 25% of risk departments reported they found salary expectations to be reasonable, down from 31% a year ago, with only 14% reporting them to be excessive. Risk candidates have generally become more realistic in their expectations, given the perception that the risk recruitment market, post the Brexit vote, has become more vacancy than candidate led. Redundancies in banking have tended to promote this view. Currently it is unusual for an offer to be turned down on the basis of salary alone.
After a period when the UK economy flirted with deflation, inflation is likely to have a greater influence on the recruitment market. We have been surprised at the number of risk managers who reported to have received no or only a marginal salary increase from their existing employer. In 2016, 26% of risk managers reported they received no increase, up from 16% in 2015. In a low inflation environment, this is possibly understandable. However, given that inflation is likely to exceed 2.5% in 2017, many of these departments will need to offer their staff nominal salary increases that are at least in line with inflation or a significant number of risk managers will experience a fall in their real earnings. Whilst many of these may have already concluded that, given their poor marketability, there is little they can do in terms of changing employer, a material rise in inflation is likely to have an unsettling effect on the wider risk recruitment market. Clearly amongst more marketable risk managers there is an expectation that their salary will increase, not only in nominal, but also in real terms. If it does not, entering the recruitment market is the obvious solution.
This report was published by Barclay Simpson in February 2017. To read the full report and see more information on the Employer Survey results, click here.