32 Investment Banking
Compliance & Risk Management The internal police keeping the front office in check
It is up to risk management teams in investment banks to make sure the bank doesn’t exceed its risk appetite and potentially make huge losses in its pursuit of gigantic profits.
As just about every investment bank has had to write off billions of dollars during the global financial crisis, the focus on a more prudent investment strategy has never been greater.
While risk managers try to stop a bank’s employees indulging in behaviour that might lead to big losses, compliance teams are there to ensure banks are working in line with the regulations imposed in the countries in which they operate.
Since the financial crisis, regulators across the world have increasingly been baring their teeth. With regulators in different countries so far adopting different approaches, there have been increasing calls for more international coordination on how best to reform financial services regulation.
One of the most sweeping forms of regulation in Europe is Basel III, which places more stringent demands on the amount of capital banks are required to hold. The Dodd-Frank Act in the US, introduced by the Obama administration to rein in ‘too big to fail’ banks, has also placed a greater compliance burden on institutions.
This has created more work for risk teams and increased hiring – Morgan Stanley, for instance, has doubled its risk headcount since the financial crisis. Compliance staff are also riding on the wave of increased demand for their services.
In the UK, the Bank of England, along with the new Financial Conduct Authority and the Prudential Regulation Authority, has this year taken over from the Financial Services Authority to run the regulatory regime.
In the US, the Securities and Exchange Commission is the financial watchdog. In Asia, the Securities and Futures Commission regulates Hong Kong, while Singapore is under the watchful eye of the Monetary Authority of Singapore.
As well as individual country watchdogs, European firms are also regulated by the European Securities and Markets Authority, the
Banks are facing a barrage of regulation, placing greater demands on risk and compliance teams
Risk managers need to stand up to others in the business
Salaries are still below the front office, but have been growing
European Banking Authority, and the European Insurance and Occupational Pensions Authority.
Roles and career paths
Risk management jobs in investment banks are divided into different areas of risk.
Market risk – the risk of a group of traded financial products (e.g. stocks, bonds or commodities) falling in value simultaneously because of outside events, such as rising oil prices. Also known as ‘systematic risk’.
Credit risk – the risk of a particular company or an individual defaulting on their obligation to repay their debts.
Operational risk – the risk of a bank incurring damage or losses due to internal factors, such as systems breakdown or financial wrongdoing.
If you join an investment bank as a graduate trainee, you are likely to be ‘rotated’ around different areas of the risk function.
Compliance roles in investment banks can also be divided into various categories.
Sales & trading compliance – working with a bank’s salespeople and traders to ensure their activities comply with the requirements of the local regulator. Sales & trading compliance pros are often product specialists – for example, they might specialise in bonds, equities or derivatives.
Control room compliance – centralised tasks such as maintaining the bank’s restricted list (which restricts confidential information to key individuals) and checking for abnormal or alarming dealing activity. Should certain staff be placed on ‘stop and watch’ lists, it is the control room compliance team that ensures they are stopped and watched.
Monitoring and surveillance – scrutinising specific behaviour and transactions that might indicate fraudulent activity, such as insider dealing or manipulation of markets across the exchanges.
Opportunities Kudos Money How hot?
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Compliance in recent years has become a key function for the investment banking industry. It demands high standards and a high level of accountability.
Charles Eve Head of compliance, EMEA, Goldman Sachs
the overview
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