ICT Views


Investing in Compliance

by: (Associate Director, Research and Development) on

Let’s have a quick vote.

‘Hands up’ if you think that the amount of enforcement actions against financial institutions is going to continue.

And the verdict is…?

Well unfortunately this is only a blog rather than a fancy-dan interactive press-the-red button or text your answer to ICT on XXXX - so I’ll have to guess the outcome. But I imagine it’s a resounding ‘yes’ (ie: there are many hands in the air).

Crystal Ball

So - part 2 of debate.

Given that fines are widely assumed to be going to continue, should I invest in a Bank? Will I make money? What is the risk to my investment?

Now this is an interesting question and one which seems to divide opinion.

I’ve come across two articles with two contrasting points of view.

Sell, Sell, Sell!

Neil Woodford, the highly regarded fund manager, has sold all his shares in HSBC. This is apparently because he fears that banks now face unquantifiable fines from regulators.

Correct me if I’m wrong, but Mr Woodford seems to have coined the (rather catchy) term ‘fine inflation’:

"In recent weeks I have started to become more concerned about one particular risk: that of 'fine inflation' in the banking industry. I am worried that the ongoing investigation into the historic manipulation of Libor and foreign exchange markets could expose HSBC to significant financial penalties. Not only are these potentially serious offences in the eyes of the regulator, but HSBC is very able to pay a substantial fine…. The size of any potential fine is unquantifiable, so this represents an unquantifiable risk”.

(As an aside – when we talk about risk assessments and appetites on our courses, we need to be able to assess the factors which will have an impact, and then decide how probable they are. ‘Unquantifiable’ effectively adds to the overall risk as it can’t be planned for/mitigated).

Buy, Buy, Buy!

Of course, it’s all a matter of opinion.

On the flip side, there are other fund managers who are actively buying shares in banking institutions.

For example, Stephen Message, an Equity Fund manager, has bought into Lloyds Banking Group, saying that the trend in the banking sector is one of ‘gradual improvement’.

So who is right?

Wall StreetHonestly, I don’t know. My guess is probably both. It’s an interesting one though.

We teach about all the associated risks of an incidence of regulatory non-compliance, particularly on the reputational side.

Amongst other things, reputation clearly has an impact on share price and investability (have I just coined a new phrase too?) – but not always in a predictable way. I recall the recent sanctions fine for Standard Chartered saw a share price drop of 17%. But it soon recovered.

On other occasions, there has been little/no or even a positive impact on share prices where a fine hasn’t been as bad as was rumoured, or the market thought the firm could bear it.

One thing is for sure though – this is another indicator of exactly how many angles there are to ‘Compliance’ and how many people have an interest in it.

Or perhaps, how many are prepared to take a punt on it.

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