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Archive blog: Risk Management in Global Financial Markets 2 - May 2010

I considered in my previous blog how our focus on technical learning, education and ultimately in professional qualifications has so far been centred on how risks affect micro investment decisions by consumers. This week, I am looking at the case for extending technical education and compulsory professional qualifications for those involved in assessing risk either relating to funds, financial institutions, a wide variety of asset types or products – in particular derivatives.

It is generally accepted that the new suite of professional qualifications to be launched in the UK this summer, in response to the Retail Distribution Review, will address only the micro effect of global risks – the direct risk to the consumer. In previous blogs, it is these professional qualifications which have so far held our attention.

However, there has also been a stealth-like increase in the interest shown by serious professionals within the sector in the Financial Risk Manager (FRM) qualification, examined by the Global Association of Risk Professionals. In 2009, 20,000 candidates enrolled for this professional qualification, with almost 25,000 individuals in over 90 countries now holding the FRM Certification.

So what is the connection? What is the relevance to the UK Financial Services sector of wider qualifications?

At the consumer end of the market, all the professionalism and qualifications that money can buy will not deliver good outcomes to UK consumers if, behind the scenes, the lack of understanding of complex financial instruments is not addressed.

There is something quite futile about requiring those directly advising consumers about complex investment products to raise their professional education standards, whilst those responsible for understanding the inherent risks within the underlying investment instruments need not be subject to the T&C rules set out by the Financial Services Authority more than a decade ago.

It is appropriate therefore for all UK investment Firms to demonstrate better understanding of risk, particularly on the part of those involved in senior roles.

Last June, President Obama spoke about Financial Institutions’ obligations to themselves and to the public to manage risk carefully. It was a timely statement which opened up the debate for regulation of the derivatives trading marketplace, potentially challenging the global financial sector to rethink its education steer.

Legislation, both in the US and the EU, aimed at fixing failures which precipitated the meltdown of the banking sector and the credit crisis in 2008, appears to be well on its way, but this measure will need supporting with higher levels of education, which in turn will accelerate detection of risks. Every UK investment adviser providing a high calibre service to private clients relies heavily on faith in what the US President describes as “the integrity of the invisible hands in the marketplace”. However, where this integrity breaks down, higher knowledge and understanding, brought about through a renewed commitment to technical education will contribute just as much as any piece of new legislation.

Financial Institutions have obligations to themselves and to the public, to manage risk carefully, and to do this, the global investor might only be reassured when every Bank, Investment Company and Intermediary has invested in appropriately equipping itself with qualified Risk Management Professionals including Directors, Risk Officers, Risk Analysts, Operational Risk Managers, and Investment Risk Managers. A wider perspective on professional qualifications and technical education, greater than the Retail Distribution Review requirements will deliver this, and we plan to extend our own training provisions to cater for their competence and training needs.

It is all but inevitable that after EU and US legislation has been passed, and the impact on UK investors of previous tenuous understanding of complex products has been exposed, statutory obligations to raise education standards relating to risk will follow. When this occurs, one would expect the Financial Services Authority T&C statutory obligations to extend substantially beyond its current boundaries.

There are a small number of internationally recognised education programmes and professional qualifications already available to individuals working in senior roles within our sector, or those involved in specialist risk assessment areas. I believe we can expect to see the take up of these qualifications rise steadily. There are already a small number of UK training providers supporting students taking the Financial Risk Management qualification, and we expect to enter the market during 2010 to extend the range of training courses already offered to our customers.

Mark Ehlinger - 6^th May 2010