Wave of global change to push cost efficiencies

Tom Carey, president of global technology and operations solutions for EMEA and Asia Pacific at Broadridge, spoke yesterday to an audience of clients and investors on "achieving cost and efficiency gains in large banks and broking firms."

Carey said the pressure from ongoing regulations on banks and brokers, along with changes in the structure of the financial services sector, was likely to lead to change in how costs were managed.

"What's happened over the past five years is that there has been intense pressure from shareholders for an increased return on equity from the largest banks," he said.

Typically, global ROE had reduced from an average of 15 per cent to an average of seven or eight per cent due to cost pressures and the need for banks to hold more capital, Carey said.
 
"It's not going to get any easier, with the next wave of regulations due to sweep over the industry for the next three to five years, in the form of Basel III, liquidity measures, and so on.

"The model that banks are using will therefore have to change," he said.

"Banks will have to reduce costs by sharing costs. One of the most prevalent ways to do this that we have seen is to centralise operations and set up centres of excellence within the firm, or to find a way to go to external infrastructure providers and service providers to share costs across many firms.

"That, we believe, is the future of the market, and we'll see a much faster evolution over the next five years, towards having more IT platforms and internal services moving to external providers."

In Australia, this pressure would come in two forms: to reduce the cost of transactions, and to diversify with more international investments. "However, trading internationally comes at an increased cost of ownership to the broking firms and banks undertaking these transactions," Carey said.

"That, again, is where there will be a need for shared services to bring down the costs of these transactions."

Australia was unlikely to be the first region to adopt these changes. "The European market will probably adapt first because of the intense cost and profit pressures in that region today," Carey said.

But he said he believed these changes in doing business among the large banks and broking firms would, at some point, make their way to the Asia-Pacific region, as part of what Carey sees as "an ongoing wave of change".

For the brokers and banks with brokerage businesses, the ASX trading system, CHESS, is predicted to be one area of change, although exactly what form this will take remains an open question, as Carey explained:

"All we know about CHESS at this point is that it will be re-platformed (due 2019) and that we have clients using our systems to access CHESS today.  We will work with our clients when the replatform roadmap is announced by the ASX. This is how it has worked in Japan and other markets.‎"